Fear and volatility high in markets; after sharp selloff, Wall Street regains some today; Japan staggers, China struggles with jobs and bank capital; UST 10yr 2.79%; oil down and gold up; NZ$1 = 67.2 USc; TWI-5 = 71.9

Here's our summary of key events over the holiday that affect New Zealand, with news of extreme fear and heightened volatility.

The "Fear & Greed Index" we follow is as extreme as we have ever seen it. The Volatility index we follow is very elevated and nearing a seven year high.

More regional activity reports point to a US economic slowdown.

On Wall Street on Christmas eve, stocks were down again, this time very sharply. There was a -2.7% fall on the S&P500, the sharpest slide just before the close. That took the drop to -16% in December and -19.6% since the beginning of October, perilously close to be being called a bear market. (Actually, the tech-heavy NASDAQ is already in a bear market.)

These drop came after an incompetent set of announcements from the White House and the US Treasury Secretary which fueled the flames. Markets recoiled from amateur fiscal leadership. That has prompted a backtrack today. But there is zero progress toward a resolution of the Federal Government shutdown.

Today, markets are feeling it is all a bit overdone and a solid recovery is underway which will make back most of Monday's losses. The official US government confusion hasn't really changed anything but very good early retail sales data (and here) is behind the recovery.

However, blowback in place like Japan has been severe. Their equity markets dropped -5% on Monday, pushing them firmly into a bear market. Yesterday they stopped falling but made no recovery either.

Hong Kong is closed, but in Shanghai, their markets also fell yesterday, taking their index down to a similar level it was on October 18 before the 'home team' stepped in. That means, since the beginning of October, this market is down -11.5% and since the beginning of 2018 it is down -25%. There are also the added risks of 'pledged shares'.

In China, their banking regulator is moving to bolster bank capital. Their problem is that their big four pillar banks (ICIB, Bank of China, China Construction Bank - all who have a New Zealand presence - and the Agricultural Bank of China) are all suffering from low and 'dwindling' capital levels and a straight equity infusion seems beyond them. The new idea is 'perpetual bonds', a fixed interest offering that may appeal to retail savers. It seems doubtful however they understand the risks they are taking with their savings.

China is also facing shrinking labour demand, a situation that could become volatile quickly if not managed carefully.

In Australia, it looks like their retail sales will have held up ok, aided by lower petrol prices.

But it now looks like New Zealand retail sales will only be up about +1% in 2018 compared with 2017. With Black Friday capturing an outsized share, and Christmas Eve falling on a Monday, it seems the pre-Christmas period brought no major retail gains. All eyes are now on Boxing Day sales data.

The UST 10yr yeild is at 2.79%, little changed. But their 2-10 curve is up to +19 bps.

Gold is up sharply and is now at US$1,271, a strong +US$13/oz gain on Monday alone and another +US$2 so far today. We haven't seen gold at this price since June 2018.

US oil prices have stopped falling having slumped to as low as US$42.50/bbl yesterday. The Brent benchmark got down to US$50.50/bbl. Both were -US$3 drops. Today prices are rallying however, up +US$3 to US$45.50 and US$53.50 respectively.

The Kiwi dollar starts the very short and thin trading session today a full -1c lower at 67.2 USc. On the cross rates we are at 95.3 AUc, and at 59.2 euro cents. That puts the TWI-5 at down to 71.9.

Bitcoin is now at US$3,760 and a -5.7% drop from where we left it pre-Christmas and it is sitting on a -9.2% loss for December.This rate is charted in the exchange rate set below.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

Daily exchange rates

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USD 
NZD
End of day UTC
Source: CoinDesk

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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24 Comments

It was around this time last year that crypto hit it's peak before it's year long downfall through 2018.

That's a rather oblique comment. Are you positioning crypto as a harbinger of doom?

dp

Yup

New Zealand is sweet bro we have the housing market. Its immune to the stock market because its on holiday in the Caribbean till 20/21 when it back with a vengeance.

