Last week’s spike in market volatility may spill over into today’s trading, but Monday will be quiet for economic news. That’s partly because US markets are closed for the Martin Luther King Jr holiday.
With fresh perspective via macro updates generally on hold today, the markets outside the US will have a commanding influence on shaping the outlook, for good or ill. The short list that deserves close attention on Monday includes the German 10-year yield, along with global stock markets and ground zero for much of the recent angst: Tumbling oil prices.
Search for safe havens ... equities are having a tough time of it to date. Photo: iStock
Germany 10-Year: The global appetite for safe havens is soaring – again. Even before Friday’s disappointing US economic news for retail sales and industrial output, Treasury yields were falling. The U.S. 2-Year yield – said to be the most sensitive for rate expectations – posted declines nearly every day in the new year, dipping to 0.90% by January 14. The following day, Friday, the risk-off trade accelerated, pushing the 2-year yield down to 0.85% – the lowest since last November.
Adding to the case for downsizing expectations: the Atlanta Fed’s widely followed GDPNow estimate for fourth-quarter US growth on Friday was revised down to a tepid 0.6%.
US trading is on holiday today and so Germany’s 10-year yield will receive even more attention than usual as the world looks for direction in the fixed income markets after last week’s stampede out of risky assets.
Europe’s benchmark 10-year yield fell below 0.5% on Friday, close to the lowest level in a month and the crowd will be focused like a laser beam on how this key yield moves today.
Not surprisingly, it’s now widely expected that the Federal Reserve will leave interest rates unchanged when the central bank convenes its policy meeting next week. Some analysts are even starting to consider the case for backtracking on rates and rolling out more monetary stimulus. That’s still a minority view, but the week ahead may suggest otherwise. An early clue on what comes next can be found in Monday’s change in Germany’s 10-year yield.
Global stock markets: Equities are having a rough time this year and it’s all about fears of deteriorating economic activity. China’s the main worry, but the latest declines in industrial activity and retail spending in the US for last month serve as a reminder that global contagion is a factor.
It’s important to point out that the bear market in energy is a key source of the weakness we’re seeing in the numbers, particularly in the US. Consider, for instance, that after stripping out petrol sales from retail spending, consumption last year was up a decent, if unspectacular 3.9% (and flat on a monthly basis ex-petrol in December).
“The soft report on retail sales in December does not spell doom for the US economy,” reasoned the economics team at First Trust, a bank. “Declining sales at gas stations are largely a function of lower gas prices, which gives consumers more money to spend on other items,” the firm explained.
“Gas station sales are down a whopping 14.6% from a year ago.” The bottom line, according to First Trust, is that US payrolls will continue to rise at a respectable pace, which is “enough to keep the Fed on track for another rate hike in March”.
That’s a bold outlook given last week’s sharp losses in equities around the world. Does First Trust's narrative have any chance of resonating with the market in the days ahead? Today’s trading offers a test. US markets are closed for Monday, but elsewhere we’ll see if the weekend has cooled last week’s bearish passions.
The early bellwether: China’s Shanghai Composite Index (pink line in chart below), which last week slumped back to the lows of last August. A sustained decline today and in the days to come – particularly one that’s supported by continued selling in other markets – would deepen the already troubling signs emanating from global stocks so far this year.
Global sharemarkets weekly chart
Crude Oil: Another key signal for the week ahead will come from the oil market, which has been at the forefront of macro worries in recent months. By some accounts, the slumping price of crude since mid-2014 has been a macro warning sign all along – the proverbial canary in the coal mine.
“With the global economy, we could be in a serious crisis … which translates into a lack of demand for energy,” noted an analyst at Tradition Energy on Friday. “Emerging markets were the one bright spot in the world, and with that being removed now and no change on the [oil] supply side … that’s going to continue the overhang in the market.”
The optimistic spin is that crude oil prices have been tumbling primarily because of excess supply, which has been exacerbated by a choice by the world’s key swing producer – Saudi Arabia – to maintain production at or near record levels in the face of lower demand. Plans to lift sanctions on Iran that will open the door for this major producer to ramp up exports this month only adds to the sense that the oil glut will get worse before it gets better.
Whatever the reason, the ongoing slide in oil is widely seen – rightly or wrongly – as a proxy for global economic expectations. With spot prices for the two key benchmarks – Brent and West Texas Intermediate – falling to the lowest levels in over a decade last week, another leg down will trigger even darker expectations.
Spot price, light crude monthly chart
Disclosure: Originally published at Saxo Bank TradingFloor.com