Be careful what you wish for
Over the past few days there has been an increasing number of publications and comments adding up how many days it has been since the S&P 500 last moved more than 1% in a single trading session. And then yesterday, bang!
All but 43 of the index’s 500 stocks closed in the red seeing it close down 35.81 points or 1.45%. All but three of the Dow stocks also lost on the day that saw that index shed 204.69 points or 0.93% although the big loser was the tech heavy Nasdaq, which lost 135.46 points or 2.13%.
Losses were taken around the world with the Dax off by 1.15%, the Cac by 0.59%, Ibex by 1.38%, the MIB by 0.76% but the biscuit was taken by the FTSE, which gave back 1.44% of its already modest 2017 gains. The selling went overnight with pretty much everything in the Far East and the Antipodes also losing ground.
The main reason given for this sharpish reversal is the bellicose rhetoric emanating from the White House. I will, if I may, beg to differ. President Trump’s ever more floral threats against North Korea show no more than a “mine is bigger than yours” exchange between two school playground bullies; they are not the reason for the correction but they do offer a darned good excuse. Global risk asset markets, but most of all American ones, were in dire need of a spot of consolidation and Trump’s invocation of Al Jolson’s “You ain’t heard nothin’ yet” came just at the right time.
The rhetoric might be sharpening but the risk of an actual armed conflict has, in my humble opinion, not moved away from being next to zero. It might now be right next to next to zero but trying to make it responsible for a great flight to quality seems, as noted, more of an excuse that a cause. Quarter to-date, all three US indices are still looking pretty healthy on an annualised basis and even if we close out tonight on a softer tone it will take a lot more than a couple of sessions of price consolidation to turn this market on its head.
Most of the losses have come from the tech sector with Apple being the lead loser on the Nasdaq. 39.31 points of the 204.69 decline were accounted for by the 3.22% hit taken by Apple and it was the Nasdaq which was the biggest loser among the big three. To me that looks like a good old bout of profit taking which, thanks to the ever-increasing spread of index tracking funds, has the algos putting up their hands and surrendering even though there was no enemy in the camp. The massive rise in the VIX, which had looked in recent weeks as though it was attached to very short leash that would permit it only to trade either side of 10, also showed that there was still life in the old dog yet. That index closed at 16.04, its highest closing level since the elections in November. Is this telling us anything special about long risk exposure suddenly being hedged? I think not. Although the VIX is supposed to reflect risk appetite as it is formulated as a hedging tool, we all know that, like corporate credit spreads, it is just another equity market proxy and its sell-down is nothing more than a different way of expressing the directional trades on the Big Board.
We are, after all, at the end of a very hearty Q2 reporting season and with all the good news out of the way, of which there was more than enough, isn’t it quite natural to lock in some of the gains, to flatten the book for the rest of August and to start tidying up the desk ahead of the summer hols? Kim Jong-un and Donald John Trump, I’d venture to guess, are just one big and very timely excuse.
That said, it would not take too many negative sessions to put the woollies up some of the longs, and with markets as fickle as they have become since conviction has been replaced by peer group comparison as money managers’ key driver, a 10% correction could easily happen by default rather than by design.
The fact that it is the tech sector, the heavily overbought darling of recent months, that has taken it on the nose encourages me to believe that this is more of a risk asset market internal thing than it is some sort of strategic repositioning ahead of Mickey Mouse and Pluto lobbing nuclear bangers at each other.
Elsewhere, after a protracted wrangle, a campaign group has released records of the extravagant travel expenses claimed by EU officials. Transparency campaign group Access Info Europe managed to gain access to the travel expenses claimed by EU commissioners after a three-year battle which they themselves described as often being “Kafkaesque”. Among the figures lurked a so-called “air taxi” from Brussels to Rome claimed by the muppet-in-chief Jean-Claude Juncker, costing €26,351.
EU Commission spokeswoman Mina Andreeva retorted that the private jet was chartered to take Juncker and his entourage of eight to Rome because there was “no viable commercial plane available that would fit the president’s agenda”. EU officials are allowed to claim for travel and accommodation expenses if their official outing lasts for over six hours. EU rules do allow the use of private jets if there are no commercial flights available. However, there are currently seven flights a day from Brussels airports to the Italian capital. I suppose it was too much to ask Juncker, for the benefit of the EU taxpayer, to fit his agenda to the flights available. Maybe it has something to do with the increasing difficulty of getting free drinks on board.
All the while, back in Brussels the Brexit negotiations are still going nowhere. The City’s Brexit envoy Jeremy Browne expressed perplexity in an interview with City AM. In it he says “the inability of Brussels to comprehend British politics, or read the British character at the most elementary level, is bewildering”. He does concede that “the British often suffer from similar failings” but reckons that “talks will ultimately succeed, or at least not wholly fail”. He ends on the rather sobering thought that, in his view, the eurozone has “a quasi-nationalistic desire to prevent business continuing as usual in London Post-Brexit”. Anyone who thought that this was going to be a friendly divorce has never been through a divorce, or at least not one where there were lots of goodies and benefits to be divided.
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. While the south of Europe is roasting and running dry, here in the UK October seems to have come early. Time was when parents despaired when the weather broke during the summer holidays and the kiddies were knocking around in the house with nothing to do and bored to tears. How times change. When it’s wet and miserable, the youngsters are as happy Larry on their computers, iPads, smartphones and with endless daytime repeats of Game of Thrones. Nowadays parents are troubled about how to keep their little treasures entertained and to get them outside when the weather’s good. The sun was out here yesterday and I’m fairly sure I saw a bunch of troubled teenagers out there doing a rain dance.