Politics is playing havoc with how people are feeling about everyday life, and it's even overriding how they usually feel about topics that aren't necessarily as influenced by our representatives.
The preliminary Consumer Sentiment survey for August by the University of Michigan showed a stunning drop. Not only is the survey relatively low, it was the biggest miss in 20 years relative to economists' expectations. Granted, this could change substantially by the time the official reading is released in a couple of weeks.
This is an abnormally low reading given how the S&P 500 has fared over the past year. There is a positive correlation between the 12-month rate of change in the S&P and the Consumer Sentiment readings, and this month really stands out as an outlier.
Assuming the S&P doesn't completely fall apart in the coming weeks, this month's reading would be the 2nd-lowest all-time for any month when stocks closed at a 12-month closing high. Only December 1991 would have a lower reading.
A low Consumer Sentiment reading during a month when the S&P closed at a new high tended to be a good sign.
What else we're looking at
- How the S&P 500 performs after a big miss in Consumer Sentiment
- What a low Sentiment reading, and a big monthly drop, means when stocks are doing well
- Breadth among small-cap stocks hasn't had a run like this in over a year
- A detailed look at an options trade using SPY
- What happens after copper does a massive reversal around its 200-day moving average
Energy ETFs like XOM and XLE have declined for 6 consecutive days, tying their longest losing streaks since the pandemic crash. The few other 6-day streaks all preceded at least short-term bottoms, so watch for a change in character.
Copper top. Dean shows that copper has dropped below its 200-day moving average, after the metal doubled. Its performance over the next 1-2 months was consistently poor.
Fear in force. The Fear & Greed model plunged to its lowest level in a year on Thursday. Investors have been increasingly less enthused about stocks as they've rallied in recent months...but be careful about simply interpreting this as a knee-jerk contrarian would. This also happened in 2015.
Correction camp. With the latest selloff, nearly 40% of S&P 500 stocks are more than 10% below their peaks. Healthy markets typically see this figure hold consistently below 40%; when above, it signals dangerous internal conditions in the index.
The Post-Mortem on Evergrande and the Fed
Will Evergrande contagion impact your portfolio? … be wary of commodity trades for now … what the Fed’s statement means for the fourth quarter
Will Evergrande contagion impact your portfolio? … be wary of commodity trades for now … what the Fed’s statement means for the fourth quarter
It’s been a rollercoaster week for investors.
Monday and Tuesday brought panicked selling as the Chinese Evergrande debacle roiled markets. All three major indices dropped, with the Nasdaq leading the losses with a 2% haircut.
But come Wednesday afternoon following the Fed’s statement release, investors were back to “buying the dip,” as they’ve done ever since the March 2020 low.
As I write Friday afternoon, investors seem to be digesting all the news, with the markets flat to slightly down.
In today’s Digest, let’s look closer at both Evergrande and what we learned from the Fed with the help of our technical experts, John Jagerson and Wade Hansen, of Strategic Trader.
Though the market has largely brushed off Evergrande concerns, and no longer fears an unexpected announcement from the Fed, there are lingering issues investors should watch.
Today, let’s shine a light on them and see how our technical experts are sizing up the fourth quarter.
***The fallout of the Evergrande implosion
For newer Digest readers, Strategic Trader is InvestorPlace’s premier trading service. It combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.
This week, we’ve seen all of these directions, beginning with “down” thanks to Monday’s news that Chinese real estate developer, Evergrande, was struggling to meet its debt payments.
Here are John and Wade with more details:
Evergrande is a massive Chinese property developer with subsidiaries in a variety of other businesses. Depending on the day, they have assets of $1.3 trillion and liabilities of $300 billion.
Despite its size, Evergrande has become over-extended and has been effectively insolvent for quite a while.
Evergrande’s stock has been imploding this year. Below, you can see it losing 80% of value and counting since we began 2021.Source: StockCharts.com
This issue here is the ripple effect of Evergrande’s demise. Yesterday, we learned that Beijing will be hesitant to bail out the giant developer.
From the Wall Street Journal:
Chinese authorities are asking local governments to prepare for the potential downfall of China Evergrande Group, according to officials familiar with the discussions, signaling a reluctance to bail out the debt-saddled property developer while bracing for any economic and social fallout from the company’s travails.
