The Daily Prophet: Squiggly Lines on a Chart Doom Stock Markets

Connecting the dots in global markets.

The benchmark S&P 500 Index tumbled more than 2 percent on Monday, and at one point was down as much as 3.30 percent, adding to a string of big declines over the past two months. So, what was it this time? Trade war jitters? Worries that corporate profits may not live up to their lofty forecasts? Concern about higher interest rates? Disappointing economic data? Debt and deficit fears?

All would be logical guesses, except Wall Street is often illogical. Monday was one of those days. Sure, equities were weak to start the day, but the declines really picked up steam once the S&P 500 fell below its 200-day moving average, closing below that level for the first time since 2016. For the most part, academic studies have discredited the practice of trying to divine future share price performance by looking at past trading patterns, equating that effort to little more than gambling. But these days, technical factors can have an outsize effect on markets because many computer-based trading programs are wired to kick in and buy or sell massive quantities of stocks when events such as the breach of a moving average happens. So, where to now? In the long run, fundamentals win out, but in the short-term, investors can anticipate a slide of up to 5 percent, Adam Turnquist, Piper Jaffray’s technical analyst, said last week. That would take the S&P 500 some 14 percent below its January record.


“This is definitely a flight to safety type of market,” Peter Jankovskis, co-chief investment officer at Oakbrook Investments, told Bloomberg News. “You’re seeing people coming out of the stocks that had been performing well. There’d been various stories that momentum was extended in the market place, and I would say today’s activity supports that trying to unwind a bit.”

YIELD CURVE WORRIES
At 47 basis points, the gap between two- and 10-year Treasury notes yields ended the first quarter at its narrowest since 2007. The difference was little changed Monday as bonds of all maturities rallied while investors sought havens from the carnage in stocks. By now, most everyone knows that a narrowing yield curve is usually associated with an economic slowdown, and an inversion typically predates a recession. So, if you're a true believer in the predicate nature of the yield curve, then you should be very concerned about what's ahead for the economy based on a research note Monday from the top-ranked ranked strategists at BMO Capital Markets. They wrote that there's little in the way of keeping the curve from narrowing to about 25 basis points. "March might soon be reflected upon as the turning point for the Treasury market," they wrote. The bond market is likely to be on edge until Friday, when the U.S. Labor Department releases its monthly jobs report for March. Although economists are forecasting a drop in the number of jobs created in March to 185,000 from 313,000 last month, that's not as bad is it looks because they were forecasting an increase of 205,000 for February. In other words, a reading of 185,000 would be in line with the recent monthly average.


YEN FLEXES ITS MUSCLES
Japan's currency demonstrated once again why it's the "go to" currency in times of turmoil. On Monday, the yen strengthened more than any of the other nine developed-market currencies tracked by the Bloomberg Correlated-Weighted Indexes. On that basis, the yen has had the best performance over the past three months gaining, 6 percent, handily beating the second-best performer, the British pound, which has risen about 3 percent against a basket of its peers. Although many find it odd that an economy that has a debt load that is about 220 percent bigger than the size of its economy would have a currency that is a haven, it starts to make sense when you realize that Japan is the world’s largest creditor nation, with net external assets equivalent to more than 60 percent of gross domestic product. The yen has been making up a bigger percentage of global currency reserves, with the International Monetary Fund saying Friday that the currency's share rose to 4.89 percent at the end of the 2017, the highest since 2002. So, is there still room for further yen gains? Perhaps. The Organization for Economic Cooperation and Development estimates that the yen is 17 percent undervalued.


EMERGING MARKETS ARE HAVENS
Equities in developing economies held up surprising well relative to those in major economies in Monday's selloff. The MSCI EM Index fell just 0.12 percent, versus 1.22 percent for the MSCI All-Country World Index. Unlike in major economies, Citigroup's economic surprise indexes show that the data in emerging markets continues to exceed estimates, and at a faster pace than either one or two months ago. And investors, strategists and traders remain bullish on emerging assets for the rest of 2018, a Bloomberg News survey of 15 emerging-market participants conducted March 22-28 shows. That’s even after MSCI indexes of emerging-market equities and currencies capped five quarters of gains in March. Top picks are Asian stocks, followed by Latin American bonds. In currencies, Asia came out on top as well, ahead of Europe, the Middle East and Africa and Latin America. "Gradual gains in emerging-market asset prices are still expected, given their healthy economic conditions and tame inflation," Takeshi Yokouchi, a senior fund manager in Tokyo at Daiwa SB Investments, which oversees the equivalent of $53 billion, told Bloomberg News.


OIL CAUGHT IN DOWNDRAFT
If, in fact, trade tensions are on the rise, it stands to reason that global economic growth will take a hit. And if economic growth decelerates, demand for oil will likely diminish. At least that was the rational given for biggest decline in crude prices in more than seven weeks on Monday, which helped drag the broader Bloomberg Commodity Index lower. And while that's certainly a plausible explanation, perhaps a simpler reason for the decline was hedge funds covering wrong-way bets that supplies would diminish. Nationwide crude production has remained above 10 million barrels a day since early February, according to Bloomberg News' Jessica Summers. Crude inventories in Cushing, Oklahoma, increased 2.4 million barrels last week, based on forecasts compiled by Bloomberg. “The broader markets are struggling,” John Kilduff, a partner at the hedge fund Again Capital, told Bloomberg News. The oil market “is super long at the moment, so without a catalyst it will be hard for that length to stick around.” OPEC’s efforts to curb output have been undercut by surging U.S. production. A Kuwaiti oil undersecretary told the state-run news agency he doesn’t expect crude to dip below $55 a barrel.


TEA LEAVES
Tuesday brings the monthly vehicle sales data. The consensus is for the fifth decline in the last six months, to an annualized rate of 16.9 million sales for March. That's clearly a trend the automakers would like to reverse. The problem is, though, a key source of demand looks like it's drying up. Rising interest rates and new-vehicle prices are squeezing shoppers with shaky credit and tight budgets out of the market, according to Bloomberg News' John Lippert and Jamie Butters. Although sales were flat among the highest-rated borrowers in the first two months of this year, deliveries to those with subprime scores slumped 9 percent, according to J.D. Power. Among the largest automakers, General Motors is expected to post the biggest sales gain. Only Nissan Motor and the combined sales for Hyundai Motor and its affiliate Kia Motors are seen dropping.

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