The signs and signals are there to be seen. From slumping bank prices to weak housing and slowing manufacturing, the signs are there to be seen. Investors are differentiating between what they buy and what they sell, from the unglamorous defensives to the cyclicals, earnings and outlook are increasingly being scrutinised. Homebuilders and banks are two sectors that have fallen foul of weaker trading conditions.
Treasuries became a safe haven after the results of Google and Amazon were released, both of which were disappointing. Treasuries have moved with equities and as equities rallied yields rose, the inverse correlation is back to some degree. Third quarter GDP results were released with the third quarter showing 3.5% growth (a little lower than expected).
So what is driving market concerns? The tax cuts have now filtered through. Earnings are high but can business carry on at the same pace? Perhaps it’s because Nirvana is ending and that Trump speak won’t get the markets higher. Participants are concerned that we may have hit the ceiling for earnings that the peak has now come. Manufacturers are warning of higher input prices and the cost of borrowing is increasing. The ability to keep making excess profits are coming under pressure.
Any company that is reporting a stall in earnings has its stock price hammered. Del Taco gave weak guidance and their shares are down to a two year low. PPG Industries forecast weaker profits and saw its share price fall 10%. Akzo said it thinks input prices have peaked and saw its share price rise 3%. Markets are nervous and the current stock market rise is not sustainable unless profits increase or borrowing costs fall. Excess profits are needed to sustain the rally.
Rotations are starting to happen. Consumer staples are becoming sexy again whilst discretionary is becoming on the nose.
Bonds, however, have been somewhat sceptical of the rally and are pricing two more hikes between 2018-2020.The fear of inflation is diminished. Bonds are not fearing what the equity markets fear. A slowdown in the economy is appearing but that’s not a recession and bonds appear to be reacting to that view.
Meanwhile, with the falling stock market Trump has increased is attacks on Powell and that could prove counterproductive. This probably means we now have levels to trade off and the yield curve will probably flatten if Treasury continues to issue shorter dated maturities. The bets come off though when investors no longer wish to fund the ballooning budget deficit.
In Europe, Italy is the word. S&P declined to lower Italy’s rating. However, the country is on negative watch. It’s all about the budget. Italian bonds rallied after the S&P announcement with the 10-year bond rallying some 4 bp. The all-important bund-BTP spread is now back out to 310. Italy is currently looking to issue an inflation linked bond towards the end of November. The bond is expected to be a retail offering with a four year maturity.
With the mid-terms due shortly expect an increase of rhetoric from Trump. Trump is about to head off for an eight day blitz to raise flagging support for the GOP. Trump’s rhetoric could lead to market destabilisation at a time when markets are seeking guidance. It will interesting to see if the Pittsburgh shooting plays a part in the looming mid-terms, some are getting sick of prayers and wishes and want action. The GOP and especially Trump want more guns not fewer so that belief could prove decisive if there is an electoral backlash.
Spare a thought for pork producers. The pork producers are getting slaughtered by Trump’s tariffs as exports to China have now become nonviable. China has also massively increased its pork productivity and this is yet another reason why U.S. pork producers are seeing profits eroded.
Asian spot LNG has seen prices fall to a two month low after supply has increased. U.S. energy firms added oil rigs for the third week in a row and the rig count is the highest for three years. Falling oil shale productivity is seen as the cause because to keep output growing more wells are required to be sunk.
Putin is off to Washington shortly but he has been told to exit the Ukraine.
Equities: The S&P was down 1.73%. and the Dowfell 1.19% and the NASDAQ Composite was down 2.1%.The Stoxx fell 0.8% while the Vix closed at 24.16.
Currencies: The Bloomberg Dollar Index fell 0.3% while the pound rose 0.2% and the euro rose 0.3%.
Bonds: The ten-year closed around at 3.077%. The 2-year closed at 2.81% and the 30-year closed at 3.312%. The ten-year bund closed at 0.351% and the OAT closed at 0.739%. The U.S. curve closed on the day with the following closes 2/10 at 26.6 bp, 2/30 at 50 bp and the 10/30 closed at 23.3 bp. The U.S. 5-year closed at 2.909%.
Commodities: WTI rose 0.7%. Gold rose 0.2%.
Bitcoin is trading at around U$6,387.
Aussie Market Today.
Once again it appears as though markets are in risk off mode so expect some possible selling of the stock market. With few drivers to push markets higher, the market should be weak.
Bonds strength should continue as the risk off momentum continues. Expect bond to rally on the day.
Aussie could strengthen a little on the day. The strength of king dollar will determine the Aussie battler’s direction.
The direction for markets appears to be strongly influenced by Asia. Look north for some guidance.
Geopolitical risks remain high.