All of this indicates that investors remain inclined toward risk-aversion in a steeply overvalued market. That in a nutshell, is the “reason” behind this decline, and those conditions – particularly the ragged internals – have been in place for months. Most of the “explanations” you hear for this decline are simply events that prompt investors to simultaneously take actions that were ultimately baked-in-the-cake anyway.
https://www.hussmanfunds.com/comment/observations/obs181226/

Right on. Fed lifting interest rates in an overvalued market can only have one outcome. US Stock Exchange trading bots already in sell mode show how AI perceives this risk.

.....and on queue the Dow is up 1000 points.

QE, zero interest rates and tax cuts puffed up the US markets...and by default, the rest us. Our esteemed msm economists and banksters have been cheering it along, happily encouraging us to fill our pockets and share in this fabricated wealth. Such trickery can only last for so long.....

"Markets can remain irrational for longer than you can remain solvent" (John Maynard Keynes).

(Is the definition of 'irrational' seeing the Dow go from 100 down to 1,100 up in a single day? We are about to find out!)

..and irrational algorithm! Is there such a thing i wonder?

Random number generator. aka Trump speech writer?

A random number generator cannot reliably generate irrational constants and most definitely is rational/algorithmic..

Not to long I hope.. I've gone and set myself up for a nice profit if the market goes back to its downward trajectory before mid Jan. This is more fun than lotto.
Might be an interesting few days.
End of year/quarter pension fund/ETF/Hedge fund rebalancing might cause all sorts of ructions.
https://www.zerohedge.com/news/2018-12-26/why-stocks-are-soaring-massive...?

Pragmatist.....can I use this lull and ask you direct me to where i may learn how to do such things? I do my own shares, but that's the extent of my investment skills. Thanks

Basically i've bought put options with a lowish strike price for a couple of ETFs and indexes with a January expiration. As those indexes/ETFs prices fall the value of the options will go up (and it will also go down over time as they near expiry). One of the options I purchased this morning is
QQQ 190104P136.5 - QQQ is the underlying ETF, 190104 - 4/01/2019 expiry, P = put option, 136.50 = strike price. At the moment thats well out of the money, QQQ is currently trading at 151. But should the market take a large dive the value of that option should go from the 0.36 I paid to a hopefully much higher value at which point I will sell and take the profit. I don't need the option to end in the money to make a profit, just for it to go up in value. That is a very speculative bet btw, it's either going to be a 100% loss, or i'll double (or triple) my money. Basically i'm betting that the market will drop a decent amount in the next couple of trading days.

https://www.investopedia.com/university/options/option.asp

I use the tradestation platform, but any of the online broker (US or EU) platforms should work just as well, just check what data feeds and access is included in the basic access, some may charge for options data/access.

NZ market doesn't have options worth mentioning, not sure there is much in the ASX either.

Worth mentioning, of course, most people who try this kind of thing will lose money. Potentially a lot of work for a small chance of success (which itself will be essentially indistinguishable from good luck). Don't put in any money you would miss if it disappeared.

Could be a different matter if you're using them for hedging, in which case you're just paying for insurance.

Indeed, I've only made a total of $3k USD in deposits, and originally was basically hedging against some exposure to the US markets via an ETF. But I sold my position in that ETF a while back and have done okay out of so far out of the options I had. While the volatility is in the US markets i'm having a play. Its as much fun as online poker, and the hours are just as anti-social..

Don't even think about writing options.. that is when you get into the possibility of unlimited loss for very limited profit. Buying options, the most you can lose is what you pay for the options (+brokerage), if they expire worthless.

And of course, the most 'annoying' thing with buying an Option is seeing it get into the money only to find that the Option Seller (your earlier comment!) is not in a position to 'pay up'.You got it right, and still lost money! Many an OTC option holder has found that out the hard way....( I assume you're buying European Style, Exchange Traded Options)

That is a non issue with exchanged traded options via the OCC. And no, not European style.

Cheers.

Haha I never knew that was keynes’ quote. Makes sense though, with his economics it definitely helps markets remain irrational

Keynes would have reckoned without algorithmic share trading.