February 25, 2020
We talked yesterday about the message from the interest rate market. The past two times we were here, at record lows, there was a fear of the unknown outcome for the global economy – i.e. a fear of an impending implosion of the global economy.
This means rates at a very key level. And, already, after just a couple of days of declines in stocks, we are sitting on key levels in stocks.
Let's take a look at some charts …
Today, in the face of another plunge in stocks, the 10-year yield held pretty solid, but did indeed break to new record lows, before recovering into the close. You can see the triple bottom in rates here. Interestingly, though much of the contagion fear on the coronavirus over the past two days has been directed toward an outbreak in Europe/Italy, German yields are still about 20 basis points above the record lows.
As for stocks, the S&P 500 traded into big trend line support (the yellow line) that dates back the December 2018 lows.
As for the Dow, it’s now trading below the 200-day moving average (the purple line).
For stocks this puts us 7.8% off of the highs in the S&P, and 8.4% off of the highs in the Dow.
These technical levels will be key to watch tomorrow, but the most important market to watch will be the 10-year yield. A break down in yields from here would quickly bring about the negative-rates narrative for the U.S. And that would bring out the deflationary, secular stagation pontificators. That chatter would not be good for consumer and business confidence. And confidence has been a key piece in the economic growth formula.
As we've discussed, expect global policymakers to start signaling measures to offset drags on the global economy (from supply chain disruptions, etc.).