Markets gloom deepens as Wall Street has its worst week in nine months
Bond yield inversions, death crosses to bear … it was another tough week at the office for Wall Street traders. (Reuters: Brendan McDermid)
For global markets it was an ugly end to a week that started with such promise.
- Wall Street experienced its worst week in nine months, while the ASX nudged higher
- Fears of a slowdown next year and another deterioration in relations between the US and China are hurting sentiment
- Oil prices jumped after OPEC and Russia agreed to a larger-than-expected production cut
What appeared to be some sort of rapprochement between the US and China on trade and some soothing words from the Federal Reserve was soon enough steamrolled by investors fleeing with profits stuffed in their pockets.
The kicking-the-can down the road exercise from the G20 tete-a-tete between Presidents Trump and Xi — initially seen as a positive — was overtaken by tensions blowing up again over the arrest of a senior Huawei executive and the bond market presaging the possibility of if not a recession, at least a serious slowdown next year.
Weaker-than-expected US jobs data on Friday didn’t help the sentiment with markets now clearly factoring in the US economy clicking down a gear or two.
Wall Street’s key indices fell more than 2 per cent on Friday, the tech-centric NASDAQ fell more.
Over the week they were down 4-to-5 per cent, the sharpest decline since the March wobbles.
The ASX hung in bravely and notched a gain, but futures markets point to that, plus more, being erased when trading resumes. The Australian dollar was also toying with slipping back under 72 US cents.
“There were no doubt a dozen other contributing reasons why the US markets cracked, but looming large seems to be the realisation that Trump’s appetite for instability kills sentiment,” Peninsula Capital Management’s Richard Campbell observed.
Markets on Friday’s close:
- ASX SPI 200 futures -0.6pc at 5,637 ASX 200 (Friday’s close) +0.4pc at 5,681
- AUD: 72.0 US cents, 63.1 euro cents, 56.5 British pence, 81.1 Japanese yen, $NZ1.05
- US: Dow Jones -2.2pc at 24,389 S&P500 -2.3pc at 2,633 NASDAQ +1.1pc at 6,969
- Europe: FTSE +1.1pc at 6,778 DAX -0.2pc at 10.788 EuroStoxx50 +0.4 at 3,059
- Commodities: Brent oil +2.2pc at $US61.38/barrel, Gold +0.8pc at $US1247/ounce, Iron ore $US66.90/tonne
Bond yields are inverting, does it matter?
Raising the issue of bond yields is generally, and sensibly, a conversation killer.
However, in financial markets at the moment it is a hot topic.
To cut to the chase, short-term yields on US treasury bonds are converging with long-term yields — implying weaker economic conditions in the future. Normally long-term yields are a fair bit higher.
When the short-term bonds return better yields than long-term bonds that’s called an inversion, and horror or horrors, for many that means a recession is on its way.
Certainly the bunching up of yields doesn’t look healthy, but some of it can be attributed to the end of the Fed’s massive money printing operation.
AMP Capital’s Shane Oliver is not shaking in his boots, particularly given much of the angst at the moment is over and inversion between two- and five-year bonds, not the usual two- and 10-year benchmark.
“The sudden frenzy over a bit of the US yield curve is whacko,” Dr Oliver said.
“The yield curve to watch is the gap between the 10-year bond yield and the Fed Funds rate and it’s flattened but is still positive at 72 basis points,” Dr Oliver cautioned.
As well, the two-year rate compared to the Fed Funds rate is also a long way from negative.
“Prior to the last three US recessions both of these yield curves inverted — but there were several false signals and the gap between the initial inversion and recession can be long, averaging around 15 months,” he said.
“So even if they both invert now, recession may not occur until 2020 and yet historically share markets only precede recessions by around three to six months, so it would be too far away for markets to anticipate.”
Short term bond yields above long yields in the US sometimes precede a recession, but not always (Supplied: AMP Capital)
What about the ‘death cross’?
If inverting bond yields don’t catch your attention, the emergence of the dreaded “death cross” may. It certainly sounds scarier.
Death crosses are for many technical traders an ominous message from the future; a premonition that markets have further to fall.
