Today’s Key Market Drivers: 28th August 2019
More recession indicators are flashing.
Monday’s relief rally was short-lived with another recession indicator flashing warning signs, this time with the 30-year bond yield falling below the S&P 500 dividend. Last week it was the 10 year and 2-year bond yields inverting and it appears the fall in yields is continuing. Donald Trump had the markets in recovery mode on Monday saying the Chinese had contacted his office wanting to start trade negotiations again and the market jumped higher on the news. The Chinese confirmed no such call happened and the market immediately stalled and went soft with the safe-haven currencies moving back higher and stock indexes turning on their heels.
The last time the 30-year yield was below the dividend value of the S&P 500 was at the height of the global financial crisis. What does this new so-called recession indicator mean? Usually, bond yields in the USA pay more than stock dividends but when you have such high demand for fixed income (bonds) the price of the bonds rise but the yield investors receive falls. To keep it simple, higher demand for bonds means the market is nervous. It means more of the markets money is wanting to move away from riskier investments (stocks) and into something that will offer a fixed income return, albeit lower.
According to CNBC. “Individual stocks now yield more than 5-, 10-, and 30-year US Treasury bonds, according to Bespoke’s research. As of Tuesday morning, two-thirds of the stocks in the S&P 500 yield more than the 5-year. More than 60% yield more than the 10-year, and roughly half are yielding more than the 30-year note.”
The reason why traders are using the term, “recession indicator“, is because higher demand for fixed income assets means big business and investment banks and hedge funds are gearing up for a downturn in the economy.
The USD v JPY is a great guide to the market’s currency fear factor.
The USD v JPY fell to an 18-month low on Friday touching 104.44 which was last reached in February 2018. The USD v JPY is currently directly correlated to the S&P 500 and is the market’s currency fear factor. As bond yields decline so does the USD v JPY so if you prefer to trade only currencies and have the view markets will continue to decline (like me) then a short USD v JPY trade would be a very correlated position to being short on the S&P 500.
Trump tweets still have power.
The impact Trump’s Twitter feed has on the market must be acknowledged and a world leader using social media in an attempt to influence markets, political leaders and Central Banks is something the market has never had to deal with prior to the Trump Presidency.
Director of Floor Operations for UBS and the longest-serving member of the New York Stock Exchange, Art Cashin summed it up best. Cashin said on Tuesday “I don’t know how long the lesson will last but I think he’ll be more modified from now on,” Cashin, UBS director of floor operations at the New York Stock Exchange, said on Closing Bell. “I don’t know what phone calls [Trump] got or didn’t get but I saw somebody who is trying to pull Friday back out of the fire. I think when he saw that we were down 700 points, I think he said maybe that was me.”
Pound remains supported as Labor leader says he wants to support a Brexit deal.
The British Pound has been steadily building up a head of steam in recent trading sessions following comments from German Chancellor Merkel and French President Macron that seemed to indicate support in securing a Brexit deal with the UK before the end of October.
Tuesday saw the UK’s opposition Labor leader Jerome Corban say he wants to do whatever he can to support a Brexit deal that does not see the UK crash out of the EU with no divorce deal on October 31st.
US economic data continues to impress.
This week has seen two high impacting US economic data indicators released. Durable Goods and Consumer Confidence which have both far exceeded leading economists estimates. Consumer Confidence jumped in the month of July to 135.1 vs the 129 analysts expected. Above 100 means there are more optimists than pessimists.
Today sees the release of second-quarter GDP figures which are expected to show the US economy grew at an annualised rate of 2%. If the data misses and comes in under 2% this will likely mean bond yields continue to slide and stock markets will resume their downtrend on fears future company earnings will be negatively impacted. It would also likely send the USD v JPY lower.
Worry is a waste of energy. It can’t change the past and it can’t change the future.
About the Author: Andrew Barnett
Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).
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