“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
― Ernest Hemingway, The Sun Also Rises
On the surface, nothing much changed last week. The Fed, as expected, raised short-term interest rates very modestly, the US, Canada and Mexico cut a new NAFTA deal (kind of a pleasant surprise), unemployment fell again, Trump continued to tweet while Democrats and Republicans continued to express their mutual disdain via dirty tricks and contrived insults. Business as usual, in other words, in our dysfunctional new normal.
Yet for some reason financial market psychology suddenly shifted from euphoria to terror. Long-term interest rates spiked…
…the dollar rose…
source: tradingeconomics.com
… and stocks tanked. The NASDAQ especially was slammed by the sudden reversal of its previously-bulletproof FAANGs (FB, AAPL, AMZN, NFLX, GOOGL):
What happened? Apparently the weight of accumulating problems finally became too great to ignore. Interest rates had been rising for a while as inflation bumped up against Fed targets, but traders only noticed when the 10-year Treasury yield pierced 3%. This cycle’s housing boom had been moderating since June, but lately the bottom seems to have dropped out, generating headlines like this:
Manhattan home sales tumble in market clogged with listings
Vancouver home sales mark steady decline
For Sale home supply surges in hot West Coast markets
Bond-market bloodbath likely to hit mortgage rates soon
And the emerging market crisis – easily managed if the dollar just went back down – suddenly feels permanent as rising interest rates pull the dollar along for the ride. Here’s a recap of last week’s EM action, courtesy of Doug Noland’s Credit Bubble Bulletin:
The South African rand sank 4.3% this week, with the Chilean peso down 3.0% and the Colombian peso falling 2.0%. Asian currencies were under notable pressure, with the South Korean won down 1.9%, the Indonesian rupiah 1.8%, the Indian rupee 1.7%, and the Thai baht 1.6%. The Russian ruble declined 1.6%, the Polish zloty 1.3% and the Turkish lira 1.3%. As for major equities indices, stocks in both Turkey and India sank 5.1%. Equities fell 4.4% in Taiwan and 3.7% in South Korea. Argentine stocks sank 9.8%, with Mexico down 2.9%.
As much as currencies and stocks were under pressure, the more ominous EM moves were in bond markets. Ten-year (local) sovereign yields surged 33 bps in Indonesia, 26 bps in Russia, 21 bps in South Africa, and 14 bps in Hungary. And dollar-denominated EM debt provided no safe haven. Venezuela’s 10-year dollar yields surged 70 bps to 38.55%; Argentina’s 64 bps to 9.90%; and Turkey’s 52 bps to 7.86%. Ten-year dollar yields jumped 19 bps in Indonesia, 19 bps in Chile, 18 bps in Russia, 17 bps in Mexico and 14 bps in Colombia.
