5 February 2018Reading time 3 minutes

The fall continues

Overnight falls in equities have at least checked the previously relentless bond yield ascent. The USD is slightly stronger against Asian FX, but only slightly stronger against the EUR. Oil is a bit lower too.   


Ytd price change for S&P 500

Its not that bad...yet


Only a little over a week ago, I performed one of my sporadic assessments of pension and other investments and was pleasantly surprised. Funds I had not looked at in over a year were actually worth considerably more than I had imagined. Retirement might be a little better than the bread and water existence I had been expecting. Why am I telling you this? Well mainly because if I performed the same assessment today, following the Dow's worst points fall ever yesterday, the bread and water diet would look very much on the cards.

Still, "easy come, easy go", as they say. My earlier surprise that I was doing OK now looks like a fairly accurate indication that markets were overstretched. Now I can wait until a bottom is found, and then spend the next year watching markets climb the wall of worry. I certainly can't afford to stop saving in these markets. 

There has been nothing substantial overnight to propel further losses, merely the sell-off of the previous day gathering momentum. That suggests we have some way to go yet before these markets begin to look attractive to the value community. The S&P500 is, for example, not even down a full percent year to date, though that probably tells us more about how strong the gains in January were than anything else. 

The original catalyst for the sell-off was the unexpectedly strong January wages growth in the US, though viewed in the right perspective, wages growth in the US is still weak in absolute terms. This wage data propelled thoughts of a more aggressive Fed. But such thoughts are now being pared back as markets flounder. We can't look for this to provide much support though, that really would be circular thinking. But eventually, these and other such factors will begin to provide support and stem the decline.  

The same circular logic ought to apply outside the Fed too. That said, global financial uncertainty should add further to the widely held belief that the RBA will not deliver any tightening of policy when it meets later today. Wages have not yet started rising meaningfully in Australia, nor inflation. And until we see more signs that this is happening, Governor Lowe and his team can rest easy. 

The ECB can also declare itself far from victory in the war to raise inflation, as Draghi did in the EU parliament yesterday, without sounding too foolish, or reckless. In these markets, caution looks warranted. Though the same remarks will begin to lose credibility again the moment sentiment begins to firm.  

Aside from Philippines inflation data, which could nose higher on the weaker PHP, there is not much else on the calendar today. As we mentioned yesterday - that does not mean markets will be quiet. Its what you can't see that usually worries humans, and that includes investors. So a day without data guidance leaves us still in the dark...scary.