Bedrock’s Newsletter for Friday 2nd of November, 2018
2 November 2018


 Friday, 2nd of November 2018

We are into November. At last, out from the nasty storms of October. Clearly a month best forgotten. The adage “Sell in May and go Away” whilst often wrong, it does rhyme. “Sell in September and go in a Slumber” may well have been better advice… The problem with these words of wisdom (?) is primarily in that they are a little vague as to when to buy back…


What is really going-on here? We have had a month and some to observe, suffer, contemplate the slope and to try to understand. We dare not suggest that we really did get our heads around these market gyrations and immense losses, but we feel we can put forth our best view here.


The markets seem to have come to grips with the “end of the bond-market 30-year rally”. It is a strange psychological/social driver that suddenly wakes-up in the middle of nothing. One, or rather many, many people open their eyes all together to a new state of being, a new understanding, to a new vision of the future. Whatever drove October’s scary sell-off in the stock market seems to have also spooked buyers of fixed-income ETFs. Last month, investors pulled $2.7 billion from exchange-traded funds that hold debt, the first month of net outflows in more than three years, according to data from State Street Corp. “Fixed income ETFs had seen 38 straight months of inflows,” said Matthew Bartolini, State Street’s head of SPDR Americas research. “And that streak is over.” Investors are racing into short-term U.S. government debt ETFs this week to hedge against rising interest rates with stocks tumbling to the worst month in seven years. Equity investors turned their attention to the perceived safety of U.S. government debt, and fixed-income investors shortened the duration of their Treasury bets. Despite the outflows from overall debt funds, ETFs focusing on government bonds took in $4.3 billion for the month, pushing the 2018 total to $29 billion, according to the data.


October was a rough ride for U.S. stocks, which despite regaining a portion of the month’s losses on Wednesday followed by Thursday’s additional rises, ended as one of the worst months since the financial crisis. The S&P 500 lost $1.91 trillion in October, according to S&P Dow Jones Indices analyst Howard Silverblatt. Losses were spread widely across industry sectors. October was the worst month for the S&P 500 since September 2011. “October volatility is legendary, and we’re not just talking about the crash in 2008,” Silverblatt told CNBC. “October is a much more volatile month than any of the others as far as quick declines go.” The month kicked off on a rocky note for stocks when Federal Reserve Chairman Jerome Powell said the central bank is “a long way” from neutral interest rates. Powell said the Fed does not need the policies put in place that pulled the economy out of the last financial crisis. He declared that “we don’t need” the “really extremely accommodative low interest rates” the central bank put in place a decade ago. The Fed is likely to raise the federal funds rate to 3.4% before pausing, according to the most recent projections. Big technology stocks — most well-known as FANG: Facebook, Amazon, Netflix and Google parent Alphabet — were among the hardest hit. Amazon ended the month down 20.2%, and Netflix ended down 19.3%. Investors fled both after earnings reports. Facebook and Alphabet finished October down 7.7% and 9.7%, respectively. The S&P 500 lost 6.9% in October, its biggest one-month slide since September 2011, when it fell 7.2%. The poor stock reactions were despite this third quarter being much better than last year’s earnings season, with nearly 8 in 10 companies reporting better-than-expected earnings.


Strange markets you think? Well, not really when you dig a little deeper- the biggest hits came to the previously best performing stocks. Human nature pushes investors to sell-down their winners when they are afraid or simply short on margins. This “normal” behaviour is more often than not the wrong idea. Semiconductors were one of the hardest hit sectors in the stock market. The VanEck Vectors Semiconductor ETF fell 12.2%, its worst month since 2008. Shares of Nvidia, Advanced Micro Devices, Micron and Applied Materials are all down double-digits for October as shares sold off following the companies’ earnings reports this month. Those chip giants are also all in what some traders consider ‘bear market’ territory, down more than 20% from their recent highs. AMD has had a particularly rough month — that stock was far and away the best performing stock in the S&P 500 at the end of September. But shares have plunged 41% in October, its worst monthly performance since 1992. But then, at about $20/share now, it has doubled year to date…! AMD isn’t a suggestion here, Just an example!


