Market Brief – Tuesday 12/4/18

In what was expected to be the early stages of a bull market surge for stocks, stock prices took a hard reversal today. Reports from China are showing a different interpretation of the G-20 dinner between President’s Trump and Xi, while at the same time the Trump Administration appears to be backtracking on their interpretation of the outcome of the meeting.

I mentioned yesterday that Nomura’s CTA quants were going to move to a 100% equity exposure for their S&P 500 models, which they did. Those models then reversed as the market fell and in the same day, sold down to a +65% long S&P 500 position.

Treasury yields fell as short-sellers are forced to buy as their short positions are getting squeezed. Ten-year Treasury yields briefly fell below 2.9% and closed at 2.914%. The two- and 3-year Treasury yields are now higher than 5-year Treasury yields, which have caused the 2s5s and 3s5s to invert. Two-year Treasury yields are coming close to being higher than 10-year Treasury yields. Inverted yield curves are a major warning sign of an impending recession.

In a report out of Europe yesterday, the European Central Bank is expected to end their version of Quantitative Easing this month. The M3 money stock, which is an expanded version of the M2 money stock, was growing at a 5% rate when the ECB was buying 80 billion Euro’s worth of bonds each month. In the third quarter, the M3 growth rate fell to 2.1% and experts believe it will fall to zero in the first quarter of 2019, followed by an outright contraction in the money supply.

The major indices were all down more than 3% today as systematic trading programs sold, which wiped out all the gains from the past three days. When liquidity is low, markets can fall quickly. This was not a major liquidation, as trading volumes were average. Don’t be surprised if there’s more selling Thursday, as the equity and bond markets are closed tomorrow to honor the passing of George H.W. Bush, our 41st President.

The API inventories came out showing an unexpectedly large inventory build – Crude: +5.36M, Cushing: + 1.4M, Gasoline: + 3.6M, Distillates: +4.3M.