Market Talk- October 11, 2018

As you would have anticipated, the decline in Asia was as brutal as expected. Not everyday you see an 800+ fall in the DOW and so Asia followed through with its interpretation. All core opened lower and it went worse from there. Shanghai was the standout closing 5.22% down on the day. Talk that the PBOC were in play and late this US evening the CNY trades -0.5% better at 6.8900. The Hang Seng held-in a touch better but still lost 3.5% on the day. We are seeing the largest one day declines since February this year, but Asia is still a cause for concern. Shanghai index is now at November 2015 levels and puts the YTD at -22%. The difference with the Nikkei and both the HSI and Shanghai indices is that although it declined nearly 4% today, the YTD return is flat. In fact, the Nikkei is still 9% above its March lows. Worth meaning that the SENSEX is also still up 4% from its lows this year (23rd March), but for a foreign investor the INR has depreciated over 15% YTD. This environment is seeing energy prices decline (WTI -3.5% today) and a rally into Gold which is now trading $1230 (+3% today). The capital flow remains towards USD’s and is visible by a relatively unchanged Yen and a flatter US Treasury curve.

Europe saw a similar picture with all markets declining around the 2% mark. The DAX held in a little better, just off 1.5%, but then the index is off 11% YTD while the CAC is playing with its YTD low. the UK’s FTSE lost 2% also and puts that YTD return at -10% with an additional 3% in the Cable rate (GBP/USD). All focus was predominantly on Fixed-Income and the supposed flight to quality. We did see a little of that in the core, but peripheral debt (Italy, Spain, Portugal, Greece) all saw their bond yields increase. Strange really that the street still sees the core as safe, while their balance sheets are full of peripheral debt! We did hear some positive noises from the EU towards BREXIT, the result of which is mildly surprising as the market sees it as Euro positive (+0.6%), with GBP up by just +0.25%. However, this talk is that the UK would remain within the customs area, which obviously is not BREXIT and would even mean it could not negotiate directly with the USA. Lots more on this topic as always, but can’t quite see that being passed through Parliament. Bit more verbal from the EU to Italy also inferring they could not help via the ECB without an EU bailout!

US started with lower than anticipated Inflation numbers of 0.1% having seen a +0.2% in August. That took the Y0Y rate to 2.3% from the Augusts 2.7%. Initially, we saw a positive first couple of hours trading, but then the ETF’s saw more selling and option players and the started delta hedging in cash again. The VIX has spiked to 25 a gain of 6% today, from yesterdays opening of sub 15. Back to the US Treasury curve flattening trade today, as the auction was well bid. Dealer participation was the lowest seen this year, which confirms that Direct bidders (Foreign Central Banks etc.) were there to support the $15bn supply. Fridays we have the large banks (Citi, JPM, WF) begin to report and given the S+P Financial was down 3% both yesterday and today, any misses will probably be heavily punished! There is talk this evening that President Trump and Xi Jinping are tentatively arranging a meeting sometime soon – this would certainly be something positive for the markets to respond too! Both the DOW and S+P finished around 2% lower, while the NASDAQ managed to lose just 1%.

Japan 0.14%, US 2’s closed 2.84% (-1bp), US 10’s closed 3.14% (-5bp), US 30’s 3.31% (-6bp), Bunds 0.52% (-3bp), France 0.88% (-2bp), Italy 3.56% (+6bp), Turkey 19.09% (-21bp), Greece 4.45% (+4bp), Portugal 2.01% (+6bp), Spain 1.64% (+3bp) and Gilts 1.67% (-6bp).