It has been a rough start to 2016 for many of the world’s major markets. The most significant news begins with China. For two of the five trading days last week, Chinese equity markets were closed due to circuit breakers that engage if the market falls at least 7% in a day (China has since terminated the use of the circuit breakers). There has also been a significant spill over into US equity markets, as the S&P 500 is down nearly 6% so far in just 7 trading days this year. The other major story currently affecting US markets is crude oil. As of this afternoon, oil actually traded below $30 per barrel for the first time since 2003.
The one exception to this trend would be the bond market. The sharp drop in prices has caused the value of most bonds to increase. In fact, the 10-year treasury yield just traded below 2.10% again today for the first time since October of last year.
On December 16, 2015, we experienced the first change in the federal funds rate since 2008, and the first increase since 2004. With the increase in rate, we saw higher short term rates, particularly in the 1-3 year term, but no increase in longer term rates, such as the 10-year treasury rate. This may suggest that over the next few years, if the Fed continues to raise rates at the implied pace of 100 basis points per year (for two years), we may see a significantly flatter yield curve.
The macro trading range for the 10-year treasury yield is still intact, and continues to get tighter and tighter as we move sideways. On the low end our first resistance comes in around 2.02%, and on the upper end support comes in around 2.33%.
January typically marks the beginning of an earnings season for US companies, and analysts expect that US earnings announcements will likely point towards fourth quarter profits that will make 2015 the second year in a row of declining profits for US companies as a whole. The December employment report, released last Friday, showed that company hiring for the holiday month was over 45% above expectations, and the unemployment rate remained at 5.0%. This week we have the producer price index and consumer sentiment figures being released on Friday.
Eric Swanson, CFA