Hugh Son of CNBC reports, Markets are going haywire. Here’s why these sudden moves are here to stay:
Wherever Mark Connors looks at markets, from stocks to currencies to oil, he sees signs of the unknown.
Equity investors got whipsawed this week during two rough and volatile sessions, but Connors, global head of risk advisory at Credit Suisse, had seen worrying signs long before that. A key technical measure he tracks, the correlation between the price of stocks and currencies, had broken down starting in April. That, along with sharp drops in the price of oil, point to one thing, he says: Uncertainty about the future as central banks around the world unwind programs that bought trillions of dollars of assets.
“We’re seeing two of the biggest asset classes, stocks and currencies, exhibit a degree of uncertainty in their relationship in 2018 that we’ve never seen before,” Connors said. “Crude just exhibited something very unusual in the context of the last 40 years.”
The unwinding of central banks’ programs a decade after the financial crisis brought economies to the brink is known as quantitative tightening. J.P. Morgan Chase CEO Jamie Dimon said in July that one of his biggest fears is around how markets would behave as central banks removed their unprecedented stimulus.
“If quantitative tightening continues, guess what’s going to happen? More of this,” Connor said, referring to unusually violent moves across markets.
Automated trading effect
Another factor in the speed of recent declines is the result of several important changes that have happened since the last financial crisis.
Automated trading strategies from quant hedge funds and the massive shift to passive investing have helped to remove liquidity from the system in times of panic, according to Marko Kolanovic, J.P. Morgan’s global head of macro quantitative and derivatives research. He said in a September note that index and quant funds made up two-thirds of assets under management globally and the majority of daily trading.
So when investors begin to sell, as they did on Tuesday amid concerns over the state of U.S. trade talks with China, the moves were probably amplified by computerized trading strategies. Selling intensified that day after the S&P 500 fell below its 200-day moving average, a key technical measure.
Before the next trading session on Thursday, equity futures plunged, prompting the CME Group to halt trading more than three dozen times. Markets continued to slide: At one point the Dow plunged almost 800 points before recovering after a news report that the Federal Reserve may take a more cautious approach to future rate hikes.
SEC needs to look?
As experts grasp for explanations on these unnerving moves, some are calling for help. Billionaire hedge-fund manager Leon Cooperman, founder of Omega Advisors, blamed the U.S. Securities and Exchange Commission for allowing machines to dominate markets.
“I think your next guest ought to be somebody from the SEC to explain why they have sat back calmly, quietly, without saying anything and allowing these algorithmic, trend-following models to wreak havoc with what has, up to now, been the best capital market in the world,” Cooperman said in a CNBC interview.
He and others have called for the reinstatement of the uptick rule, which restricted short selling to stocks that traded higher at least once between short orders. The rule was repealed in 2007, just in time for the financial crisis. Since then, during times of sharp distress, market commentators have wondered aloud why the rule went away.
John Nester, a spokesman for the SEC, declined to respond to Cooperman’s comments.
“Uncertainty is here, and that means deleveraging into a market with reduced liquidity,” Connors said. “Expect more of these exacerbated moves.”
Don’t worry, the SEC is on it, right after its employees finish watching porn (sorry, couldn’t resist).
It’s been another crazy week in markets. In fact, it was a terrible start to December for US stock investors as almost $1 trillion has been wiped from the value of stocks in just four days of trading.
At the close on Friday, the Dow tumbled more than 500 points, wiping out gains for the year to cap wild week on Wall Street:
Stocks dropped sharply on Friday, concluding what has been a wild week for Wall Street. A weaker-than-expected jobs report and China-U.S. trade tensions sent the Dow Jones Industrial Average lower by 558.72 points to 24,388.95 and erased its gains for the year.
At one point, the Dow was up more than 8 percent for 2018.
The S&P 500 pulled back 2.3 percent to 2,633.08 and also turned negative for the year. The Nasdaq Composite dropped 3.05 percent to close at 6,969.25. Shares of large-cap tech companies led the way lower. Facebook, Amazon, Netflix and Google-parent Alphabet all traded lower. Apple’s stock also fell 3.6 percent — erasing its gains for the year — after Morgan Stanley cut its price target on the tech giant’s shares, citing weakening iPhone sales.
For the week, the major indexes all dropped more than 4 percent. Thursday’s session included a violent drop of nearly 800 points, followed by a strong rebound from those levels. This week was also the worst for the indexes since March.
Indexes fell to their lows of the day after the Wall Street Journal reported federal prosecutors are expected to bring charges against Chinese hackers allegedly trying to break into technology service providers in the U.S., another negative headline amid tense trade talks between the two countries.
The U.S. economy added 155,000 jobs last month. Economists polled by Dow Jones expected a gain of 198,000 jobs. Wage growth also missed estimates. But investors were torn about the data as it could signal fewer rate hikes from the Federal Reserve down the road.
“The report was solid, not great, but it is still enough to keep the pace on track,” said Kate Warne, investment strategist at Edward Jones. She added, however, that volatility will persist as “investors are not sure about how much growth is slowing and are worried about U.S-China trade relations.”
Investors worried about the U.S. and China striking a permanent deal on trade after news of the Huawei CFO’s arrest broke. News of the arrest initially sent stocks down sharply on Thursday, but equities managed to recover most of their losses. This also came after President Donald Trump and Chinese President Xi Jinping agreed last weekend on a cease-fire to the ongoing U.S.-China trade conflict, which sent stocks sharply higher on Monday.
