- NASDAQ Composite +0.31% Dow +0.69% S&P 500 +0.52% Russell 2000 +0.79%
- NASDAQ Advancers: 1511 / Decliners: 750
- Today's Volume (100 day avg) +0.34%
- Crude +2.02%, Gold +0.96%
- MBA Mortgage applications fell 6.2% during the week ending August 23rd.
- Department Of Energy reports crude oil inventories (10.03M) barrels vs consensus (2.9M) barrels
- Prime Minister Boris Johnson suspends Parliament until mid October
Equities maintained a positive bias buoyed by trade optimism throughout much of the morning yesterday but it lacked conviction and eventually drifted into negative territory. The market’s undoing was a combination of Chinese officials questioning statements made by President Trump, inverted yield curves ( 10 year note slipped 5 basis points to 1.493%, its lowest since July 2016 while the 2 year note slipped 2.5 basis points to 1.533% and the 30 year fell to 1.975%, an all time low), negative yields throughout the world and a collapse in German exports that pushed Europe’s largest economy to the brink of recession. There was also a slew of Bank warnings on the health of the market. Goldman Sachs concern with the trade war escalation prompted them to trim their GDP estimates for Q3 and Q4 of ’19 and Q1 of ’20. Bank of America noted that Corporate Buybacks decreased last week. Finally, Nomura commented that Hedge Funds seem less keen on taking risk recently. All three indexes finished in negative territory with the Dow falling -0.47% followed by Nasdaq slipping -0.34% and S&P 500 declining -0.32% Financials were the worst performer amid the lower rate/flatter curve backdrop.
This morning equities have recovered from earlier losses to trade in positive territory but not with a lot of confidence. Volumes remain low for the session and Energy is the primary driver of the gains on a larger than expected draw in inventories. Reality remains an overhang as early optimism emanating from the G7 meeting is fading. It is becoming increasingly likely that President Trump’s upbeat comments at the end of the meeting was his way of walking back the tweet tirade of last Friday. China has done nothing to confirm his earlier statements regarding phone calls, talks etc. and there are reports in the press that based on past behavior, they can’t trust that he would stick to a signed deal. Yield anxiety also remains front and center as inversion between the 2 and 10 year continues to widen, fanning the fear flames of an impending recession (10 year yield lower than 2 year yield is viewed by fixed income traders as a warning sign of recession). Prior to the market open this morning the spread between the two widened to 6 basis points. It has since recovered somewhat.
Geopolitical unrest is also playing a part in investors anxiety. In the United Kingdom, Prime Minister Boris Johnson has approval from the Queen to suspend Parliament from mid-September until mid-October. The politically motivated move would make it harder for lawmakers to block a no deal Brexit by October 31st. The pound has dropped against the dollar as a result. Opposition leader Jeremy Corbin has called the move a “smash and grab tactic”. On a positive note over in Italy, talks are progressing to form a new government reducing the potential risk of new elections. Disagreements were abundant as to who will take key roles in the new government. Currently Democrats are backing Five Star Movement’s choice of Giuseppe Conte as Premier. A combination government of Democrats and the Five Star party is seen as the best for markets, being less confrontational to the EU.
Light day on the economic calendar as only mortgage applications were reported at 7:00 am this morning. The MBA mortgage application index fell 6.2% in the week ending August 23rd after falling 0.9% the previous week. Purchases were down 4.0% after falling 3.5% the prior period. Refinancing’s fell 7.6% after rising 0,4% the prior week.
Gold has eased somewhat today after rising over 1% yesterday on recession fears. Even with the pull back the shiny metal remains at six year highs on trade talk uncertainties and the hopes that the US Central Bank will cut rates at their September policy meeting. Oil continues to surge boosted by two recent inventory reports. Yesterday the American Petroleum Institute reported that crude stockpiles fell by 11.1 million barrels last week, the largest decline since June. This morning The Department of Energy reported a draw of 10.03 million barrels vs the consensus draw of 2.9 million barrels. The yield curve between the 2 and 10 year remains inverted at 1.506% and 1.477% respectively. The VIX is 20.19 after hitting 21.64 earlier.
