Volatility is back. It’s been a while since we’ve seen market swings like the ones we saw today. The 10-year treasury temporarily dipped as low as 1.87% (chart below) and the S&P 500 futures had a 4% intraday trading range.
10-year treasury yield (intraday) Source: @toby_n
It’s not entirely clear what drove this volatility other than slower US retail sales in September and a weaker-than-expected New York manufacturing report. The story of the world economies slowing was also being thrown around, although I am not sure how that’s news all of a sudden.
Walmart lowered its sales forecast, seeing some clouds on the horizon for the holiday season. The one item that continues to make me uneasy is the Ebola situation in the US. The sentiment deterioration could be quite damaging to the economy if fear begins to spread.
Source: Bloomberg
As of last week, the high frequency survey reports show no impact on consumer sentiment — in fact, confidence is up in the US. But all that could change...
Source: Gallup Daily Tracking
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The Eurozone periphery bond spreads to Germany rose sharply as risk aversion set in. German yields hit new lows while Greek, Portuguese and other periphery yields rose.
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Note that the five-year German government bonds now yield just 10 basis points — that’s lower than the five-year Japanese bonds. Here is the yield curve comparison.
Source: SoberLook.com
The European Central Bank can continue to argue that economic conditions in the Eurozone are nothing like those in Japan. The markets say otherwise...
The US dollar index fell sharply this morning with US equities.
Ultimately, this should arrest the declines in crude oil. So far, however, it hasn’t, as crude price declines accelerated.
Brent crude ********* With energy prices falling, the five-year US breakeven (Treasury Inflation Protected Securities-implied inflation expectations) fell below 1.5% for the first time in years.
Source: SoberLook.com
Ebola hysteria risks aside, economic conditions in the US are quite benign, which should benefit the consumer. Here are three examples:
Source: Barchart.com
Source: Barchart.com
Source: MND
Here is a great quote on this topic:
The recent spike in volatility has created a "dislocation" in US equity options markets. The VIX index, which is a measure of implied volatility for large-cap shares is now higher than RVX — the small-cap equivalent. This is highly unusual, since small-caps tend to be more volatile. Part of the issue is the outsized spike in the volatility of large energy shares due to the recent sell-off in crude oil.
In US credit markets, Business Development Companies continue to come under pressure. There was way too much capital raised in BDC land because of the sector’s great performance since 2009. But that trade has played out. The market adjustment should correct some of the stupid valuations in middle market credit and private equity that was created by BDCs.
Blue=HY bonds, Green=leveraged loans, Red=BDCs