“Wherever Mark Connors looks at markets, from stocks to currencies to oil, he sees signs of the unknown.
“Equity investors got whipsawed this week during two rough and volatile sessions, but Connors, global head of risk advisory at Credit Suisse, had seen worrying signs long before that. A key technical measure he tracks, the correlation between the price of stocks and currencies, had broken down starting in April. That, along with sharp drops in the price of oil, point to one thing, he says: Uncertainty about the future as central banks around the world unwind programs that bought trillions of dollars of assets.
““We’re seeing two of the biggest asset classes, stocks and currencies, exhibit a degree of uncertainty in their relationship in 2018 that we’ve never seen before,” Connors said. “Crude just exhibited something very unusual in the context of the last 40 years.”
“The unwinding of central banks’ programs a decade after the financial crisis brought economies to the brink is known as quantitative tightening. J.P. Morgan Chase CEO Jamie Dimon said in July that one of his biggest fears is around how markets would behave as central banks removed their unprecedented stimulus.
““If quantitative tightening continues, guess what’s going to happen? More of this,” Connor said, referring to unusually violent moves across markets…
““Uncertainty is here, and that means deleveraging into a market with reduced liquidity,” Connors said. “Expect more of these exacerbated moves.””
“The value of the City’s leading companies fell by more than £56bn on Thursday during waves of selling on stock markets in Asia, Europe and North America prompted by heightened fears of a trade war between the US and China.
“The FTSE 100 index suffered its biggest percentage fall since the day after the EU referendum in June 2016 – closing almost 218 points lower at 6,704.”
“More families are struggling to keep up with their mortgage bills today than at the height of the financial crash, the UK’s financial watchdog has revealed… the Financial Conduct Authority found that there are 14,000 more households in serious arrears of more than 12 months than there was in 2008. That comes despite mortgage rates being near record lows and the regulator has warned that banks will start to repossess more homes if interest rates rise.”
“An investor who predicted the 2008 financial crisis has revealed he is betting against the UK banking system.
“Steve Eisman, known for appearing in The Big Short, said he had bets against three UK banks, though he declined to name them… Mr Eisman said he expected UK markets to fall as a result of Brexit.”
“German industrial output fell unexpectedly in October, data showed on Friday, adding to signs that a cooling trend in Europe’s largest economy will continue in the fourth quarter. Data from the Statistics Office showed industrial output fell by 0.5 percent, confounding a Reuters forecast for an increase of 0.3 percent.”
“An economic downturn in Turkey is deepening after a slump in the value of the lira.
“The currency has fallen by more than a quarter against the dollar this year, prompting consumers to cut back on spending and pushing up costs for businesses as wholesale price inflation surged to almost 50 percent.”
“China’s yuan will breach the 7 per dollar rate within the next six months, according to about 60 percent of FX strategists polled by Reuters, who also said authorities would continue to exert control over the currency in 2019…
“The most pessimistic call was for it to weaken to 7.85 per dollar in a year, the weakest view ever in about eight years of Reuters polls on the yuan, and a rate not reached in a dozen years. That negative call was driven by worries over increased capital outflows and lower foreign exchange reserves as Chinese authorities are slowly stepping up interventions…”
“The Australian dollar hasn’t been this undervalued against the greenback since the depths of the global financial crisis, with fears over a potential escalation in the US-China trade conflict largely to blame.
According to Joseph Capurso, Senior Currency Strategist at the Commonwealth Bank, the AUD/USD is now extremely cheap based on the bank’s fair value model.”
“Homebuilder stocks were under pressure this week after Toll Brothers issued a warning about a slowdown in the [US] housing market, and an analysis of short interest in the sector suggests there is more pain ahead…
“Rising interest rates have weighed heavily on the group this year…”
““When credit starts looking dicey, investors quickly pay attention and for good reason,” says Michael Mackenzie in the Financial Times. In 2008, US subprime mortgage loans triggered the financial crisis. Now, eyes are turning to record high corporate debt, with investors fearful that we are heading into a “typical late-cycle period where the excesses of corporate borrowing come home to roost”. Already, 2018 is proving to be the worst year for investors in both investment-grade and high-yield (“junk”) debt since 2008, with total returns negative for the year.”
“As a longtime market observer, what I find most interesting about the latest correction in equities has the feeling of inevitability that it will turn into something worse. It wasn’t this way in late January, when everyone wanted to buy that dip. It certainly wasn’t this way in 2007, when the magnitude of the recession was grossly underestimated.
“Even the Federal Reserve is getting into the pessimism. Chairman Jerome Powell signaled last week that a pause in interest-rate hikes might be forthcoming.”
“Only a globally co-ordinated debt “bonfire” can save the world’s leading economies from depression now that monetary and fiscal armouries are exhausted, a leading economics consultancy has warned.
“Public and private debt levels are so high in the developed world and traditional policy levers are so overextended that the next recession will turn into a depression unless radical measures are taken, Erik Britton, managing director at Fathom Consulting, said.”