Markets: Bounces

When bounces are meant to be sold, you know you have entered a bear market or a dead cat. This is the key lesson for 2018 and it changes the paradigm for passive and algorithmic trading systems. The summer mantra of buying-dips has shifted. The long winter for a number of markets is upon us early.

The $1trn drop in market cap for the FAANG and the sharp drop in oil prices lead the price action of the last 48 hours but not the last 12. The roller coaster of markets is climbing the wall of worry into the US Thanksgiving Holiday. The list of worries remains significant – for Europe you have 1) UK May-Juncker talks, UK Labor opposition to the Brexit deal and ongoing Tory splintering over it. 2) The Italian budget issues come to a head today, with the deputy PM Salvini saying“The League rules out revising the fiscal plan,” but then revises his approach suggesting he is willing to talk after the EU rejects the 2019 budget.

The ISTAT forecast for 2018 growth in Italy was cut to 1.1%from 1.4%, but sees 1.3% bounce for 2019. 3) For the US it’s still about China and the trade war with a new report from Trade Representative Lighthizer’s office accusing China of ongoing IP theft. Throw in expectations for an FOMC hike in December despite ongoing market volatility and risk-off globally. But this is where hope rests for the day with rate policy reactions to the present financial distress not so clear for 2019. The present price action in FX reflects this story and the USD rally that extended yesterday despite the equity/oil rout has reversed a bit today with focus on the EUR remaining central for trading the markets – with 1.1550 needed to prove any sign of real hope for a bounce to become a counter-trend rally. 

Question for the Day: Is the OECD too sanguine? The OECD economic forecasts call for a fragile soft landing for 2019. “We’re returning to the long-term trend. We’re not expecting a hard landing, however, there’s a lot of risks. A soft landing is always difficult,” OECD chief economist Laurence Boone told Reuters in an interview. The OECD cut its forecasts for global growth from 3.7% this year to 3.5% in 2019 – that is down from 3.7% previously. The group sees growth slowing the most in non-OECD countries with emerging markets most likely to see further capital outflows as the US continues to hike rates. The OECD cut its outlook for countries at risk such as Brazil, Russia, Turkey and South Africa. 

Presenting the Outlook, OECD Secretary-General Angel Gurría said: “Trade conflicts and political uncertainty are adding to the difficulties governments face in ensuring that economic growth remains strong, sustainable and inclusive. We urge policy-makers to help restore confidence in the international rules-based trading system and to implement reforms that boost growth and raise living standards – particularly for the most vulnerable.”

What Happened?

• Japan September all-industries activity index drops 0.9% m/m after +0.4% revised – weaker than -0.8% expected. The August revised lower from 0.5% m/m. The tertiary index fell 1.1% after 0.4% - also weaker than 0.9% drop expected. 

• UK October PSBN rises to GBP8.82bn after GBP7.235bn last year and GBP3.259bn for September – more than the GBP6bn expected. The ONS cited “notable” growth in expenditure on goods and services, as well as social benefits. Interest payments on government debt also increased. For the first 7-months of the 2018/2019 fiscal year the deficit is down almost 30% to GBP26.7bn – the lowest in 13-years. The total public debt excluding the BOE and banks is GBP1.5985trn or 75% of GDP – that is off from 79% in Oct 2017. 

Market Recap:

Equities: The US S&P500 futures are up 0.6% after losing 1.82% yesteday. The Stoxx Europe 600 is up 0.6% with telecoms and banks leading – the first gain in a week. The MSCI Asia Pacific Index was off 0.1% with China bouncing but rest of region lower again. 

• Japan Nikkei off 0.35% to 21,507.54
• Korea Kospi off 0.29% to 2,076.55
• Hong Kong Hang Seng up 0.51% to 25,971.47
• China Shanghai Composite up 0.21% to 2,651.51
• Australia ASX off 0.64% to 5,722.10
• India NSE50 off 0.53% to 10,600.05
• UK FTSE so far up 0.6% to 6,989
• German DAX so far up 0.5% to 11,124
• French CAC40 so far up 0.3% to 4,940
• Italian FTSE so farup 0.5% to 18,574

Fixed Income: Little new economic data leaves risk-mood in equities then UK and Italy stories driving – UK 10-year Gilt yiels are up 0.7bsp to 1.387%, German Bunds up 1.7bps to 0.365%, French OATs up 1bps to 0.763% while periphery rally drives on Italy budget deal hopes – BTP off 11.7bpst o 3.495%, Spain off 2bps to 1.625%, Portugal off 2.7bps to 1.95% and Greece off 2.7bps to 4.615%. 

