A Bloody Race to the Bottom

A bloody race to the bottom.  Stocks were hammered yesterday as geopolitical risks around the globe mounted.  Trade war concerns were combined with increased tension in Hong Kong causing traders to sell stocks.

 

MY TWO CENTS

 

1. Don’t cry for me Argentina…  Yesterday’s wild market rout was accentuated by a little followed story bubbling up in Argentina.  The emerging market nation’s President Mauricio Macri took office in 2015 and was welcomed by the international finance community.  He was expected to turn the nation away from the populism that could be dated back to the times of Juan Peron (husband of the now, more internationally famous Eva, or Evita Peron).  The populism, known as Peronism, plagued the country’s financial system and ultimately led to a sovereign bond default in 2001.  As you might expect, Argentinian bonds were blighted in the aftermath making the running of the country’s economy more of a challenge.  Macri took office with a band of PhD economists and pledged to change the economy, which had been dominated by outdated policy and broad corruption.  Investors liked what they heard and began to place bullish bets on Argentina’s success.  Over the weekend, presidential primary results in Argentina showed Macri’s competitor Alberto Fernandez taking a slight lead over the incumbent, which took many by surprise.  Fernandez has been vague regarding his economic policy and is populist and embraced by the Peronists.  Argentina’s debt has grown significantly under Macri, which is not necessarily bad… unless investors begin to worry about a default.  Yesterday’s news that the Argentinian economy might be under the control of a new populist custodian raised fears of just that.  The result: the Argentine Peso fell by as much as -33%, their Merval Stock index fell by -48% (its worst ever loss), and Credit Default Swap pricing on sovereign debt imply a 75% chance of default in the next five years.  No guarantees of armageddon, but investors are certainly spooked.  More worrisome to global investors is fear of contagion to other Latam emerging market countries.

 

2. Flotation devices can be found…  I have been writing quite a bit about the mounting pile of negatively yielding debt.  According to a Bloomberg Barclays Index, the size of global negatively yielding debt stands at $15 trillion.  That’s a lot!!  Over in the US, debt still has positive yield, but not much.  This morning, 10-year treasuries yield 1.64% and 30-year bonds are yielding 2.11% (a record low).  Bonds have been rallying, putting pressure on yields as investors expect poor economic performance, accommodative policy, and low inflation.  Yesterday’s move was sparked by a flight to quality.  In a world of chaos in which assets move out of risky assets, funds are often shifted into high quality assets such as gold or bonds.  US treasuries, considered the world’s safest, are one of the primary safe havens in times of risk.  When you consider that German 10-year Bunds are yielding -60 basis points (yes that is negative), the US 10 year yield of 1.64% looks outright juicy (if you can apply that term in finance).

 

THE MARKETS

 

Stocks sold off yesterday as investors were spooked by ongoing trade disputes, trouble in Hong Kong, and increased fear of credit defaults in Latin American emerging market debt.  Investors fled from risk assets and jumped into traditional safe havens like gold and US Treasuries.  The S&P500 fell by -1.22%, the Dow Jones Industrial Average dropped by -1.48%, the Russell 2000 sank by -1.29%, and the NASDAQ Composite pulled back by -1.2%.  All sectors were down yesterday with the worst hit being Financials, down -1.9%, as the flattening yield curve and low rates make it difficult for lenders to make profits.  Bonds jumped yesterday and 10-year yields fell by -10 basis points to 1.64%.  Gold jumped by +0.95% to $1511.16 / Oz.

 

WHAT’S NXT

 

– This morning we will get the Consumer Price Index which is expected to show a year over year growth of +1.7% compared to last month’s 1.6%.  Excluding food and energy, the CPI is expected to show a growth of +2.1% , same as last month’s figure.

–  This morning Advanced Auto Parts missed and Avaya beat Wall Street earnings estimates.  Today, we will also get earnings from Tilray.

daily chartbook 2019-08-13