10-year Treasury yields are now flat on the session
The early trading in the bond market is hinting at some indecision about the risk mood. Treasury yields turned flatter about two hours ago before recovering some poise and is now back to flat levels again on the session.
As a result, USD/JPY has pared gains to 109.81 currently and we are seeing a similar story for the aussie as AUD/USD falls to a session low of 0.6743 after having traded around 0.67455-65 earlier in the day – just take note AUD/JPY is at key resistance levels as well.
European equities have pared back some of its earlier gains too but are still keeping higher in trading so far. This may yet lead to some mixed tones between stocks and bonds again but just be mindful of the market saying that “the bond market is always right”.
The infectious and mortality rates of the new coronavirus have become the main force driving the pendulum of investor sentiment toward fear. The move is all the more dramatic as the investors had been positioned for a continuation of the historic bull market in equities and eager to take on new risks.
The coronavirus has surpassed the earlier precedents of SARS (2003) and the Swine Flu (2009). The World Health Organization declared an international health emergency, which will free up resources and boost efforts to contain the pathogen. It took roughly 20 months to devise a vaccine for SARS, and it is estimated that a vaccine is possible within a month or so now to begin the testing process. Although China is expected to return from the extended Lunar New Year on February 2, more than a dozen provinces and cities will be closed several days longer, which ballpark estimates suggest are responsible for a little more than 2/3 of GDP and 3/4 of exports. Supply-chain and business disruptions will likely last longer still.
Investors fear that the health crisis will turn into an economic crisis. Although President Xi is understood to be the strongest Chinese leader in a generation, the challenges that China faces are immense: US rivalry and trade conflict, Hong Kong, Taiwan, and a highly leveraged domestic economy underpinned by a deteriorating demographics. China recently reported its birthrate fell to a record last year. Still, some argue that the situation is even more dire as the official figures exaggerate both the population and the birth rate. More monetary and fiscal stimulus is expected to be delivered to cushion the impact. Some forecasts show the Chinese economy slowing to around 4.5% in Q1 20 from 6.0% in Q4 19.
Since the onshore yuan (CNY) stopped trading for the holiday, the dollar appreciated by a net of a little less than 1% against the offshore yuan (CNH). A catch-up move of roughly the same magnitude would bring the greenback toward CNY7.0. While the last time the dollar rose through that threshold, the US accused China of currency manipulation, this time is considerably different. Moreover, of all times, this is the time when China could likely get away with manipulation if it wanted. It is not just because of the macro shock, but also because the US has played the card once and relatively quickly reversed itself. Continue reading »
The coronavirus concerns have sapped upside momentum from European shares. The falls come despite economic data out of Europe that was not bad. UK employment data was strong and German/EU ZEW sentiment data was also better-than-expected.
The provisional closes are showing:
German DAX, unchanged
France’s CAC, -0.54%
UK’s FTSE 100, -0.57%
Spain’s Ibex, -0.57%
Italy’s FTSE MIB, -0.6%
In the European debt market, the benchmark 10 year yields are ending mostly lower with Italian yields up marginally. France’s 10 year yield move back toward the 0.0% level. The low reached 0.001%.
In other markets,
gold slid earlier to a low price of $1546.41, but has rebounded and currently trades at $1557.19. That’s down about $3.50 or -0.23%
WTI crude oil futures are down $0.25 or 0.43% of $58.29
In the US stock market the NASDAQ index turned positive after opening lower and traded to it a new all-time high.
The current prices are showing:
S&P index -3.04 points or -0.09% 3326.60
NASDAQ index +5.068 points or 0.06% at 9394.20
Dow industrial average -41.7 points or -0.14% at 29306.64
In the US debt market yields are lower led by declines in the 10 year yield up -4.6 basis points. The yield curve is also flattened with the 2 – 10 spread falling to 23.74 basis points from 26.23 basis points on Friday..
I love this quote from George Soros because it is more true every day. He said it in his book on the crash of 2008 but he might be talking about fake meat, marijuana or electric cars today.
We can all see trends towards environmentalism, renewables, e-commerce, the internet, eating out and TV streaming along with a dozen other things. The reaction function of the market is to identify a trend and throw money at it in a virtual gold rush, hoping that one day the claims will pay.
Last year we saw it in WeWork. Co-working was undoubtedly a trend and WeWork was the biggest and best-known name in the space. SoftBank and others drove the company valuation into the stratosphere but it all came crashing down when the collective conscience of the world realized the business model could easily be replicated.
The big macro trend of the generation is low and falling inflation. We’re at the point now where every bond investor — voluntarily or not — is betting on low inflation. The perception (or perhaps misconception) is that inflation will stay low forever. If the market is wrong, it would be the mother of all financial busts. The bond market is worth more than $100 trillion with a myriad of derivatives layered on combined with endless knock-on effects, like mortgage rates.
Loss per share of 33-cents vs 21-cent estimate (31-cents ex-items)
Alcoa sees 2020 global aluminum demand +1.4-2.4%
Final 2019 aluminum demand -0.4% to -0.2% vs -0.4 to -0.6% AA estimate
Expects 2020 global aluminum surplus between 600K to 1m metric tons
Full year 2019 net loss of $1.125 billion or $6.07 per share
Full year adjusted loss of $184m
In October, the CEO said he expected a big rebound in aluminum demand this year. At the time he said the global economy “will come roaring back once this uncertainty is behind us.” I wouldn’t say 1.4-2.4% will cut it. At some point global growth will have to pickup or there will be more plant closures and factory layoffs.
Shares are down to $19.73 from $20.18 in the after-market.
Closing changes for North American trade on January 10, 2020:
On the day:
S&P 500 down 9 points to 3265 after hitting 3282 (-0.3%)
DJIA down 133 points to 28823
Nasdaq down 24 points to 9178
On the week:
S&P 500 up 0.9%
DJIA up 0.7%
The turnaround today is a bit of warning signal. Note that January is a weak seasonal month but there is a long-term trend of strength early in the month. I also tend to think the signing of the ‘phase one’ deal is sell-the-fact risk.