By Pam Martens and Russ Martens: January 5, 2016
10-Year Treasury Note Yield Action During Monday’s Stock Plunge
From Riyadh to Tehran, Shanghai to Frankfurt, investors had plenty to sweat about yesterday. The culmination of this perfect storm landed in U.S. stock markets yesterday where the Dow Jones Industrial Average was shortly after 11 a.m. off by more than 450 points. The Dow closed the day down 276 points after some kindly buying support exceeding $1 billion from unknown sources came in to prop up the market at the close.
The first weekend ahead of Monday’s stock market open got off to a bad start with trouble spots that are likely to challenge markets throughout this year. Saudi Arabia (a country that still refuses to grant women licenses to drive a car) engaged in mass executions of 47 people, one of whom was a Shia Muslim cleric, Sheikh Nimr al-Nimr. This set off wild protests in Iran, which has a Shiite majority, with the Saudi Embassy in Tehran being set on fire. The Saudis responded by cutting diplomatic relations with Iran and neighboring states choosing sides in a mushrooming war of words.
Typically, upheaval among major oil producers in the Middle East would send the price of oil spiking upward. But by the end of trading yesterday, oil was moving in the opposite direction, suggesting to market players that the economic drag on oil prices from subdued global growth and a growing glut is a far bigger worry than Middle East clashes.
New York stock exchanges and S&P futures trading in Chicago took their early morning clues from one of the most disorderly trading days in Shanghai’s history, marking the worst ever New Year start for the Chinese equity market. It was not so much that the Shanghai Composite Index fell by 6.9 percent but the circumstances of that fall that rattled other global stock markets.
Unlike the U.S. stock market where trading does not halt for the balance of the day until there is a 20 percent decline, China has imposed a tiny limit of 7 percent and then it shuts down further trading for the day. The nuttiness of this idea got a full vetting yesterday with a decided thumbs down. After the Chinese market was off by 5 percent, the standard 15-minute trading halt was imposed. But knowing that the market would be locked down for the rest of the day with just an additional 2 percent decline, sellers panicked, trading volume spiked, and bam, the market was down 7 percent and shut down.
Two additional factors likely contributed to the slump in Chinese equities: a Caixin China Manufacturing PMI index showed a drop from 48.6 to 48.2, signaling further industrial contraction in China. Additionally, a government ban on large shareholders selling their positions, which was set to expire on January 8, may have led other investors to want to get through the exit doors ahead of a wave of heavy selling. After the rout in China yesterday, Bloomberg News is reporting that the ban “will remain valid beyond January 8.”
One particular oddity stood out in yesterday’s trading in the U.S. – the behavior of the 10-year U.S. Treasury note. As the above chart indicates, as prices dropped further in the stock market after the 10 a.m. release of the Institute for Supply Management’s index showing that U.S. manufacturing had contracted further to a reading of 48.2 from 48.6 the prior month, the yield on the 10-year dropped to as low as 2.20 percent from an overnight reading of 2.29 percent. Given the tumultuous global trading day, with markets in Europe particularly trounced, one would have expected a much larger flight to safety into the 10-year Treasury and a more dramatic drop in yield. One explanation for the timidity to park safe harbor cash in Treasuries is likely the posturing by the Fed that more interest rate hikes await markets this year. Gold thus became a secondary haven yesterday.
Adding a reminder to markets that 2016 will include a highly contentious presidential election, Vermont Senator and Democratic presidential candidate Bernie Sanders is set to deliver a major policy speech on reforming Wall Street today at 2 p.m. The event will be held at the historic Town Hall at 123 W 43rd Street in midtown Manhattan. The venue was created in 1921 by suffragists – who had won the right to vote the prior year in their “democracy,” 144 years after the nation’s founding.
Leaked portions of Sanders’ speech indicate he will promise to break up any bank, shadow bank or insurance company that would pose a catastrophic risk to the U.S. economy without a taxpayer bailout. That might be why JPMorgan Chase’s stock took a hit in yesterday’s trading.
