Category: Market Action

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Equities got hammered again:

The S&P 500 tumbled to the brink of a bear market on Monday as U.S. stocks extended their steep sell-off in a pre-holiday shortened session, with investors rattled by the U.S. Treasury secretary’s convening of a crisis group and by other political developments.

All three major indexes ended down more than 2 percent the day before the Christmas holiday. The S&P 500 finished about 19.8 percent below its Sept. 20 closing high, just shy of the 20 percent threshold commonly used to define a bear market.

Treasury Secretary Steven Mnuchin called top U.S. bankers on Sunday amid the pullback in stocks and said he was calling a meeting of financial regulators to discuss ways to ensure “normal market operations.”

Investors also were grappling with the federal government shutdown and reports that President Donald Trump privately discussed the possibility of firing the Federal Reserve chairman.

And the ever-helpful President of the United States weighed in:

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Criticizing the Fed is bad enough, but I can’t imagine anything worse for the US – and global – economy than firing Powell, an idea that has been allegedly discussed. In the first place, who’s going to take the job? None of the top-rank people want to be remembered as Trump’s Lackey. So it will be somebody with a less than sterling central banking reputation. And secondly, will the Chairman be able to force the votes on the FOMC? FOMC members are pretty weighty guys in their own right – it will be pretty funny to see a lot of 11-1 votes with the Chairman dissenting!

TXPR closed at 600.04, down 0.82% from December 21‘s close, after touching a new 52-week low of 599.70, undercutting the previous 52-week low of 604.53 set on December 21. Volume was low at 1.75-million shares in a day that closed early so practitioners of the highest paid profession on earth could go out and complain about lousy service in bars nowadays.

CPD closed at 12.10, down 0.74% from yesterday’s close after touching a new 52-week low of 11.96, undercutting the prior 52-week low of 12.11 touched on December 6. Volume of 239,285 was higher than might be expected given the early close.

ZPR closed at 9.71, down 1.52% on the day; the close marked a new 52-week low, undercutting the prior 52-week low of 9.80 reached on December 6. Volume of 256,406 was surprisingly high for Christmas Eve.

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TXPR closed at 605.00, down 0.58% from yesterday‘s close, after touching a new 52-week low of 604.53, undercutting the previous 52-week low of 607.63 set on December 20. Volume was elevated at 3.38-million shares, but nothing special by recent standards. There was a huge number of issues trading more than 10,000 shares, suggesting that there is a lot of retail action.

CPD closed at 12.19, up 0.49% from yesterday’s very poor close and a little above the 52-week low of 12.11 touched on December 6. Volume of 207,008 was high, but nothing special in the context of the past thirty days.

ZPR closed at 9.86, down 0.30% on the day, and within shouting distance of the 52-week low of 9.80 reached on December 6. Volume of 513,624 was fifth-highest of the past thirty days.

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Wild drone story in the news today:

Britain sent troops to its second-biggest airport after an unprecedented attempt to cripple Christmas travel with large drones forced all flights to be cancelled on Thursday.
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Flights were halted at 2103 GMT on Wednesday after two drones were spotted near the airfield, triggering the biggest disruption at Gatwick since a volcanic ash cloud in 2010.

Police said more than 20 units were hunting the operators near Gatwick airport, 50 kilometres south of London.

Transport Secretary Chris Grayling said it was clearly a deliberate act. “This is a commercial-sized drone,” he said. “Every time Gatwick tries to reopen the runway, the drones reappear.”
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Richard Parker, head of air traffic management technology firm Altitude Angel, said this was the first time a major airport had been hit by such a sustained and deliberate incursion into its airspace.

“It’s sophisticated, not from a technology side, but it’s organized. People have charged lots of batteries, and are deliberately trying to avoid being caught, probably by driving around to different locations,” he told Reuters.

“It really is unprecedented.”

Gatwick’s Chief Operating Officer Chris Woodroofe described one of the drones as a heavy industrial model.

“The police advice is that it would be dangerous to seek to shoot the drone down because of what may happen to the stray bullets,” he told BBC radio.

