Dec 7 – In today’s Financial Sense Newshour podcast, Ryan Puplava gives listeners an update on a number of key events and news headlines that rattled markets this week, including the arrest of a major Chinese corporate executive and the potential for further deterioration in trade talks.
Ari Wald at Oppenheimer discusses the technical outlook of the US stock market looking at the decline in breadth—that is, the number of stocks in a bull market—and what that means in terms of a possible market top.
Lastly, Greg Weldon at Weldon Online gives an update on the flattening and partial inversion of the yield curve, whether this is a recessionary signal, and then comments on the US trade deficit with China and what investors should expect for global market should a deal be reached.
Market wrap-up: The week started with a positive reaction to the agreement last weekend between President Trump and President Xi to cease fire on any escalation in the trade war for 90 days. It was felt on Monday that perhaps the rally was a bit of an overreaction to the agreement since this was the base case scenario. The rally from the lows last week sent the S&P 500 to 2800 close to the October high. The reversal for stocks started on Tuesday based on a lot of attention paid towards Treasuries, primarily regarding the inversion of the yield curve between 2- and 3-year notes, both at 2.80%, and the 5-year which fell below those levels to close at 2.79% on Tuesday. Jeffrey Gundlach, Doubleline CEO believes the inversion is a signal the economy is poised to weaken.
When I wrote my article Tuesday on the subject (see Let Me Take You on an Inversion Excursion), I remember looking at the 2-10 year spread which had dropped from 21 Friday to 15 Monday and it was 10 basis points Tuesday. Ending the week, the 2-10 spread closed at 14 basis points. The 10-year Treasury note has dropped from 3.2% to 2.85% in a couple of weeks. Something I hope the Fed has an eye on. The Fed will announce its policy directive Wednesday the 19th in two weeks. The implication now is investors are bidding up long-term Treasuries in a risk off mode now, and the inversion based on similar correlations with previous recessions suggests the economy may turn negative in late 1919 or 2020.
Since the tariff cease fire agreement over last weekend, the perspective has shifted on trade from one of hope to one of doubt that the US and China, two trading partners with trade issues in place for decades, can work out their differences in just 90 days. There were many headlines since Saturday that have influenced trading sentiment this week. President Trump tweeted Tuesday “I am a tariff man” stating he wants countries to pay for the privilege of raiding our wealth. Thursday, the arrest of Huawei’s CFO in Canada on behalf of the US was seen as an escalation of sorts. Many tech executives have been warned about travel to China. Peter Navarro reminded us Friday that tariffs will increase from 10 percent to 25 percent if there is no trade agreement in 90 days. Trump tried to rescue sentiment Friday with another tweet that talks with China are going very well, but I think overall sentiment has really soured this week. The implication right now is we are still very far away from an actionable agreement between the two countries.
To end the week, there were a couple more news stories worth mentioning. OPEC decided to cut production 1.2 million barrels per day with Iran exempt from the cut. Oil rallied on the news but some of that was reduced by the weakness in equities. West Texas Intermediate Crude closed at 52.26 Friday, up 77 cents. Finally on the economic front, the payrolls were in and that originally helped rally the market into positive territory Friday because while it missed on the headline number at 155k additions, the average hourly earnings were up only 0.2% the same as last month leaving the year over year rate at 3.1%. The key here is that the hourly earnings increase has been under the expectations of the Federal Reserve Bank. The Federal Funds futures still suggests a 76% chance the Fed will raise in December, but it will be any dovish or hawkish comments from the Fed policy statement and or Powell that will carry the most weight in addition to the officials’ projections for interest rates and economic growth in 2019. We haven’t seen an update to these since September. Given the partial inversion of the yield curve and the backpedaling on how far we are from neutral by Powell and gang over the last two weeks, this December meeting is turning out to be a more important meeting than anticipated.