Market Brief – Wednesday 10/31/18

Global stock markets got a boost as U.S. stocks were technically oversold and China is indicating they will stimulate their economy. The last time China stimulated their economy was back in 2016 when they used their foreign currency reserves to pull the global economy up as it was about to enter a recession.

China doesn’t have much in foreign currency reserves, so if they were to stimulate their economy again, it means they will devalue their currency. Such a move is risky since the Trump Administration is ready to apply more tariffs.

South Korean Industrial Production fell -8.4% YoY, the largest drop since 2009. South Korea is has led global economic expansions and contractions, so this is an indication of what is coming for the rest of the world.

Next week the U.S. Treasury will issue $83 billion in debt, setting a new weekly record for debt issuance. Wall Street and investors are saying they want higher yields to buy this debt, but they don’t seem to understand the debt will be sold regardless of yield. Rising government deficits lead to disinflation or lower long-term bond yields.

A simple chart can prove that long-term bond yields fall as a government takes on more debt. I took the inverse of our total Federal debt and charted it against 10-year Treasury yields. With no surprise, after the inflation scare of the 1970’s to early 1980’s, 10-year Treasury yields have fallen as government debt has increased. Based on my chart, 10-year Treasury yields should be under 2%.

Today is the Fed’s SOMA redemption day when they officially unwind part of their balance sheet and destroy money. Typically, SOMA days are bad for stocks, but today was not one of those days as the FAAGN stocks helped boost the broad markets.

Trading volumes were surprisingly light, which is an indication that large investors were not participating in today’s buying spree. Large moves on low volume aren’t viewed as pillars of support. Sure enough, sellers came in an hour before markets closed and slammed the major indices back down. All major indices closed in the green for the day, but hard late-day selling is not an indication of strength.

Treasury yields were up for the fourth day in a row, but buyers have been buying each day. Most of the selling is being done before markets open whereas the buyers are coming in during normal trading hours.

After oscillating above and below its 50-day moving average, the large gold miners managed to close over their 50-DMA. The silver miners are a better proxy of what is to come for the gold miners, as the silver miners have been leading the gold miners. Today the silver miners closed down, just above their 6-month low.

Agricultural commodities saw some hard selling today, but buyers mopped up most of the selling, leaving the ETF down slightly on the day. Buyers continue to show strength here and even foreign investors are buying.

October was an ugly month for global investors as $8 trillion of wealth was lost.