Everyone knows it, but in case you were under a rock, the Dow had its worst day in six years yesterday. At one point the index fell around 1,600 points before recovering to close down 1,175 points, or nearly 5%. The S&P 500 fell 4.1% to close down 7.8% since last Monday. One commentator argues that the market is now in “full price discovery mode”, with no technical supports or trend lines holding whatsoever.
FINSUM: We are five years since the Taper Tantrum, and now it is actually happening. Is this the start of the huge sting everyone has been predicting for years?
The markets had a wild day yesterday. Big loss at open, almost back to even, then a really steep fall, and finally, a little rally to close. Bloomberg says that the trading activity has all the telltale signs of algorithms wreaking havoc. For 15 minutes just after 3 pm, the volume of sell orders was so quick and so voluminous that nothing alive could have possibly executed them. The market tanked, plunging to a 1,597-point loss. Interestingly, the involvement of algorithms might help to assuage some fears, as brokers are using that dimension as a way to calm human investors that this was not an all out emotional panic, but rather technology gone wild.
FINSUM: So we know they are deeply ingrained and certainly going nowhere, but why, in principle, are non-human agents allowed to transact in markets? Market-making firms would say they add liquidity, but they certainly exacerbate, or even cause panic too.
One of the guiding ideologies of the bond market over the last few years has been to buy the dips. Every time that bond yields have risen some, it has been smart to go long bonds as they inevitably came back down. However, this time looks very different. The difference is that central banks are no longer fixed to their ultra-low rates policy, which means there is no big magnet that pulls rates and yields ever downward.
FINSUM: So in our view what is really happening right now is a market wide price discovery period for bonds. Because the underlying situation is changing, no one is comfortable judging bond yields and prices. This worry has spread to equities, but in our view the root anxiety is in fixed income.
The midterm elections are currently dominated by two incompatible assumptions. Democrats think Trump’s low approval rating and the rash of Republican congressional retirements will lead to a big string of victories for their party. Republicans hope that growing economic confidence, underpinned by the White House’s policies, will win out. The big X-factor is now the stock market, which has been gutted over the last few days, a fact which could rattle the economic confidence of Americans. Democrats need 24 seats in the House to take back a majority. Many suspect they will win 30.
FINSUM: Trump and the Republican party are up against history (the party of the President typically does poorly in midterms), and now possibly the markets and economy.
While all the focus is understandably on stocks, Bitcoin is continuing to see a huge exodus of buyers. The market is now down to around $6,000, or about 70% from its peak of near $20,000. Bitcoin, and crypt currencies generally, have been brutalized by a number of regulatory announcements which seek to reign in the currencies. These include in South Korea—one of cryptocurrencies’ biggest markets, as well as by the SEC in the US, where chairman Jay Clayton has become a staunch enforcer.
FINSUM: We have been saying for months that there was simply too much regulatory risk to sustain the high valuations. That prediction has certainly proved right and we think it has further to run.