Equity markets are in a bit of panic mode. The CNN fear/greed index is down to 9 (extreme fear) and the only thing right now preventing it from being at zero is the VIX which has risen (+12% yesterday) but remains relatively low (13.7 on the spot VIX). A year ago, the index was 7 – the S&P 500 was 1933.
According to regular guest Bill Blain from Mint Partners, when the world is a mess “Buy bonds, buy bonds, and if in doubt, buy some more bonds.” And that seems to be what’s happening as the German two-year bond has fallen to a record low (27 basis points) as have French and Italian twos. U.S. tens are trading down through recent support at 2.2% and now down to May lows of about 2.1%. The twos in the U.S., while slightly lower in yield are still double (65 basis points vs 30 basis points) the lows of last October – and the curve continues to flatten but this time with the long end falling.
So it is all about the macro today (hate that!). But with all of the angst comes opportunity. Having said that, my superstitious hat sees a good bounce and then a plop and then a year-end rally (see August through December last year). Play accordingly.
Currency markets–where the moves by the Chinese are reverberating through currency, fixed income and equity markets around the world. According to Dennis Gartman, while everyone is watching the renminbi versus the U.S. dollar, he believes the more important relationship is versus the yen where that currency has seen a dramatic 40% decline against the Chinese currency since 2011. That might be the more important cross to watch. Lots of moving parts in this story. And comparisons will be made to 1998 (the Asian currency crisis) – our goal will be to distinguish this from that as well as find the opportunities in the mess.
Interesting spin. China does a tremendous amount of trade with Europe and especially Germany. The first thought was that Germany would suffer as its goods became more expensive as China’s currency weakens. The DAX got smoked yesterday (the equivalent of 400 Dow points) and it is getting smoked again today (the equivalent of another 400 Dow points). But, it the perverse world of trades, the euro is stronger because a weak yuan will ultimately stimulate a Chinese economy and ultimately make for a better market for German (and European) goods. You can’t make this stuff up. The theory is that currencies react to economic differentials not rate differentials – hence Euro up – for six days in a row.
www.bnn.ca