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.
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