Brexit, more bubbles and the Fed converge to shake up markets.
Red week in US equities yet again as we just thought that Red October was something of the past. This past Monday, veterans days markets started the week off weak with NASDAQ leading the way lower, Apple announcing a key corporate outlook downgrade. Other tech stocks followed suit.
Kudlow, the White House’s adviser confirmed that trade talks have resumed ahead of the G20 meeting. China and the US have for the time being stopped bashing heads. This saw a temporary stall to the downside in equity markets.
All of this while Crude oil continued its decent. Finding support midway through the week and making an attempt to edge higher. The drop in crude came with a surge in natural gas prices. A rarity which caused a forced unwind.
The rest of the world did not bode well from an economic standpoint. Economic data out of Europe did not impress, yet again Germany seems to be faltering. Italy was also in news as Italian and EU officials fiscal policy talks and trade talks resulted in higher borrowing rates in Italy. The EURIBOR spread reached levels that have not been seen since the turn of the millennium before the Dot.Com bubble.
Theresa May and the EU came to some sort of draft separation agreement this week which signaled some softening in the Brexit concerns as one may read further in this blog post.
Here is a look of last week’s stock market on a daily basis (red vertical lines split days).
Stock Market and Sector Overview
Here is a break down of the weekly performance in various stock market sectors (top chart):
- Energy stocks down 2.14%
- Technology down 2.49%
- Financials down 1.42%
- Retail down 4.58%
- Utilities down 0.02%
Overview of key markets last week (bottom chart):
- Crude oil down 5.08%
- S&P500 down 1.33%
- Silver was up 1.91%
- Gold up 1.00%
- US dollar down 0.45%
Brexit and May.
In recent news, Brexit has caused a stir and Theresa May has been in the middle of it all. This past week May won the cabinets backing for proposed Brexit deal. The deal was a integral step to the exit of Great Britain from the European Union in March. This deal involves billions of Euros to be paid by Britain, the outlines of the transition period and how Europeans that live in the UK would be effected. Of course there will have to be endorsement by European leaders in November 2018. It’s said that there will be little resistance to this decision by EU leaders.
One Deutsche Bank has decided on lowly probability that May will successfully pass the Brexit deal and overcome her leadership challenge. A meager 35% is priced in by the banking giants. Deutsche says that May will either peruse a second referendum which is a People’s vote that she insists will not happen. (Deutsche Bank marks these odds at 30%) OR pursuing a much softer Brexit than anticipated. Adding that the only way that the May deal will get passed would be if “significant market pressure is brought to bear against the Tories”. May is falling victim to a lot of scrutiny, she is slowly losing MP support. Deutsche does think that she will most likely resign if she loses support of over 130 MPs. (Deutsche says there is a 20% chance of this) Chaos would then break off and a Brexiteer leader would take control, resulting in the obvious…no deal.
The secondary softer Brexit possibility stems from the little political interest to pass the current Brexit draft deal. (A softer Brexit is priced in at 15%) Of course, this isn’t an easy alternative either. There is possibility that this path will result in the Labour Party joining in supporting arms in the Commons. However, there is a high probability that the EU will not allow this.
Others claim that May does not have the UK’s best interests in mind with this proposed deal. If the current deal would pass, the UK would effectively be surrendering a high level of control of their trade and tax policies to the EU. “Brexit was the last grasp of a dying empire to assert its national relevancy”. What is to come of the Brexit negotiations? Banks such as Deutsche seem to think there is more chaos priced in than relief.
What does this mean for the GBP, pound sterling? As many traders might be aware, that the bears are out on the GBP. Below is a three step chart, weekly (top left), daily (top right), 4H bottom. The past two weeks have been volatile times for the GBP, ending red with a lot of swinging from highs to lows. This past Thursday, November 15th the GBP dropped significantly over 2% from its open to the bottom of the move. This was due to FEAR! When there is fear, assets drop, and in this case, the fear of a leadership change or the current leadership turmoil sparked the huge sell off. The resignation of Minister Raab was a big contributing factor to the bearishness. Not to mention other ministers that have resigned. The uncertainty over control will bring out further bearishness if continued.
The Fed, markets and a new bubble?
Fed Chair Powell was on the wire this past November week, and his tone was a little less Hawkish than it had been in September. But that doesn’t mean that it was full on Doveish. In September, traders will recall that Jerome Powell said “we are far away from the neutral rate”, sparking fear of what seemed to be a spree of endless rate hikes to come.
He went onto acknowledge the current stock market conditions in saying ” stock market turmoil is something that affects the real economy and financial conditions matter for the outlook, defied hopes for a Fed intervention to halt the market slump”. Fed Chair Powell still stands by his notion that the Fed is more focused on economy rather than the market. In this past meeting, Powell was not very concerned with what the US equities experienced in October, there is more to the financial market than just equity swings.
There are in fact signs of the US economy slowing down. One is the slide of the Dollar, and the drop in the 10Yr yield. Not to mention the Fed put we recently talked about. In recent blog posts we mentioned a Fed put that was placed hundreds of points under the current level of the S&P 500 so is that reason for Powell calmness?
The chart beneath is an Hourly of the US Dollar Index (DXY). The blue tint rectangle on the chart reflect the November 8th press conference held by Powell, in which his report was deemed Hawkish. This pushed the value of the index a lot higher, almost reaching the 98 level. Since then, there has been a steady decline in the US Dollar index, with a substantial drop this morning. The red tint box is the Doveishness that came out of Fed Vice Chair Richard Clarida. Where he effectively dispelled Powell’s September statement by saying rates are “getting closer to vicinity of neutral and being at neutral would make sense”. Hinting at less probable rate hikes.
After these press conferences, even Goldman Sachs started to throw around the “R” word…Recession. The economy is slowing, the real GDP growth forecast by Goldman is set to drop by 0.4% in 2019.This is not the only reason there is talks of recession. Its the fact that the global recession risk seems to be more on the rise. GDP for many countries and zones is dropping within the next year.
To add to tall of this, a new bubble concern has emerged. Tech Bubble 2.0? The start up bubble. There is a huge list of companies that were able to raise $100 million or more since the last recession in the United States. Along with a huge list of start up companies that are valued at $1Billion as of Q3 in 2018. According to crunchbase news, there is a new $100 Million start up “unicorn” born every 4 days. With exponential growth since 2017.
The economic environment, there are an endless wave of entrepreneurs and VCs hungry to come up with the next tech giant, the next Google. Just like the Dot.com bubble, a very very small percent of these companies are actually making money… Which could mean that a lot of these investors could be left holding the bag.
Looking at the Nasdaq below, we’ve outlined both the Tech bubble and what can be seen as the Start up bubble. The over 300% increase in the tech heavy Nasdaq on a steep slope does not spell good news for these start ups.
Weekly Economic Calendar
A very quiet week ahead in relation to economic news. There are only a few high impact events scattered through the week, and only one out of the US which will most likely have little effect on the equities markets.
Monday, one event out of Australia, Monetary policy meeting minutes, this is an important event for those watching the Aussie dollar.
Tuesday, RBA Governor Lowe goes on the wire out of Australia and the UK releases Inflation report hearings.
Wednesday, the only US event of the week, pre market. Core Durable Goods orders hit the news.
Thursday, no news.
Friday, two events out of Canada pre market, CPI and Core Retail Sales.
That’s all for this week, good luck and good trading. Manage your risk and trade like a TRADEPRO.
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