This is probably kids having a laugh, but it’s also the sort of low-grade annoyance that an irate foreign power might try. Particularly an irate foreign power that has no problem actually killing people in the UK.

I think global authorities have screwed up. What they really need at Gatwick, right now, are drone fighters. Semi-autonomous drone killers, perhaps equipped with nets.

TXPR closed at 608.54, down 0.92% from Wednesday‘s close, after touching a new 52-week low of 607.63, undercutting the previous 52-week low of 609.77 set on December 6. Volume was very high at 4.85-million shares, beaten over the past thirty days only by December 12 at 4.96-million. There was a huge number of issues trading more than 10,000 shares, suggesting that there is a lot of retail action.

CPD closed at 12.13, down 2.10% from Wednesday’s close and just barely above the 52-week low of 12.11 touched on December 6. Volume of 325,763 was high, but not even in the top 5 of the past thirty days.

ZPR closed at 9.89, down 1.30% since Wednesday, and within shouting distance of the 52-week low of 9.80 reached on December 6. Volume of 433,206 placed it fifth-highest of the past thirty days.

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The FOMC Statement was released on schedule:

Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2‑1/2 percent.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.

No dissenters! The market was quick to note:

In previous statements, the Fed had said it planned “further gradual increases” in its benchmark rate, conveying to investors that additional hikes were expected. Wednesday’s statement slightly calibrated those expectations by adding the word “some” to the beginning of that phrase, suggesting that the pace of rate increases is likely to slow.

A majority of Fed officials on Wednesday predicted the central bank would raise rates no more than twice next year. In September, most Fed officials had predicted at least three rate increases.

The S&P 500-stock index, which had been up more than 1 percent early in the day whipsawed wildly after the 2 p.m. announcement from the central bank, paring gains and at times slipping into negative territory. But the sell-off worsened during the news conference that accompanied the announcement, with stocks falling below 2 percent at moments.

A separate economic outlook from the Fed showed 2019 growth tapering slightly from September’s projections, with the central bank now expecting gross domestic product of 2.3 percent for the year, down from its previous projections of 2.5 percent.

Treasury yields declined on the day, while the five-year Canada rate, important in FixedReset pricing, was down 4bp to 1.89%.

I’m pleased to see guaranteed minimum income getting some political support:

Prime Minister Justin Trudeau and Social Development Minister Jean-Yves Duclos have argued that the Liberal-created Canada Child Benefit, among other measures, amounts to a guaranteed minimum income already.

But in an interview this week with The Canadian Press, Duclos said the current suite of federal programs could one day be enhanced to provide a minimum income of sorts to all Canadians, particularly those without children who aren’t eligible for federal benefits for families, seniors or the working poor.

“Whether this is going to be enhanced eventually to a broader guaranteed minimum income for all Canadians, including those without children that are not currently covered by a guaranteed minimum income at the federal level, I believe the answer is yes,” Duclos said. “At some point, there will be a universal guaranteed minimum income in Canada for all Canadians.”

As for implementation, just make it a refundable (and taxable!) tax credit. Start it off small and increase it.

PerpetualDiscounts now yield 5.98%, equivalent to 7.77% interest at the standard conversion factor of 1.3x. Long corporates now yield a little over 4.05%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 370bp, a significant increase 360bp reported December 12. I find this spread level to be incredible, particularly since it doesn’t make much sense for a declining yield environment. We seem to have entered a Twilight Zone in which PerpetualDiscounts are priced off FixedResets, rather than independently.

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The Five-Year Canada closed yielding 1.94% today, which probably didn’t help the market much.

And tomorrow we’ll see what the Fed says, which could make the afternoon interesting!

A number of big names from the Fed – Kenechukwu Anadu, Mathias Kruttli, Patrick E. McCabe, Emilio Osambela and Chaehee Shin – have published a working paper titled The Shift From Active to Passive Investing: Potential Risks to Financial Stability?:

The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift on financial stability through four different channels: (1) effects on investment funds’ liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and co-movement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be increasing some types of risk while diminishing others: The shift has probably reduced liquidity transformation risks, although some passive strategies amplify market volatility, and passive-fund growth is increasing asset-management industry concentration. We find mixed evidence that passive investing is contributing to the co-movement of assets. Finally, we use our framework to assess how financial stability risks are likely to evolve if the shift to passive investing continues, noting that some of the repercussions of passive investing ultimately may slow its growth.

