Bedrock’s Newsletter for Friday 7th of December, 2018
7 December 2018




 Friday, 7th of December 2018

Friday again and we are closing-in on the last stretch of trading for 2018. Very unusual markets across all asset classes. Some perspectives are required here.


The DJIA which closed yesterday at 24,947 had opened the year at 24,809. Only a 0.50% move and a positive one at that. The S&P 500 closed last night at 2,695.95 exactly the close of January 2nd- 2,695.81. The NASDQ, the home of FANG and other volatile creatures closed last night at 7,188.25, up some 182 points for the year.


What happened elsewhere? Looking at the German DAX it is at 10,900 or so, down from about 13,000, down over 16%. The Nikkei came from 23,000 to close this morning at 21,700 some 6% down.  We remember reading in late 2017 that it is the turn of Japan and Europe to make money for investors, both being “cheap” when compared to the USA… Let’s not mention the FTSE being mauled alive by the Brexit woes- now at 6,800 down from 7,700 scoring down 12%. U.K. stock investors can wave goodbye to index gains of the last 18 years. The FTSE 100 on Wednesday closed below the level seen at the end of 1999. Were you asking yourself if Brexit was a good idea?


We take a deep breath and plunge into an attempt to rationalise the market moves.  Markets have grown so jittery that moves seem detached from the fundamental or technical analysis that traders use to underpin investment decisions. Thursday alone brought the biggest reversal for the Nasdaq 100 Index since April, a swing of almost 3% amid relatively little news. That was after the overnight futures session began with so much selling pressure that the exchange operator had to pause trading to ensure orderly execution. It would be nice to write the market’s convulsions off to liquidity failures, or to tariffs, to the Federal Reserve or to tech valuations. But for the people living through these swings on trading desks, none of those explanations does the trick — and that’s what really worries them. Yes, there is a plethora of viable reasons for rising volatility, from the uneasy trade truce to a suddenly uncertain path for Federal Reserve rate hikes and the persistent concerns that the U.S. economy is headed for a slowdown next year. It’s just that traders have become unable to anticipate what issue will drive the day’s trading and when it will hit. One can’t analyse how the Trump meeting with Xi is going to go, you can’t analyse that we’re going to have a Chinese executive arrested. What you get is not a typical thing that happens.


How can the US markets be flat for the year??? Earnings grew at huge 20%+ rates, GDP progressing faster than 3%, unemployment is at all-time lows, Trump tax cuts passed and are in effect, there is no inflation, energy is cheaper than in years (another form of tax cut) and then, stocks which appeared cheap at the start of the year are back to be in the starting blocks. Not clear…


Mark Connors, global head of risk advisory at Credit Suisse, had seen worrying signs long before that. A key technical measure he tracks, the correlation between the price of stocks and currencies, had broken down starting in April. That, along with sharp drops in the price of oil, point to one thing, he says: Uncertainty about the future as central banks around the world unwind programs that bought trillions of dollars of assets. “We’re seeing two of the biggest asset classes, stocks and currencies, exhibit a degree of uncertainty in their relationship in 2018 that we’ve never seen before,” Connors said. “Crude just exhibited something very unusual in the context of the last 40 years.” The unwinding of central banks’ programs a decade after the financial crisis brought economies to the brink is known as quantitative tightening. J.P. Morgan Chase CEO Jamie Dimon said in July that one of his biggest fears is around how markets would behave as central banks removed their unprecedented stimulus. “If quantitative tightening continues, guess what’s going to happen? More of this,” Connor said, referring to unusually violent moves across markets. Another factor in the speed of recent declines is the result of several important changes that have happened since the last financial crisis.


Automated trading strategies from quant hedge funds and the massive shift to passive investing have helped to remove liquidity from the system in times of panic, according to Marko Kolanovic, J.P. Morgan’s global head of macro quantitative and derivatives research. He said in a September note that index and quant funds made up two-thirds of assets under management globally and most of daily trading. So, when investors begin to sell, as they did on Tuesday amid concerns over the state of U.S. trade talks with China, the moves were probably amplified by computerized trading strategies. Selling intensified that day after the S&P 500 fell below its 200-day moving average, a key technical measure.


Let’s peek at the safe-havens… Gold started the year at $1,307 and trades now at $1,240, proving to be not much of a hedge… And this in a period where the measure of volatility, the VIX, has doubled! Oh, lest not forget the “Wonder Antidote”, Bitcoin having fallen from $14,000 to under $3,400 this morning. WTI Oil had started the year at $62 only to trade at $51 now (having visited $77 in October).  The US$ in all this did managed to rise somewhat this year and we see the DXY as a measure of its relative strength at 96.85, up some 5.5% from 91.86 in January.


We are disappointed with the slow rise in the Dollar and lay the blame here on the US Trade Deficit which crossed $55.5Bn for the month of November alone, the highest it has been in over ten years.


