Markets Gyrate, German Bunds Yields Go Negative

What You Need to Know Today

• German and European macro data disappoints

• German Bunds go Negative

• Analysts concerned about the Japanification of Europe

• US Stocks pointing lower as traders take profits ahead of the weekend

Remember – you can never do just one thing….every action causes a re-action – and in this case – the FED move to halt any rate hikes for the foreseeable future caused the algo’s to run wild – taking the mkt back up on Thursday after the Wednesday afternoon retreat.  The VIX (fear Index) falling by 2% as stocks enjoyed the ‘day after’ surge. 

Tech stays in the lead – with the Nasdaq surging 109 pts or 1.42% as the XLK surges to within 1 pt of  breaking the October 2018 high….And in a twist – Consumer Discretionary  (XLY) broke out as well – surging by 1.32% as Energy (XLE), Consumer Staples (XLP), Communications (XLC) and even Utilities (XLU) all surged better than 1% - as expected Financials (XLF) were the worst performers – falling by 0.31% as the reality set in.   Look – the FED made a dramatic move on Wednesday – taking any rate hike off the table until some time in mid-2020 – and that is not the ‘best’ news for the banks…..but investors seemed to cheer the broader mkts with the Dow adding 216 pts or 0.84%, the S&P surged by 30 pts or 1.09%, Nasdaq up 109 pts or 1.42% and the Russell ahead by 19 pts or 1.25%.  The change in heart (at least for yesterday) was that the algo’s assume that a more accommodating FED must be good for riskier assets.  And just like the Dow did on Tuesday when it experienced it’s ‘Golden Cross’ – the S&P and Nasdaq are only a day or two away from having their moment…..and that will ‘check another technical box’ giving the algo’s another reason keep buying….Recall the Golden Cross is when the 50 dma crosses up and thru the 200 dma – creating a bullish technical signal that should give further rise to the mkts…..

We are now with striking distance of the October highs on almost all of the indexes – and with the FED on hold – what are investors supposed to do?  Where do they find growth and opportunity?  You got it – in stocks.  In the end – the power of the FED cannot be underestimated – the old adage – ‘Don’t fight the FED’ has never been more true.  Growth names – and many of those are in the tech space – are the biggest beneficiaries of easing policy – thus the continued surge of that group.  The Nasdaq is now up 18% ytd – well ahead of the Dow and the S&P at +11% and +13% as it was before the 4th qtr meltdown.

The US macro data remains stable, China and the US remain fully engaged in trade talks, unemployment is near all time lows, wages are growing, monthly job growth remains solid – so it’s all good – right?  Well – maybe not so much….we see Asia and Europe coming under stress – and overnight – EU flash PMIs were a disappointment again, as the composite EU PMI fell to 51.3 vs. (E) 51.4.  Manufacturing was especially bad as the EU flash manufacturing PMI dropped to 47.6 vs. (E) 49.5, a five year low and if that wasn’t enough - IHS Markit reported that the Purchasing Managers Index for German Manufacturing fell to 44.7 – well below the expected 48 and well below 50 -which defines contraction/expansion.  Anything south of 50 is contractionary and a 44.7 read is well seated in a slowdown…..this report caused German Bund Yields to go NEGATIVE as investors piled into German Bunds - seen as a ‘safety play’ as investors run for the hills – remember price and yield move inversely to each other – prices go up/ yields go down and as of this morning – yields on German Bunds are now negative. Talk of the ‘Japanification of Europe’ (inflation, growth and yields remain permanently low) is now the new concept and we have to start to wonder if the FED is worried about that same issue in the states. 

(Recall that Japan has struggled for 3 decades – low inflation, an aging population, low growth and their stock mkt which crashed back in 1989/1990 has yet to recover!  In December 1989 – the Nikkei was trading at 39,000 – by August of 1992 it was trading at 14,500 – rallying to 23,000 by June 1996 only to fall to 7500 by May 2003 – today the Nikkei is trading at 21,500 or some 45% below their all time highs some 30 yrs ago.  Both nations/regions have pushed rates to zero and now negative and still have yet to ignite inflation and with European gov’ts unwilling to carry big deficits and monetary policy more limited – we could see Europe spiral into deflation……Every time investors thought that Japanese yields couldn’t go lower – they did – turning bonds into a great investment – and with unrest in France,  Italy struggling to come to terms with their economy (and political framework)  and with the UK about to divorce the EU – action in the German bund mkt makes perfect sense but also reignites the argument about ‘Japanification’.)

European mkts are weaker this morning  as the macro data causes the algo’s to hit the ‘sell’ button as the disappointing eco data only amplifies the FED’s subdued outlook.  The EU has agreed to an extension for the UK (of course they did) allowing them a bit more time to consider the terms of the divorce giving PM Theresa May one more week to get her papers in order.  Yesterday we also learned that the BoE (Bank of England) left rates unchanged reserving judgement on their economic outlook until they get clarity on BREXIT.  FTSE -0.99%, CAC 40 – 0.85%, DAX -0.45%, EUROSTOXX -0.76%, SPAIN – 0.46% and ITALY -0.96%.

S&P futures are off by 14 pts  after we’ve had another night of debate on exactly what the FED did and what the message should be…..and while yesterday’s action suggests that investors are ok with it – you can’t help but wonder about how concerned the FED really is…and that is causing the risk off tone this morning….besides the fact that it is Friday and the weekend is coming – so don’t be surprised to see more profit taking as the day wears on.  On the Trade front – both Bobby and Stevey are on their way to Beijing next week to continue talking…..while Chinese Vice Premier Liu He will visit the Trump Hotel on Pennsylvania Ave in early April…..so the clock ticks…..

I suspect that yesterday’s high of 2860 is about it for now with 2835 being short term support – if that breaks then look at 2800 for intermediate support….the longer term trendline is at 2755 – a level I do not think we will hit especially since the S&P is about to create a ‘Golden Cross’.