Stocks set to be foiled again

Investors aren’t looking a gift horse in the mouth, but perhaps they should

On the first day of the quarter, investors are not looking a gift horse in the mouth after Chinese manufacturing returned to growth ahead of another round of U.S.-Sino trade talks. The encouraging fillip helps continue unwinding the yield curve ‘inversion’ that chilled sentiment recently.

The message from debt markets contrasts with stocks. 10-year Treasurys yielded 2.48% earlier, above a 2.338% 15-month low from last week, but below rates seen before the inversion. The Fed bears partial responsibility after scratching all possible 2019 hikes at its last meeting. Still, policymakers downplay recession risk, yet rates markets project a 0.25% cut in 2019.

Further data and events this week should bring some clarification.

After shrugging off soft retail sales and extending gains on solid manufacturing prints, stocks can benefit more from additional positive readings. Further out, what if a slowdown really is off the cards? Fed funds may price tightening back in. Recall volatility unleashed by rate anxieties last winter. And note that best-case trade scenarios appear largely priced already. Conversely, disappointing data would help corroborate the inversion signal. Even if The Powell Put and easy policy elsewhere keep a lid on volatility, stocks wouldn’t escape entirely unscathed.

As markets creep back near emotionally charged highs, the challenge of regaining and sustaining them shouldn’t be underestimated. Dow Jones futures contracts are eyeing the 26265 high from 8^th November. After touching the level then, futures fell 18% before bottoming on Christmas Eve. The best they’ve achieved since was 25^th February’s 26238.

E-mini Dow Jones Futures – 120 minutes [01/04/2019 18:59:40]