A near flash-crash spooks markets, so it’s time for ‘maximum caution,’ says trader
Stock-market bulls are definitely not catching any breaks these days, and Thursday isn’t looking like the exception.
Thus far, the market isn’t sanguine about the chances for further progress on trade relations between the U.S. and China, after the arrest of Huawei’s CFO Meng Wanzhou. Indeed, carnage in global equity markets is already on display.
Combine that narrative with an OPEC production gathering that has the market on a knife’s edge, and the recipe for more pain seems fairly baked in as traders return from a day off to mourn the 41st U.S. President George H.W. Bush.
That detention of a high-profile tech executive in China is being credited, at least in part, for some crazy action for S&P 500 futures as electronic trade restarted in the wee hours of Thursday. As this chart shows, those futures plummeted so viciously at the open that the CME had to step in and stop trading for a period, just to cool things off:
That leads us to our call of the day from trader Greg McKenna, who runs McKenna Macro. He says while the jury’s still out on whether a so-called fat finger, or accidental trade, caused that big spike down, or it was something else, it’s a warning shot for investors.
“This is a very dangerous set up. I’m not Chicken Little, but we need to see a base build up or prices will slip,” he said in emailed comments. “Market collapses happen from weakness so we need to get through Thursday trade in the U.S. to give folks more confidence again.”
As for retail investors, probably a bit frazzled by now given what the week has thrown at them so far, his advice is to “stay in the time frame that they trade. Investors invest, and traders trade. Don’t get caught outside those parameters.”
McKenna says cash is a “reasonable alternative” right now, for those who are a bit unnerved right now. He says the levels to watch are 2,600 for the S&P 500 and above 2.8% for the yield on the 10-year Treasury note. In addition to trade worries, investors have been focused on a narrowing of the yield spread between the 2-year and 10-year government bonds to the tightest gap in about 11 years has many fretting about a potential recession.
While some are fretting about that outsize move overnight, others are taking a glass half-full view.
“Personally I think everyone looking at this the wrong way. the circuit breaker worked and limited the damage. Everyone missing that point that an algos-gone-rogue was prevented by CME systems from causing further unnecessary losses,” said Chris Weston, head of research in Pepperstone, in emailed comments.
“So many are worried about a world with algos causing distortions but in the case we can sleep slightly better at night — the system won,” said Weston.
The Dow DJIA, -2.21% S&P 500 SPX, -2.02% and Nasdaq Composite COMP, -1.62% are all getting hammered in early action.
Europe SXXP, -2.64% is also in the red, and it was no better in Asia, which saw widespread losses, led by Hong Kong HSI, -2.47%
Crude US:CLU8 has taken a big hit as the market grapples with the Vienna OPEC meeting where there’s some confusion over a potential production cut. The dollar DXY, -0.38% is flat and gold US:GCU8 is easier. The yield on the 10-year Treasury note TMUBMUSD10Y, -2.12% is hovering at 2.894%.
Read: Brace for a 15% plunge in S&P 500 next year if the Treasury yield curve fully inverts
Check out the Market Snapshot column for the latest action.
Huawei’s CFO was detained on Saturday, but news seemed to get around slowly and take the market by surprise in Asia Thursday. Arrests don’t get more high-profile than Meng—the daughter of the Chinese telecommunications giant’s founder and potential successor. The Chinese are furious, with the embassy in Canada demanding her release, while the company says she’s innocent. One security expert says U.S. tech executives should avoid traveling to China until this all cools off.
The other big spotlight Thursday is on Vienna, where markets are waiting to see if OPEC will green light a production cut to help support struggling oil prices. Crude is tearing lower amid some worries Saudi Arabia won’t push for a big enough cut.
China may have been behind the massive hack at hotel chain Marriott MAR, -0.87% say sources.
Facebook FB, -1.26% has “too many adversaries,” said Stifel Nicolaus, which cut the company to hold from buy on Wednesday. Facebook is among the techs getting hit pretty hard Thursday.
Lands’ End LE, -5.28% Children’s PlacePLCE, -14.81% Hovnanian NOV, -3.04% and H&R BlockHRB, +0.44% are reporting, along with Lululemon LULU, -3.84% , AVGO, -4.22% and American Outdoor AOBC, +1.78% later. Earnings released late Tuesday and Wednesday may grab attention, after Brown-Forman’s BF.B, -0.80% sales numbers disappointed, but Marvell MRVL, +0.52% beat revenue forecasts.
Boeing BA, -5.47% is among the losers after the CEO of its biggest client, Lion Air, said it may cancel a huge order after the airline group appeared to blame his company for a deadly crash in October.
A huge batch of data is hitting, kicking off with ADP employment data, which showed private-sector payroll gains under consensus. Weekly jobless claims fell, but still remain near a 5-month high. Other data showed rising productivity in the third quarter and the trade deficit reaching a 10-year high. The Markit services PMI, the ISM nonmanufacturing index, factory orders and a quarterly services survey will also be released.
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