It wasn’t supposed to be this way.
Expectations were high heading into today’s policy announcement from the European Central Bank that it would finally unveiling something that chief Mario Draghi has been promising for years: Outright government bond purchases. You see, starting in 2012 Draghi masterfully bluffed investors into believing that — despite legal constraints saying otherwise — the ECB was on the verge of unleashing a wave of quantitative easing focused on sovereign debt.
This expectation has helped push Eurozone bond yields to record lows this week and has supported stocks globally.
He didn’t deliver; instead suggesting the ECB would revisit the topic early next year despite weakening economic fundamentals in Europe and a dangerous decline in inflation expectations.
A mid-day bounce was reversed following a report in the German press that Draghi has lost the support of a majority of ECB members, with Germany in particular concerned about being left on the hook should troubled and deeply indebted countries like Greece or Italy decide to default on its bonds as part of an exit from the eurozone.
As a result, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite each lost 0.1%, and the Russell 2000 lost 0.5%.
Crude oil dropped 0.9% on reports that Saudi Arabia was looking to cut oil prices to the United States and Asia next month, along with analysts estimates that U.S. oil production could increase next year to levels not seen since the 1970s. That pushed energy stocks down 0.8% as a group with ConocoPhilips (COP) dropping 2.1%.
Ongoing deterioration in market internals resulted in the flashing of another “Hindenburg Omen” signal — driven by the increase in new lows as well as an eroding of the number of stocks moving higher. This is the second signal in three days. The last cluster of signals was back in the middle of September as the market was tipping into a near 10% correction.
Traders now look ahead to Friday’s nonfarm payroll report, with the consensus estimate looking for another 230,000 jobs in November. The unemployment rate is expected to hold steady at 5.8%. A strong performance will keep the pressure on the Federal Reserve to start raising interest rates sometime in the first half of 2015 to prevent wage inflation from getting out of hand.
The bond market is worrying that it could act too soon, with long-term Treasury bonds rallying hard into the close as fixed-income traders moving out of high-yield corporate debt into a safe haven. As a result, the December $120 calls on the iShares 20+ Year Treasury Bond (TLT) that I recommended to Edge Pro subscribers back in November climbed to a gain of more than 46%.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
