On top of that Richmond Fed Manufacturing Index hit -9 vs +1 expected showing weakness persists in the manufacturing sector. At the same time the Case-Shiller 20-City home index y/y fell to 2% the lowest house price gains since Q4 2012. And if weakening consumer confidence was not enough corporate insiders in the US are selling the most shares since the end of the financial crisis.
All these factors confirm us in our thesis for Q4, presented in yesterday’s equity update, that equity volatility will rise substantially in Q4 and that corporate executives will increasingly use the quarter as a kitchen sink in terms of asset write-downs and layoffs. We expect employment numbers and broader economic indicators to weaken over the coming three months confirming the feared spillover effects from a manufacturing sector in recession. What can change the outcome and avoid a recession, or maybe just making the blow soft? The only potent policy choice that with short notice can rectify the slowdown is intervention in the USD. This happens to be our theme for our upcoming Quarterly Outlook.
The price action in yesterday’s US session tells the story of investors being scared that equities might be in for a rough drawdown to reflect the underlying fundamentals. But it’s the only sensible alternative most will say. Sure, but what is small negative yield in a bond relative to a large drawdown? Investors can quickly change their reassessment of negative yielding bonds if a recession unfolds. Technically S&P 500 futures look weak and are rolling over in line with our view for weeks that unless the index could deliver new all-time highs then traders should be shorting the index. Our conviction trade for Q4 is long volatility.