Historic November
Doug Nolan
November 2024.
Future historians will look back in utter amazement.
As for equities, strong market gains pushed all major averages further into record highs – the S&P500, Nasdaq Composite, Nasdaq100, mid-caps, small caps, and the “average stock” Value Line Arithmetic Index.
For the month, the S&P500 returned 5.9%, and the Nasdaq100 returned 5.3% - solid gains, but significantly lagging the broader market.
The small cap Russell 2000 returned 11.0%, outpacing the S&P400 Mid Cap’s 8.8%.
The Value Line Arithmetic returned 8.2%.
I have a hunch that the post-election financial stocks feeding frenzy will prove a challenge to reconcile in hindsight.
For November, the KBW Bank Index returned 13.6%, the Regional Banks 14.8%, the Securities Broker/Dealers 13.7%, and the Nasdaq Financial Index 14.2%.
If nothing else, the big Trump win and Republican sweep triggered quite a short squeeze.
The Goldman Sachs Most Short Index jumped 13.3% in November.
Tesla surged a third – inflating market capitalization to $1.1 TN – or 20 times Ford and 16 times GM.
Stocks will do what stocks will do.
Global bond markets, however, are the realm of analytical intrigue.
Ten-year Treasury yields briefly touched 4.50% the week following the election.
But yields ended November at 4.17%, down 12 bps for the month.
From a domestic perspective, it’s reasonable that a confluence of market exuberance (i.e., stocks, crypto...), record debt issuance, the loosest financial conditions in years, and prospects for larger deficits and trade war inflation risks under the Trump administration – would unsettle the bond market.
But there are clearly powerful global factors at play, pushing yields lower.
For the month, 10-year Germany yields sank 30 bps, Spain 30 bps, Italy 38 bps and Greece 39 bps.
Despite being in the market’s crosshairs, yields dropped 20 bps in the UK and 23 bps in France.
I do not dismiss big bond market moves.
European yields reversed sharply lower soon after the U.S. election.
Perhaps prospects for tariffs, trade wars, and global economic weakening explain slumping yields.
It’s curious to see European yields lead on the downside.
The escalating war in Ukraine, with Putin firing an experimental nuclear warhead-capable hypersonic ballistic missile – while revising Russia’s nuclear doctrine – points to a dangerous spike in geopolitical risk.
Meanwhile, after a few months hiatus, political stability concerns are back on the boil in France.
November 29 – Bloomberg (Samy Adghirni and Ania Nussbaum):
“Far-right leader Marine Le Pen, who holds outsize leverage in France’s split parliament, gave Prime Minister Michel Barnier until Monday to accede to her budget demands before she decides whether to topple the government.
Le Pen’s National Rally is demanding that Barnier tweak his 2025 budget plans, which incorporates €60 billion ($63.5bn) of fiscal adjustments, to abandon a proposal to reduce drug reimbursements, call a moratorium on new or higher taxes on most individuals, to index pensions to inflation from Jan. 1 and to enact tougher migration and crime policies.”
France’s bond yield spread to Germany widened intraday Wednesday to 90 bps – the largest risk premium since the 2012 European debt crisis – before settling back down to 81 bps by Friday’s close.
Also notable, French yields briefly traded above Greece this week.
France’s sovereign CDS traded up to 40 bps in Wednesday trading – matching the level during the June election, which was the highest since the Covid crisis.
I refer to the “GLOBAL government finance Bubble” for good reason.
Over-indebtedness is systemic.
France ranks 7th globally by GDP and is high on the list for its heavy debt load.
At 112%, France’s debt-to-GDP ratio has risen significantly since debt crisis year 2012’s 88%.
Flouting the Eurozone's 3% limit, France is expected to run a 2024 deficit of 6.2%.
After gains by both the far right and far left in the summer’s parliamentary election, President Emmanuel Macron appointed Michel Barnier Prime Minister to lead a fragile coalition government.
Barnier is struggling to push through spending cuts and tax increases necessary to somewhat pare the big deficit, stating he is prepared to use a special constitutional provision to bypass a Parliamentary vote.
But invoking “Article 49.3” risks a no-confidence vote from the opposition parties.
There are ultimatums, and we’ll know more Monday.
Global worries are not limited to France’s government and bond market.
The Japanese yen’s 1.2% Friday advance boosted the week’s gain to 3.4%.
Higher inflation readings have the market now at two-thirds probability of a hike at the Bank of Japan’s December 19th meeting, up from only a third to begin November.
Bloomberg: “Carry Traders Gird for Stressful Holiday With Wild Swings in Yen.”
Yen “carry trade” worries have returned.
For the week versus the yen, the Brazilian real dropped 5.9%, the Russian ruble 5.2%, the Argentine peso 3.8%, the Turkish lira 3.6%, the Colombian peso 3.6%, the Indian rupee 3.3%, and the Chinese renminbi 3.2%.
November 29 – Bloomberg (Giovanna Bellotti Azevedo and Leda Alvim):
“Brazilian markets were on pace for the worst week in two years after a much awaited plan to cut government spending only added to angst over the country’s budget.
The real slid as much as 1.6% Friday…
It’s down almost 5% this week, by far the worst performer in developing nations…
Investors have rushed to dump Brazil assets this year amid concern over the nation’s growing debt levels as President Luiz Inacio Lula da Silva increases spending to fulfill pledges of improving living standards for poor Brazilians.”
