Bedrock’s Newsletter for Friday 30th of November, 2018
30 November 2018


 Friday, 30th of November 2018

With all the market movements and political noise, we did not notice that, yet another month has gone by. Yes, November is expiring today and believe it, we will all be in December on Monday. A truly meaningless observation but it is THE holiday season. We are expecting many others to rejoice in this traditionally cold month by spending their hard-earned money on gifts and decorations, travel to family reunions and turkey eating… The holidays of light. Rejoice


We just had the general rehearsal for Christmas with “Black Friday” and the “Cyber Monday” that followed. On the Friday our human brethren went in droves to buy stuff because it was on sale. Good results for the stores that clocked significant increases in sales over the previous event a year earlier. As shopping has evolved towards mouse clicks, we got Cyber Monday, where Amazon and its like virtual shops have their own feast on consumers. This lot (mostly regular retailers with a website) also clocked some records in sales and computed growth. Yes, Walmart got another day of sales frenzy. Alibaba, Jack Ma’s Chinese selling machine had invented “Singles Day” a while ago, creating yet another multi-billion one-day selling event. For all of us who were not suckered into spending our money in these events, let’s rejoice in the fundamental strength of the consumers who showed us through their buying that things are going well. Yes, the economies are doing quite well! The stock markets have disagreed with the numerical evidence from the economy as the equity indexes continued to fade downhill. Amazingly, just a week ago we read these words in Bloomberg-print- “The stock market is no longer not just not great — it’s downright awful”. In fact, after the 550-point plunge in the Dow Jones Industrial Average on Tuesday, 2018’s market meltdown, at least in terms of valuations, now ranks among the worst of the past few decades. The price-to-earnings multiple of the S&P 500 Index, based on the next 12 months of earnings, has fallen 17% in 2018. That’s the third-biggest drop in valuations since 1991, which is as far back as Bloomberg data goes on that metric.


The real logical disconnect lies elsewhere- Black Friday comes, many people will awake at some ungodly hour, go stand in line in front of a store, rain and cold, then push and be shoved to acquire something they most probably don’t even really need just because it is some 10 or 20% off in price. On the following Monday they repeated the exercise from the comfort of their home or office, being abused by slow connections under big loads.


If it is truly just the effect of buying because it is cheaper than it was, why are they not all rushing to buy stock? Clearly these items at 15%, 20% and some at 50% off should be clicked and dragged into a buy-basket? Strange how a useless widget that you can touch for less, excites one’s buying neurons more than a valuable piece of virtual paper like a share in Amazon which seems not to trigger those same nerve ends.


Hmmm…. Stepping back into the flow of data for this week we had Mario Draghi talking ECB words into the microphones and Powell into his set of listening devices. Whilst Mario’s words did little to make markets question themselves, the dovish words from the Fed woke us up; Federal Reserve Chairman Jerome Powell said Wednesday that he considers the central bank’s benchmark interest rate to be near a neutral level, an important distinction from remarks he made less than two months ago. “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth”. He made further statements to show that the Federal Open Market Committee, which sets interest rates, does not have a pre-determined idea for where rates should be and will be making policy decisions instead on developing economic and financial conditions.


Markets reacted immediately to the speech, with stocks lurching higher and government bond yields nudging lower. We had one of the largest single-day up markets ever, with the DJIA up over 600 points. Ten-year US Treasury yield fell and are now at 3.02%. This is more than a full quarter of a percentage point drop from their recent peak! We all remember the dire warnings from “experts” and analysts of what the rise of this benchmark to 3.25% will do to the economy. Many blamed the erosion in equity prices since August on this rise. Now, just one statement from Powell that the Fed will be more cautious going forward, yields are back down, and stocks are way up. Yes, it is the Fed.


Or is it yet again Super Donald that did it- Just days before Powell’s speech President Donald Trump had stepped up criticism lately of both the central bank and Powell. Trump has gone beyond criticism of the rate hikes and has even objected to the Fed’s balance sheet unwind, in which it is reducing the size of the bond portfolio it accumulated when trying to stimulate the economy. The credit for the bounce back we are all enjoying is clearly due to Mr. President… Imagine how Powell must feel in appearing to bend the Fed’s independence to the Tweets of the Administration…


We were concerned that the Fed was over-zealous in raising rates to curb future wage-driven inflation because unemployment was so low. Oooof… a long and complicated sentence… We wondered if they ever looked at Switzerland which had minuscule inflation whilst unemployment was consistently at or around the 3% level. Then they said they must raise rates so that they could cut them when the inevitable recession came. Back to looking at far lands of Japan, Europe and Switzerland again- all with very low nominal interest rates when the recession came ten years ago. Surprise! A central bank can cut rate to stimulate the economy even when the starting point is low… look carefully and you see that it can be cut even when it is zero. Then, it can be cut again to negative 0.75% What is to stop the SNB from going to minus 2.00%? certainly not logic or mathematics… And, exceptionally here, we back Trump’s views as published Monday, the International Labour Organization (ILO)’s Global Wage Report found that international wage growth saw a 0.6% decline in 2017, based on data from 136 countries. Collectively, advanced G-20 nations saw wage growth fall from 0.9% to 0.4% between 2016 and 2017, while emerging and developing G-20 countries saw wage growth fall from 4.9% to 4.3%. Yes, the Fed should slow down.


