Investors are waking up to a rumble on the geopolitical front, as tensions heat up between two big nuclear powers, India and Pakistan.
See below for more details, and watch for Southern Asia unease to be used as an excuse for selling, something that has already been seen across global equities. Earnings disappointment and ever-present worries about the U.S. economy also get some credit for rattling investors Wednesday.
On that last point, Fed Chairman Jerome Powell heads back to Capitol Hill ahead of more data, as big banks struggle with the debate over whether the U.S. is headed for recession. J.P. Morgan’s CEO James Dimon reportedly told clients Tuesday they are bracing for a recession, just in case.
Doubts about the U.S. and global economy color our call of the day, from Octavio ‘Tavi’ Costa, Crescat Capital global macro analyst, who sees a recession coming, and thinks investors are blind to the fact the bear market for stocks has already started.
“In our view, September of 2018 marked the peak of the U.S. economic cycle. We are now seeing a typical bear market rally, and the next downward leg is likely to be just as abrupt as the first one,” Costa told MarketWatch in an interview. “It’s hard to pinpoint when exactly, but my best guess is between now and April.”
Costa, who says he’s shorting U.S. and global stocks, shared his “deck of charts,” which back up his concerns about the U.S. and global economies. Among them, is this one that shows the widest drop in consumer confidence expectations versus the present situation since the tech bust of the late 1990 early 2000. He notes that notes that every other such drop in the past 50 years has led to a recession.
He also highlights this next one, which shows more than a dozen major economies facing negative 30-year yield spreads vs. the fed-funds rate — a global yield-curve inversion. What that means is that short-dated bond yields are trading above long-dated ones — a move that has reliably predicted past recessions.
Costa says bear markets tend to develop in different ways, with a few lags and fairly aggressive moves before markets calm down again. He noted that January saw the third-largest drop in history for the VIX or the Cboe Volatility IndexVIX, -3.10% which indicates investors are less fearful, but at the same time, a traditional haven in times of trouble, gold, was moving up.
Gold and precious metals are asset he likes right now, and he’s also shorting the yuan and Hong Kong dollar on the view that China is probably sitting on the biggest credit bubble in its history.
Costa’s last whack at the bulls comes through what he says is a metric for valuing stocks that is completely misleading investors right now. That is, the price/earnings ratio — a common metric for valuing share prices of a company relative to earnings per share. In fact, he says the S&P’s has the second-highest p/e ratio at a market peak before a recession going all the way back to 1871.
The market
The Dow DJIA, -0.28% , S&P 500 SPX, -0.05% and Nasdaq COMP, +0.07% are off to a downbeat start. See Market Snapshot for more coverage
The dollar DXY, +0.00% and gold GCJ9, -0.11% are flat, but crude CLJ9, +0.07% is soaring as a Saudi Arabia official said the country was committed to output cuts.
Geopolitical tensions dented Europe stocks SXXP, -0.28% while stocks in Asia ended mixed, with the Shanghai Composite COMP, +0.07% and Nikkei NIK, -0.49% both higher.
The quote
“If this (situation) escalates, it will no longer be in my control or in (Prime Minister) Narendra Modi’s.” — That was Pakistan’s president and former cricket star Imran Khan in a televised statement, who added. “We invite you for dialogue… better sense must prevail.”
His comments come after Pakistan says it shot down two Indian jets and seized the pilots, Wednesday, a day after Indian warplanes bombed what they described as a terrorist camp on Pakistani soil. The whole mess started after a suicide attack that killed 40 Indian paramilitary officers nearly two weeks ago. Not helping are some videos circulating, allegedly showing that Indian pilot being roughed up.
The chart
Our chart of the day shows the very bad day Pakistan’s benchmark KSE 100 had Wednesday. It finished the day down about 2% with investors there clearly stressed out, while India’s BSE Sensex closed with a loss of just 0.3%
The buzz
The Hanoi summit between POTUS and North Korean leader Kim Jong Un is underway, as the two shook hands and sat down to dinner in Vietnam. Among the highlights were the leader of the free world telling his counterpart that fewer nukes would help out North Korea a whole lot.
A day of indigestion awaits investors in the company formerly known as Weight Watchers. WW International WTW, -34.49% warned on revenue, saying an early push to add members hasn’t gone so well and its key winter season got off to a soft start.
Lowe’s LOW, +2.47% post sales miss, says it will take a $1.6 billion charge and shares are down. Best Buy BBY, +14.11% is soaring on blowout results. Results also rolling in from Dean Foods DF, -13.85% , Campbell Soup CPB, +10.03% and Chesapeake Energy CHK, +10.27% . Square SQ, +1.76% , Fitbit FIT, +3.93% , HP HPQ, -0.21% and Box BOX, +2.26% are among the companies reporting after the close.
Ignoring a veto threat by POTUS, House Democrats (plus 13 Republicans), approved a bill blocking his emergency declaration over a border wall.
The economy
An advanced look at U.S. trade patterns in December showed a 12.8% jump in the nation’s trade deficit, while Case-Shiller data showed home prices slumping to a fresh 4-year low. Still to come are pending home sales and factory orders.
We’ll also get the second day of Fed Chairman Powell’s Capitol Hill testimony, in front of the House Banking Committee, which could be a little more heated than Tuesday’s.
