With the Labor Day holiday coming up this weekend, it's pretty safe to say that most of the trading desks are working with skeleton crews. Now where was this lack of interest more obvious than in the trading volumes seen today. The S&P 500 registered one of its lowest readings of the year at 2.6 billion shares. Needless to say, today's move lower (down 1.47%), while certainly not inconsequential, lacked any real conviction and shed little light on equity's ultimate direction. In fact, I think it's fair to say that the reminder of this week will see continued lackluster trading as hedge funds and mutual fund managers will likely hold off on adding to positions until after August knowing that another influx of capital at the outset of September is on the way. What they ultimately do with this fresh capital, though, is going to be the more interesting thing to watch over the coming weeks. Given all macroeconomic concerns that are currently in focus (double dip recession, the threat of deflation, stagnant corporate revenue growth), I would be surprised if managers had the courage to step up and buy stocks with any real conviction. And for good reason.
Treasuries, after dropping precipitously on Friday, roared back today. While the rally wasn't quite large enough fully regain Friday's losses, both the 10-year Treasury note and the 30-year Treasury bond saw their yields rise more than 10 basis points on the day. By the close, 10-years yielded 2.53% while the 30-year yielded 3.58%. While I don't have access to any trade volume information for this market, it feels like Treasuries may have seen thin trading today as well, hence the large swing in yields. Though this morning's consumer income and spending report (incomes increased 0.2% and spending rose 0.4%) was slightly worse than expected, it certainly was not a big enough miss to warrant a 10 basis point drop in long-term rates. As a result, I remain cautious about buying into this rally as bids remain frenetic. But with September looming and trading volumes primed to pick up, it shouldn't be long to see if the price action of the past two months has truly reflected broad investor sentiment or simply been a function of thin trading. I continue to remain cautious on Treasuries for now as I still think rates have fallen too far too fast. When/if deflation materializes, I will definitely become more bullish on Treasuries as a whole, but the data to this point simply doesn't warrant chasing this market.
As someone who keeps a close eye on geopolitical events, I came across some reports from STRATFOR (Strategic Forecasting) regarding the possible defection of China's central bank governor Zhou Xiaochuan to the United States. Before going any further, I must stress that these reports are as yet unconfirmed by any of STRATFOR's sources. That said, STRATFOR's people on the ground in China find it odd that such a rumor would be allowed to fester as long as it has without any government officials coming out to deny or rebut the assertions. Furthermore, the Chinese government has apparently begun blocking search engines from the searching for information on this rumor within the country, which is certainly a strange development for an innocuous rumor. Again, this information is very preliminary and could be proven to simply be a rumor, but, at the very least, it's a development that warrants thinking through as it could have implications for our portfolios.
If the reports prove to be true, I think it's realistic to assume a couple of things will happen. First, there will be an escalation of the already rising tensions between China and the U.S. This additional uncertainty will likely weigh on equity markets (the extent of this drag is hard to quantify) until some sort of resolution is put in place. Second, as is normally the case when uncertainty rises, safe harbor assets like crude oil and gold will likely see a good bit of buying. These spikes in price will likely prove to be fleeting, but the opportunity to generate decent returns in a short period of time will none the less prevail Lastly, I believe that if these reports prove out, there could be a bit of a run from Treasuries. This may seem counter intuitive since Treasuries are looked upon as one of the primary safe harbor assets, but consider this: Part of the reason why Zhou Xiaochuan's potential defection has remained plausible has to do with the internal politics of China's party leaders. There has been speculation that Mr. Xiaochuan has been in the midst of a power struggle among party elites. With more than $400 billion of losses attributable to the ownership of U.S. Treasury securities (allegedly), many party leaders have laid the blame for these losses at the central bank governor's feet. While this charge likely is a cover for a more politically motivated move, if there is a larger concern within the party that continued ownership of U.S. Treasury bonds is, in fact, a risk China does not want to take, this potential change in policy could instigate a severe round of bond selling. As such, rates could rise hard and fast. While there is not yet any sign that China would make such a shift in policy (such a change would have negative consequences for their economy too), it is at least a scenario worth considering. All the more reason, in my opinion, to add Treasury positions on dips. All this, of course, is simply speculation at this point. However, by at least considering some of the potential outcomes if the reports prove to be true, I think I've got a better understanding of how to protect assets.
Like the title of this post implies, I'm ready for September and for these markets to show us a little more on where they want to go. Sadly, they may end up saying that they want to go sideways. And in a lot of ways, sideways action could be construed as a victory for the bulls as there are a growing list of concerns that will likely keep equities from moving higher. Looking to tomorrow, reports on housing prices, consumer confidence, and commentary from the Fed's previous interest rate meeting (known as the Beige Book) are due out. It's hard to see how any one of these data points could be a real boost to the markets, so I would suspect the selling will continue. I wouldn't be surprised to see the futures up in the morning as a bit of a relief rally, but I'm inclined to think that any early bid will be overcome with additional selling towards the end of the session. But, then again, the market has a funny way of proving us all wrong on a regular basis. I guess that's what keeps me coming back day after day. The day that I've got it all figured out is the day I walk away. Until tomorrow.....
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