Weekly research notes covering the full spectrum of asset classes

Market Commentary—5/12/18

December 5, 2018 / Claudio Cirillo

Stocks: The US stock markets experienced great losses, signaling a fear of an economic deceleration. The Dow Jones Industrial Average lost more than three percent erasing the recovery of the last week of November. As many analysts pointed out, given the composition of the index and the small number of firms involved, it does not give an accurate representation of the US stock market trend. However, analysts are worried about fixed-income markets, which give a first-hand impression of investors about economic outlooks. S&P 500 and Nasdaq Composite lost an even a bigger share of their value yesterday (4.4 and 3.8 percent respectively). The fear of an imminent depression pushed down expectations on the financial industry, which has been the worst performing sector of the S&P 500 index.

Fixed-Income: After weeks of wait, yield curve inversion finally happened, and it is a horrible event for investors. This event is likely to show up once in ten years and is generally followed by a depression. However, it takes from six to twenty months for the depression to show up after the inversion and this time should exploit the opportunity to account gains and move toward safer investments. The inversion, already predicted in my previous market commentary on the 22nd of November (“On the other hand, in the U.S., investors are worried about its steepness. Accounting for either the liquidity premium or the risk premium, the U.S. yield curve is almost inverted.”), is still weak and it only involves three years and five years government bonds. If the most-followed 2 year-10 year treasury spread will slump in negative fields, then inversion will be the official main event of 2018 bond market.

Currencies and Commodities: The Euro slightly increased against the US dollar after hitting a low this week, mainly because the dollar lost power against all world major currencies. The US dollar lost power because investor sold their assets worried about an upcoming recession. In addition, in Europe, hidden consulting services to the UK Prime Minister Theresa May are embarrassing the cabinet and are thus bringing sterling down. These facts add pressure on the EU Commission-UK deal on Brexit. Commodities are suffering weak trading sessions, gold and precious metal recorded losses (but smaller than 1 percent each) and crude oil is keeping on weakening upon the likely decision of the OPEC and NO OPEC countries to increase production by 2019.