A REMARKABLE DAY 30th Anniversary of Black Monday

As today marks the 30-year anniversary of the crash of 1987, the 19th October 1987.  Today was a remarkably unremarkable day excepting for two reasons. After waking to a plethora of negative headlines, the equity market, after an initial sell off, staged a recovery of sorts to close marginally down. Tech stocks were battered early on with Apple down 2.5% on the day. The FANG stocks had a bad day while the NASDAQ ended down 0.36%.

So, what were the drivers? Certainly, the uncertainty in Spain and the relationship with Catalonia is causing some headaches. The impasse appears to be worsening and unlikely to be resolved anytime soon.

The other reason is being attributed to a Chinese central banker giving a speech at China’s leadership meeting. The People’s Bank of China’s Governor Zhou Xiaochuan discussed risks to markets and warned about a Minsky Moment, that is, a complacent market that continues to increase risk to excessive levels and then suddenly realises it has too much risk and de-risks. The reversal is sharp and painful. Equity markets listened and so too bonds.

Bonds staged a small rally and that was part in due to the Chinese Central Banker and partly safe haven buying because of increased concerns with Catalonia. They are also rallying partly because in an environment where inflation is not rising they become somewhat desirable. Bonds rallied a point or two on the day. Part of the rally can also be attributed to a little short covering. The U.S. Government issued $5 bio of 30-year TIPS into solid demand.

Trump met with Yellen today. However, Taylor appears to be rapidly firming to succeed Yellen and many believe that Yellen won’t have her term extended. On other important news, the Congress is getting closer to a  shutdown over Obamacare and immigration. This brewing battle will, in all likelihood leave the GOP with no accomplishments in Trump’s first year despite holding a clear majority.

Bitter infighting and feuding is leaving the GOP in disarray. Instead of massaging the situation, Trump seems more at home feuding with the parents of a dead soldier and giving himself a 10 out of 10 for his Puerto Rico aid. The big policy agenda currently is the Tax Plan and that has a very small chance of succeeding in being passed in 2017. The framework is still being discussed and there is still little detail that has been released. ROTH 401k plans look to be a likely target to help pay for reform.

On Sunday, Yellen made a speech and referenced the Fed model. This has raised some interesting analysis by the Street and using the Fed model equity valuations look fair. The Fed model looks at earnings then estimates forward earnings and compares those returns to treasuries.


Equities: the S&P 500 rose 0.1%, the Dow rose 0.7%. The Stoxx 600 fell 0.6%.

Currencies: The euro rose 0.4% and the pound fell 0.4%

Bonds: saw 2-years rally 2bp to close at 1.534%. The U.S. 10-year closed 2.31% down 3bp while the 30-year closed at 2.828%, rallying 3 bp on the day. The yield curve steepened about 1bp. European benchmarks were a couple of points better. The 10-year benchmark closes were, gilts closed at 1.276%, bunds at 0.655% and OAT’s 0.655%.

Commodities: Gold rose 0.4% and WTI fell 1.3%. Copper fell 0.3%.  Aluminium shortages are expected to increase as the Chinese crackdown continues. BHP is providing a united front against an activist shareholder and Barclays has a lawsuit against it for $850 mio relating to moneys lost by hedge fund Red Kite trading copper during the period 2010 to 2013.

Aussie Market Today.

Aussie bonds will continue to trade in a tight range and today may be a little vulnerable to short covering. I expect a small rally in bonds. Equities look likely to continue the upward trend and credit looks well bid.