Global stocks under pressure today with oil continuing to fall and the IEA out today saying the oil glut in 2016 will likely be more than this year. The Stoxx Europe 600 declined 1.3% in early afternoon European trading today, following three consecutive days of decline, taking losses for the week to 3.3%. Yesterday US stock indexes increased with investors and traders stepping into energy related stocks. Not a good idea and today prior to the open at 9:30 stock index futures were following Europe lower. OPEC this week refused to cut production.
At 9:30 a huge selling binge to start the day. The DJIA opened -200, NASDAQ -53, S&P -21. The 10 yr note yield dropping below the key resistance at 2.20% at 2.17% and testing long term averages (100 and 200 day). MBS prices up 23 bps frm yesterday’s close and +7 bps frm 9:30 yesterday.
Two 10:00 reports; Oct business inventories expected +0.1% were unchanged,, the 2nd weakest this year and will have a dampening impact on Q4 GDP. The mid-month U. of Michigan consumer sentiment index was expected at 92.0, the index at 91.8 frm Nov 91.3. No noticeable market reaction to the two reports; markets already seeing large moves this morning.
The Fed is the center piece now, the FOMC meets next Tuesday and Wednesday. The general consensus is the Fed will increase the FF rate 0.25%; it would rock markets hard and further reduce the Fed’s credibility if there isn’t a rate increase. Markets mostly have discounted the increase in current prices of interest rates and the stock market has mostly adjusted to the increase. It isn’t the increase that may roil markets, it’s the policy statement wording about Fed thinking on further increases. Yellen has stated she wants a ‘gradual’ path to higher rates; how that is presented will be key, as well as her press conference and the Fed’s quarterly forecasts for inflation and economic growth. On inflation expectations, the Fed has mis-judged it for over a year now; believing what the Fed believes is in itself a risky decision.
We have noted over the last week that market volatility would remain at high levels; the week has been volatile with oil dropping and adding uncertainty for investors, the FOMC next week and the stimulus from the ECB. Today expect more volatility in the bond and stock market. The indexes opened quite weak, likely to weak. Potential intraday wide moves in oil and equity markets is possible. Global divergence with central banks causing investors and money managers to re-think relationships and market impacts.
High volatility with the FOMC next week. Our models now have turned slightly bullish with the 10 yr breaking below 2.20% this morning. The 10 is testing its one day low yield set on Dec 1st when the note dropped to 2.15% and looked strong. It lasted one day then rose to 2.36% on the Nov employment report. These levels for treasuries and MBSs have in the past met with selling. The stock market is driving the price declines in treasuries and MBSs; stocks being driven lower by expectations of lower oil and commodity prices, but the sentiment remains edgy. We will begin floating, we have to respect the technicals although we don’t feel comfortable with it.