Yesterday’s market dump, the biggest one-day selloff in eight months as concerns about the stability of the Trump administration and concerns about a potential Trump impeachment finally slammed risk assets hard, is also a one-off event. At least that’s the opinion of Bloomberg commentator and former trader, Mark Cudmore, who overnight wrote that “without some major new developments, it’s unlikely to be the start of a severe correction. In fact, the worst is probably over already for U.S. equities, for Treasury yields and for the dollar.”
Then again, his note hit less than an hour before the latest Reuters report according to which the Trump campaign had at least 18 previously undisclosed contacts with Russians, which dragged S&P futures and global risk assets to new lows, at the same time as Brazil was suffering a brand new and far more serious political crisis which has crushed Brazilian stocks, which a Chinese insurer has warned it is now the target of a shadow bank run, which makes us just a little skeptical that the “fundamentals” are not there to justify a selloff, especially with US stocks having a long way to go to catch down with virtually every other asset class…
Or maybe not: if there is anything this market has shown, is that the most obvious and logical answer is usually wrong.
In any event, we present his full note, and readers can decide if today is when yesterday’s “dramatic” selloff, which incidentally only pushed stocks less than 2% from all time highs, ands and the dip buying resumes.
From Mark Cudmore, a former FX trader who writes for Bloomberg
Bears Will Need Something Fundamental to Stay Awake: Macro View
Wednesday saw the largest sell-off in the S&P 500 Index for eight months. Without some major new developments, it’s unlikely to be the start of a severe correction. In fact, the worst is probably over already for U.S. equities, for Treasury yields and for the dollar.
Bears may be excited. There is a large sloth (it’s the correct term — I looked it up!) of them that have been trained, like Pavlov’s dogs, by the 2008/09 financial crisis, to look for crises at every turn. And they are obsessed with their perceived “over-valuation” of the U.S. equity market.
However, while bears awake on panic, rumors and speculation, they ultimately need the sustenance of genuine negative fundamentals to stay alert and maintain their focus for a persistent bout of risk aversion. Right now there are thin pickings for them.
As my colleague, Cameron Crise, outlined Wednesday, the Trump premium was priced out of U.S. equities months ago. So selling stocks because fiscal stimulus looks unlikely is a poor idea. If you want to sell them for some other reason, then go ahead.
But what other reason suddenly matters now more than it did on Monday when equities made a record high close? Trump isn’t suddenly enacting unexpected negative policies. At least not yet.
The economic data hasn’t suddenly deteriorated. In fact, Tuesday’s industrial production print showed the fastest month-on-month growth in more than three years.
It’s not commodities prices — they’ve been remarkably calm. It’s hard to point to any external event. Chinese assets were showing stress but this week has seen the first signs of stability there in some weeks.
The facts of the matter are that the recent earnings season was strong, there’s still excess cash on the sidelines and way too much capital chasing too few financial options, global growth is picking up, U.S. growth is fine even if not great, and long-term yields remain low. This is a good environment for equities. Those are bad reasons to get long Treasuries. And it’s a poor excuse to sell the dollar, even if I’m a structural dollar bear.
This risk aversion was driven by political noise and speculation. That just doesn’t provide sufficient calorie intake for bears. This isn’t to say that we can’t get a fundamentally negative development in the days ahead, but unless we do, expect the bears to be back in hibernation by the weekend.