By Doug Noland
Credit Bubble Bulletin: What a Week
The S&P500 jumped 2.3% Monday in what appeared growing confidence that Hillary Clinton was on the verge of becoming the next POTUS (buoyed by Director of the FBI Comey’s statement). It’s worth noting that Monday trading saw both the Financials (XLF) and the Industrials (XLI) jump 2.5%, only to be bettered by the Biotechs’ (BTK) 4.1% surge. EM equities (EEM) rose 3.6% Monday. Election day trading was then relatively quiet, with the S&P500 adding 0.3% Tuesday.
After closing Tuesday’s session at 2,135.50, S&P 500 futures jumped to 2,151 in evening trading on exit polling and early reports from Florida that appeared favorable for Clinton. Futures, however, reversed course as it became increasingly apparent that Donald Trump was performing better than expected, especially in Florida, Pennsylvania, Michigan and Wisconsin. By midnight on the East Coast, S&P futures were “limit down” 5%. DJIA futures had reversed a full thousand points, and Nasdaq futures had fallen almost 6%.
The huge move in U.S. equity futures was outdone by a stunning 14% collapse in the Mexican peso. In a span of a couple hours, the U.S. dollar/Mexican peso moved from 18.205 to a record high 20.78. After trading near 17,400 (futures) in overnight trading, the DJIA closed Wednesday’s session up 257 points (1.4%) to 18,590. Financial, industrial and biotech stocks, in particular, were in melt-up mode. The Banks (BKX) closed Wednesday trading up 4.9% – then added another 3.8% Thursday, before ending the week up 12.7%. The Broker/Dealers (XBD) surged 5.9% and 3.7%, with a gain for the week of 14.8%. Again not to be outdone, the Biotechs (BTK) spiked 9.2% higher Wednesday and 17% on the week. The Industrials (XLI) gained 2.3% both on Wednesday and Thursday, closing out the week 8.1% higher.
As exuberance took over, the broader market dramatically outperformed. The small caps (RTY) traded higher all five sessions this week, with Wednesday’s 3.1% rise the strongest in a noteworthy 10.3% weekly advance. The mid-caps (MID) gained 1.9% Wednesday and 5.7% for the week. The DJIA traded to a record high this week, with the S&P500, small caps and mid-caps just shy of all-time highs.
There are different perspectives through which to interpret this week’s extraordinary market action. The bullish viewpoint will take a casual look at U.S. stock performance and see overwhelming confirmation that the bull trend remains intact. And with news and analysis, as always, following market direction, rather quickly we’re deluged with material professing a bullish outlook courtesy of a Trump Presidency and Republican House and Senate. Apparently the country is now on the verge of a major infrastructure investment program, positive healthcare reform, corporate tax reform, and a dismantling of Dodd-Frank financial regulation (for starters). In particular, a focus on infrastructure and de-regulation implies a Trump Administration lot likely to place confrontation with the Yellen Federal Reserve (or the securities markets) high on their priority list.
From my perspective, it was anything but a so-called “bullish” week. I saw alarming evidence of dysfunctional markets. There was also further confirmation of a bursting bond Bubble. Indeed, there was strong support for the view of a faltering global securities Bubble – even in the face of surging U.S. stock prices.
Let’s return to election late-night. I doubt traders and the more sophisticated market operators will easily forget what almost transpired. It’s worth noting that while S&P500 futures and the Mexican peso were collapsing, the Japanese yen was in melt-up. In just over two hours, the dollar/yen moved from 105.47 to 101.22 – an almost 4% move. Meanwhile, EM and higher-yielding currencies were under intense selling pressure – the Brazilian real, South African rand, Turkish lira, Colombian peso, Australian dollar and New Zealand dollar (to name a few). At the same time, gold surged from $1,270 to $1,338. Crude sank 4%. Global markets were on the brink of a serious speculative de-leveraging episode.
There had been significant hedging across global markets going into the U.S. election. Especially after Monday, the markets viewed a Trump win a low probability. With markets shaky of late, along with an approaching historic political event, enormous derivative positions had accumulated in various markets. In the event of a surprising outcome, those that had written (sold) market “insurance” would be forced to aggressively (“dynamically”) hedge their losses by selling/shorting into already weak markets – perhaps even with major markets highly illiquid (or already halted limit down).
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