The officials characterized the actions being ordered as “getting ready for the possible storm,” saying that local-level government agencies and state-owned enterprises have been instructed to step in to handle the aftermath only at the last minute should Evergrande fail to manage its affairs in an orderly fashion.
They said that local governments have been tasked with preventing unrest and mitigating the ripple effect on home buyers and the broader economy, for example by limiting job losses—scenarios that have grown in likelihood as Evergrande’s situation has worsened.
***As bad as this sounds, John and Wade believe the wider issue is the impact this will have on Chinese interest rates
Back to the Strategic Trader update:
Without massive intervention, corporate borrowing in China is likely to remain expensive.
High yield debt is already back to COVID-19 crisis levels, and we don’t expect that to come down.
In the short-term that should drag on commodity prices because higher rates will slow demand in the Chinese economy.
John and Wade point out that this is already weighing on commodity stocks, so they’ll be avoiding commodity-related trades for the time-being in Strategic Trader.
We made this same point here in the Digest earlier this week. The battery metals trade, which we believe will be a massive winner this decade, is under pressure from Beijing’s efforts to tamp down commodity inflation in China.
Long-term, the Chinese government can’t keep a lid on commodity prices. But shorter-term, which is where John and Wade are focusing, yes, commodity stocks could be weak.
For shorter-term trades, keep your eye on this.
***If Evergrande does implode, will it bring down U.S. stocks?
Returning to the broader, macro picture, what’s the potential fallout if Evergrande goes belly-up?
Back to John and Wade:
Yes, Evergrande is massive and there are a lot of Chinese, European, and US banks that will suffer losses if they fully default on their debt. However, in our view, there is no way that the Chinese government will allow that to happen.
We agree that an Evergrande default would create some risk of contagion, but the Chinese government is managing a delicate balance. Evergrande’s troubles have reduced the price of housing as real estate speculators have been burned, which is good for them. However, broader financial instability would be unthinkable.
We expect the Chinese government to step into the market and “rescue” Evergrande before things get much worse. While we don’t think that will bring Chinese interest rates down, it should be plenty to avoid a meltdown. Intervention in September or early October appears most likely.
If we are correct about an Evergrande bailout, then the volatility hitting U.S. stocks that has been triggered by the Evergrande default should calm down in the short-term.
I’ll point out that the Wall Street Journal article quoted above reported that local Chinese officials were instructed not to step in and help until “the last minute.” To John and Wade’s point, such language does suggest that China won’t allow a complete melt-down.
***Switching gears, what about the Fed, tapering, and interest rate hikes?
On Wednesday, the Fed held its benchmark interest rate near zero, but indicated that hikes could be on the way sooner than some had expected.
Here’s John and Wade with more:
The committee kept things vague (Wednesday) by saying “a moderation in the pace of asset purchases may soon be warranted,”. The Fed keeps things very vague when they are pushing the timeline for a change out further into the future.
So, we feel that (Wednesday’s) statement adds confidence to the estimate that the Fed will resist a taper until late this year or once the hiring picture improves.
After the Fed’s announcement on Wednesday, stocks rallied. But John and Wade, who wrote their update on Wednesday afternoon, suggested caution:
Drawing conclusions from today’s market action will be difficult. Fed days are always volatile and are prone to price reversals.
It will likely take investors a day or two to settle down before we can get a good read on how the Fed’s forecast that tapering should begin “soon” and that some members of the committee expect that rates could start to rise in 2022 will affect sentiment.
To John and Wade’s point, yesterday the buying continued, with all three major indices climbing. But as I write Friday, the markets are either flat or down.
***Wrapping up, weighing all these factors together, how do John and Wade size up today’s market, and where we’re headed in the fourth quarter?
Here they are with their bottom-line:
Despite the outstanding issues of the Fed’s announcement today and the Evergrande crisis in China, the pullback in the S&P 500 has remained within normal ranges for a bull market retracement.
Market volatility is always frustrating, but we expect investors to start pricing in another stellar earnings season in October; that should lead to a bounce in the major indexes in the short-term…
We remain optimistic that monetary policy will remain stable enough to support stock prices in the fourth quarter.
