Signals Awry.

How much worse can things get? That seems to be the question that the stock market asked today. With no change in economic outlook other than resetting the algo parameters, stocks took a leap of faith and rallied.

On the day the S&P 500 Index rose 1.3%. The dollar was steady and treasuries were sold. The stabilising influence was the yuan. The PBOC stabilised the yuan above 7 and that was the catalyst for stocks. The yield curve continues to draw attention and remains a concern as a signal of recession.

When China looked to stabilise the yuan that was the catalyst for the day’s movement. The Dow rose 1.2%. Apple gained 1.9% and the Philadelphia Semiconductor Index rose 1.28%. Ten of the 11 sectors rose. Energy was weaker as the drop in crude prices kept energy in the red. Volume on the exchanges was strong again with 7.93 bio shares exchanged compared to a 20-day moving average of 6.91 bio shares.

The Treasury curve continued to flatten on the day. The yield curve is pricing in more stimulus from the Fed. U.S. Treasuries are also rallying because of record negative yields in Europe and Japan. On a global picture U.S. rates and bond yields look very attractive.

The HSBC economists have slashed their forecast of U.S. and German bond yields. The bank is forecasting the level of UST 10-year at 1.5% from 2.1%. The 10-year bund is expected to fall to -0.8% by year end. If HSBC is correct the forecast is quite gloomy.

Kudlow said talks would resume in September and that comment gave a boost to equities. It was reported that the PBOC told a number of large exporters that the weakness in the yuan would not be significant.

Oil moved into bear territory and Bitcoin weakened. The pound strengthened as opponents of a no-deal Brexit hardened their plans to stop Boris Johnson from doing so. It was all in a day’s work in an unusual day.

The Rant.
Have the hedge funds got it wrong again? Fast money was burnt again this week as investors scrambled to get out of positions the previous day.

It is expected that volatility targeting funds will need to sell about $50 bio of equities over the next couple of sessions and leverage remains high. Selling by systematic investors, investors that trade in fundamentals appear to be laying the ground for a broad retreat .In fact any rally may be a good opportunity to sell.

It looks as if the sellers are possibly lining up and especially so if markets remain uncertain. It is estimated by Nomura that risk-parity funds could sell $20 bio of developed market shares and buy the equivalent in investment grade corporate bonds. Deutsche Bank estimates that systematic traders could sell $70 bio in the coming weeks.

Market Recap.

Equities: The S&P 500 fell 2.98% The Dow fell 2.90%. The Vix closed at 20.17. The Stoxx Europe 600 Index fell 0.5%.

Currencies: The pound gained 0.2% The Bloomberg Dollar Spot Index rose 0.1%. The yen fell 0.5%.

Bonds: (as at 4.30pm). The ten-year is trading at 1.716%. The 2-year is trading at 1.597% and the 30-year is at 2.24%. The U.S. curve closed on the day with the following closes 2/10 at 11.5 bp, 2/30 at 64.6 bp and the 10/30 closed at 52.9 bp. The U.S. 5-year closed at 1.526%. The 2/5 spread is now -7.4 bp. The ten-year bund closed at -0.536% and the British gilt closed at 0.518%. The 10-year yen gilt is trading -0.181%. The 10-year OAT (France) is now -0.265.

Commodities: Gold rose 0.6% and WTI fell 1.9% to 53.68 a barrel.

Bitcoin is trading around $11,380.

Aussie Market Today.

Stocks to rally on the day. This could be a dead cat bounce, so care is warranted. Markets are reacting to China holding the yuan around 7. Nothing has changed from the previous night in fundamental terms. The only change is sentiment and that can quickly change.

Bonds should probably weaken a little. Bonds will look to reassess the information however they still look to be in a risk off mood.
Credit should rally on the day. After backing up some 13 bp over the last few days, an equity rally will give some confidence for investors to buy credit. Either way credit looks an attractive proposition with cash rates at 1%.

At least one more rate cut is still expected.

Geopolitical risks remain high and still need to be monitored. Watch developments out of Hong Kong as the protests have a real chance of upsetting sentiment in the region.