After sinking almost 5% in three sessions to a record low, Brazil’s currency recovered somewhat in late Friday trading to end the week down 2.8%.
Brazil’s local currency bond yields traded above 14% (multi-year high) in chaotic Friday trading, before closing the session at 13.44% - up 57 bps for the week.
Brazil CDS rose eight this week to 163 bps.
Brazil’s Ibovespa equities index dropped 2.7%, trading this week to the lows since early July.
Other EM headlines:
“Mexico’s President Says She’s Sure Country Can Avoid US Tariffs.”
“India’s Growth Shocker Puts Pressure on RBI to Cut Rates.”
“Turkey Economy Slides Into Recession Ahead of Rates Decision.”
“Bank of Russia Says No Emergency Steps Needed to Stabilize Ruble.”
“Russia Tries to Stem Panic Over the Plummeting Ruble, as the Central Bank is Forced to Intervene.”
November 29 – El Pais (Cristian Segura):
“The Russian ruble has once again plunged to levels not seen since the early days of the Kremlin’s war against Ukraine.
After a gradual decline throughout November and a sharp drop during this week’s ‘Black Wednesday,’ the currency stabilized on Thursday at 109.5 rubles per dollar…
This marks its weakest rate since March 2022, when the initial wave of Western sanctions caused the ruble to briefly plummet beyond 140 rubles per euro.
Prior to the invasion, the ruble traded around 80 per euro, and a decade ago — before the illegal annexation of Crimea — it was under 40…
‘It is not easy, neither in our country nor in neighboring countries, but everything is under control, everything is going according to plan,’ Russian President Vladimir Putin claimed.”
The Russian ruble was down as much as 7% in Wednesday trading, before central bank intervention helped cut the week’s losses to 2.8%.
The fragile ruble will force even tighter policies from the Bank of Russia, only exacerbating economic weakness.
Intensifying pressures – on the battlefield and the currency market – heighten fears of Putin resorting to increasingly desperate measures.
I’ll have to admit that my analytical interests are piqued when I see troubling Ukraine War developments, European bond yields leading on the downside, a weak euro currency, and a quick 7% plunge in the ruble.
And then the abruptly strengthening yen places renewed pressure on “carry trade” leverage.
A month to go to book spectacular 2024 market gains – a month away from ensuring big Wall Street year-end bonuses and huge hedge fund payouts.
Troubling geopolitical developments - though sinking global bond yields do place downward pressure on Treasury yields.
And lower market yields underpin equities speculation, especially in the U.S.
November 25 – Bloomberg (Amara Omeokwe):
“Federal Reserve Bank of Chicago President Austan Goolsbee said he foresees the central bank continuing to lower rates toward a stance that neither restricts nor promotes economic activity.
‘Barring some convincing evidence of overheating, I don’t see the case for not continuing to have the fed funds rate decline,’ Goolsbee said…
‘How fast that happens will be determined by the outlook and conditions…
But the through line to me is pretty clear that we’re on a path, and that path is going to lead to lower rates, closer to what you might call neutral.’”
“Convincing evidence of overheating”?
The KBW Bank Index has returned 48.2% y-t-d, with the Broker/Dealers returning 54.1%.
The S&P500 has a y-t-d return of 28.1%.
Annual issuance records are being crushed throughout fixed income.
Investment-grade spreads recently traded the narrowest since 1998. A $1.83 TN fiscal 2024 federal deficit. Booming Credit – “private Credit,” “private equity,” M&A, ABS, “buy now, pay later”…
Overheating throughout the financial realm is rather conspicuous.
Goolsbee, of course, would instead focus on the real economy when arguing against overheating.
But a Bubble economy so maladjusted by price distortions, resource misallocation, and inequitable wealth redistribution is not inclined to traditional economy-wide overheating.
The “Periphery to Core” analytical framework informs us that the “Core” often enjoys an initial boost from fledgling stress at the “Periphery.”
Lower market yields are the last thing the overheated “Core” needs at this juncture.
Is the Fed really going to cut rates again on the 18th?
Quite interestingly, the expected Fed policy rate for December 2025 sank 48 bps this week to 3.45% (two-year Treasury yields down 22bps this week).
As for the ECB policy rate, market expectations for October 2025 dropped 18 bps this week to 1.48%.
Something's up.
Meanwhile, the “Core” has a new administration hankering to brandish tariffs over the entire world.
On so many levels, extraordinary instability festers below the surface.
It was as if initial lava flows appeared this week.
November 22 – Financial Times (Colby Smith, Joshua Franklin and Stephen Gandel):
“The sell-off in US equities in early August showed that highly leveraged hedge funds operating in a low-liquidity environment could magnify market shocks, the Federal Reserve said…
Financial markets fell sharply in the first week of August in what was seen then as a reflection of concerns over the US economy and rising interest rates in Japan, which turned against investors who had borrowed cheaply in yen in a popular trade known as the yen carry.
In a report, the Fed blamed August’s sudden jump in market volatility in part on ‘highly leveraged hedge funds’ quickly selling down their positions to meet internal volatility targets…
‘During this event, liquidity in the Treasury market, as well as in other markets, deteriorated markedly, but market conditions improved rapidly following favourable data releases the following week,’ the Fed wrote…
‘Nevertheless, this episode showed once again how high leverage can amplify adverse shocks.’”
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