Have a good evening,
Jeff Remsburginflation commodity monetary markets policy metals interest rates fed monetary policy
Week Ahead – Risks haven’t gone away
Are investors getting complacent? The next few months are going to be extremely interesting in the markets, with central banks becoming less comfortable…
Are investors getting complacent?
The next few months are going to be extremely interesting in the markets, with central banks becoming less comfortable with the level of stimulus they’re providing, economic recoveries slowing and market risks mounting.
Evergrande has come to the forefront of investors minds in recent weeks. The threat of contagion is a concern that’s been discussed in depth the last week and one that’s unlikely to go away until more clarity is provided.
Now that investors have come to expect a November taper by the Fed, the focus for the economy primarily resides on supply chain issues, labor shortages, and any additional pricing pressure catalysts. Much attention will fall on Capitol Hill over the debt ceiling and the grilling that Fed Chair Powell and Treasury Secretary Yellen will have to endure.
Monday is the tentative deadline for the House vote on the bipartisan infrastructure package. That could move if Republicans don’t make any concessions over the debt limit.
Thursday is the deadline for Congress to pass a stopgap funding bill that will avert a government shutdown. The debt ceiling standoff will likely go down to the wire, but expectations are still optimistic that Republicans won’t want to take the blame for sending the economy immediately into a recession and as that could trigger millions of jobs lost and wipe out $15 trillion in wealth.
Most of the economic data in the US will take a backseat to politics and corporate updates that might show further expectations that pricing pressures remain elevated and will be passed onto the US consumer. The most important economic reading will be the ISM manufacturing reading which could show a small deceleration in September. A steeper drop with the headline and higher prices paid could weigh on growth expectations for the rest of the year.
German federal election takes place this weekend. The SPD holds a narrow lead in the polls going into the election but no party is even close to a majority meaning negotiations, potentially lasting months, lie ahead. The market impact should be limited.
The economic calendar next week primarily consists of survey data, with CPI the focus on Thursday, with inflation running at 3% currently.
A number of BoE policymakers appear next week, including a couple of appearances from Governor Andrew Bailey on Tuesday and Wednesday. The MPC has turned more hawkish in recent meetings and the market is now pricing in two rate hikes next year, with the first (15 bps) in February and the second (25bps) in the summer. Given the number of downside risks to the outlook, this strikes me as hopeful.
A few data points of note next week including GDP on Thursday and the manufacturing PMI on Friday.
The United Russia party won more than two-thirds of the vote – giving them a supermajority – in last weekends election, the first to take place electronically. The result has been disputed by opposition supporters who declared the result was rigged. Challenges and potential unrest could follow.
The SARB left rates unchanged last week at 3.5% as inflation rose slightly to 4.9%, just ahead of expectations. The calendar next week is light with only tier three data on the cards.
The CBRT, led by Governor Şahap Kavcıoğlu, cut the repo rate by 1% to 18% this week, despite previously vowing to keep it above inflation, which currently stands at 19.25%. Rates are expected to be cut by at least another 100 basis points before the end of the year. The central bank expects inflation to fall in that time but its credibility is tarnished and the lira has slipped to record lows against the dollar as a result.
Kavcıoğlu is due to appear alongside finance minister, Lutfi Elvan, next week at an economy summit on Tuesday, when this topic will likely be discussed.
China spent most of the week on holiday leaving markets to tie themselves up in knots over whether Evergrande’s slow trainwreck posed a systematic risk or not. That will continue into next week with Asian markets, including China, acutely vulnerable to negative headlines emerging over Evergrande during the weekend. Evergrande is listed in Hong Kong and negative weekend headlines will see the Hang Seng slump.
The week ahead gives markets some distraction though with Industrial Profits on Monday, official Manufacturing and Non-Manufacturing PMIs and the Caixin Manufacturing PMI on Thursday. After a nightmare slump by the Non-Manufacturing PMI for last month, it will be most closely watched. A negative or positive surprise will be reflected in a similar reaction by China stock markets and Asia as a whole.
USD/CNY remains range-bound with no sign that the PBOC is looking to engineer a weaker currency to stimulate the economy, yet. The PBOC has been aggressively adding liquidity via the repos this past week, it has yet to translate to CNY weakness.
