Well, it was an ugly end to an ugly week on Wall Street.
What’s particularly interesting here is that the market appears to be buying into its own narrative with regard to the U.S. economy. We talked about this phenomenon at length on Tuesday in “Ban Bond Trading: Curve Inversions & The Reality Distortion Loop Of Reverse-Engineered Growth Slowdowns.”
Last week, a dovish lean from the Fed (in the form of Jerome Powell’s efforts to walk back his “long way from neutral” debacle and “confirmation” of a new, “flexible” approach a day later via the November minutes) was a bullish catalyst as it appeared to suggest that the restriking of the Fed put had run its course.
One week, two inversions (3s5s, 2s5s), a mammoth Tuesday long bond rally and a Thursday short end capitulation later and everyone seems squarely convinced that the Fed’s dovish relent amounts to a tacit admission that we’ve already “tightened ourselves into a slowdown” (to quote Nomura’s Charlie McElligott).
The aggressive fading of the Fed continued apace on Friday. Hot on the heels of Thursday’s session when, at one point, 2-year yields fell 10bps, Treasurys again rallied, closing near the best levels of the session. Here’s 2-year yields with yesterday’s plunge highlighted along with an annotation for Friday’s jobs report.
Meanwhile, EDZ8-9 compressed relentlessly to close the week, throwing cold water on the notion that Lael Brainard’s “gradual hikes remain appropriate” comments (around lunchtime) might have sent a hawkish message.
Again, this ongoing aggressive fading of the Fed seems to be a clear manifestation of the market buying into its own narrative as dictated by the curve. The Fed is inadvertently contributing to this by adopting a dovish slant, thus “confirming” that we’re close to restrictive policy. Nobody seems to be aware of the reflexivity/circularity going on here and, perhaps as importantly, nobody seems to care. Obviously, the Fed is damned if they do, damned if they don’t in that scenario.
As far as equities go, this was obviously a story of flash crashes, quant finger pointing and broken markets. The following visual is just S&P futures with this week’s most notable episodes highlighted for ease of use.
There are all manner of possibilities as to what was at play during the three episodes with the red annotations. Clearly, something was afoot at lunchtime on Tuesday and also on Wednesday evening. Friday was a little more “orderly” if that’s what you want to call it.
Read more on this week’s manic market manifestations
Ultimately, this was the worst week for the S&P since March, just seven days removed from the best week since 2011.
On a simplistic read (i.e., just using IVW and IVE), Growth is back to underperforming Value, a week after Powell reinvigorated the Growth trade. This is a further testament to the notion that this is a market that simply isn’t prepared to see the leadership baton passed.
Semis were down a grievous 6.6% this week, the worst weekly showing since March and the 3-day RoC chart is horrendous.
IG credit risk is still a pretty big concern for folks, although it got back-burnered a bit this week amid more “pressing” concerns. Here’s CDX IG spreads.
Crude obviously got a lift on Friday from the OPEC deal, but even that petered out as risk sold off.
The bottom line of Friday, is that nobody wants to carry any risk into the weekend given the potential for geopolitical tape bombs, especially given the increasingly contentious Huawei standoff and domestic political risk tied to, among other things, ongoing staff shakeups at the White House and the Mueller probe.
That lack of a fundamental/discretionary bid probably conspired with more systematic de-leveraging on Friday, or at least it certainly seemed that way given how the bottom just kind of fell out this morning.
This is, undoubtedly, a rather precarious juncture for market participants who appear increasingly prone to forgetting their own role in shaping the reality they’re pointing to to justify souring sentiment.
When you throw in a dearth of liquidity (which, in S&P futs is now at a five-year listless nadir) and questions around exactly what robots are selling what and when, you end up with a truly “sad” state of affairs – to again quote one strategist we spoke to on Tuesday afternoon.