Sweet and sour. Stocks were pounded on Tuesday as trader sentiment shifted from ecstatic to panic. Markets seemed to set themselves up for disaster last week as they rallied on no real Fed policy changes and hopes for a Chinese deal. By Monday it should have been clear that the meeting in Buenos Aires represented progress but it was far from anything that could possibly have a positive effect on markets. The news however was initially met with buying, causing stocks to rally in the first half of Monday’s session only to fade into the close. Stocks still managed to post gains, but suspicion about the alleged deal began to grow as press releases were conflicting and the President’s men were unable to clearly articulate any tangible positives. Tuesday found the market opening on its back leg as Monday’s suspicion started to turn into doubt causing traders to sell stocks. Then it came… the tweet, but this time it did not have the intended effect as the President dubbed himself “… a Tariff Man”. Push the sell button. Then there was the yield curve which, as reported here, whose front end between 2 year and 7 year maturities inverted on Monday. The initial move was speculative as traders bought longer maturities with hopes that the Fed tightening cycle would slow and end quicker than expected. A move that I called a risky gambit. On Tuesday that risky gambit paid off as stocks sold off causing a rally in treasuries pushing long yields down even further. The buying intensified as short sellers were squeezed into covering. It is well known that many speculators have been short treasuries expecting rates to continue to rally and, in fact, actually hit some new highs in October. Short sellers watched 10 year yields cross below the critical 3% support level in late November and the worrying started. Monday’s rally in bonds put a fine point on the short seller’s pain causing them to buy on Tuesday. It is important to remember that, at a high level, the front end of the yield curve is controlled by policy and the longer maturities by speculators. Speculators take positions based on their assessment of future inflation and economic health. If traders believe that things are going to get bad in the future causing the Fed to ultimately ease rates, traders will go long (or buy) longer maturity treasuries. If the Fed is raising short term yields and traders are buying longer term notes thus causing yields to go down… the curve flattens. Stock traders took note of the curve flattening on Tuesday and began to connect the dots that an inverted yield curve might be a sign that a recession is looming causing further panic selling. I won’t take too much time to go through it on this note, but intraday algo traders make money when markets are volatile and on a very volatile day like Tuesday, they actually accentuate the moves taking advantage of momentum, which in Tuesday’s case was negative. Additionally, longer term algo traders, which base much of their trading on trend and momentum saw stock markets breech some critical levels causing a bit of additional selling. When the smoke cleared markets gave up a good portion of the gains gotten in last week’s rally. Hardest hit were the always-first-to-rally and always-first-to-selloff tech stocks. It probably didn’t help that Apple was downgraded from BUY to HOLD by Wells Fargo. Financial sector stocks were also under pressure as lenders are able to make more money when a yield curve is steep. Remember that they borrow money short term and lend it long term. The selloff in stocks has left the major stock indices in a weakened technical position, all of them now below their important 200 day moving averages. Ten year treasury yields will start today’s session at 2.89% and the 2/10 yield curve will start the day at around 12 basis points.
Today we get lots of economic data. Here are the ones to watch: ADP Employment Change is expected to show 195k new jobs created versus last month’s 227k, Trade Balance is expected to show a widening of the trade deficit to -$55 billion from -$54 billion, Services PMI is predicted to be at 54.4, ISM Non-manufacturing Index is predicted to be at 59.0 down from last month’s 60.3, Factory Orders are forecast to be down -2.0% versus last months increase of +0.7, and finally Durable Goods Orders is expected to show a decline of -2.4% compared to last month’s -4.4%. That’s a lot of numbers to take in, and a jittery market can move on any of them. OPEC is meeting in Vienna today and tomorrow and the resulting policy changes and statements will also impact markets as recently weak crude oil is looking for some relief. Finally, last night WHILE YOU SLEPT, Canadian officials arrested Wanzhou Meng, the CFO of Huawei (large Chinese telecom equipment manufacturer), who also happens to be the daughter of the company’s founder. The charges are related to violating sanctions against Iran and she faces extradition to the US. That can’t be good for US – Chinese trade relations and traders have been selling stock futures in the overnight session. Markets are looking to open in the red as traders come back to their desks to assess Tuesday’s damage after pausing for President George H. W. Bush’s memorial yesterday. Today will be a tough day, which will be best viewed from the sidelines as traders sort things out. Please call me if you have any questions.