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Yesterday's stock market drop on a bad bond auction in Spain moves us back to familiar territory--here are the steps we've danced before
04/05/2012 2:51 pm EST
Of course, that experience does, worryingly, suggest that this downward trend is likely to go on for a while.
Let’s review the milestones on this path
- Bad news from some debt-burdened EuroZone country (was Greece, is Spain) sends bond prices tumbling and yields climbing in those countries, and sends the euro down against the dollar. As of 2 p.m. New York time yesterday the euro was down 0.71% against the dollar. Today it’s down another 0.63%
- The dollar and other safe-haven currencies such as the Japanese yen climb against pretty much every global currency, even those far away from the EuroZone debt crisis. For the U.S. dollar that continues an upward trend in evidence on Tuesday when February’s minutes from the Federal Reserve Open Market Committee showed very little inclination toward a third round of quantitative easing. The U.S. Dollar Index (DXY), which had been in decline (a decline that extended the March rally) since it hit 80.565 on March 14, hit a temporary bottom at 78.82 on April 2. It has since rallied on the Fed minutes and on bad news from Spain to 80.084 as of 2:40 p.m. New York time.
- A rising dollar is bad for commodity prices and for prices of commodity stocks. Yesterday, gold was down 3.2%; West Texas Intermediate crude was down 2.2%; Brent crude was down 1.9%; and copper was down 3.2%. Shares of Freeport McMoRan Copper & Gold (FCX) were down 1.9%; shares of gold miner Newmont Mining (NEM) were down 4.9%; and shares of U.S. oil producer Pioneer Natural Resources (PXD) were down 2.5%. Today commodities and commodity stocks have, in general, recovered about half of their losses.
- With European and U.S. stock markets selling off, risk-averse or simply spooked investors sold down emerging market stocks too. Brazil, one of the few emerging stock markets open when New York is open, was down 0.9% yesterday. Shares of Chinese stocks that trade as ADRs in New York were down as well. Baidu (BIDU) was down 1.8%. That’s not as big a drop as the German DAX Index (2.8%) or the Spanish IBEX 35 Index (2.1%). Asian markets followed the European and U.S. markets down when they opened for trading last night.
- Once the market has started on a trend—either up or down—it will continue on that trend until some bit of news creates sentiment for a reversal or until prices get so cheap or expensive that they cause their own trend reversal. Spain and Italy (especially Italy) have a heavy schedule of bond auctions in April with Italy auctioning bonds on three days next week and on three days in the week of April 23. If yields continue to climb during those auctions, it will keep the current risk-averse trend in place and keep downward pressure on asset prices.
- The one thing that’s different this time is that this scare comes after a big rally in global stock prices. That’s likely to increase the propensity of investors and traders to sell in order to protect their gains. (When investors are underwater, they will often hold, hoping to get back to even. When they’re in the black, they tend to sell to protect gains.) You could see that in today’s market action when some of the stocks up most recently took the biggest hits. So, for example, JPMorgan Chase (JPM), F5 Networks (FFIV), and Coach (COH), all stocks with good runs in the first quarter were down yesterday by 2.3%, 2.2%, and 1.2%, respectively.
In my opinion, even if we get a partial recovery today (and right now at 2:45 p.m. the S&P 500 and the Dow Jones Industrial Average are both down slightly)—and remember that this is a short week since the New York markets are closed on April 6 for Good Friday—the downward bias in the markets will run until we get some kind of temporary reversal on the negative news from Italy and Spain on bond yields.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Baidu, F5 Networks, Freeport McMoRan Copper & Gold, and Pioneer Natural Resources as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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