Sector strength is led by Energy (+1.51%) followed distantly by Healthcare (+0.78%) and Consumer Discretionary (+0.54%). Lagging are Technology (-0.33%), Utilities (+0.17% and Communications (+0.26%).
Brian’s Technical Take
We are certainly living in interesting times and I know I was not the only one with eyes wide open after reading President Trump’s twitter storm last week in response to China’s latest round of tariffs. But just when you thought you have seen it all, early yesterday William Dudley, the former President of the New York Federal Reserve from 2009 – 2018 and vice chairman of the FOMC, penned an “interesting” Op-Ed in Bloomberg.
Just 14 months removed from his civil service, Dudley argues the Fed should “refuse to play along” with Trump’s trade war with China. The administration he determines keeps making bad choices on trade policy and Trump’s ongoing attacks on the central bank has made it untenable for the Fed to remain apolitical. Taking it one step further, Dudley opens his closing paragraph with “ There’s even an argument that the election itself falls within the Fed’s purview”, and ends it with “Fed officials should consider how their decisions will affect the political outcome in 2020.”
Last night it was refreshing to read the compilation of four highly regarded market participants In Bloomberg’s “Fed Independence: What are the Limits?” all of whom disagreed with Dudley’s take. I won’t cherry pick any provocative quotes but it is a good, quick read with a number of reasons why Dudley’s viewpoints are a bad idea.
In 1977 Congress anointed the Fed with a dual mandate of maximum employment and low inflation. The latter goal of low inflation, which has evolved to a 2% inflation target, has long been a thorn in the Fed’s side. In 2017 the Fed seemed to champion that the “real recovery”, albeit later than expected, was finally underway and a new cycle of continued hikes was warranted. It is worth noting eight of the nine rate hikes from the zero bound have taken place following Trump’s election victory, along with the somewhat unprecedented quantitate tightening program.
Trump has long lambasted the Fed for this policy, not just following the July 31st “hawkish cut”. Recently Chairman Powell dampened animal spirits with his “mid-cycle adjustment” characterization and the greenback immediately responded by breaking out of a three month range to multi-year highs. Two weeks later on August 14th Former Chair Janet Yellen appeared on Fox Business and stated “Historically, [the yield curve inversion] has been a pretty good signal of recession and I think that’s when markets pay attention to it but I would really urge that on this occasion it may be a less good signal.” Last week at Jackson Hole more than one Fed official came out to say they need to see more data before committing to a second rate cut in September.
Are current and former Fed officials really uncertain about the current state of the global economy, or afraid to admit they were wrong and the “real recovery” was not fully underway as evidenced by long term market measure of inflation (break-evens, TIPS, rates, etc), or some other? From my novice viewpoint the market has long been flashing textbook signs of deflationary pressures, liquidity risk, and instability, and the nine rate hikes and QT were too much for the interconnected global markets.
It is worth noting the Fed raised the overnight rate seven times before the 10YR UST yield rose above its January 2014 highs. Under Trump’s Presidency 10YR break-evens peaked at 2.21%, more than 45bps below their prior highs made in 2011 and 2012. After a brief rise in 2H’2016, the 10YR – 2YR UST spread has been flattening since its peak in December 2016, and now is negative. This cycle’s ninth rate hike in December 2018, after nearly three months of widespread risk-off sentiment which arguably was sparked by Powell proclaiming “rates are a long way off from neutral”, and soon later followed that they could be hiked above neutral, was immediately followed by an inversion of the yield curve. And while the dollar is at multi-year highs, in untypical fashion so too is gold which may be reflecting its role not only as a hedge against inflation, but also as a hedge against instability. Oh by the way there is also more than $16.5T of negative yielding bonds globally, up from 6.5T last September.
I am sure there are plenty of credible and more intelligent viewpoints arguing the Fed is in the right with this cycle’s monetary policy actions and communications, and that is what makes markets, however the Fed’s track record has not been perfect. We only need to look at the previous cycle when Bernanke stated that subprime was ring-fenced. Maybe the Fed should focus on its own mandates and stay out of politics.
On that note we leave you with the monthly period chart of the 30-year UST yield which on August 14th broke down to new all-time lows. On that day China announced poor retail sales and industrial production data while Germany reported a negative 0.1% Q2 GDP figure.
Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.