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  • Hello and welcome back to the note.

  • It's been a fairly ugly end to the week. Quite a sharp sell off in the US stock markets to end Friday.

  • Let me now try to put that into perspective.

  • Well, taking a look at first is the oil price, obviously something that has preoccupied many people for a while now, that very very sharp tumble in the latter half of 2014.

  • What is intriguing is that there's been huge volatility ever since then. But we've basically gone flat ever since the beginning of 2015.

  • It doesn't feel like that. There's been this intense volatility we've tended to over compensate for that.

  • Now, if we take a look at this next chart, you can see that that plays to one of the more important nature's of the oil market.

  • It may be very volatile, but in the long term, oil price and the gap between demand and supply for oil - that's using numbers from the IEA - are remarkably close.

  • The price gets very high when demands outstrips supply the most, as it did in 2007, 2008,

  • and the price gets very low when supply outstrips demands by the most last year.

  • That could imply that the oil price is very sensitive to changes in oil and in demand and supply,

  • perhaps more accurately, it means that demand and supply actually respond quite quickly to changes in the oil price.

  • This means, I would suggest, given that there is concern about whether the oil price is about to fall once more,

  • that we should always keep an eye on that for the long term.

  • There is no particular reason to think that oil prices will stay low for a very long period

  • because the way the market works is that we can expect demand and supply to adjust.

  • Now, moving on to the news that was moving the market today, we heard about US retail sales and as you can see, these were really pretty sharply good results.

  • A 3% annual growth as you can see after quite a slow clip most of last year,

  • it does look as though the consumer is buying stuff not at the rate we saw 10 or 15 years ago,

  • but still plainly ticking up, plainly reason for some comforts.

  • Now, why therefore would we have seen the sell off that we saw in the stock market?

  • One argument is that because we've seen strong macro-data today, that has worried people that the Fed is more likely to raise rates sooner rather than later.

  • That's something that the stock market doesn't want to see.

  • However, if you look at the Fed funds future's market, it isn't showing any particular rise in the expectations on rates,

  • that it's still seen as barely 50-50 shot that we'll have even one rate rise by the end of this year.

  • However, now let's take a look at the bonds markets.

  • And here we do have one signal that might have worried people very much.

  • This is the yield curve, many people are rather frightened of bond market technology, it's terminology.

  • It's fairly straightforward. This shows you the gap between the yields on the 10 year treasury and the 2 year treasury.

  • When that gap is lower, or in other words when the yield curve is flatter, that means that investors generally expect rates to rise less in future inflation,

  • to rise less in future and growth to be slower in future.

  • In other words, a flatter yield curve is a bearish signal.

  • And when the yield curve actually becomes inverted when the 10 year drops below the 2 year, that is a classic recession indicator.

  • We've seen the yield curve flatten very sharply the last few days, and as of today, it is now as flat as it has been at any point

  • since the end of 2007 on the dawn of the financial crisis and the great recession.

  • Somehow or other the bond market at the moment is spooked and worried about a recession despite what is broadly positive data.

  • That may be the best explanation for why stocks are having a bad time of it and why it's now almost a year since we saw the all time high in the S&P 500.

Hello and welcome back to the note.


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フラットマーケット|オーサーズノート (Flat markets | Authers' Note)

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    Kristi Yang に公開 2021 年 01 月 14 日