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What has happened to the Markets?

Year 2016 started off with lots of negative news.  John Authers of Financial Times, listed down 12 guilty parties causing the market turmoil.  From my view, here are the key ones:

  1. The Fed commented the possibility of 4 rate hike - Jan 2016
  2. China markets plunged due to fear of hard landing- Jan 2016
  3. China currency was attached by the short seller - Jan 2016
  4. Oil price plunged - Jan 2016
  5. Bank of Japan joined the negative interest club (ECB, Swiss, Sweden and Norway) - 2016-01-29
  6. Fear of US follow Japan introducing negative interest rate - Feb 2016
  7. Deutche Bank announced huge losses of €6.8B for Year 2015 (before the fall of Lehman Brother, its loss then was $3.9B) - Feb 2016
  8. Sell off by the Sovereign Wealth Fund - Feb 2016
  9. Worst quarter for company earnings reports since 2009 - Feb 2016

During this highly volatile period, it is interesting to note that gold, Yen and Euro become the safe haven.  To be precise, during this period of time, gold, Yen and Euro strengthen against the dollar.

Apparently, almost all the bad news are reported.  Hence, some analysts are calling that the markets have hit the bottom.  It might be in the short term, but not in the longer term.

Why?  Because the bearish trend in high-yield bonds has extended into January and possibly February.

 

In previous instances in which the high-yield bond market and stocks trended in a different direction, it was the high-yield bond market that proved prescient. The reason stocks have been so late to follow the high-yield market’s bearish trend, may be because of the Federal Reserve’s efforts to prop up asset prices through quantitative easing.

Here is another chart showing the relationship between High Yield and stock:

The chart below illustrated that the ongoing drive by high-yield borrowing activity suggests the current upturn is in its latter stage:

If the high yield were to be a good indicator, we probably have to be more cautious. 

Reference:

  1. MarketWatch, Chao Deng, 2016-01-28, "China closes at lowest level in over a year as Fed unnerves investors"
  2. MarketWatch, Steve Goldstein, 2016-01-27, "The Fed says sorry for its rate-hike forecast"
  3. MarketWatch, Takashi Nakamichi & Megumi Fujikawa, 2016-01-28, "Bank of Japan adopts unprecedented negative interest rate"
  4. Hexun.com, 新浪网, 2016-02-11, "野村揭秘日本股市暴跌:中东主权财富基金抛售"
  5. 每日经济新闻, 袁东, 2016-02-14, "德银若轰然坍塌将产生怎样的灾难"
  6. MarketWatch, Ellie Ismailidou, 2016-02-16, "This has been the worst quarter for company earnings reports since 2009"
  7. MarketWatch, Ciara Linnane & Tomi Kilgore, 2016-01-31, "Junk bonds suffer a rare negative return in January--and that’s bad news for stocks"