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Equity And Credit Markets Divergence


US stocks (sector performance) started the first 90 minutes sharply lower as credit markets traded weaker and amidst political tensions in Europe from Italy to the UK. From then on, US equity markets stabilized and recovered on some optimism regarding Sino/US relations and following more dovish comments from Fed Chair J. Powell who said in Dallas that the economy was strong, still likely to face some headwinds next year and that the Fed will evaluate the effects of its tightening policy on the Markets and the economy. The response to this question is that we’ve got a bear market in everything since the beginning of the year from stocks to bonds to commodities as a broad deleveraging was initiated. Market expectations for a tightening in December have receded to 75% with tightening expectations for next year also dropping to 1.74 rate hike expected for next year.

 Yesterday’s reversal was the 35th time in the last 20 years that the S&P 500 was down 1%+ intraday but reversed higher to close up over 1% on the day; Bespoke wrote, noting that average and median one-week returns are positive following these prior occurrences but average and median returns in the one- and three-month periods following are actually negative. In other words, it could just be another violent short squeeze.  

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