Equity bulls will be hoping this rebound can last following a series of bounces in the past few weeks that quickly gave way to declines as some $8 trillion was wiped off stock markets globally. The MSCI All-Country World Index has dropped almost 8% in October, the worst monthly performance since May 2012. there are risks in the background, from the American midterm elections to trade talks with China. Meanwhile, the U.S. jobs report is due Friday — private data surprised to the upside on Wednesday. In Asia, Japanese stocks were the stand-out performers as indexes rose across the board. China’s overnight repo rate surged the most in more than four years as authorities take steps to combat bets against the yuan, which held near the weakest level in a decade against the greenback. The yen edged lower after the Bank of Japan left its monetary stimulus unchanged and kept its 10-year bond yield target at about zero percent. On October 30th, China’s Yuan touched the weakest level since May 2008, as the central bank cut its daily fixing and on signs that a trade war with the U.S. may escalate. Since, words of appeasement from Trump suggest that a wonderful, great and amazing deal for America is being agreed and set with Xi Jinping… Now the Yuan is at 6.89 to the Dollar.


The dollar index, DXY, which measures the strength of the U.S. dollar against a basket of currencies, rose 2% in October to 95.89. The Fear Index, the VIX, has come down to 18.8 and the US futures are pointing up for Friday trading- This in spite of disappointing reports from Apple which looks to open down some 5% (AAPL is a big weight in the indices, so might pull these down!). We feel compelled to agree with Goldman Sachs view- “The recent sell-off has priced too sharp of a near-term growth slowdown,” David Kostin, Goldman’s chief U.S. equity strategist, said in a note to clients. “We expect continued economic and earnings growth will support a rebound in the S&P 500.” To be sure, Kostin’s forecast of 2850 for the S&P 500 is exactly where he predicted the benchmark to end this year in his 2018 outlook piece published a year ago. Third-quarter US GDP rose 3.5%, according to a preliminary reading Friday. With 48% of the S&P 500 reporting, quarterly earnings are up 22.5% from the same period a year ago, according to FactSet. However, some corporate officials have expressed worry about the road ahead, particularly concerning the impact tariffs and rising interest rates will have on growth. Goldman has forecast total stock repurchases this year of about $1 trillion, which it expects to support the firm’s 2,850 price target for the S&P 500. We note that Stocks usually rally after midterm elections, which when added to the strong corporate profits should give investors comfort. The MSCI Emerging Markets Index has seen its valuation tumble to levels last seen before the start of an $8 trillion upswing in January 2016, according to data compiled by Bloomberg. Its ratio of price to estimated earnings now hovers just above 10 times, the cheapest P/E multiple since Russia annexed Crimea almost two years before the developing-nation advance got under way. Looking cheap out there… But… Gold buying by central banks reaches its highest level since the fourth quarter of 2015. Around $5.82 billion was spent during the third quarter to boost central bank reserves. Gold is steady at $1’236. Oil is sinking slowly to $63.60 for a barrel of WTI.


Our optimism is back. We believe in fundamentals and feel that the price gyrations might have been driven by technical trading systems. Clearly requiring more algorithm tuning… We had our discontinuation here, fitting Johann Wolfgang von Goethe words “Everything in the world may be endured except continual prosperity”.



