Correction? Watch How S&P, Bonds and Dollar Respond to Oil Prices

11/20/2017 10:44 am EST

Focus: CURRENCIES

Robert Savage

Partner & CEO, CCTrack Solutions

This bull market in equities is the second longest in history without a 20% correction. The real record:  SPX has seen only 4 days of 1% drops this year – the least since 1964. Volatility across all markets remains low, writes Bob Savage, CEO of Track Research Friday.

Prices in markets can have sharp corrections seen by some as a signal of health – allowing buyers on the dip – but others see it as a market overdone and rush to valuation metrics.

Some moves aren’t big enough to satisfy either bulls or bears and that is how many would characterize last week. The corrections in markets can seem like a prison to those trying to catch a bigger trend.

This bull market in equities is the second longest in history without a 20% correction. The real record is that the S&P500 Index (SPX) has seen only 4 days of 1% drops this year – the least since 1964.

Volatility across all markets despite this last week remains low. We had a modest move lower that to many just keeps buyers on the dip content but not yet fully satiated.

The drivers for last week’s drop start with concerns about policy – particularly in Europe. Oil is higher, driving up potential inflation, while growth remains robust but policy normalization in the U.S. are being followed by tougher talks and more tapering abroad – with the Riksbank minutes mixing with the ECB speeches to suggest that 2018 will be a less simple year for stocks and bonds.


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This last week also brought the one-year anniversary of Trump where many noted that the S&P500 is higher but the U.S. dollar (USD/EUR) isn’t and bond yields are stuck in a prison. The rise of oil and its role in the U.S. economy has become key – with the next week focused on how much shale oil production gets turned on thanks to the increases in oil prices.

The rise in inflation concerns from energy had a sharper reflection on credit spreads – some blame that more on M&A and corporate issuance along with the U.S. bond sales this week.

The move in credit, particularly iShares iBoxx  $ High Yield Corporate Bonds ETF (HYG) and other ETFs, has added to the bearish arguments that this market is ready for a larger correction – but the Friday price action was less than convincing for that.

So too, the reversal of the Japan Nikkei 225 Index (NI225)– with an almost 4% reversal – didn’t end the week with a negative but rather a modest gain with the Japanese yen (JPY/USD) holding over 113 rather than breaking 112.

Throw in the fears about U.S. and EU growth into 2018 with the shape of the yield curve and central bank policy doubts – the talk of inversion reversed Friday. The standout issues for trading this “correction” mood starts with the Saudi purge and the role of Iran/North Korea in disrupting markets still.

The U.S. local elections and the “win” for Democrats in New Jersey and Virginia and what it means for Trump/Congress on tax reform are the other issues.

Throw in the weekend far-right marches in Poland and the ongoing UK Brexit issue of Ireland and you have plenty of macro-fears about policy and growth.

How the S&P500, US 10-year and USD respond to oil prices going forward seems to be central to understanding the larger risk for a 3% correction.

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