The move in the S&P 500 since January 1st (the selloff, bounce, weak test of the lows and a big surge afterwards) has been so eerily similar to the Aug-Oct move a few months back that it’s a little weird… Even the multiple 2-day retracements in the middle of the surge.
The August selloff unfolded after China broke their currency peg with the US dollar. By utilizing some short-term derivatives, they were able to stabilize the currency which eased funding conditions. This led to the bounce in “risk” assets like stocks. These derivatives eventually started to roll-off though forcing China to become a seller of the Yuan, which had the effect of tightening global monetary conditions and created the next round of selling (around mid-November). As mentioned a few weeks ago, China began attempting the same stabilization process in early January, so we’ll have to watch how stocks and related assets behave through this month and heading into April.
We’ve been in a purely macro-driven market for over a year now with nearly all markets (stocks, bonds, currencies and commodities) getting grouped into certain themes such as “risk off” or “risk on” categories. We can see a similar effect by looking at a basket of Emerging Market currencies:
Everything right now revolves around the dollar. The global money supply (funding conditions) has been contracting significantly the past few years as banks have been exiting businesses like FICC and cutting back balance sheets/liabilities. This has been creating a serious shortage of dollars in the world. The shift so far this year has seen an easing of conditions though, which has led to a nice bounce in all cyclical (economically sensitive) commodities, like oil and copper, as well as the currencies of countries which rely on exporting these commodities.
You may start to notice that the charts of all of these assets look very similar. This goes back to the macro-driven market we’re in. Everything right now is tied to the dollar (global funding conditions) and will move in the opposite direction.
This means that everything (still) remains in the hands of the Central Banks and how much money they decide to print. In my view, it’s still the Yuan and thus the People’s Bank of China (PBOC) that have been driving the macro movements, which means they’re still the key factor to watch. We’ll have to see if there are any further signs of weakness as we progress through March. If so, it could lead to yet another leg down in “risk” assets (as we saw from Nov to Jan). What has had me on edge and not ready to remove our option hedges is how vocal the PBOC has become about not devaluing the Yuan. That makes me nervous that they will…which would reverse all of the charts above.
We also have the ECB and Fed meetings coming up so March is looking to be pretty pivotal. Only time will tell!
-Nick
One thought on “A Case of Deja Vu”
Comments are closed.