Market Weekly Highlights

Currencies & Commodities

  • The greenback, which lost value for almost one month on the back of US-China continued trade disputes matters with the Dollar Index DXY moving from the 97 highs to 93.90 has come back since the last FOMC decision to raise rates. The USD continued to rally across major currencies mainly driven by the Federal Reserve’s expected rate hike guidance for 2019 as well as the investors’ flight-to-quality reaction to the latest correction in the equity markets. This week the DXY strengthened and is currently trading at 96.00, fuelled by potentially productive conversations between the US and China. As a general note, global trade disputes, US sanctions, Turkey and Italian contagion fear on Europe, Fed interest rate anticipations and US mid-term elections will remain present and add volatility to currency markets.
  • The EURUSD pair traded higher this week showing 1.1437 currently after a dip at 1.1300, however remaining volatile and under pressure on the back of the recent concerns expressed by the European Union over Italian government’s expansionary fiscal plans, raising overall conflicts within the common currency zone.
  • The CHF also strengthened this week with the USDCHF pair trading just below parity, while the EURCHF trades at 1.1431 this morning.
  • The Pound edged higher this week, reaching 1.30, despite UK and EU officials denying that a financial services deal had been reached, in part because the Bank of England signalled a faster pace of rate hikes. This is still higher than 1.2660 seen in the middle of August but below the 1.4375 top seen early this year in April.
  • The JPY seems to have marked a pause to the latest two-week rally against the USD with the pair trading down from 114.50, the highest levels seen this year, currently showing 112.80.
  • In EM, both the Russian Ruble and Turkish Lira are suffering amid US sanctions for the former and economic crisis and political turmoil for the latter. However, since mid-September the Russian Ruble has strengthened against the USD trading from 70 to 65.70, unchanged for the past month, as did the Turkish Lira which reached 7.23 in early August and is now at 5.47.
  • The Brazilian Real is flat for the week, now at 3.70 against the USD, however it enjoyed a 13% pre-election rally. But it has not fully recovered from the 20% losses since the start of the year amid lower appetite for emerging market currencies sparked by trade-war fears and rising US interest rates.
  • Bitcoin hit nearly 8’500 jumping 20% from the latest support found at just above 6’200, only to come back to almost 6340 now; still a big drop since the beginning of March.
  • Crude oil WTI is down again this week to $63.65 per barrel, amid US dollar strength, Trade War escalation and mounting pressures from US sanctions on Iranian Oil; Brent is trading at about $73.20.

Fixed Income

  • U.S. Treasuries yields, which had traded in a range during the last quarter of 2017 from 2.30% to 2.40%, crossed the 3.25% this month amid inflationary pressures and FED rate hikes to current show 3.16%.
  • The Japanese 10-year JGB yield traded in a range from 0.020% to 0.060% for the first 6 months and then hit 0.16% as BOJ tapers to only drop back to 0.12% currently, levels last seen in early February.
  • In Europe, the German Bund yield nearly doubled at one point this year, jumping from 0.40% to 0.80%, but then came back down as low as 0.20% in May on the back of fears of an Italian crisis. Now at 0.43%, on the back of the latest election results, higher than where it closed 2017. Same for the French 10Y Yield which had crossed the 1% during February, it dropped as much as 0.60% during the summer to trade back higher at almost 0.90%, currently showing 0.78%.
  • In Peripheral Europe, Italian 10Y yields are now trading just below 3.50%, levels seen in May when their internal political turmoil kicked-off, well above the 1.70% low April levels. The Spanish 10Y yields trade some 200 bps lower than Italy at 1.56% lower than where it started the year at 1.61%.


  • Markets in the US are all up since last Friday and remain all positive for the Year 2018 with NASDAQ being the strongest performer and posting 7.69% positive yearly return, despite the 10% drop from the highest levels reached this year. SP500 and DJIA are up, respectively by +2.50% and +2.68% YTD. The SP500 is currently at just above 2’740, the DJIA just a couple of points above 25’380, while Nasdaq is trading some points below 7’335.
  • In Europe, markets are all up for the week but are showing important negative returns for the year so far. The Eurostoxx50, DAX, Spanish IBEX 35, Italian FTS MIB and Swiss SMI are all down by -7.41%, -9.94%, -10%, -10.76% and -3.71% respectively.
  • In Asia, the Nikkei was also up for the week but negative for the year marking -2.29%, while Hang Seng is down by 11.47%.
  • BOVESPA turned positive for the year again showing a strong positive performance of +15.17% helped by the election optimism.


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