The Harvard Law School Forum on Corporate Governance and Financial Regulation has published a summary of the work.

Speaking of the Fed, I learned today that the New York Fed has a webpage titled Measuring the Natural Rate of Interest, which estimates the Natural Rate of Interest in the US as about 0.75% and 0.5% for ‘Advanced Economies’. Canada is estimated at 1.43%.

So much for the rally! The market’s back to normal …

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The market turnaround is being ascribed to dovish hopes for the Fed:

Comments by U.S. Federal Reserve Chair Jerome Powell that interest rates were “just below” neutral propelled Wall Street higher on Wednesday, easing investor worries about the pace of interest rate hikes next year.

Hopes that the United States and China could call a trade war ceasefire at the upcoming G20 summit also helped stocks.

Meanwhile, the U.S. dollar retreated with potentially fewer rate increases on the horizon, and sterling rose after the Bank of England said the economy could shrink by as much as 8 per cent in about a year after a no-deal Brexit.

Equity investors reacted favorably to the comments by Powell, who indicated there may not be as many future interest rate hikes from the central bank as was initially anticipated.

The meaty section of Powell’s actual speech was:

Outlook and Monetary Policy

Congress assigned the Federal Reserve the job of promoting maximum employment and price stability. I am pleased to say that our economy is now close to both of those objectives. The unemployment rate is 3.7 percent, a 49-year low, and many other measures of labor market strength are at or near historic bests. Inflation is near our 2 percent target. The economy is growing at an annual rate of about 3 percent, well above most estimates of its longer-run trend.

For seven years during the crisis and its painful aftermath, the Federal Open Market Committee (FOMC) kept our policy interest rate unprecedentedly low–in fact, near zero–to support the economy as it struggled to recover. The health of the economy gradually but steadily improved, and about three years ago the FOMC judged that the interests of households and businesses, of savers and borrowers, were no longer best served by such extraordinarily low rates. We therefore began to raise our policy rate gradually toward levels that are more normal in a healthy economy. Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth. My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent.

There is a great deal to like about this outlook. But we know that things often turn out to be quite different from even the most careful forecasts. For this reason, sound policymaking is as much about managing risks as it is about responding to the baseline forecast. Our gradual pace of raising interest rates has been an exercise in balancing risks. We know that moving too fast would risk shortening the expansion. We also know that moving too slowly–keeping interest rates too low for too long–could risk other distortions in the form of higher inflation or destabilizing financial imbalances. Our path of gradual increases has been designed to balance these two risks, both of which we must take seriously.

We also know that the economic effects of our gradual rate increases are uncertain, and may take a year or more to be fully realized. While FOMC participants’ projections are based on our best assessments of the outlook, there is no preset policy path. We will be paying very close attention to what incoming economic and financial data are telling us. As always, our decisions on monetary policy will be designed to keep the economy on track in light of the changing outlook for jobs and inflation.

Under the dual mandate, jobs and inflation are the Fed’s meat and potatoes. In the rest of my comments, I will focus on financial stability–a topic that has always been on the menu, but that, since the crisis, has become a more integral part of the meal.

It doesn’t seem all that dovish to me, but then I’m not trying to convince my clients that these are turbulent times in which Skilled Fed Watchers examine the entrails of Powell’s chickens between naps.

The Canadian preferred share market was on wheels today.

TXPR closed 647.04, up 0.96% (on a price basis). Volume was on the high side in the context of the last thirty days, but nothing special.

CPD closed at 12.93, up 0.47%. Volume was about average in the context of the last thirty days.

ZPR closed at 10.59, up 0.67%. Volume was the fourth-highest of the past thirty days, exceeded only by November 27, November 16 and October 29.

PerpetualDiscounts now yield 5.94% (!), equivalent to 7.72% at the standard equivalency factor of 1.3x. Long corporates now yield about 4.20%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 350bp (!), a significant widening from the 340bp reported November 21.