Yes folks, what we thought was happening is happening and the current malaise sweeping the stock market is a correction that in reality is probably long overdue. The Nasdaq tumbled 1.6% after Alphabet, Facebook, and Amazon.com crashed and burned after they were mentioned as possible targets for the U.S. government antitrust regulators. Google was down 6%, and Amazon .com fell 4.6%.
The S&P sloshed around on the day and was volatile whilst the Dow failed to wake from its weekend slumber and was unchanged on the day. Globally, manufacturing data has been weak, and this comes as no surprise as global growth has slowed since Trump made his stand on trade.
On the day, the communications services sector which includes the tech behemoths was down 2.8%, and Amazon helped the retail services sector to fall 1.2%. Materials gained 3.4%, and healthcare was up 1.2%. The volume on the exchanges were good with 8.34 bio shares exchanged versus a 20-day moving average of 7.11 bio.
Manufacturing data in the U.S. is starting to weigh in on people’s concerns. Activity fell to the lowest read since October 2016. The index fell to 52.1 in May from 52.8 and the forecast was 53. The number was short of economist expectations. The view is that demand is clearly slowing, and the trade war is providing the headwinds to growth. The stance on trade is now starting to bite into the U.S. economy. A fall below 50 is seen as contraction and there has not been a contraction read since August 2016.
In the UK, Trump is promising a great trade deal as the UK breaks away from the EU. The only problem is time. Father time will no doubt take his toll before any deal is done.
Bonds are enjoying the moment in the sun, as risk off trades predominate. Bonds are rallying because of expectations that the Fed will cut and with treasuries rallying significantly over the month of May. The (U.S.). 10-year rallied some 36 bp and bonds as a sector produced a return of 2.35%. This is the best return since August 2011.
The 2-year fell 10 bp and traded 1.838% the lowest level since December 2017. The 2-year is on track to record the biggest two day fall since October 2008 when they fell 35bp. On 29 May 2019, the 2 year was 2.70.
Adding fuel to treasury rally was St Louis Fed President James Bullard who said that a rate cut may be “warranted soon” after weighing the risks of trade and weak domestic inflation. Interest rate traders have a 60% probability for a rate cut in July.
There is one thing that is dominating markets at present and that’s trade. Trade friction is dampening growth and ultimately will undermine consumer confidence. The issue for central banks will arise as and when inflation starts to rear its ugly head.
As tariffs bite that cost will be passed onto consumers. Many products simply are no longer manufactured in the U.S. and to do so would require significant retooling, training workers and sourcing the various components and importing those components.
As inflation bites, it won’t be the inflation the central banks are looking for which is wages growth as a result of improving productivity. Instead, it will be like a malignant cancer eroding workers’ wages and eating consumer confidence.
For investors, this will be the tricky bit and especially so for bond investors. Interest rates are universally low and are currently being used to fund, as in the U.S., a massive budget deficit. If tariff induced inflation bites, then expect bond investors to become rather concerned and watch for carnage. And especially so if investors believe that inflation will linger.
Equities: The S&P 500 fell 0.28%. The Dow rose 0.02%. The Vix closed at 18.86. The Stoxx Europe 600 Index fell 0.8%.
Currencies: The Bloomberg Dollar Index was flat. The euro rose 0.4%. The yen fell 1.1%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.074%. The 2-year is trading at 1.84% and the 30-year is at 2.538%. The U.S. curve closed on the day with the following closes 2/10 at 23.3 bp, 2/30 at 69.7 bp and the 10/30 closed at 46.3 bp. The U.S. 5-year closed at 1.84%. The 2/5 spread is now -0.1 bp. The ten-year bund closed at -0.198% and the British gilt closed at 0.866%. The 10-year yen gilt is trading -0.096%.
Commodities: Gold gained 1.3%.
Bitcoin is trading around $8,500.
Aussie Market Today.
Equities look set to have another bad day unless the RBA chooses to ease. The offshore markets are now calling the current bear phase a correction due. The equity market should watch for any signals relating to trade. A cut in interest rates will no doubt help sentiment on the bourse and we may even see the day end on a positive note.
Even though bonds are rallying offshore, the Aussie bonds look reluctant to take the long end much further. The market has factored in an easing by the RBA and probably is awaiting confirmation. The Aussie Itraxx has widened and is about 80. However, short dated credit remains bid. The widening is in part due to falling bond yields and swap lagging behind. As the swaps widen, so too does credit.
Given the offshore movements and the level of U.S. interest rates, the RBA could choose to ease this meeting. The Aussie yield curve is inverted between the bills to 3 years with the 3 year @1.10% before the curve starts to normalise.
It’s difficult to understand why the RBA would ease other than sentiment, but they probably will today. The housing market has started to rebound, unemployment remains low (wages growth relatively stagnant) and inflation is low and as such other than sentiment at any other time conditions are not bad.