China is capturing the EM headlines at the moment and there has been little in the way of market-moving data from India. Q2 Current Account is released on Thursday but is now well and truly backwards-looking. Markit Manufacturing PMI is released on Friday but will create only short-term volatility. India, and EM, in general, will react more directly to sentiment surrounding the Fed taper and/or the impending US debt ceiling.
Australia & New Zealand
The Australian and New Zealand Dollars continue to bounce around on daily shifts in international risk sentiment, rather than domestic developments. Half of Australia and Auckland in New Zealand remain under virus lockdowns. That situation will continue in the week ahead with Evergrande contagion/collapse and US debt ceiling developments likely to drive the intraday direction. NZD remains vulnerable to the delta-variant jumping the Auckland boundaries which would see it move sharply lower.
Japan has a packed data week featuring the BOJ Minutes, Retail Sales, Industrial Production and the Tanken Surveys for Q3. However, Tanken aside, the data is all from August or July, making it somewhat irrelevant. Instead, all eyes will be on the ruling LDP who will choose a new Prime Minister on Thursday. Markets have priced in the certainty of more fiscal stimulus and the comments post-election will cause volatility in Japan equities.
USD/JPY remains a pure rate differential play between the US 10-year and Japan JGBs. The spike in US yields at the end of the present week has lifted USD/JPY to near the top of its near 4-month 109.00 to 110.50 trading range. Realistically, a close above 111.50 needs to occur to signal a medium-term directional move higher is occurring. Everything rests on whether US yields continue rising in the week ahead.
Key Economic Events
Saturday, Sept. 25
– New York Fed President Williams delivers a paper on international monetary policy coordination at a SNB research conference.
Sunday, Sept. 26
– German Federal Election Day
– United Nations 76th General Assembly resumes
Monday, Sept. 27
– Fed Governor Brainard and Chicago Fed President Evans speak at the National Association for Business Economics’s 63rd annual meeting.
– New York Fed President Williams talks about the economic outlook before the Economic Club of New York
US durable goods
Mexico IGAE economic activity
Tuesday, Sept. 28
– Treasury Secretary Yellen, BOE policy maker Catherine Mann to speak at the NABE conference.
– BOE Governor Bailey speaks at the Society of Professional Economists dinner.
– Fed Chair Powell and Treasury Secretary Yellen testify at the Senate Banking Committee hearing on “CARES Act Oversight of the Treasury and Federal Reserve.”
– ECB President Lagarde to speak at the ECB Forum on Central Banking. Executive Board members Schnabel and Panetta, plus Vice President de Guindos, chair sessions.
– US Commerce Secretary Raimondo to speak at an Economic Club of D.C. event
US wholesale inventories, S&P CoreLogic Case-Shiller home prices, Sept Conf. Board consumer confidence: 114.6e v 113.8 prior
Australia retail sales
South Africa SARB Quarterly Bulletin
Wednesday, Sept. 29
– Japan’s Liberal Democratic Party elects a new leader
– Central Bank chiefs Bailey (BOE), Kuroda (BOJ), Lagarde (ECB) and Powell (Fed) speak on an ECB Forum panel. Riksbank’s Deputy Governor Breman will also attend.
– ECB’s Visco speaks at a Sustainable Policy Institute event.
US pending home sales
Eurozone economic/consumer confidence
Thailand rate decision: Expected to keep Benchmark interest rate unchanged at 0.50%
EIA Crude Oil Inventory Report
Thursday, Sept. 30
– US Congress faces a deadline to approve a stopgap funding bill to avert a government shutdown on October 1st.
– Fed Chair Powell and Secretary Yellen testify to House Financial Services Committee
– New York Fed President Williams opens and closes a conference on the Fed’s pandemic response
– St. Louis Fed President Bullard speaks
Chicago Fed President Evans speaks at an event hosted by the Bendheim Center for Finance
US GDP (third reading of Q2), initial jobless claims, MNI Chicago PMI
Australia building approvals
Unemployment: Brazil, Chile, Colombia, Eurozone, Germany, Italy, Israel
China Caixin manufacturing PMI, non-manufacturing PMI
Czech Republic GDP
UK Final Q2 GDP
Chile copper production
Japan industrial production, retail sales
Mexico rate decision: Expected to raise Overnight Rate by 25 basis points to 4.75%
New Zealand building permits
South Africa trade balance
Sweden Riksbank minutes
Friday, Oct. 1
– Philadelphia Fed President Harker talks about the economic outlook with the New Castle County Chamber of Commerce
– ECB’s Schnabel speaks at a Fed conference.