“The death cross appears on a chart when a stock’s short-term moving average crosses below its long-term moving average,” is Investopedia’s pithy definition.
As bad luck would have it, Friday’s stumble saw Wall Street’s benchmark index the S&P500 form a death cross, joining the small-cap Russell 2000 index in the same unhappy boat.
For the statistically minded, according to Reuters death crosses have formed on the S&P500 only 12 times since the Great Depression back in the late 1920s.
On 10 of those occasions the market has dropped over the next month. Spooky? Perhaps not.
Firstly, more often than not the market rebounds out of “death cross” and secondly there is an argument death crosses only tell the market what it already knows.
“It doesn’t happen until the market has already broken down, and we’ve already seen that happen,” New York fund manager Ken Polcari told Reuters.
“We’re in for more bumpy price action, but I don’t think we’re in for a crash.”
But before becoming too complacent, it should also be noted the wealth demolition during the GFC occurred without a hint of death cross beforehand.
In 10 0f 12 times the S&P500 has formed a “death cross” since 1928, the market has ended the following month lower. (Supplied: Thomson Reuters)
OPEC turns down the taps
Oil bucked the trend of Friday sell-off on the news that the “OPEC+” cartel (or OPEC and the Russians) had agreed to turn down the production taps far more than expected.
The market thought a 1 million barrel per day (b/d) cut would be delivered in an attempt to put a floor under falling oil prices.
After two days of intense negotiation, OPEC+ agreed to a 1.2 million b/d cut from next year, to be reviewed in April.
It had the immediate effect of driving up prices, the global Brent crude benchmark jumped almost 3 per cent to $61.67 a barrel. It rose almost 5 per cent over the week, so stand ready for renewed bad news filling up.
OPEC and Russia have agreed to tighten the taps on oil production, driving prices higher. (Reuters)
Commenting off to the sidelines at the Vienna meeting, Wood Mackenzie oil specialist Ann-Louise Hittle said the deal was expected given how high the stakes were and the glut the market faces next year.
“A production cut of 1.2 million b/d would tighten the oil market by the third quarter of 2019 and cause prices to rise back above $70 per barrel for Brent,” she said.
The deal thumbs its nose at Mr Trump’s demands on OPEC not to force prices up, but there is a constituency in the US that would still be quietly pleased.
“The decision is likely to be met with support from some US producers who were concerned that without a deal, WTI [West Texas Intermediate crude] prices would fall further, possibly curtailing 2019 drilling activity, Ms Hittle said.
Quiet week ahead
After the torrent of releases last week, things look quiet ahead of the protracted summer data drought.
The latest home loan data (Monday) should still show a subdued appetite for borrowing.
Measures of business and consumer sentiment (Tuesday and Wednesday respectively) should be OK leading into Christmas.
Overseas, Tuesday’s Brexit vote dominates Europe, while the regular monthly data dump in China (Friday) is expected to be relatively uneventful.
This column will be taking a break for a while, but should return in early February.
In the meantime, if you’ve made it this far, thanks for your perseverance and please have a merry Christmas and happy, healthy and prosperous New Year.
|Home loans||Oct: Likely to be softer again, particularly in the investor sector|
|RBA speech||Assistant governor Christopher Kent speaks on US monetary policy and financial conditions|
|Business conditions & confidence||Nov: Holding up well|
|House price index||Q3: RBA measure, not as up-to-date as private monthly surveys. Will tell us what we already know|
|Consumer confidence||Nov: Westpac series. Optimism still outweighs pessimism. Last survey found home buying was again back in favour|
|Westpac AGM||It’s the investors’ turn to grill the banks’ top brass. Executive bonuses have been cut, so no strike expected|
|JN: GDP||Q3: It fell in the previous quarter, tipped to fall again. Bingo, recession returns|
|UK: Brexit vote||Soft Brexit, hard Brexit, no Brexit? Stand by.|
|US: Inflation||CPI expected to be flat, taking YoY rate to 2.2pc|
|EU: Industrial production||Oct: Expected to rebound after September contraction|
|EU: ECB rates decision||No change|
|CH: Monthly data release||Nov: Surprisingly strong in October, that strength likely to be maintained|
|US: Retail sales||Nov: Modest growth at best|