Oct 7. Storms brewing
–When I was a kid working on the floor of the CBOT, the way it was explained to me was, “insurance companies have to raise money to pay claims when there’s some kind of natural disaster, and to do that they sell bonds.” I don’t know if that quaint bit of market lore has any validity these days, but I do see pressure building on the long end of the market, and it’s pretty obvious that Hurricane Matthew is going to do some damage. The storm in the markets this morning concerns the British pound, which experienced a flash crash drop. Again, I am not sure of the ramifications (the longer I’m here the less sure I am about cause/effect given gov’t intervention), but volatility across markets seems pretty low given these one-off events that aren’t all that infrequent. USD appears to be breaking out to the upside (which I think will translate into weakness in EEM). This morning from the WSJ: “The yuan hit its weakest level against the U.S. dollar since January in offshore trading in Hong Kong after data showed a sharper-than-expected decline in Chinese foreign-exchange reserves. ” The yuan touched 6.7182 per dollar early Friday, its lowest since Jan. 7. Recall the August 2015 devaluation of yuan the reverberated through markets; this latest move is controlled but still will have an impact.
–Today is, of course, the employment data. NFP expected 172k. Avg Hourly earnings +0.3 m-o-m and 2.6% y-o-y. I believe it’s a pretty low bar to hurdle to encourage new waves of selling in treasuries, and I don’t think the strong oil/strong dollar situation is going to do any favors for stocks. The most important aspect of yesterday’s trade was that reports of an ECB taper plan were called incorrect by Vitor Constancio. “Indeed, we [the ECB] have not discussed anything about the timetable of QE. So all the rumors are just that, rumors without any foundation.” This comment caused a rally In both stocks and fixed income, but the pop in TYZ was short-lived and the contract came back down to make a new low.
–What I think I HAVE learned is this, I wouldn’t be selling any cheap property insurance in the southeast, knowing a storm is bearing down. Today’s GBP crash is a reminder that damage can occur in markets as well; might not want to BUY cheap premium, but you surely don’t want to sell it.
