1. Moving the markets

With the earnings season fading away, the US-China trade disagreement moved to center stage again, with positive statements stoking the markets and continuing the relentless push higher.

This happened again in the face of sharply rising bond yields with the 10-year jumping an amazing 10.57 basis points to end the day at 1.92%. This was an aggressive rise in yields, an event that in the past has always been a bad omen for stocks, so will it be different this time?

Today’s ramp started early on when the futures market set the bullish tone after China said that the US had agree to roll back tariffs. The alleged agreement was that China and the US would roll back tariffs on each other’s goods in phases while working towards a trade deal, the optimism of which has now contributed to the rally over the past 5 days.

For sure, the market’s mood kept getting better with some analysts arguing that any resolution would halt or at least slow down the current path towards the much-feared global recession. At the same time, some of the slowing countries like Europe, Japan and even China may have bottomed in terms of their economies weakening; at least so goes the hopeful thinking.

Then came a cool wind of reality when Reuters reported that according to “sources” the White House plan to roll back China tariffs “faces fierce internal opposition,” which yanked the markets off their lofty intra-day highs but still enabled the major indexes to score another winning session.

And so, the saga goes on…

1. Moving the markets

Ever since we had 2 down days at the beginning of October, equities have been on a relentless march higher (green arrow in chart) with virtually no interruption. Despite the Fed’s efforts to lower interest rates, this rally happened in the face of rising bond yields, an event that usually takes the starch out of upward equity moves.

But we seem to be living in a financial system where historical norms no longer apply. The fallout from higher rates has been a recent underperformance of not just bond ETFs but also the low volatility ETFs like SPLV, which had been one of the top performers for the first 9 months of this year. In my advisor practice, I have now reduced our exposure to SPLV.

It simply lost its luster, as a result of 10-year bond yields starting to hiccup early in September, after having been on a downward trajectory all year. Today, the yield rocketed another 8 basis points higher to close at around 1.86%, which is within striking distance of taking out the September high of 1.90%.

If this continues, there will be a point, however, when equities will be affected by rising yields, but that moment in time is still the big unknown. On the other hand, as I posted yesterday, thanks to the largesse of the Central Banks injection of liquidity (the Fed added $250 billion just in the last 8 weeks), we have now two opposing forces, that simply can be looked at as an ongoing tug-of-war between bulls and bears with the outcome to be determined.

While today was a session during which the major indexes clustered around their respective unchanged lines, it looks to me, for the time being, that the power of liquidity may win and propel the markets higher, despite extreme greed having set in already.