• Germany sold EE2.4475bn of 5Y 0% Oct 2023 BOBL at -0.22% with 1.54 cover – previously -0.18% with 1.2 cover. 
• Portugal sold E650mn of 1Y bills at -0.327% with 2.64 cover– previously E1bn at -0.26% with 1.48 cover. Portugal also sold E350mn of 6M bills at -0.369% with 2.64 cover. 
• US Bonds are lower, curve steeper, tracking equities– 2Y up 0.6bps to 2.81%, 5Y up 0.9bps to 2.895%, 10Y up 1.1bps to 3.075%, 30Y up 1.7bps to 3.332%. 
• Japan JGBs rally bull flattening with risk-off, 10Y back to August low yields – 2Y off 0.3bps to -0.152%, 5Y off 0.5bps to -0.11%, 10Y off 1bps to -0.083%, 30Y off 2.3bps to 0.815%
• Australian bonds edge lower despite Lowe comments, Iron ore drop– 3Y flat at 2.08%, 10Y up 1bps to 2.70%. 
• China PBOC skips open market operations for 19thday, keeps liquidity neutral.  The MOF sold CNY26.16bn in 1Y bonds at 2.41% today with 2.12 cover – down from 2.81 previously. The MOF also sold CNY26.46bn of 10Y bonds at 3.25% with 2.91 cover.  Net result – curve flattens with equity bounce – 2Y up 3bps to 2.75%, 5Y up 5bps to 3.12%, 10Y off 1.5bps to 3.35%.

Foreign Exchange: The US dollar index off 0.25% to 96.60 with 96.55-96.86 range.  In Emerging Markets – USD mostly lower – EMEA:ZAR up 1% to 13.955, TRY up 0.45% to 5.355, RUB up 0.3% to 65.98; ASIA: TWD flat at 30.89, KRW off 0.45% to 1130.70, INR up 0.3% to 71.46

• EUR: 1.1400 up 0.25%. Range 1.1365-1.1418 with Italy relief, UK holding and talk of FED pause driving. 1.1350-1.1500 consolidation?
• JPY: 113.00 up 0.2%. Range 112.65-113.15 with EUR/JPY 128.90 up 0.5% - despite Nikkei flip in Europe driving with 112.20-113.80 in play. 
• GBP: 1.2805 up 0.15%. Range 1.2773-1.2820 with EUR/GBP .8905 up 0.1% - all about UK Brexit and politics still – 1.27-1.29 consolidation
• AUD: .7240 up 0.4%. Range .7472-.7491 with bounce back from yesterday with commodities, China rebound, NZD up 0.6% to 0.6830 with .6880 key.
• CAD: 1.3290 off 0.15%. Range 1.2376-1.3318 with BOC comments yesterday still stinging 1.3250-1.3400 risk holds with data Friday key 
• CHF: .9940 off 0.15%. Range .9930-.9957 with EUR/CHF 1.1335 up 0.15% - all about Italy still – watching .9880-1.0020. 
• CNY: 6.9449 fixed 0.24% weaker from 6.2980, trades 0.1% stronger at 6.9375 with 6.9327-6.9529 range. 

Commodities: Oil up, Gold up, Copper up 0.4% to $2.8075. 

• Oil: $54.30 up 1.65%.Range $53.39-$54.72 with focus on $52.50 against $55 for WTI. API reported a surprise 1.5mb crude draw – when a 4.8mb build was expected.  This puts EIA today as key for extending any bounce. Brent up 1.5% to $63.45 – still is off over 25% from the Oct 3 $87.74 yearly highs. Focus is on $62-$65 trading now. 
• Gold: $1223.70 up 0.15%.Range $1222-$1225 with focus on $1226 and $1235 resistance against $1215 base building. USD/Rates driving with risk mood. Silver up 0.65% to $14.41 still consolidation phase with $14.25-$14.50. Platinum up 0.6% to $847.30 and Palladium up 0.8% to $1154.50. 

Conclusions: Is Cash now King? The market has awoken to risk and searches for safety with the 3.5% drop in the S&P500 since Monday going into Thanksgiving anything but happy. The asset allocation game for 2018 lifts cash to the leading position, the S&P500 is second, global bonds third. Defining the right balance into the end of the year maybe different than the right balance for 1Q2019 and so the watch for bounces and selling will remain central for traders and investors.