Nervous Market Pauses at Notable Juncture

Market Moves

Which was to say, the rebound after the worst day for US equity markets in about six months wasn’t particularly helpful in picking out which sectors of US markets might be safer in volatile times. Utilities (represented by the Utilities Select Sector SPDR Fund, or XLU) rebounded the least yesterday, at +0.75%, while the Technology Select Sector SPDR Fund (or XLK), and the Consumer Discretionary Select Sector SPDR Fund (or XLY) both did better, returning +1.25% and +1.75% respectively.

Perhaps the best hope for investors searching for any indication that the markets will simply recover from the most recent shudder is contained within The Walt Disney Company’s (DIS) quarterly earnings, which were reported after the bell. Specifically, heading into the announcement, investors had anticipated the company’s quarterly results so good that the company’s stock had managed to rise even in what can be described as one of the worst days in market history. But the mixed news (revenues up, profits down) was, as one headline proclaimed, ‘mixed’. To sum it up in a word: uncertain.

The fact that the markets fell off a cliff yesterday and are essentially flat today compared with where they fell off that cliff means that investors largely find themselves back at square one, having experienced nearly a year of no stock market gains, and wondering what to do about it. Investors will need to look at the big picture to ascertain how specific asset markets are faring.

Though the trade war between the US and China has dominated the headlines and the comments of Chinese currency officials screamed the loudest in terms of price action in the past 48 hours, two other assets have been engaging in quiet but emphatic trends higher in 2019: gold and US Treasury Bonds.

And up through today, an even bolder argument can be made that US stocks, for all their volatility, were beating every other asset class, a trend that would be expected to continue through to year-end. Smart investors need to review their portfolios to consider if they are adequately positioned for further downside moves in stocks.

Carry Trades Drop the Ball

As the world’s most traded and largest shares currency pair, anonymised trade in the Chinese yuan against the greenback has set official records. Likewise, anonymised trade against the US dollar, in the world’s second most traded currency pair, the U S greenback against the euro, logged records as well. All this activity tells us that authorities have extended the Fed’s reach into other countries in a generally pervasive manner. So what would we expect from action in free-market currency pairs? Surely, we should see big moves, if any at all. After all, so‑called carry trades, placed in an attempt to extract a difference between the interest rate assigned to one currency and another, are arguably the best example of the global risk appetite of institutional investors – especially banks. The two most common currency pairs used in carry trades are the US dollar-yen (USDJPY) and the Australian dollar-yen (AUJPY) pairs.

These two pairs went through 12 months of buyer support in the past two days and appear ready to extend what had already been a very bearish-looking trend since late 2018. We could be looking at confirmation that global bankers and institutional investors are eyeing better escape routes above rising waters.

Yields Down, Prices Up

Just like with falling yields, when yields hit a new low, bond prices hit a new high. That shows up positively in the indexes that track bond prices, and far more importantly, in the ETFs that track those indexes. the 30-year Treasury bond is tracked by iShares 20+ Year Treasury Bond ETF (TLT) Here’s TLT making a good proxy for stock investors to track as we try to score some free stock index returns via the bond market’s trend in price.

The most intriguing action right now as I see it on the TLT chart is today, but here is the twist if the bond market was a pure inverted reflection of the stock market then today’s bond market moves should have been smaller and end the day only slightly lower than where it was yesterday with the range contained within the span made by yesterday’s big jump in prices, but that wasn’t the case. Rather, the bond market moved price higher again into new highs with very little indecision in the price action as prices yanked up against the resistance. Maybe bond players are preparing to move lower as the stock market continues to break down.

The Bottom Line

Fears of retaliation by the Chinese continue to fuel negative reactions to further price drops in any of the US stock market indexes. The appetite for risk around the world appears to be plummeting, and bond buyers now seem resigned to a poor environment for the remainder of the summer. It’s time for all stock investors to carefully examine their holdings and prepare a sober game plan for the rest of the summer.