Market Brief – Monday 12/3/18

Global markets rallied on a 60-day extension of the next round of tariffs by President Trump. Without any material commitment from China, this is just a stalling tactic by President Xi. Investors seem eager to buy stocks and this news gave them every excuse to do it.

Trading action on the U.S. indices suggested not all are buying into the story, as all the major indices closed below their daily highs. Strong rallies usually close at or near their daily high. Look for equity markets to move higher tomorrow as Nomura’s CTA quant computer programs will buy into a 100% long position tomorrow on the S&P 500. Major resistance on the S&P 500 is 2,815, a price level the bulls want to break, and the bears want to hold.

The big story of the day was in the bond market, as Treasury yields tumbled following the ISM manufacturing report showed prices paid fell. Falling prices are disinflationary, and bond yields reacted accordingly. Three-year Treasury yields are now higher than 5-year Treasury yields, which happens when the yield curve inverts. When short-term yields are higher than long-term yields, it is a signal that something is wrong with the economy. Banks borrow against short-term yields and lend against long-term yields, so an inverted yield curve should slow lending growth.

Ten-year Treasury yields closed at 2.98%, their lowest level since September. Thirty-year yields also closed lower on the day, both of which are putting pressure on the Treasury short-sellers who drove yields higher. As the shorts unwind, look for yields to fall.

Momentum on agricultural commodities is turning up, and since momentum leads price, prices should follow. Agricultural commodities closed right on their 50-day moving average, on hopes China will follow through with President Trump’s claim they will buy a “substantial” amount of U.S. agricultural products in the next 90-days.

Oil rebounded on news China may start buying U.S. oil again, however, the media failed to realize they still are buying U.S. oil. With inventory data due out on Tuesday and Wednesday, we’ll see if today’s jump holds or folds.