The Global Equity Markets are recovering again today...is the correction over?

By Jeffrey Cohen
President, US Advanced Computing Infrastructure, Inc.

Update 13:30 ET: The 10-year UST auction completed, and the 10-year yields are back where they were on August 2, 2024. Just like that, the 10-year note rally is behind us. The market is resisting a sub-4% yield on the 10-year UST. A few thoughts on why it happened, but none of it informed.

1. Inflation expectations are higher than we thought, maybe as high as 3%, which makes this a 1% real interest rate.
2. There is no recession, so no need to shelter money for 10 years at 1% real rates.
3. This was all a short-term play on rates anyway (long on fixed income)...and the air is out of the balloon after a few days.
4. The markets just don't like Harris/Walz and don't believe they will improve US Federal fiscal policy (by cutting spending and debt growth). This could be a political statement that America must not be Progressive when it comes to actual policy (vs. words).

This hurt equities today...and of course we are long so we are personally impacted by these moves.

U.S. equities (S&P 500) gave back the gains today. This is a 5-minute chart that goes back to August 1, 2024, and captures the recent move.

Ten-year UST Note yields are back up...

Was this just a Fed FOMC-induced fixed income temper tantrum?

• Who knows, but highly unlikely. This would be an emotional response to waiting until September 2024 to begin raising policy rates by a quarter or a half of a percent.

Was this a great 'unwinding' trade from Japan?

• Japan's central bank raised rates, and indicated a tightening of rates (from 0% to 0.25%) to fight their nascent inflation, which is expected to continue. This 'I have read' caused a great unwinding of Japanese cash in U.S. markets, as it all ran back home to earn an extra quarter percent (soon to be half a percent if you believe the Bank of Japan Governor Kazuo Ueda).
• Highly unlikely in our opinion, although Japanese fixed income policy rates have been near zero for the past seventeen years, and this must feel a shock to some market participants. I suppose many assets can make the trek from Japan to the U.S. in seventeen years of near-zero interest rates. Who knows how much of the fifty trillion to 55 trillion USD invested in the U.S. equities markets is funded by Japanese savings?

This could be end of irrational exuberance, helped along by Summer trading desks and market technical instability.

• Maybe the market just needed a pause to convert profits into cash, to allow a few big trading desks take a Summer vacation in early August. The hypothesis is that trading desks would have lowered their risk control levels, and junior traders could not handle the volatility. Combine that with a market shut-down of retail traders (Monday, August 5, 2024 saw retail traders unable to log in or trade on major platforms), and it could have been a march of the market losers doing all the wrong things for two days in response to the Bank of Japan raising rates. We think this is part of the problem...the market became disorderly.

We did have market uncertainty from the introduction of VP Harris and Tim Walz into the 2024 U.S. presidential race. We do not under-estimate the impact of a diverse and progressive word-salad, San Franciscan challenge to a felonious, conservative, loud and abrasive New Yorker. I feel a race like William Jennings Bryan against Barry Goldwater, and the only thing we are missing is the mushroom-cloud advertisement.

Thank you to the U.S. Library of Congress for preserving this ad.

The thing we noticed the most in this latest market correction, the thing that really surprised us and made us tweet furiously and sit confused in front of blaring, red screens of doom, was the response of U.S. interest rate futures.

What? Who cares about fixed income? Isn't that the boring area where grandma puts her nest-egg, and clips coupons every six months to make those sweet apple pies?

No, fixed income is a significantly larger market than U.S. equities. Here is a perspective I shared with my daughter yesterday taking her to music lessons:

• "The U.S. equity market that we study each day is worth around $50T, maybe $55T on a very good day."
• "The U.S. Federal Government has debt of $35T, and that does not include states, municipalities, or all the corporations? I would guess they owe $100T, so the fixed income market is around 2x the stock market in size."

Net-net, the 13-week UST rate and the 10-year UST rate both crashed. The value of fixed income rose quickly and decisively. We think this was the play on Monday.

Gotta go...markets open in 4 minutes. Have a great trading day, and good luck to all #GLTA.

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