Maybe, just maybe this week’s Fed talk gave the markets the force to make the Santa Clause Rally happen with reasons beyond theology. Beyond the Fed learning what to do, Oil prices fell on Wednesday, continuing a recent run of losses, after U.S. crude inventories rose for the 10th week in a row. The market also remains nervous over whether OPEC-led producing countries will reach an accord next week on output cuts. Saudi Arabia said on Wednesday it would not cut output alone and Nigeria stopped short of committing to a new push to curb supplies. U.S. West Texas Intermediate crude fell $1.27, or 2.5%, to $50.29, the lowest settle price since early October 2017. It is trading now at $50.72… is this disinflationary? We think so… The price of Brent has dropped by more than 30% from a four-year high above $86 in early October. Investors sold oil over worries about slowing economic growth in 2019 and Washington’s decision to grant several waivers to importers of Iranian oil after re-imposing sanctions on that nation. Crude’s drop since October is on a par with the 2008 price crash and steeper than that of 2014-2015, both of which prompted OPEC to agree output curbs to support the market. And for those who felt a need to diversify away from Central Bank managed currencies and then chose to do so with the unregulated, unwatched “independent” Bitcoins, Bitcoin is only 10 years old, but the crypto-currency has already seen its fair share of bear markets. It slid below $3,500 for the first time in 14 months, then later recovered toward the $3,900 level by Monday, according to data from CoinDesk. That brings its decline from last year’s peak to more than 81%. Expensive to be independent… Those who do not remember the past are condemned to repeat it. We have repeatedly said “don’t forget the Tulips…”



Market Weekly Highlights

Currencies & Commodities

  • The DXY is almost flat currently trading at 96.90, influenced by mixed signals on potentially productive conversations between the US and China at the G-20 meeting in Argentina, and the latest Fed Chairman Powell’s comments on a possible Fed rate pause. The EURUSD pair hit 1.1267 this week to then open higher this morning at almost 1.14, after Fed chairman Powell’s more dovish comments on rates on Wednesday.
  • The CHF is stronger this week with the USDCHF pair trading just below parity, as is the EURCHF trading at 1.1324 this morning.
  • The Pound is almost unchanged for the week, currently at 1.2755. However, it remains volatile and under pressure, not only because of risk of a No-Deal Brexit, but also because of a latent risk of a snap selection with a potential Labour victory which could increase taxes, bring nationalisation of industries and more regulations.
  • The JPY seems to have hit a resistance at 114 marking a pause in the latest two-week drop against the USD with the pair trading currently slightly lower at 113.60.
  • 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 66.86, lower for the past month, as did the Turkish Lira which reached 7.23 in early August and is now at 5.18.
  • The Brazilian Real weakened earlier this week crossing 3.9 level to currently show 3.85 against the USD.
  • Bitcoin dropped heavily after breaking support at $6’400. It now trades around $ 4’000, a 30% drop in less than 2 weeks….
  • Crude oil WTI is down again this week to $50.80 per barrel, amid US dollar strengthening, trade war escalation and mounting pressures from US sanctions on Iranian Oil; Brent is trading at about $59.

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% mark this month amid inflationary pressures and FED rate hikes to currently show 3.01%.
  • The Japanese 10-year JGB yield has been trading in a range from 0.020% to 0.060% for the first 6 months and then hit 0.16%. now at 0.09%.
  • 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 0.31%, after the latest GDP weak data. Same for the French 10Y Yield which had crossed the 1% during February and then dropped to 0.60% in the summer. Currently at 0.69%.
  • In Peripheral Europe, Italian 10Y yields are now trading at just about 3.22%, slightly lower than the levels seen in May when the internal political turmoil kicked-off, but well above the 1.70% levels of April. The Spanish 10Y yields trade some 170 bps lower than Italy at 1.50%, lower than where it started the year.


  • Markets in the US turned positive again for 2018 despite the longer than expected October correction; NASDAQ being the highest positive performer and posting 5.36% yearly return, giving away more than 10% from the highest levels reached this year. SP500 and DJIA are up, respectively by 2.40% and 2.51% YTD. The SP500 is currently at just below 2’740, the DJIA just a couple of points above 25’330, while Nasdaq is trading some points below 7’275.
  • In Europe, markets are all showing significant negative returns for the year so far, with DAX and Italian MIB being the largest underperformers at respectively -13.04% and -12.42%. The Eurostoxx50, Spanish IBEX 35, FTSE 100 and Swiss SMI are all following with losses of -9.79%, -9.77%, -9.00% and -4.06%.
  • In Asia, the Nikkei was up this week but still down for the year marking -1.82%, while Hang Seng is down by 11.41%. BOVESPA is the most positive equity market for the year showing a strong performance of +17.42%. This is helped by election optimism, and slightly positive in USD, despite the important weakness of the currency.


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