atara, this bodes ill for the economic future of the US, and elsewhere. Jaws indeed.U.S. stock index futures lurched lower, signaling no respite to the rout that?s lopped more than $3 trillion from the market since late September.
S&P 500 Index contracts slumped as much as 1.9 percent from Tuesday?s close, before trading at 2,673, down 1.1 percent, as of 8:30 a.m. in London. Selling pressure early in the session was so intense that it forced CME Group to intermittently pause trading, according to a spokesperson for the exchange. European equities declined at the open, adding to the negative sentiment.
Concern about China-U.S. trade relations deepened after the arrest of Huawei Technologies Co.?s Chief Financial Officer Wanzhou Meng, though traders were still puzzled at the magnitude of the declines. Some speculated that Wednesday?s closure for cash markets and shortened session in futures was a factor.
?It?s a bloodbath today,? said Naeem Aslam, the chief market analyst at Think Markets U.K. in London. ?The risk aversion trade has returned with vengeance. The entire trade truce element between the U.S. and China, which promoted some optimism in the market, is under a huge threat after the arrest of the CFO of the Chinese telecom company Huawei.?
The plunge was the last thing that investors needed, already skittish after Tuesday?s rout and an enforced lull on Wednesday for a day of mourning for former President George H.W. Bush. The S&P 500 plunged 3.2 percent on Tuesday, its biggest slide since the mid-October sell-off, while the Dow Jones Industrial Average sank almost 800 points as a litany of concerns wiped out the rally in risk assets.
Some of the bricks in the wall of worry:
- A segment of the U.S. yield curve inverted for the first time in more than a decade, a phenomenon that has occurred before previous recessions
- Concern about what has actually been agreed between U.S. President Donald Trump and China President Xi Jinping on trade
- And the economic outlook: the Federal Reserve?s Beige Book report published Wednesday showed fading optimism over growth prospects at U.S. firms.
?One thing adds to the other - there?s concern about the flattening yield curve, the direction of the policy, ? said Walter ?Bucky? Hellwig, senior vice president at BB&T Wealth Management. ?Coupled with that is concern about slowing growth. It seems like the growth concern isn?t removed, and it?s building rather than receding."
Thursday?s moves look even worse if the rebound in Wednesday?s abbreviated futures trading session is taken into account. S&P 500 futures fell as much as 2.5 percent from levels on Wednesday, a non-settlement day.
The risk-off mood accelerated across Asian stock markets, bonds and currencies. Among the worst equity performers was a gauge of Chinese stocks, headed for its biggest two-day drop since February. Treasury yields slumped to the lowest since September and the yuan resumed declines.
?Futures were up overnight but when I looked tonight -- I said ?Oh my god?,? said Donald Selkin, chief market strategist at Newbridge Securities, in a phone interview. ?I was surprised in light of the fact that last night and during the day today they were up. Why all of a sudden was the optimism fleeting?"
CME Group said that volatility near the open triggered more than 40 of what it calls "velocity logic events," causing intermittent trading pauses in equity index futures and options. All markets operated as designed throughout, according to the spokesperson.
For Bruce McCain, chief investment strategist at KeyBank, the big concern is whether there will be a floor to the market sell-off. ?The fear is that there may not be a bottom to this weakness - because the U.S. economy is weaker than we see right now and because global growth is decelerating faster than we expected,? he said.
A sharp decline in long-term Treasury rates and the lingering trade concerns are likely ?lingering at the back of traders? minds? as the rout continues. ?There are too many issues to be concerned about,? McCain added.
As the Dow Jones Industrial Average confronts its ugliest December loss since 1931, the time of the Great Depression, there is another notable way to put the severity of this persistent bout of losses into historical context.
If current conditions hold, it would mark the worst average daily moves for the Dow (DJIA) the S&P 500 index (SPX) and the Russell 2000 index (RUT) since October of 1987, according to Dow Jones Market Data.
In market lore, October of 1987 is a period that remains infamous. On Oct. 19, the Dow sank 22.6% in a single session, marking its steepest percentage drop ever, with trading during that period under pressure all month until the final crash.
There?s a similar downtrend that is taking hold in December, despite the seasonal tendency for that month to enjoy a pre-Christmas updraft, typically known as a Santa rally, with institutional investors finding the month a good time to buy looking ahead to the new year.
