Markets staged a recovery of sorts. Only time will tell if the bounce is a recovery or a dead cat bounce.
The day started with tech shares falling after a U.S. court found Apple had infringed on a Qualcomm Inc patent. Apple must now deal with a partial iPhone ban on the sale of some models. Apple was down 1%.
The tech sector gave up some of its recent gains. Goldman’s came out with a piece saying the recent selloff was overdone and not to be so concerned about the inversion of 3-month bills and 10-year treasuries. The day’s activities really looked like retracing from an oversold position.
Bonds were steady on the day even as some bearish sentiment on risk assets waned and views that the selling may have been overdone.
The 2-year auction saw strong demand for the sale of $40 bio of notes with the bid to cover at 2.6 and 40% acceptance at the highest acceptable bid of 2.26%. The level was 1 bp lower than where the market was trading at the time.
On the day, the economic data shows a slowdown in the U.S. economy is continuing. Consumer confidence for March was weak and so too U.S. home building which fell more than expected in February. The housing data was down 8.7% falling to a near 2-year low. The consumer confidence index fell 7.3 points to a reading of 124.1 in March. This is the second straight monthly decline.
Brexit continues to create concern and divisiveness in both the UK and Europe. And China-U.S. trade talks are still an important piece in the risk puzzle.
Financial repression remains strong. And with some $10tr of negative yield bonds, it’s hard to think about how banks, in particular, can quickly mend balance sheets when assets that they trade don’t provide a positive return.
The amount invested in negative yield bonds is around similar levels to September 2017 and accounts for some 19% of the market value of the Bloomberg Barclays Global Aggregate Bond Index. One consequence of negative bonds is that demand for lower-rated credit and illiquid private assets has soared. And time will tell us that if a break is to occur in the system then these illiquid assets may become a hurdle when investors try to exit.
On the 22nd of September 2015 in a prescient piece, Ed Yardeni pointed to a possible recession commencing March 2019. What it does show is that his model using his Coincident Economic Indicators is a powerful tool. Not that we are in a recession yet, but his model is good at forecasting possible problems.
His model looks at S&P 500 forward earnings as these are highly correlated with the U.S. index of coincident economic indicators. The prediction for the 2019 recession is based on a simple average of the length of previous expansions once the CEI has rebounded from its peak.
In his note in 2015, Yardeni commented that the cause won’t be because of rising rates and that it would be caused by a severe downturn abroad. And that’s possibly what Trump’s tariffs are achieving. Quoting Yardeni at the time, “more likely is that the U.S. will continue to grow fast enough to keep the global economy growing as well, albeit at a pace that is best described as “secular stagnation.”
However, one of Yardeni’s most endearing chart is a chart of the S&P500 versus US 5-year generic BB. The magic works here as a reliable forward indicator. The equities have lagged the turndown in the spreads by about 2-3 months.
For those concerned about the state of the markets, this could be a neat indicator. For those who are unfamiliar with Yardeni, he received hiPh.D.hD from Yale studying under Nobel Economics laureate James Tobin. He also worked as an economist at the New York Federal Reserve and held positions at the Federal Reserve Board of Governors. Yardeni also worked at a number of investment banks.
Equities: The S&P 500 rose 0.72% and the Dow barely rose 0.55% The Vix closed at 14.68 while the Stoxx Europe 600 Index was up 0.8%.
Currencies: The Bloomberg Dollar index rose 0.2%. while the euro fell 0.4% and the pound rose 0.1%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.425%. The 2-year is trading at 2.27% and the 30-year is at 2.874%. The U.S. curve closed on the day with the following closes 2/10 at 15.3bp, 2/30 at 60.3bp and the 10/30 closed at 44.8bp. The U.S. 5-year closed at 2.207%. The 2/5 spread is now -6.5bp. The ten-year bund closed at -0.017% and the British gilt closed at 1.003%. The 10-year yen gilt is trading -0.063%.
Commodities: WTI rose 0.2% and gold rose 0.8%.
Bitcoin is trading around $3,917.
Aussie Market Today.
On the day, I expect some recovery in stocks. The recovery of sorts should continue for a little while yet as markets have the distinct feel of being oversold.
Bonds should drift on the day. U.S. Treasuries remain better bid when push comes to shove and that’s probably the case for Aussie bonds as well. Expect a little sell off as risk is once again being taken. The trend remains positive for bonds and for the moment any sell off is probably an opportunity to purchase.