What a day! At some point in NY trading on Wednesday we were confronted with this chart of WTI crude oil, as the March contract traded below $27.50/bbl. That’s right, oil was down nearly 7% on the day.
Source: barchart
For some reason US equities are now trading in lockstep with crude oil. As a result the S&P500 was down over 3% (2-year low) during the day before recovering sharply later.
The S&P500 is actually one of the better performers among the major indices. Here are some others (a number are in “bear market”).
Source: @FTMarkets
The reason behind this oil-induced fear in the equity markets remains a mystery. Here is a simple summary from the WSJ (Alan Blinder’s article called “Markets Are Scaring Themselves”) questioning this relationship.
Source: @BrattleStCapm, WSJ
So was there something else besides oil spooking US equity investors, pushing this CNN “fear & greed” gauge deep into the red?
Source: CNN
The real concern should be around the Fed driving US dollar higher. The currency of one of these economies (in the chart below) has strengthened sharply in the past 2 years; can you tell which one?
Source: Morgan Stanley
However the Fed-related concerns should be easing. The January 2017 Fed Funds futures are now pricing in only a 23bp increase in rates by year-end (that means a high probability of one rate hike and a much lower probability of two).
Source: barchart
In fact according to the CME, there is now only a 22.4% probability of 2 or more hikes this year and a 37.8% chance of “one and done” (no hikes). This dovish view from the markets should in theory arrest the dollar appreciation. Will it?
Source: CME
We have a one-question survey on the Fed at the end.
Given such extraordinary volatility let’s take a look at a few recent trends in US equity and credit markets.
1. Banks and homebuilders came under increasing pressure with the markets seemingly pricing in a severe economic slowdown in the US.
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