Here?s how the December moves have shaped up:
- The S&P 500 has had an average daily move of negative 0.80%
- The Dow has had average daily move of negative 0.78, as of 2:30 p.m. ET trade Friday
- The Russell 2000 index has had an average daily move of negative 1.05%
For those equity benchmarks, that is the worst performance since that dreaded month more than 30 years ago, based on market levels at 2:30 p.m. Eastern Time.
The Nasdaq Composite Index (COMP)which was set to close in a bear market, widely defined as a drop of at least 20% from a recent peak, has seen an average move of 0.8%, on track for its worst daily moves in a month since September of 2001.
On Friday, stocks extended withering losses that have been driven by a litany of investor concerns, cropping up after Wall Street enjoyed one of its best years in recent memory in 2017. Those fears include the Federal Reserve?s pace of interest-rate increases, the health of the U.S. economy, a looming government shutdown, trade-war jitters and an international economic landscape that shows signs of stalling.
The U.S. economy does remain healthy, but optimism is in short supply. Some market strategists argue that a tradeable bottom could be at hand.
Bob Doll, senior portfolio manager and chief equity strategist at Nuveen Asset Management, in a research report dated Friday said ?calling market bottoms is a fool?s game,? but noted that his investment shop sees ?evidence that a tradeable bounce could be in the offing, which means stocks prices could be poised for a rally phase.?
A wide swath of market-watchers expect the U.S. economy in 2019 to be the worst since the depths of the 2008 financial crisis, potentially putting President Trump in a hole as he heads into his re-election race.
Flashback: A year ago, we wrote about a rare and enviable trend: synchronized global recovery. Now, we have synchronized global retreat.
Last week was Wall Street's worst in 10 years. If the Dow and S&P 500 finish at their current levels, they'll have their worst December since 1931, during the Great Depression.
- Bloomberg says the S&P 500 is "one bad session away" from ending the decade-long bull market.
Between the lines: Against that backdrop,many in the financial world were agape when Treasury Secretary Steve Mnuchin tweeted, with no real explanation, that yesterday he had "convened individual calls with the CEOs of the nation's six largest banks."
- "The CEOs confirmed that they have ample liquidity available," the statement continued.
- Justin Wolfers, a University of Michigan economics professor, tweeted: "If you wanted to create financial market volatility, this is how you would do it."
- Bloomberg's headline: "Mnuchin Bid to Calm Markets Risks Making Bad Situation Worse."
The big picture: Almost everything going on in the world is bad for the economy, Felix Salmon and Dion Rabouin point out in Axios Edge, our weekly look ahead for business.
- A partial list: Trump attacking the Fed ... the trade fight with China ... China's slowing growth ... a possible Brexit catastrophe ... German and Italian growth slowing ... the French presidency under siege.
Chris Krueger of Cowen Washington Research Group, one of the sharpest observers of the collision of Washington and Wall Street, tells me in an email with the subject line, "For the night is dark and full of terrors":
- "2019 will begin with a partial government shutdown, fragile markets, and leadership vacuums at the White House, Pentagon, Justice Department, United Nations, and Interior Department ? at a minimum."
- "Some might call that American carnage. Nearly every hard policy catalyst in Q1 of 2019 carries significant downside risk."
Another worry, according to Dan Senor, a fund executive and former adviser to Speaker Paul Ryan and Senator-elect Mitt Romney: "If we were to face a real financial crisis in 2019, we will be in much choppier waters than 2008."
- "In '08, sovereign governments could backstop the crisis in the markets with extraordinary fiscal and monetary measures, and their ability to do so was unquestioned," Senor added. "In 2019, different story."
And Krueger notes how different the U.S. administration is now:
- "2008 had ... people minding the shop ... like Hank Paulson, Ben Bernanke, Josh Bolten, Steve Hadley, Condi Rice, Bob Gates, and real deputies who all had the implicit trust of both the president and the markets ? and worked together to prevent disaster."
Most forecasts reflect the Washington chaos and global slowing:
- Jon Hilsenrath, The Wall Street Journal's global economics editor, writes: "Most private economists expect U.S. growth to slow in 2019. ... Global economic growth accelerated in sync in 2017. In 2018, as the U.S. accelerated further, Europe, Japan and China all slowed."
Be smart, from Axios markets editor Dion Rabouin: "The market is looking for a hero because everything is terrible right now around the globe."
- And he notes this dissonance:"Everything is terrible, but the U.S. data is still good so most traders and fund managers are seeing this as a buying opportunity. ... But the algos don't buy it."
P.S. A bit of perspective from Bloomberg:"Even with its 17 percent drop over the last three months, the S&P 500 has risen 18 percent since Election Day."
