by Pinchas Cohen
Key Events
Yesterday, US equities dropped to a three-week low. The dollar and Treasury yields followed. This after recent, slower-than-expected growth in China sparked a commodities selloff, compounded by sudden fears of a renewed oil glut, which reawakened long-dormant fears that global growth will not persist. The mood was further darkened by the prospect of tax cuts not being enacted, for the second time.
Global Financial Affairs
The S&P 500 Index registered a fourth daily slide within 5 sessions. However, not all contractions are the same. A close toward the bottom of the session suggests bears are more fully in control, while a day in which declines may have registered early in trading, but the market finished at the top of the range indicates that bulls have come back.
Thus, even within a downturn, yesterday’s session was set to close at the height of the session, which would have been a bullish hope within a lower close. But a report released during the last hour of trading, indicating that a key Republican would not sign the Senate’s most recent tax bill, stanched any bullish control and prices ended in the lower half of the daily session.
A look deeper, beyond the index itself, reveals particularly bearish sentiment within the market's segments, since even defensive sectors were sold off. The single sector in the green yesterday, with a 0.23 percent gain, was Financials. Energy, a growth sector, led the declines with a 1.16 percent slide as crude continued its downward trajectory toward $55 a barrel. It was closely followed by Consumer Staples, a defensive sector, which was down 1.06 percent.
The commodities market, responsible for dragging equities down, extended its worst decline in a year, stopped by its uptrend line. Not only do commodities drag down shares of producers, they are leading indicators for inflation as well because they are a pricing gauge. As such, institutions may be concerned with an economic slowdown and a slower path to higher interest rates.
Perhaps this explains why even data demonstrating US consumer attitudes remain robust, crucial for a consumer-driven, developed economy, alongside higher inflation, couldn’t help stocks gain traction. The only sector that enjoyed inflation-related growth was the single sector that was in the green, bank shares.
Even as US inflation and retail data indicated an economy ripe for a Fed rate hike stocks still fell. The optimistic releases should have eased fears regarding whether the biggest economy in the world was on the move (even if at times expansion seems so slow that it’s hard to tell). Still, the flattest yield curve in a decade had investors and institutions thinking the US economy was about to implode.
Yesterday, yields on the US 10-year rose. Rising yields, often a sign of cash flow to stocks, could also be an indicator of the bull-bear interplay of a head-and-shoulders top in the making. A top in yields occurs when investors seek a safe haven.
In addition to lower commodity prices acting as a leading indicator to a lower outlook for inflation, they raise the risk of cracks in the high-yield debt market. Corporate bonds, issued by companies that have a higher default risk, could more easily default in such an environment. The contagion might then spread, causing market selloffs.
Another potential risk is the shattering of investor hopes for tax cuts. The more obstacles and the more drawn out the process, the greater the potential disappointed investors will begin unwinding their tax cut related trades, which can easily snowball into an all-out crash.
But back to the direct cause of the current selloff, weaker than expected Chinese data, which sent commodities into a tailspin. Is that story over?
Depends who you ask. China Daily’s headline said “China’s economy on steady track despite softened momentum,” while the South China Morning Post asked “Are China’s US$3 trillion reserves an economic curse?. According to the second article, "a government economic adviser says China's central bank should stop-drip feeding cash into the economy, fueling asset price bubbles and wayward investment.”
This, after China’s central bank yesterday boosted the supply of cash, injecting a net 310 billion yuan, or $47 billion into the economy, the biggest one-day addition since January 18. The People’s Bank of China’s injection came after the country's benchmark 10-year yield surged Tuesday, pushing past 4 percent for the first time in three years. The infusion into the financial system was the most since January, even as stocks declined. While this points to a problem that's being prolonged, which exacerbates the economic bubbles currently percolating within China's economy, the cash infusion stabilized commodities.
After a 4-day decline, this morning, Asian stocks rebounded.
Japanese equities ended their longest decline of the year. Also, gauges in Australia, South Korea and Hong Kong climbed.
European markets, seeing their Asian counterparts turn bullish, rallied for the first time after 7 days of losses. The Stoxx Europe 600 Index was buoyed by financial services firms and builders.
Commodities in general and oil in particular reached equilibrium, after the sharpest five-session decline for crude since early October.
News the EU won’t go for the UK's proposal for a custom trade deal injected volatility into the pound. The general mood in Britain was worsened when auto demand declined for a seventh straight month in October.
Up Ahead
- Bank of England officials address the bank’s future on Thursday, while European Central Bank chief Mario Draghi speaks Friday.
- A string of Fed appearances may further illuminate the FOMC’s commitment to a December hike.
Market Moves
Stocks
- The Stoxx Europe 600 Index climbed 0.4 percent as of 8:43 a.m. London time, the first advance in more than a week and the largest increase in more than two weeks.
- The MSCI All-Country World Equity Index climbed 0.2 percent, the first advance in more than a week and the biggest increase in more than two weeks.
- The MSCI Asia Pacific Index increased 0.8 percent, the first advance in a week and the largest climb in more than a week.
- The U.K.’s FTSE 100 Index increased less than 0.05 percent, the first advance in more than a week.
- The MSCI Emerging Markets Index climbed 0.9 percent, the first advance in more than a week and the largest increase in more than two weeks.
- S&P 500 Futures are up 0.29%
Currencies
- The Dollar Index climbed 0.7 percent to 93.92, extending an advance after yesterday’s powerful bullish hammer, with an exceptionally long lower shadow, whose low was reached on October 20.
- The euro, in a precise mirror image to the DX, lost 0.7 percent, falling to 1.1776, after yesterday’s bearish shooting-star, with a bearish upper shadow, equal to the dollar hammer’s lower shadow.
- The British pound, after unusual fluctuation, fell less than 0.05 percent to $1.3169.
Bonds
- The yield on 10-year Treasuries climbed three basis points to 2.35 percent.
- Germany’s 10-year yield gained one basis point to 0.38 percent.
- Britain’s 10-year yield increased less than one basis point to 1.289 percent.
Commodities