Lemon crumble anyone?

Stocks are starting to lose a little sweetness. In fact, stocks are starting to sour. Tech stocks once were sweet but now they are becoming somewhat sour as they lead the market down.

Geopolitics is certainly playing its part and for those AI fanatics they were probably a breath away from calamity because no programmer could have foreseen what almost happened towards the end of last week.

First, we have the Khashoggi debacle which is forcing the Trump Administration to think up new ways of supporting a despot.

Second, we had the Israeli incursion at the time Netanyahu was trying to sign some accord with Hamas that went horribly wrong. That could easily have led to 50 Israeli soldiers death that would have led to a complete meltdown in the area. Netanyahu now has to contend with a possible dissolving of his fragile coalition as a result.

Third, we had Pence stirring up the Chinese with some fiery words and China telling Australia that some of its agricultural products will now attract tariffs if we side with the U.S.

The fact that risk off has not gone further is a miracle. Politics is certainly helping to shape the market outlook and elevated concerns are reshaping market sentiment. Stuff that was once sweet fruit is now becoming sour like lemons.

The world order appears to be reshaping itself and the Trump Administration is leading the charge through divisive politics and a campaign of stretching and distorting truth. CNN ran a fact check on this and found that in Trump’s 649 odd days he has made some 6,420 false assertions.

On October 22 in Houston, Trump made 83 false statements. No wonder investors are tiring because the truth is hard to find. This is what makes reacting to news relating to trade and tariff so difficult now. Trump says a deal can be reached, Pence fires shots across the bow at China. How can this madness lead to any compromise on China’s part or even some form of a deal?

In a shortened week, markets are reacting to anything and for stocks that’s negative. Bonds have acted as the safe haven and held steady. And some real interesting stuff is starting to occur. For example, U.S. 1 –year treasuries are now 7 bp higher than China’s 1-year note.

In 2017, China’s premium was 2% over the U.S. treasury. This will suggest to some that the yuan may have some way to depreciate against the dollar which will only be seen by the Trump administration as manipulation and earn the ire of Trump’s team.

There is uncertainty aplenty. Ghosn, the Chairman of Nissan has been arrested for financial misconduct. The proposed Aramco bond sale has been cancelled forcing the Saud’s to find $70 bio elsewhere. The news only gets worse. Saud credit default swaps have now jumped 37%, with the CDS now at 94 bp.

However, for bonds they jumped on John Williams’ (New York Fed President and member of FOMC) somewhat dovish comments. Concerns and comments relating to caution are now commonplace when it comes to members of the Fed’s hierarchy talking. Hedge funds have certainly been listening and have been slashing their bearish bets.

So today was all about risk off. However, bonds were a little better. What is important though is the changing attitude and sentiment from bearish views to bullish views. Home builder sentiment posted the biggest fall for some 4 1/2 years, the index fell to 60 points in November, the lowest since August 2016. Prospective buyers declined from 53 to 45, the lowest level since July 2016.

Some of the larger funds have also been slashing equity holdings. These changes are certainly reshaping the market as hedge funds were once very large owners of tech stocks and tech stocks have been trashed the last few sessions.

For stocks, the carnage is most apparent in the tech sector. Apple has fallen some 20% from its record high in October. Facebook was down 5%, Amazon down 4.3%, Netflix down 4.9%and Alphabet down 3.4%. The tech sector was down 3.5% and led the fall.

Most of this fall started when the market became confused over trade and the Fed hiking rates. And this is all happening in a holiday-shortened week where many traders have taken the week off and liquidity is thin. The equity market is certainly very vulnerable.

Weakness in stocks is a result of the market repricing tariffs and supply chain costs. And those sentiments won’t change quickly unless there are news of agreements being reached or compromises on tariff structures. Pence’s comments certainly cemented the current pessimistic view.

Market Recap.

Equities: The S&P500 fell 1.7%. The Vix closed at 20.19. The Stoxx fell 0.3%.

Currencies: The Bloomberg Dollar Index was steady, the euro rose 0.3%, and the yen rose 0.3%.

Bonds: The ten-year closed around at 3.063%. The 2-year closed at 2.79% and the 30-year closed at 3.32%. The ten-year bund closed at 0.375% and the OAT closed at 0.782%. The U.S. curve closed on the day with the following closes 2/10 at 27 bp, 2/30 at 52.9 bp and the 10/30 closed at 25.7 bp. The U.S. 5-year closed at 2.871%.

Commodities: WTI rose 0.5%, natural gas was up 7% and gold was steady. Comex copper fell 0.05%.

Bitcoin is trading around $4,840.

Aussie Market Today.

It’s a risk off day. Equities are likely to be sold. It will be interesting to see how far sentiment moves following the Chinese threat to the application of tariffs to certain agricultural products.

Australia certainly appears to be upsetting its neighbours. First, the Indonesians and Malaysians over the move of the embassy in Israel to Jerusalem.  Second, the Chinese for siding with the U.S. Trade is suddenly being weaponised and it will be interesting to see how far this goes.

Bonds are once again is risk off mode and there now appears to be a general global consensus that global growth is slowing. Unless there is a major turnaround relating to tariffs and central banks easing back their buying programmes, a slowing global growth trend now appears to be in place. Low returns may become the new norm.

The Aussie dollar rallied on a weaker dollar.