What a sale, what a day. After running some 900 points over the course of the day, the equity market recovered towards the day’s end. What a day. The S&P 500 was down as much as 11% at one point before recovering sharply towards the close. The Nasdaq finished at its lowest level since May while the Dow slid some 500 points at its worst. Some $8tr have been wiped from equities globally this month. And the cleansing looks likely to continue.
The fear of a weaker economy is partly driving the downturn and so too earnings. The momentum traders can at least have solace now because the direction is lower and they can sell anything, just like what they did on the way up.
The FAANGS led the weakness, but so too others. Boeing was down 6.6% and IBM fell 4.1%. The benchmark has now fallen 8 of 9 days and the selling has been steady. The retreat has been led by those companies with the highest valuations. And that’s tech and discretionary. On the other hand, utilities and household stocks rose.
The main driver, however, is geopolitical and Mr Trump can take a bow. Trump’s sharp rhetoric, the glib statement and the sharp rebuke are all unsettling stock and bond markets globally. And the final straw today was Trump’s talk of implementing further tariffs on Chinese goods if talks between Xi Peng and Trump fail. Trump’s rhetoric is increasing in its virulence and meaning whilst Trump completes his 8-day campaigning as the mid-terms near.
Stock markets are unsettled. The view is things may only get worse as trade worsens and the Fed looks likely to hike shortly. As on the way up, some valuation models were drivers and so too on the way down. The decline has pushed the earnings yield 2.3% above treasuries.
However, it’s still well below the average of 3.2%. A move towards average would imply a fall of 14%. The things that should be supporting equities are not anymore. Earnings have gone largely unnoticed and signs that the economy is booming are seen as the economy is peaking. There is a whiff of desperation here.
Political uncertainty is also playing its part. The Far Right Wing Jair Bolsonaro won the Brazilian elections. He, like Trump, is a nationalist and has a strong dislike of Chinese business operations in Brazil. Merkel is going to quit as party leader but will see her term out as German Chancellor. The winter has come early.
Within all this uncertainty, bonds are well bored. Treasuries are range bound. And even across the pond, with all the shenanigans in Europe with Italy and Merkel losing key seats and power, bonds barely moved. It is as if bond investors are waiting to see the turmoil play its part before deciding the course of action. It’s very strange.
Bond investors do have a heavy data week this week. ADP payrolls are due Wednesday, PMI Manufacturing Index and ISM Manufacturing Index on Thursday, and non-farm payrolls on Friday. Year on year average earnings are not expected to rise above 3% and this trend that started in 2009 looks set to continue.
Most of the bond action was in Europe and that was because of Merkel looking to step- down. German bond investors were somewhat rattled by the news. Uncertainty at home is not something Germans have to deal with. The risk of the German coalition of collapsing has risen and it’s as if Germany has caught Latin fever. Bunds rose 3 bp today.
On the commodity front, U.S. crude inventories are up now six weeks in a row. Palladium’s premium over platinum looks set to continue as platinum slumps to its worst performance since 2004. Chinese oilseed traders are playing down the impact of the rising cost of soymeal for Chinese piggeries. And hedge funds are cutting their bullish oil bets. Copper rose as inventories on the LME have fallen. Whilst aluminium output fell in September.
Equities: The S&P was down 0.66% and the Dow fell 0.99% while the Stoxx rallied 1.3%. The Vix closed at 24.70.
Currencies: The Bloomberg Dollar Index rose 0.6% while the yen fell 0.4%.
Bonds: The ten-year closed around at 3.08% while the 2-year closed at 2.82% and the 30-year closed at 3.335%. The ten-year bund closed at 0.381% and the OAT closed at 0.745%. The U.S. curve closed on the day with the following closes 2/10 at 26.5 bp, 2/30 at 51.2 bp and the 10/30 closed at 24.4 bp. The U.S. 5-year closed at 2.922%.
Commodities: WTI fell 0.2%. and gold fell 0.1%
Bitcoin is trading at around U$6,258.
Aussie Market Today.
Today will be interesting. Equities should be weak but the late change in direction in the U.S. could give some hope locally. Asia will influence today’s direction. Expect the market to be soft.
Bonds today did not react as a risk off trade would imply. It’s as if investors are waiting for more clarity before reacting. Today could well be one of those days when what is right is wrong. My own view is that bonds are more likely to sell because they hardly rallied during today’s equity selloff. However, extension trades due to index trades will determine the direction over the next day or two.
The lengthening of the index is unusually large. This partly explains the rally of the past couple of days. And as we near month end, those funds that are index benched will look to lengthen and that means buying. The Barclays Index lengthened 0.135 year and the composite lengthened 0.05 year. Several large issues dropped below the 1 year maturity and fell out of the index leading to the lengthening. Some $22 bio of bonds were affected.
Aussie could strengthen a little on the day. The strength of king dollar will determine the Aussie battlers direction.
Geopolitical risks remain high.