And bonds? The US 10-year Treasury Note trades now to yield 2.87%. Just a couple of months ago we were well launched on-route to 3.50% as we crossed the 3.25%. Short rates were increased by the Fed and more promised for next week (19th is the day!).  We keep wondering if the Fed is missing the point on its mandate of inflation!? There isn’t any… World food prices fall to their lowest in more than two years in November. The Food and Agriculture Organization’s (FAO) food price index, which measures monthly changes for a basket of cereals, oilseeds, dairy products, meat and sugar, averaged 160.8 points last month, down from a revised 162.9 in October, reaching its lowest level since May 2016.


There was a time when European governments couldn’t utter a fiscal policy statement without mentioning the word “austerity.” Now, the concept seems to have all but disappeared from public discourse. Is the era of austerity finally over, and did austerity policies — essentially, those encompassing spending cuts and tax increases — achieve what they were supposed to achieve? Ten years on from the financial crisis and austerity measures seemed to have died on the continent too as a wave of populist politics has swept through Europe, turning much of the public against their established political parties and their unpopular programs. We’re seeing around the world a push for more fiscal spending. In Europe, governments are trying to capitalize on popular discontent with promises of more spending. The French are rioting, for two weeks now, the Greeks started to do the same for non-related reasons.


Renowned nature broadcaster David Attenborough told world leaders that climate change could lead to the collapse of civilizations, and much of the natural world. Speaking at the opening ceremony of the COP24 UN climate conference, in Katowice, Poland, Attenborough called climate change “our greatest threat in thousands of years.” Is this the risk-event the markets are sniffing? Maybe… In the interim, Sentiment measures tracked by Citi, along with the bank’s “normalized earnings yield gap work,” imply there is a 90% chance stocks are at a higher level this time next year, as per Citi’s chief U.S. equity strategist Tobias Levkovich. We see the US futures having s small down in them and hope that the employment data due before the open will correct the direction…

The great advantage about telling the truth is that nobody ever believes it.




Market Weekly Highlights

Currencies & Commodities

  • The DXY is almost flat currently trading at 96.86, influenced by mixed signals on productive conversations between the US and China in the G-20 meeting in Argentina, and by the latest Fed Chairman’s comments on a “very strong” US labor market and a possible Fed rate pause.
  • The EURUSD pair is flat this week currently trading at 1.1375 in a wait and see mood ahead of the US labour data later today.
  • The CHF is stronger this week with the USDCHF pair trading just below parity, as is the EURCHF trading at 1.1298 this morning.
  • The Pound is almost unchanged this week, currently at 1.2746. However, it remains quite volatile and under pressure not only because of the risk of a No-Deal Brexit, but also because of a latent risk of a snap election with a potential Labour victory which could increase taxes, bring nationalisation of industries and more regulations.
  • The JPY seems to have hit resistance at 114 marking a pause in the latest two-week drop against the USD with the pair trading currently lower at 112.83.
  • 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 65.77, now at 67, unchanged since the start of this month, as did the Turkish Lira which reached 7.23 in early August and is now at 5.34.
  • The Brazilian Real weakened this week crossing the 3.94 level today to a current 3.88 against the USD.
  • Bitcoin dropped heavily after breaking support at USD 6,400, losing almost 50% in one month and trading currently at around USD 3,370….
  • Crude oil WTI is down again this week after reaching almost USD 55 on Wednesday to finally trade back at USD 51.50 per barrel, marking a support around USD 50, amid US dollar strengthening, Trade War escalation and mounting pressures from US sanctions on Iranian Oil; Brent is trading at about $60.

Fixed Income

  • 10Y 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 currenty show 2.88%.
  • The Japanese 10-year JGB yield has traded in a range from 0.020% to 0.060% for the first 6 months and then hit 0.16%. now at 0.059%.
  • 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 Italian crisis fears. Now at 0.252%, after the latest GDP weak data. Same for the French 10Y Yield which had crossed the 1% mark during February and then dropped to 0.60% in the summer. Currently at 0.68%.
  • In Peripheral Europe, Italian 10Y yields are now trading at just about 3.14%, slightly lower than the levels seen in May when the internal political turmoil kicked-off, but well above the 1.70%  April levels. The Spanish 10Y yields trade some 175 bps lower than Italy at 1.46%, lower than where it started the year.


  • Markets in the US turned positive again for the Year 2018 despite the longer than expected October correction; NASDAQ being the highest positive performer and posting 4.1% yearly return, giving away more than 10% from the highest levels reached this year. SP500 and DJIA are up, respectively by 0.8% and 0.9% YTD. The SP500 is currently at just below 2,696, the DJIA just a couple of points above 24,945, while Nasdaq is trading some points below 7,190.
  • In Europe, markets are all showing important negative returns for the year so far, with DAX and Italian MIB being the largest underperformers at respectively -16.50% and -16.10%. The Eurostoxx50, Spanish IBEX 35, FTSE 100 and Swiss SMI are all following with losses of -13.73%, -13.62%, -6.85% and -5.06%.
  • In Asia, the Nikkei was down this week as is for the year marking -3.64%, while Hang Seng is down by 7.91%. BOVESPA is the most positive equity market for the year showing a strong performance of +22.57% helped by the election optimism, and positive in USD terms, despite the important weakness of the currency.


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