Go deeper: Axios' Deep Dive on the financial crisis, 10 years later
Trump wants to blame Treasury Secretary Mnuchin and Fed Reserve chairman Powell.
The stock market was only open for half a day Monday, and that was more than enough time for the Dow Jones Industrial Average to drop 2.9 percent to 21,792.20, breaking 1918's record for the worst Christmas Eve performance.
Other U.S. indexes fell too. The Nasdaq lost 2.2 percent to 6,192.92. The Standard & Poor's 500 index fell 2.7 percent to 2,351.10.
U.S. stocks are on track for their worst year since 2008, which was during the Great Recession, and their worst December since 1931, which was during the Great Depression.
The markets have been dealing with concerns of a slowing global economy, the trade dispute with China and last week's interest rate increase ? the fourth by the Federal Reserve this year.
Over the weekend, reports surfaced that President Trump was asking advisers if he could legally fire Fed Chairman Jerome Powell. Trump nominated Powell last year to take over the Fed, but since interest rates began rising, Trump has upped his rhetoric against Powell.
Efforts by Treasury Secretary Steve Mnuchin on Sunday to reassure investors backfired. He tweeted that he had spoken with the heads of the nation's six largest banks and was assured that they had sufficient lending capacity.
"We've gone through situations before where it's absolutely normal for the secretary of Treasury to reach out to the private sector," Quincy Krosby, a chief market strategist at Prudential Financial, told The Wall Street Journal.
"But what's bad is this made the papers, and says the government is very worried," Krosby told the paper, adding that with investors focused on so many issues, "it's almost as if gravity is pulling this market toward a lower level before it bottoms out."
Monday morning's drop in U.S. financial markets began after Trump tweeted about the Fed.
"The only problem our economy has is the Fed," the president said on Twitter. "They don't have a feel for the Market, they don't understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can't score because he has no touch - he can't putt!"
The Fed is an independent agency. While board members are nominated by the president, they make decisions separately from the White House.
Peter Conti-Brown, a financial historian at the Wharton School of the University of Pennsylvania, told The Associated Press: "We've never seen anything like this full-blown and full-frontal assault. This is a disaster for the Fed, a disaster for the president and a disaster for the economy."
After Monday's Wall Street losses, Asian markets followed. Japan's Nikkei 225 fell by 5 percent to end the day at 19,155.14 points. The Shanghai Composite Index ended 0.9 percent lower to 2,504.82. Benchmarks in Thailand and Taiwan also declined.
Markets in Europe, Hong Kong, Australia and South Korea were closed for Christmas.
After a pause in trading for the holiday, U.S. markets reopen Wednesday.
The Yield Curve Just Inverted. What Does That Mean?
Photograph by Clem Onojeghuo
All three major U.S. stock market indexes took a downturn on Friday, as investors responded to one of the key recession indicators: the so-called inversion of the yield curve between the 10-year and three-month Treasuries.
The Dow Jones Industrial Average and the S&P 500 were each down about 1.5% near midday, while the Nasdaq was off almost 2%.
The yield curve is the difference between the yields on longer-term and shorter-term Treasuries. A yield curve inversion happens when long-term yields fall below short-term yields. It has historically been viewed as a reliable indicator of upcoming recessions.
Why? While the short-term side of the yield curve is mainly driven by Federal Reserve policythat reflects current economic strength, the long-term end of the yield curve?10-year Treasuries and further out?is thought to indicate bond investors? long-term views of the market.
If bond investors are bullish on the economy and believe interest rates will go up, they are more willing to hold short-term bonds and hope to harvest the higher yields later on. On the flip side, if bond buyers believe the economy is heading downward and interest rates are likely drifting lower, they?d prefer to hold the longer-term bonds in order to lock in the current higher yields.
In that case, the higher demand for longer-term bonds will drive up their prices and lower the yields. Yields on long-term bonds are usually higher during economic expansions because bond investors need more compensation to be locked in. But when the sentiment gets too bearish, the long-term yields can fall below the short-term yields.
That?s what?s happened Friday.
Experts are split on which yield curve is the most reliable, but the Fed prefers looking at the curve between the 10-year and three-month Treasuries, which on Friday turned negative, to minus 0.196 percentage points.
While a yield curve inversion has preceded recent recessions, it doesn?t happen immediately, and the lead time has been very inconsistent.
Historically, a recession can come anywhere from one to two years after the curve flips upside-down, and the stock market usually continues to gain from the day of the inversion until its cycle peak.
So we?ve got more time to watch.