It was late October and October was living up to its name as the bears come out to play. For stocks, the lead out of Asia and into Europe was positive but something was wrong. The futures were weakening, an omen to what lay ahead for the day. Yes folks, we are talking a good old fashioned rout and a day when many stock jockeys look nervously around them wondering if they will still have a job to go to tomorrow.
So yesterday the bears came out to play but they fell asleep on the job. Today was different. The major indices fell as the Vix jumped to 26.32, a bearish read and yet another omen. The S&P 500 has now fallen 8.8% in October, the worst month since February 2009. AT&T and Texas Instruments were just some stocks that started the days rot. The tech stocks reported, in particular Amazon, Intel and Alphabet and their earnings were underwhelming. Risk today took a beating.
For some though, the day was a nice day; that is, if you are a bond trader. Corporate credit traders, like equity traders, have had a bad run as well. The insatiable bid is slowing and duration is starting to bite. However, one needs to define which part of credit you’re trading. For instance, CCC is rallying. Earlier we saw high grade decouple from equities. However, other risk assets continued to thrive. Higher rates are just now starting to make investors think.
As today was a risk off day, bonds thrived. The treasuries rallied with 10-years falling back to levels seen three weeks ago. The data is slowing as higher rates are buffeting housing, now at a two year low, stock valuations, and tariff inputs that are increasing costs for manufacturers.
Uncertainty is driving markets. Politics both home and abroad is causing consternation and uncertainty. The economy is ok, and that view is certainly shared by Loretta Mester (voting member Fed) who voiced there are no signs of a pending recession. No doubt at some point in the next few hours, Trump will vent about Powell and whether he should be replaced. Powell does make a good fall guy coming into the mid-terms. It’s all his fault.
Bonds should have retreated on the day. The five-year auction was soggy. The bid to cover ratio was 2.3 times, with the average at 2.48. Direct bidders took 1.9%, the lowest since 2009 (Action Economics).
Geopolitics remains murky. European dynamics between the EU, Brexit and Italy are making waves. Manufacturing data is stalling as the U.S. tariffs start to bite.
Equities: The S&P was down 3.1%. The Dow fell 2.41% and the NASDAQ Composite was down 4.4%.The Stoxx fell 0.2%. The Vix closed at 26.32.
Currencies: The Bloomberg Dollar Index rose 0.4%.The pound tanked 0.7% and the euro fell 0.7%.
Bonds: The ten-year closed around at 3.111%. The 2-year closed at 2.839% and the 30-year closed at 3.337%. The ten-year bund closed at 0.39% and the OAT closed at 0.77%. The U.S. curve closed on the day with the following closes 2/10 at 27 bp, 2/30 at 49.8 bp and the 10/30 closed at 22.6 bp. The U.S. 5-year closed at 2.943%.
Commodities: WTI fell 0.2% while Gold rose 0.2%
Bitcoin is trading around $6,423.
Aussie Market Today.
Equities, risk off. Just sell.
Bonds rallied a bit overnight, so probably we can see a rally here. I expect with risk off then bonds should be strong on the day. Credit could drift wider as the bonds rally. Swap should widen on the day.
It’s a risk off day, a stronger king dollar probably means a weaker Aussie dollar.
The direction for markets appears to be strongly influenced by Asia. Look north for some guidance.
Geopolitical risks remain high.