Market Talk- June 14, 2018

Asian markets did not bode well today, especially after the late sell-off in core US indices. Core Shanghai did attempt an initial rally, but could not find the momentum as Hong Kong sank. Just to close small down was an achievement given the surrounding circumstances. The Hang Seng lost 1% as Tech, Real estate and energy stocks were hit. The Nikkei lost similar ground whilst the Yen remained mid 110’s. SENSEX and INR almost a replica of Japan’s performance. However, the story today was always going to be about the ECB and the talk surrounding ending the QE process. In late US trading, Asian futures have recouped much of todays cash losses.

Most indices were trading with sympathy with Asia, trading a little lower whilst awaiting ECB statement and press conference. Finally it was announced the amount of QE will decline from 30bn down to 15bn and finish completely in December. Core rates held in well, but that because they still have until year end. However, the one market that really felt the effect was the currency market. The Euro lost over 1.6% and as a balance the core stock indices reflected the cheaper international valuations. The DAX and CAC gained a similar amount, whilst peripheral indices lagged the move. The uncertainty is being reflected away from the real pain and that’s the bond market. In 2019 there all still need to issue and the more rates rise the larger the amount they will require. Looking like this currency move has plenty to go with the US Dollar being the main benefactor with money returning home.

US market were meandering until ECB President Mario Draghi spoke in the press conference and then everyone was awake. The DOW, S+P, NASDAQ and Russell all reacted positively to the Euro decline as sleeping money is put to work. Again, we see the DOW underperform the other indices as big money decides its next move. Tech is leading and setting fresh highs and even more talk of capital flowing from Europe into the long end of the treasury market flattening the curve. Financials one of the biggest losers today and some interesting talk that the FED could limit the amount of credit big banks extend to each other.

Japan 0.04%, US 2’s 2.57% (+3bp), 10’s 2.94% (-2bp), 30’s 3.05% (-4bp), Bunds 0.42% (-6bp), France 0.76% (-8bp), Italy 2.72% (-6bp), Greece 4.52% (+2bp), Turkey 15.64%, Portugal 1.90% (-3bp), Spain 1.34% (-6bp), and Gilts 1.33% (-3bp).
Interesting that even though core performed, we still need to keep an eye on all peripherals to perform. If any market starts to loose ground, it just increases the pressure on the others in the long term. This is being reflected in the currency sector. Today -1.6% decline in the currency, against a average core 10yr yield of sub 1%, is a difficult calculation to justify for foreign investors. The Euro however, is still up 3% YTD against the USD.