“You’ve gone from a period of zero sensitivity to headlines to a period of hypersensitivity,” said James Athey, senior investment manager at Aberdeen Standard Investments. “We’re now in a world where no one knows which way is up and which way is down.”
Trade-related stocks like Deere and Boeing fell 4.6 percent and 2.6 percent, respectively. Caterpillar also dropped 3.75 percent.
Investors also grappled with fears of an economic slowdown this week. The yield on the 3-year Treasury note yield broke above its 5-year counterpart earlier in the week, a phenomenon referred to as an inversion. Historically, when short-term yields move above longer-term rates, it signals a recession could arrive in the near future. However, the more closely watched spread between 2-year and 10-year yields has yet to invert.
Bank shares fell broadly on Friday. The SPDR S&P Bank ETF (KBE) dropped 1.4 percent. Shares of J.P. Morgan Chase, Bank of America and Citigroup all fell at least 1.8 percent.
“Unfortunately, we still have to work through this volatility,” said Tom Essaye, founder of The Sevens Report. “Between now and the end of the year, there are two big hurdles: First, the Fed needs to do a dovish rate hike. The market can’t survive a hawkish surprise. Also, we need some semblance of calm on the global trade front.”
Let me begin with something I stated last week when I discussed the Trump or Powell put:
Anyway, back to the G20 and the Trump – Xi dinner. I’d be surprised if there is a major positive announcement, however, Trump has shown his cards, he tracks the stock market very closely.
If Powell is now on the fence, it’s up to Trump to do something on trade to ease fears in the stock market. He might say there will be no new tariffs on China as the US continues to negotiate trade with that country and that might be enough to lift Chinese and US shares higher.
It was enough to lift US and Chinese shares higher, for a day (Monday) before reality set in that there was no real progress made at this overhyped G-20 meeting. By Friday, after the arrest of Huawei’s CFO, relations between the two countries had broken down again to new lows.
Markets are on edge for a lot of reasons. Trade tensions, higher rates, a slowing economy, the Fed, the plunge in oil prices, and the list goes on.
Earlier this week, Bloomberg reported Dmitry Balyasny is cutting at least 125 people from his multi-strategy hedge fund firm, about one-fifth of the total, as losses and client withdrawals erased $4 billion in assets.
When you start to see brand name top hedge funds like this one cutting 20% of its staff, you know these are brutal markets. The volatility is insane and moves in seconds based on Trump’s tweets or what Peter Navaro or Larry Kudlow said.
It’s insane. I was talking to a currency trader earlier today who openly questioned how these big hedge funds are making money in this environment. He said it’s impossible. “If they cut losses and it comes roaring back, they look like idiots for not having any conviction in their trade. If they double-down and get slammed, they will suffer steep losses and face redemptions. Everything moves in nanoseconds, it’s just nuts.”
He thinks big funds are also selling their stock losers for tax loss reasons and that may be adding to volatility and also everyone is waiting to see what the Fed says on December 18-19 when they meet.
Will it be “one and done” or stay the course with three more rate hikes next year? In my opinion, the Fed needs to take a big pause here and just wait to see the lagged effects of all these rate hikes.
This week, one measure of the yield curve inverted and while investors shouldn’t freak out, they definitely need to pay attention as it portends to a slowing economy and more financial volatility ahead.
In his Weekly Portfolio Strategy Incubator, Martin Roberge of Cannacord Genuity stated this:
The stock market entered the week up 6% from its November lows following dovish Fed talks and a US-China trade truce. From overbought conditions, markets have steadily declined this week and are flirting with recent lows again. One concern is the arrest of Huawei’s CFO which raises the risk that China retaliates on U.S. companies doing business in China. Also, the inversion of the 5yr/2yr note yield this week is sending a cautious message on the US economy, especially given the uncertainty surrounding the Fed’s rate-hike strategy. That said, today’s soft nonfarm payroll (more below) should calm fears and cement expectations of a “one-and-done” Fed hike on December 19. Elsewhere, OPEC and Non-OPEC countries delivered a much-awaited supply cut of 1.2M bpd. Also, earlier this week in Canada, the Alberta government announced a 325K bpd cut in production to curb the glut in Canadian oil. These announcements together lifted oil prices by ~$3/bbl this week. Overall, unless more visibility is provided to investors on the Fed and the US-China trade fronts, markets could remain volatile a while longer. As we highlighted in the December edition of the Quantitative Strategist, this is typical around the 10%-correction mark.
So where are stocks headed? Nobody really knows but I still maintain it’s not bear market time just yet but that can change if stocks keep selling off.
A quick look at the one-year daily chart of the S&P 500 ETF (SPY) shows we are closer to that worrisome death cross when the 50-day crosses below the 200-day moving average (click on image):
And while the 5-year weekly chart isn’t as scary, it’s not exactly bullish either given the negative MACD (click on image):
But don’t fret just yet, it’s not game over. Trump knows Christmas is coming, he doesn’t want to see stocks getting slammed every day and will likely post a flurry of tweets this weekend to make stocks great again!
I’m being facetious but the truth is there’s nothing great about stocks recently and Trump hasn’t helped assuage fears of a trade war.
However, while stocks are getting slammed, US long bonds (TLT) are doing just fine and have helped buffer balanced portfolios from selloff in the stock market (click on image):
Remember what I’ve been telling you all year, namely, ignore the fools on television who think bonds are a terrible investment and hedge your equity risk with good old US long bonds!
Anyway, we shall see what next week holds, so far, the Santa rally looks like a non-starter but maybe the algos will change all that around next week.