The correction that we have seen in Asian, European and US equities; emerging markets; junk bonds; carry trades; and jump in volatility measures is nowhere near extreme levels. Shares are still within arm’s reach of record or decades’ highs while many of these other benchmarks for sentiment have only taken a few steps from pricing perfection.
And yet, concern is palpable. It is as much the rarity of market retreats recently as the clear correlation of assets that otherwise would not conform without a shove from risk appetite that adds such concern to investors. A market that depends on extreme quiet for performance is not a healthy one.
Wall Street: US markets finally suffered some of the degree of pain that the main European and Asian indexes have seen over the past week. While the main indices registered losses, much of the shock value in the day’s losses were in the opening salvo. Bearish gaps were registered across the board to start the day with the Dow Jones Industrial Average suffering its biggest chasm on the open since September 5th. Putting this single session’s slide into context, there is certainly reason for concern on a technical and fundamental basis.
Across the indices, there are head-and-shoulders patterns in varying degrees of clarity and progress. Also concerning is the consistency of the bearish opens. The S&P 500 has opened with a gap down over six straight sessions. That last happened in August 2016 and only happened 5 other times in the past decade.
Australia Jobs and Inflation Data: There are two particularly important pieces of scheduled event risk on Aussie docket this morning. The data will mostly focus on October labor statistics – and for good reason. History shows that the jobs report has a frequent deviation from expectations as well as hearty impact on short-term volatility for shares and the local dollar. The forecast is a 13th consecutive month of jobs added to the economy (consensus for 18,800) with the jobless rate holding at a 5.5% four-and-a-half year low. This is an important measure of domestic economic health, but the AUD’s true guiding light is its carry status – or lack there of recently. The consumer inflation expectation indicator from the Melbourne Institute may lack press coverage, but it more directly links to what could genuinely send AUD/USD for a lasting turn of trend.
US Dollar: The US Dollar seems to have been caught up in the uncertainty over what fundamental theme is dictating its strength or weakness. The ICE Dollar Index (DXY) took a notable tumble Tuesday to drop back below 94 which took the wind out of a chart progression that many technical traders would recognize - an inverse head-and-shoulders pattern. On the one hand, the Dollar has rate forecasts continually working in its favor with outgoing Fed Chair Yellen’s remarks at the ECB panel not dampening that advantage nor the US CPI (at the 2.0% target) from this past session doing anything to obstruct a gradual pace of hikes.
Yet, on the other end of spectrum, the anticipation of US tax reform was billed as a windfall for US investment but increasingly sees its capacity for support recede on concessions and deficit projections.
China’s Bond Yield: A key reference rate yield in China just hit the highest level in three years, which may begin to reduce growth as the cost to borrow rises in a debt-fuelled economy. The Chinese 10-year yield surpassed 4% intraday, which is not worth panicking over but should be kept on your radar. Recently, Chinese equities have made new year-to-date highs, and the PBoC is expected to continue and support markets intermittently signaling concerns are not imminent.
Lately, it appears that Chinese sovereign debt is the only asset not making investors in the soon-to-be global leading economy happy as expectations for above-trend growth and needed deleveraging abound. Keep an eye on this yield (we will) as a drift higher in Chinese bond yields could dampen borrowing demand and as a consequence, private growth.
BoE and Fed Speakers: Central Banker’s across the world will be speaking, and markets will be listening on Thursday, but BoE governor Mark Carney will likely command the most attention. In addition to the Bank of England Governor’s Carney, Ben Broadbent, Jon Cunliffe, Jo Place, Dave Ramsden, Sam Woods will speak at BOE's Future Forum in St George’s Hall Liverpool.
Later on Thursday, a handful of Federal Reserve Presidents and Governors will speak with the likely focus landing on Cleveland Fed President Loretta Mester as she delivers the keynote address at Cato Institute’s 35th annual monetary conference on the Future of Monetary Policy in Washington, at 9:10 AM ET.
ASX 200: Australia’s ASX 200 pushed further away from 6,000 and closed 0.6% lower yesterday with a 34 point loss. The decline was the fourth straight decline, and similar to other markets, the ASX 200 is moving near the November open price. The drop has aligned with other Asian equity markets like the Nikkei 225, which topped at 23,382 (highest intraday level since 1992) the same day as the ASX 200 at 6052.1 on November 9 before retreating.
This week’s decline is the largest decline at 1.5% since the week of June 9 that posted a 1.9% loss. The market has persistently been pricing in a lower probability of a hike from the RBA until September of 2018, and a further delay of an expected hike may lift prices still. The main culprit of losses yesterday and a trend spreading globally is financials, as compressed yields are expected to continue to strain revenue growth.
Commodities: Commodities led by Crude Oil and Metals will look to end the mid-month slump after starting November strong on Thursday. Wednesday’s EIA Crude Oil Inventory report in the US showed an unexpected supply build that coupled with traders concern about lack of details leading up to the November 30 OPEC+ (a moniker for OPEC and strategic alliances). Supply glut concerns and lack of details for the OPEC meeting have brought volatility and pushed the price of Brent, the Global oil benchmark further toward the opening price of the month at $60.94 per barrel. The price reached as high as $64.65 on November 7, the highest price since summer 2015 before retreating.
Metals markets also remain positive for the month, but concerns continue whether demand from China will continue to reduce the raw materials glut. A pledge by President Xi Jinping to focus on the quality of growth over the pace was the source of concern that demand may soon slow from China.
SPI futures moved -34.51 or -0.58% to 5934.24.
AUD/USD moved -0.0047 or -0.616% to 0.7584 - Session High: 0.7633 Session Low: 0.7573
On Wall Street: Dow Jones -0.44%, S&P 500 -0.36%, Nasdaq -0.42%.
In New York: BHP -1.34%, Rio -1.25%.
In Europe: Stoxx 50 -0.3%, FTSE 100 -0.56%, CAC 40 -0.27%, DAX 30 -0.44%.
Spot Gold moved -0.16% to US$1278.15 an ounce.
Brent Crude moved -0.32% to US$62.01 a barrel.
US Crude Oil moved -0.57% to US$55.38 a barrel.
Dalian Iron Ore moved -0.99% to CNY448 a tonne.
Iron Ore delivered to Qingdao moved -2.11% to US$61.84 a tonne.
LME Aluminum moved -1.23% to US$2082 a tonne.
LME Copper moved -1.97% to US$6759 a tonne.
10-Year Bond Yield: US 2.34%, Germany 0.38%, Australia 2.59%.
By John Kicklighter, Chief Strategist, IG Chicago