A New Weight on Equity Markets

A New Weight on Equity Markets

Late last year, stock markets worried about the Fed's path of rate hikes stifling the rally. Now the Fed has reversed, but it may be too late.

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Traders and active investors should take note of Friday's selloff. It wasn’t just the almost 200 point drop in the NASDAQ, the 54 handle fall in the S&P 500 or the 460 point collapse in the Dow, but the 20% spike in the VIX which jumped to near 18 before settling back in at 16.48.  The VIX has not sustained above the 18 level since January of this year.  Volume was also strong. Friday was the highest volume day (excluding quadruple witching) since the end of January. The weakness is more notable because the driver was global long-term yields and the US yield curve. The German 10-year bund turned negative and now sits at -0.019, the lowest level since late 2016. In the US, a widely watched section of the yield curve has inverted. The 10-year yield minus the 3-month yield sits at a differential of -0.009. A mild inversion, but no level of inversion is ever good news. The Fed has reversed its rate hike path and plans to end its balance sheet reduction in September, but that wasn’t enough for markets. Long-term rates, ten years and out, are falling precipitously as time continues to march on with no U.S./China trade deal, no U.S./EU trade deal, no Brexit deal, and weakness in economic data across the globe.  China’s auto sales continue to fall as the trade war weighs on consumers. They have announced a new stimulus package including tax cuts. Germany's manufacturing Purchasing Managers' Index (PMI) plunged from 47.6 in February to 44.7 in March. A survey reading below 50 indicates a contraction in activity and we now have 2 of those in a row, in a downward trend. New orders fell at the quickest pace since 2012 and France’s PMI fell as well, with demand for exports dropping.  The news is not good for equities, which means a trade deal is needed more than it was 3 months ago, yet even that seems further away. 

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