Investors are back fighting the tape after yesterday’s biggest stock market rally in nearly a decade fizzled, but this rollercoaster ride is unlikely to stop anytime soon as investors continue to wear emotions on their sleeve.
And while it could be argued that the pre-Xmas sell-off has been extreme and unwarranted, fundamentals count for little as in the “Bohemian Rhapsody” type of market conditions. "Nothing really matters” other than pure momentum plays.
Doing battle against an unsteady S&P 500 is proving difficult for investors during this holiday season as selloffs were getting little pushback from big institutional traders who have closed shop for the year and those that are still in the game find it much easier to trade the exaggerated daily trends, up or down, in holiday-thinned liquidity conditions.
It’s not only the tape investors are battling, but it’s weaker economic data, yield curve interpretations and the noise out of DC which will get nastier when in late January the Democrats officially take office.
It’s incredible just how harmful markets veer when sentiment slides. It appears little can be done as weaker economic data will trigger disproportionate downside moves and reassuring statements from the US administration or the Fed will be perceived as a sign of weakness and will unleash new waves of selling all the while investors remain horrified of the yield curve shape.
But keep in mind that when markets start trading off the frenzy factor, as we’ve seen during the last 24 hours, extreme market moves can cut both ways as exhibited by the bullish flip on the S&P 500 into the bell today as the market erased a 600-point tumble in another emotionally charged session.
Rebalancing Act?
However, such a profound move out of bonds and into equities suggests a high probability of year-end rebalancing. We’ve been keeping our eye on this as reports were floating that pension funds would move $63 billion out of bonds as Funds has a strategy of taking profit on the best performers while rebalancing target positions with assets that do the worst at the end of the quarter.
Indeed a 3% recovery on the SPX in short order coupled with a chunky sell-off on bonds has all the hallmarks of year-end rebalancing.
US-China tensions
Of course, the trade war narrative is never far from investors minds. Overnight Reuters reported, citing three sources familiar with the situation, that President Donald Trump is considering an executive order to ban U.S. companies from using equipment built by Chinese firms Huawei (SZ:002502) and ZTE (HK:0763). With the end of 90-day tariff moratorium looming ominously on the horizon, this announcement is yet another bump in the rocky path to a trade resolution.
Economic Data
The latest fall in the Conference Board Consumer Confidence Index could not have come in at the worst time. And while the data, which is backwards-looking, was collected during a panic parade as fears of an economic slowdown were getting pumped everywhere, but it supports the argument that investors sentiment remain fragile and weaker economic data will trigger disproportionate downside moves. Although most everyone does not believe a 2019 recession is at hand, the tumbling equity markets could be the harbinger of doom none the less as businesses cutback anticipating further consumer stress due to the markets feedback loop.
While in Asia, there was more gloom in China as industrial profits suffered the first annual loss in 3 years and confirming what we all are expecting that growth of the world’s second-largest economy will slow further in the fourth quarter from the decade-low GDP rate of 6.5 per cent in the third quarter. But potentially more damning is China manufactures could reduce near-term capital expenditures further cooling the economy.
Given the tail risk for China’s economy remains substantial, Mainland economic growth could be the most significant risk in 2019
Yield curve chatter
The Fed does not believe yield curve inversion is predicting a US recession. But the recent Blog posted on the St Lois Fed website is some interesting food for thought despite this being the landing page of the most dovish Fed member of them all, James Bullard.
Convincingly, it argues:
“Researchers have found that the economy tends to slow after banks tighten their lending standards, suggesting that an inversion of the yield curve could cause economic activity to slow by leading banks to reduce the supply of loans. Thus, an inverted yield curve might do more than predict a recession: It might cause one.”
Indeed, it does suggest banks will be less likely to borrow short term, which is usually the cheapest part of the yield curve and lend longer dates.
Oil Markets
Oil prices have staged a late afternoon rally tracking an impressive rebound on US stocks after wallowing below the critical $45 much of the session. Early selling action was triggered after much weaker than expected US consumer confidence data sent US equity markets for a tumble. But despite equity market roaring back late afternoon, oil prices laggard as the oil traders remain concerned with persistent prospects of slowed economic growth, particularly after the weaker China industrial profits data, coupled with the expectation of strong U.S. production in the new year.
Speaking of US production, in another blow to sentiment a surprise inventory build has capped this afternoons oil price recovery and could push prices lower in Asia as traders try to navigate this perilous week in the oil patch.
We continue to get moral suasion from OPEC, but its falling on deaf ears as oil prices remain inextricable from global risk sentiment at this point.
Also, Asia Oil liquidity took a bit of a hit, as if holiday thinned-trading conditions we not bad enough after traders at Unipec, one of China’s biggest traders were suspended due to excessive trade losses, yet another causality of the violent swings on oil markets
Gold Markets
Despite the late afternoon recovery in US equities, gold holds near its highest level in six months as investors are weighing the plenitude of risks heading into the new year. Indeed, there’s an extensive laundry list of concerns Trump berating the Fed, Trade Wars, China slowing growth, Brexit casualties, EU slowdown. But when you factor in a possible downswing the US economy in 2019, this is when things get ugly and why gold remains so alluring.
The market continues to view Gold as a viable hedge entering 2019 m where markets are expected struggle given the extremely shaky footings.
Currency Markets
USD underperformed dearly on Thursday, giving rise to carry currency appeal. USD/JPY traded down towards 110.50 until US equities staged a sharp recovery on dip demand which saw Dollar Yen pare declines back to the familiar 111 level
FX markets are getting whipped around by year-end positioning amidst poor liquidity.
And the discussion has centred on the Fed outlook (St Louis Blog) while mulling over an unexpected fall in US consumer confidence. But overall most traders have their finger to the wind doing little more than trading smalls on the back of equity markets swings.
Malaysian Ringgit
Currency carry appeal has the Ringgit trading on better footing as the markets continue to debate the next Fed move as a growing chorus of support suggest the Fed will be on hold until mid-2019 at least. A more dovish Fed will lend support to growth assets and carry trade, and the Ringgit should benefit on both front.
Oil prices continued to be a concern but by all accounts, we are nearing a floor, and with more stimulus likely to come in the form of more aggressive tax cuts out of China, the commodity will likely benefit which is also supportive of the Ringgit.
But liquidity remains very thin which is dissuading investors from reengaging, so caution should be exercised in holiday-thinned markets.