Wild week for markets comes to an end

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Published Date 2/9/2018

When markets become excessively out of control, the reaction is usually the same out of control condition when markets swing around. Enough is enough now in the stock market. We anticipated a correction of 10% in the indexes, we got it and then some, so now it’s time to stop this stock market slaughter. Today was another session of feverish selling and buying; the DJIA traded +349 before dropping 500 points then turning higher in the final hour. All global equity markets were caught up in the mania started with Trump’s tax cuts that lowered corporate taxes from 35% to 21%, a feeding frenzy we noted many times that hasn’t stopped for two weeks. We got what we were expecting now it is time to end this panic. Most of the leverage is now out of the equity markets, EFTs and the VIX volatility trade.

The reason “excuse” from market bulls is that global interest rates will be increasing; that is true, but it didn’t become headline news until now even with the Fed making it clear it would increase the federal funds rate three times in 2018. Rates are likely to increase, but markets are too negative about the increase in inflation. Wages are increasing slowly, but we doubt wages will move substantially higher and the level of inflation probably not exceeding the Fed and other central bank’s 2.0% target. Since the financial crash in 2008, there has been no pricing power for manufacturers or retailers, and there are no signs that pricing power is about to increase. Stock indexes have fallen to levels that should get support at these low levels, individual stocks that have been swept up in the rout should be seen as a buying potential now.

The only key data point this week was last Monday, the Jan ISM services index that was some the best data in 20 years, at 59.9 the index up 4 points, new orders were arguably more important than any composite result and the reading, at 62.7, is back at last year's peak. And employment was a particular standout, up more than 5 points to a very rare plus 60 score of 61.6 which is by the far the best of the post-2008 expansion. Treasury sold $24B of 10s and $16B of the 30s this week neither were well bid, the volatility in the US and global equity markets were not a positive background, and inflation concerns keep long-term rates subject.

Next week, after a quiet week data reports come back to the headlines. Monday, the Jan Treasury budget report. Tuesday, NFIB small business optimism index. Wednesday, Jan retail sales, Jan CPI and Dec business inventories. Thursday, Feb Philadelphia Fed business index, Jan PPI, NAHB housing market index, Jan industrial production and capacity utilization. Friday, Jan housing starts and permits, Jan import and export prices, U. of Michigan consumer sentiment mid-month index.

This week after all of the focus on the stock markets the bond and mortgage markets were unchanged from last Friday, high levels of intraday volatility kept tensions high.

Source: TBWS

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