A Wild Ride in The Markets Last Week

Hair Pin Bend SignMargin calls? A short squeeze? A panic? Whatever the combination, it was a wild ride in the markets last week.

  • Bond yields rode a roller coaster, ending slightly lower. The Barclays Aggregate and BoA Merrill Lynch High Yield (MLHY) Indices each ended the week up about 0.4%, but not after experiencing some turmoil. The option adjusted spread (OAS) of the BoA ML HY Index ended the week up 2 bps at 4.65%…but it widened by over 40 basis points (bps) mid-week before falling back. The 10-year Treasury fell almost 50 bps mid-week before rebounding to end 9 bps below its start. The 10-year TIP yield ended 5 bps lower. Japanese 10-year yields fell 3 bps to 0.47% and German 10-year yields fell 2 bps, to 0.82%. Peripheral Eurozone sovereigns sold off sharply, with Greek 10-year yields rising over 125 bps.
  • The S&P 500 Index ended the week down 1.0%, but—after sharply underperforming over the prior month—cyclicals outperformed defensives. Industrials (+2.3%) and Materials (+0.7%) led while Health Care (-2.3%) and Consumer Staples (-2.2%) lagged; the Russell 2000 Index gained 3%. The MSCI Europe Index gained 0.2% in US dollar terms, the MSCI Japan was down 4.3%, and the MSCI Emerging Markets Index was down 1.3%.
  • Currencies: The dollar gave up a little more of its recent gains. The euro and Yen each gained roughly 1% against the dollar last week; the Yuan inched up. Other emerging market (EM) currencies were mixed.
  • Commodities: Oil prices fell sharply again. WTI fell to below $82 mid-week, ending around $83. As noted last week, supply is exceeding demand. Gold was relatively quiet, ending up $15 to $1,234.

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When it Comes to the Markets, Maybe Some Rain is a Good Thing?

Close up of water droplets on leaf

Not surprisingly, we’re seeing a market correction. My metaphor for this is – If you go a month without rain, you’re due for some, but there can be no certainty about when it will actually start raining. We’d gone a long time and a long way without a correction and a lot of people were nervous – poised to sell – but there are also people saying they are waiting to buy the dip, but not willing to catch a falling knife – a perfect set-up for a correction. The VIX futures curve has inverted, which is often the sign of a near-term bottom.

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A Strong Employment Report…But Not Strong Enough to Change Fed Policy

Architect Looking out of Window

Last month, I said the “weak” job report would not deter the Fed. Despite a strong monthly employment record for September, the Fed did not accelerate its pace of tightening. The data can be volatile, and seasonal factors (e.g. local schools and automakers) are sources of noise.

For Capital Markets, it was Another “Risk-off” Week

  • Currencies – the dollar is king for a week. The U.S. dollar rose against the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars.
  • Treasuries rallied again as investors continued to seek safety as inflation expectations fell. The 10-year Treasury yield fell 9 basis points (bps) to 2.45% and the 10-year TIPS yield fell 5 bps to 0.52%. The spread – a proxy for expected inflation – declined again.
  • High yield bonds again found support after a sharp sell-off. Retail investors may be selling on fear, but institutional investors seem to like the spread/default risk trade-off.
  • Stocks rallied Friday, but ended the week down. The S&P 500 Index ended the week down 0.8% (-1.6% for the month, +0.6% for the quarter). However, the MSCI EAFE and MSCI Emerging Markets Indices fell roughly 3.4% and 2.6%, respectively.
  • Commodities. Gold fell almost 2%. Oil was down roughly 4%. WTI oil fell below $90 for the first time in 17 months, as Libya reported strong supply growth and Saudi Arabia unilaterally cut the price of its oil. A price war appears to be breaking out within the OPEC cartel.

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Are Low Job Claims an Omen for Faster Job Growth?

Banking charts and trendlines

Last week in the capital markets was a “risk-off” week. We saw more signs that manufacturing is driving moderate economic growth. There was also some good news for the “residential investment” component of gross domestic product (GDP). It’s shaping up to be another year of the square root recovery…but still with core strength.

Claims Remain Low … An Omen of Faster Job Growth?

  • Initial jobless claims (293k) rose week over week (w/w) but stayed below the four-week average of 300k.
  • It’s remarkable how few employees are losing their jobs. In conjunction with the recent rise in the number of job openings, it suggests that maybe employers are finding themselves understaffed?

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Fed Pursues a Slow Pace – What Does it Mean for Investors?

United States federal reserve

The Federal Reserve Board’s policy-making committee convened on September 16-17 to discuss winding down its stimulus program. Janet Yellen, the Fed’s chairwoman, explained the results of the meeting in a news conference on September 17.

Is the Fed Being Too Accomodative?

If you look at the indicators the Fed has used in the past – the Taylor Rule for one, but there are others – they suggest the Fed is too easy and too accommodative. In fact, Ms. Yellen in her press conference acknowledged that the Fed is pursuing an easier policy than the common indicators would suggest. That doesn’t change anything they’ve done, but nonetheless, the declining unemployment rate, for example, and the increased pace of growth, are beginning to suggest rates are too low.

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