The current low-lying high is likely to move on leaving the rapidly approaching low to dominate markets over the near foreseeable future. The low may lead to further falls and a higher Vix. Investors should be aware of heightened levels of uncertainty and possible market weakness. Investors should be aware of a possible storm warning should Trump seek to fire Mueller.
And that’s pretty much how the markets are reacting at present. Equities slid today on oil news and also whether the FANGS will be able to continue to make supernormal profits if they come under the glare of regulators.
Facebook certainly has a problem explaining how Cambridge Analytics was able to mine some 50 million accounts in a possible breach of privacy and data mining that was not supposed to happen. Facebook certainly has to answer a number of questions. The Europeans are also in on the act and are looking at taxing the FANGS at the source of their customers by imposing a 3% tax on revenue at the source.
The FANGS led the equity market lower whilst the bond market continued its bearish slumber ahead of the Fed meeting later this week (Wednesday NY ). What is interesting to note is the change in analysts’ forecasts. Forecasters are now predicting more choppy earnings partly as a result of weak economic conditions (the economy was supposed to be strong as a result of tax cuts) and weak earnings.
A number of analysts are now thinking that the Fed may have moved too early in tightening and perhaps will tighten only three times this year. Some are even suggesting that the Fed may not tighten this weak given the data does not strongly support a tightening. And this after the futures last week were suggesting a tightening was a 94% probability, which means it was absolutely going to happen. I still believe the Fed will tighten this week.
Analysts such as at Goldman’s are telling their clients to expect more volatility in their returns and lower returns in the current market cycle. Today’s selloff saw the Vix head into backwardation, a clear signal that the animal spirits are stirring and that perhaps something is amiss. It may be wise to maintain some liquidity if the Vix continues down this path.
To compound things further, it looks as if Trump is preparing the ground to fire Mueller. Should this happen there probably will be some turmoil for a period, lots of bellicose comments. It’s just a matter of how rattled markets become and what the GOP members react.
In Europe, the big news was the reaching of a deal for Britain to exit the Euro in 2020. This was big news. However, Ireland remains a thorn in the negotiations.
For bond traders and equity traders alike the weaker economic forecasts should be of concern. The Atlanta Fed’s GDPNow forecast is now predicting 1.9% annualised. (This is the same forecast that Trump used to highlight his tax cuts which suggested on February 1 the GDP was 5.4%.) This forecast has fallen from 3.5% at the beginning of the month.
Clearly, the economy has some issues and may be working as a two-speed economy. The economy is being affected by political turmoil and uncertainty. Companies will clearly have their work cut out to maintain profitability if Trump imposes tariffs and these factors and a number of other factors are creating uncertainty.
Bonds were able to rally on the day and that probably had more to do with uncertainty surrounding the equity market which had a plunge. The big bets are on for a flattening yield curve as over the past few weeks traders have upped the shorts in two-year futures whilst the ten-year contracts have seen some 90,000 shorts cut. This effectively means traders are betting on a flat yield curve.
Today was a risk-off day. However, if the markets get the jitters over a possible slowing economy then there is more at risk than there appears. A slowing economy would place the Fed in a very difficult position with a rapidly widening deficit, increased issuance and possible inflationary effects from imposed tariffs.
Today was also a big day for the Saudis and the possible global listing of Aramco, the Saudi Oil Company. The Saudis have decided not to list Aramco globally but instead list the company on the Saudi exchange. For the number of investment banks working on the transaction, this would have been a blow.
On other matters, the ECB policymakers are clearly shifting their position on interest rates. After 3 years of bond buying and with nearly 2.5 tr euros of assets, policymakers are now debating how to normalise rates. It would appear as though negative rates are drawing to a close and markets will have to adjust to a market that is normal. No free money, no massive pools of liquidity and no free lunch!
Equities: The S&P 500 fell 1.42%. The Dow fell 1.36% and the Stoxx 600 fell 1.1%. The Vix closed at 19.
Currencies: The Bloomberg Dollar Spot Index fell 0.2%. The euro rose 0.4%.
Bonds: The ten-year closed around at 2.855%. The 2-year closed at 2.31% and the 30-year closed at 3.088%. The ten-year bund closed at 0.564 and the UK gilt closed at 1.44% and the OAT closed at 0.813%. The U.S. curve closed 2/10 at 54.3 bp, 2/30 at 77.4 bp and the 10/30, closed at 22.9 bp. The U.S. 5-year closed at 2.655.
Commodities: The WTI fell 0.34% gold rose 0.2%.
Bitcoin is trading around $8,408.32.
Aussie Market Today.
The Aussie equity market should be weak on the day as equity markets were sold off overnight. Political uncertainty is rising, and this will destabilise any major gains in the near future.
Bonds should be steady on the day. With a looming rate hike in the U.S., bonds may soften later in the week.