US Sept ISM manufacturing: 59.5e v 59.9 prior, University of Michigan sentiment,Manufacturing PMI, construction spending, spending/personal income
Eurozone manufacturing PMIs: France, Eurozone, Germany
India Manufacturing PMI
Japan vehicle sales, unemployment, Tankan index, manufacturing PMI
Macau casino revenue
Russia unemployment, GDP
Singapore home prices
Sovereign Rating Updates
– France (S&P)
– Poland (S&P)dollar inflation monetary markets reserve policy fed central bank monetary policy
What e-commerce businesses need to know about cryptocurrencies?
Before we jump to any conclusion on whether any business be it a direct-to-consumer DTC company or an airline should accept cryptocurrencies we must…
- The answer to whether direct-to-consumer businesses should accept cryptos as payments is open-ended
- The risks are many, but there are rewards like brand recognition when a business accepts cryptos
- In El Salvador, the ‘bitcoin beach’ experiment is helping create a viable bitcoin ecosystem
Before we jump to any conclusion on whether any business, be it a direct-to-consumer (DTC) company or an airline, should accept cryptocurrencies, we must first understand whether they are money or assets.
A Senate hearing titled, ‘Cryptocurrencies: What are they good for’ was dominated by critics of cryptos. Ironically, it did not make as many headlines as the ‘B Word conference’ where multi-billionaire CEOs – Elon Musk and Jack Dorsey – extended overwhelming support to the crypto investment space. Recently, Amazon issued a clarification refuting the claim that it would accept cryptocurrencies as payment.
The argument against crypto adoption
Crypto assets, be it bitcoin, Ether or Elon Musk’s favorite Dogecoin, have yet to become ‘money’. They are presently a commodity, the value of which can swing wildly. The point is MicroStrategy or Tesla, two of the biggest corporate investors in Bitcoin, can manage losses on their investments without having any profound impact on business continuity. For small businesses, it can be a life or death situation.
Secondly, large businesses are investing in bitcoin and not accepting cryptos as a form of payment. Yes, a few companies like AXA Insurance may be accepting payment in bitcoin but it is just an experiment at a very small scale.
Excessive power usage or extreme volatility aside, it is the cryptocurrency space’s continuous rivalry with regulatory authorities across the world that makes it too risky. No major central bank including the Fed or the Bank of Canada is willing to accept cryptos as a legitimate form of money. They are working on their own central bank digital currency (CBDC).
Also read: Is Canada working on its own CBDC?
Risks of accepting cryptocurrencies
The risk isn’t the same for all businesses. For big corporations, holding cryptocurrencies as an asset is a risk but revenue comes from sales of products or services, and only a portion of this revenue is what they park in risky assets like cryptocurrencies. H&M is a big clothing retailer. It can experiment with cryptos as a form of payment in some jurisdictions. On the contrary, most new DTC brands have yet to achieve such economies of scale. The risk appetite is less.
Another point here is will suppliers accept payments in cryptos? Will employees accept wages in cryptos? The question is where will businesses use them? One just can’t hold on to the portfolio in anticipation of wealth creation in medium-to-long term. Cash flow is at the heart of any business. Moreover, cryptos are highly volatile. If someone holds bitcoin, the value of portfolio can swing in any direction on the back of a single tweet from an influencer like Elon Musk.
Besides, this is not the perfect time to experiment with new things.
The US economy grew by 6.5 per cent on an annual basis in the second quarter, much below the estimate of Dow Jones. Jobs data reveals the country needs more Americans to be employed to take employment to pre-pandemic levels.
