Complacency is dead, and markets are fun again

Competitors at the annual Cooper’s Hill Cheese Rolling competition. Photo: Adrian Dennis / AFP / Getty Images

Global markets are great again!

On Friday, after more than 40-straight days of the S&P 500 closing inside of a 1% range, markets are selling off as the meme of the US summer dies a quick death.

Complacency, the dominant theme in markets for the two months since the June 23 Brexit vote in the UK, has felt like it’s been the only theme in markets. And now, it seems, this is over.

Near 2:30 p.m. ET on Friday, the Dow was down over 300 points, the S&P 500 was down 43 points, and the Nasdaq was off 112. These were declines of 1.7%, 2%, and 2.1%, respectively, for the major averages.

Russ Certo, head of rates trading at Brean Capital, outlined in a note to clients Friday morning that over the last 24 or so hours, markets have had a lot of headlines to contend with.

And after months of markets not really reacting to anything, it has been an abrupt shot in the arm.

First, the European Central Bank on Thursday morning was a slight disappointment as ECB president Mario Draghi’s press conference came and went without any explicit promises of an extension of its quantitative easing program.

Certo wrote Friday that markets have come to assume that the “next outrageous leg of monetary jolt is entitled.” Certo adds that, “The enormity of monetary tidings…has lulled market into a sense of regularity regarding the presence of such stimulus. Draghi disappointed [on Thursday].”

On Friday, bond yields were rising around the world, with the German 10-year bund yield rising into positive territory for the first time since July 22. US Treasurys were flying higher, with the 10-year yield up to 1.67%.

Certo also pointed to a previously overlooked speech from Federal Reserve governor Lael Brainard scheduled for Monday, the final day Fed officials can speak before the blackout period ahead of their September 21 policy statement, as a factor weighing on markets.

In a note to clients on Thursday, Peter Hooper at Deutsche Bank said this speech brings the chances of a rate hike from the Fed coming on September 21 to around 50%.

“As a dovish member, Brainard would carry a lot of credibility delivering a more hawkish message [on Monday],” Hooper wrote.

Bloomberg pricing as of Friday afternoon put the chances of a move later this month at around 32%.

Elsewhere in market commentary, last night Jeff Gundlach, the widely-followed bond investor who runs DoubleLine Funds, held a webcast on Thursday outlining his views on markets and the economy, with the major highlight being Gundlach’s obvious caution on markets right now.

And for a manger who has long been bullish on interest rates falling, this is a notable shift.

Gundlach said US corporate bonds are highly overvalued and added that many folks have come around to hold the belief interest rates can never rise, particularly as consensus around the ineffectiveness of negative interest rates solidifies.

“In the investment business, when you hear the word ‘never,’ that means it’s about to happen,” Gundlach said. On Friday, of course, rates were rising.

“There is a lot of emotion, and movement, in markets,” Certo wrote.

And just like that, we’re back.

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