Fed-fueled rally fades as markets concentrate on Trump-Xi meeting In continuation of my Thursday discussion about the stock market rally, volatility responded curiously to Powell’s speech on Wednesday. Usually, the VIX and S&P 500 move just the opposite (although with different amplitudes), but on Wednesday there was a moment when the 9-day expected volatility (VXST) rose despite the 2% gains of S&P 500 which is very unusual. Usually, the VIX and the S&P 500 move in different directions, since, roughly speaking, panic and the accompanying increase in volatility is inherent in a rather bear market (“market goes up by stairs and down by elevator”). Interestingly, this movement has not been observed on the market since 2011. The dots on the chart indicate the daily changes in VXST (9-day volatility), in those days when the S&P 500 grew by more than 2% per day. On average, VXST fell by -17%. One of the possible explanations for what happened is that some market participants did not buy at the rally initiated by Powell, as they are waiting for the results of the Trump-Xi meeting, which I wrote about yesterday. Despite the increase in fiscal and monetary support in recent months, the activity of the manufacturing sector in China fell to 2016 low and is on the verge of contraction. The main indicator was 50 points in November – the value of separating recovery and recession. The service sector in China is also not yet able to take on the burden of growth – activity in it slowed to 53.4 points in November against expectations of 53.8 points. The weakness of debt-addicted economy cannot be eradicated even after a fresh stimulus package- income tax cuts, credit support for financial organizations in order to pour this money into enterprises through stocks and bonds. The size and position in China in the global economy will guarantee the recession echoes will feed into the PMI data of other countries, primarily in the EU and the US. Their PMI gauges is expected to be released next week. The minutes of the Fed meeting, which appeared yesterday, could seem irrelevant knowledge to the markets in the light of Powell’s communication on Wednesday, but the statement language convinces that concerns about growth in 2019 has been already gaining momentum at the beginning of this month. First, the officials urged to be more attentive to the incoming economic data. They said that in the upcoming meetings, in the content of the statement and the wording, it may be appropriate to place more emphasis on economic data in economic assessments and policy forecasts. That old and well-known “data dependence” narrative which pervaded Yellen’s comments and which Draghi cannot yet get rid of. This is the exact caution motive which may serve as fundamental ground for expectations of only one rate increase next year (in fact, to the lower limit of the neutral rate estimates by the Fed). Secondly, after a series of previous statements about strong, robust growth, first signs of Fed concerns about the economy were concentrated around slowdown in “some rate-sensitive sectors” in the November statement. Most likely this is the real estate market and possibly the construction sector related to it, the data for which were absolutely not impressive this year. Since March 2016, the 30-year mortgage rate has risen from 3.6 to 5.2%. Stock markets reacted slightly, the dollar changed was flat. Futures on the interest rate point to the same probability of a rate increase in December, while we are waiting for the results of the Trump-Xi meeting. Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.