Such macroeconomic indicators matter when we talk of acceptance of cryptocurrencies in payments. It is because these impact all investment spaces. When the economy is booming, people are earning good -- as wages and not from government’s stimulus push -- money can be parked in risky assets like cryptos. At present, personal savings rate in the US has tumbled below US$2 trillion. It was above US$4 trillion some time back. Money is scarce in the economy. And hence, accepting a volatile asset as money can heighten a business’s exposure to risks.
El Salvador has declared that bitcoin will be a legal tender in the country. But did this news take bitcoin’s value north? In contrast to this, it was China’s crackdown on crypto mining that took bitcoin’s and other cryptocurrencies’ value south. That’s the risk.
How the adoption turns out for El Salvador is a wait and watch game.
Argument in favor of accepting cryptocurrencies
We know how the DTC business model has made a comeback. Many businesses exist exclusively on e-commerce platforms and sell products ranging from clothes to electronics to home furnishing items. They don’t rely on a distribution channel, don’t need even a retail store to sell goods.
In DTC model, customer acquisition cost or CAC holds great significance.
If a business accepts cryptocurrencies as payment, will it not be a great marketing strategy? There is a reason to believe this. AXA Insurance is allowing its customers in Switzerland to pay in bitcoin. This was big news, a sort of brand building for the insurer. Many have heard of airBaltic, the flag carrier of Latvia, which accepts bookings in bitcoin and other cryptocurrencies.
Brands become a little more famous when they do something like this. It may not be bad to jump onto the bandwagon. When a business exists only on e-commerce, it needs a prefect strategy to grab eyeballs. ‘We accept payments in cryptos’ can be a rewarding branding tactic. Alongside, if the business can convince suppliers to accept payment in cryptos, it might not be risky to accept cryptocurrencies from customers.
The ‘bitcoin beach’ experiment in a village in El Salvador is an example that can be cited. Today, coffee shops in the village are selling cappuccino in bitcoin denomination. The mobile app for these transactions is now one of the most downloaded apps in El Salvador. Lastly, there doesn’t seem to be a bubble yet that will burst one day. Having lost as much as half of its market cap after the crackdown in China, bitcoin has bounced back. One bitcoin was recently priced over US$50,000.
May be, the blockchain technology in payment systems will be universally accepted someday. And if that happens -- Jack Dorsey has time and again said that bitcoin can be the native currency of internet -- crypto holdings can create wealth. Blockchain tech has multiple uses outside of the crypto space.
Cryptos have mounted a formidable challenge to the stock market. We have bitcoin and Ether exchange traded funds, S&P Dow Jones indices are tracking movements in prices of cryptos, and big banks in the US are allowing cryptocurrency investment exposure to their clients.
Cryptocurrencies are no longer on the fringes but have become a mainstream investment instrument. The answer to whether businesses should start accepting cryptocurrencies is open-ended.
This article borrows ideas from the views expressed by Kunal Sawhney, CEO of Kalkine Group, in his interview to Armando Roggio, senior editor for Practical Ecommerce and host of CommercoCo.commodity mining fed central bank bubble
“Culture As An Asset”
Rabobank: We’re In A Charlton Heston Movie, But Which One?
CAD climbs after FOMC, retail sales next
The Coming “Reversion To The Mean” Of Economic Growth
Household Net Worth Hits Record $142 Trillion, Up $31 Trillion Since COVID, But There Is A Catch…
Inflation Still Appears To Be Peaking, But For How Long?
This Has To Be A Mistake
All Eyes On Inventory
US Services PMI Plunges To 14-Month Low As Input Prices Soar
Fed Chair Jerome Powell Signals Taper Beginning in November, Rate Hike in 2022
Energy & Critical Metals11 hours ago
4 Hot Uranium Stocks to Buy Hyped By Reddit Retail Investors
Base Metals10 hours ago
Iron-Ore Price Collapse Hits Mining Stocks
Economics22 hours ago
“Culture As An Asset”
Articles22 hours ago
Bryah nabs strategic exploration ground around namesake project
Economics10 hours ago
The Coming “Reversion To The Mean” Of Economic Growth
Economics21 hours ago
All Eyes On Inventory
Economics21 hours ago
This Has To Be A Mistake
Articles19 hours ago
Drilling kicks Off and Uranium Analysis Planned at Benmara Battery Metals Project