Markets are set to drop this morning as the Fed “taper” announcement approaches. Market bulls spent the better part of Friday trying to hold 50-dma but failed. At the time of this writing, futures are down sharply point to steep losses at the open.
The sell off isn’t a surprise, as we have noted previously, given the more extreme length of time without a correction of 5% of more. September is historically a weak month, and there has been a steady drumbeat of corporate earnings warnings. While the retail sales numbers were strong, they were primarily a function of “back to school” shopping. Consumer sentiment remains soft, and market internals have been very weak.
The one thing that has remained incredibly strong has been the flow of money into equities this year which has been a literal “off the chart” record. Despite the weak opening this morning, unless something changes that flow of capital into equities, the current correction will likely not be very deep.
What To Watch Today
- 10:00 a.m. ET: NAHB Housing Market Index, September (74 expected, 75 in August)
- No notable reports scheduled for release
- President Biden will make his way to New York City for three days of meetings at the United Nations General Assembly. The president kicks things off with a bilateral meeting with UN Secretary-General António Guterres this evening. Biden will then speak to the assembly Tuesday and host a virtual COVID-19 Summit on Wednesday.
- Both the U.S. House of Representatives and the Senate return to Washington this afternoon with deadlines looming. The lawmakers want to avoid a government shutdown and pass the infrastructure deal by the end of the month. They also hope to avoid a government debt default and pass Biden’s package of social spending soon afterwards.
Will Market Bulls Buy The Dip?
As noted, the market is set to slide sharply at the open, but cracks of the 50-dma are not unprecedented. In March we saw a similar break that quickly recovered. As shown below, the market is oversold on a short-term basis with the TRIX indicator (lower-panel) approaching levels where decent entry points previously existed. Such does not mean the market can not go lower over the next few days, but the recent decline reduced much of the short-term risk. If the Fed disappoints this week with a more “hawkish” statement than anticipated we could well see a move lower. A more “dovish” statement, which we expect, will likely see a quick recovery.
With September wrapping up the “seasonally weak” period of the year, we are looking to start increasing our equity exposure opportunistically over the next couple of weeks. While 2021 will almost undoubtedly end on a positive note, the risks into 2022 continue to build.
Yields Are So Low, And That “Ain’t” Necessarily A Good Thing
“Charlie Bilello noted that the dividend yield of the S&P500 was at its lowest point since the stock market bubble of 2000. With the treasury bond market offering so little in interest rates, it begs the question: Is there anywhere to find yield today?
In his 2020 letter to shareholders, Buffett stated “Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.” We quote him extensively in our piece examining the inflation of the 1970s and believe the charts below tell the story with brutal clarity.” – Kailash Concepts
The S&P500’s dividend yield is approaching the lowest level in over 40 years. Unfortunately, yield-starved investors seeking income have few alternatives.
In the dot.com bubble, you could buy risk-free 10 year Treasury Bonds with ~7% interest payments. Today, those same bonds offer virtually no return for record duration risk.
“These dismal bond yields have investors chasing returns in the most expensive equity market in history. One that also offers all-time low dividend yields.
The timing could not be worse. With over 10,000 Americans turning 65 every day, we are reminded of legendary value Investor Jean-Marie Eveillard. He once quipped, “Life’s bills do not come at market tops.” We believe these are times for avoiding the behavioral errors that have plagued investor returns where people crowd in at the highs and panic out at the lows.”
University of Michigan Sentiment Survey
After last month’s plunge, the University of Michigan Consumer Sentiment Survey was stable at 71.0, up slightly from last month. The index is well off the 110-120 rate it was running at for most of 2018 and 2019. Of focus, one year expected inflation seems to be stabilizing albeit at a high 4.7% rate. Longer-term 5-10 year expectations are 2.9%. Per the survey, inflation concerns are spreading to a broader chunk of the population. Consider the following quote: “over the past few months, complaints about rising prices have increased among younger, richer, and more educated households“
Excess Cash No More
On many occasions this year we noted how the Treasury is carrying excessive levels of cash. The graph below shows the spike in cash due to the massive pandemic-related debt issuance and slow-to-follow spending. Federal spending has caught up, and cash balances are back to normal. The result will be an increase in the supply of Treasury debt. This dynamic is occurring at the same time the Fed is contemplating buying fewer bonds. Over the last six months, Treasury supply has not been a concern for the market due to large Fed purchases and reduced issuance. The supply/demand equation will change in the months ahead possibly pressuring yields higher.
Shipping Costs Soar
Is It Time To Buy The Dow?
The ratio of the Dow Jones Industrial Average to the NASDAQ is approaching levels last seen at the peak of the Tech Bubble. Favoring the Dow over the NASDAQ paid handsome dividends from 2000 to 2003. Are we nearing a similar opportunity? The composition of the Dow has changed over the last 20 years.
Unlike, the late 90s the Dow now has more tech exposure, like Microsoft at 5.7% of the index and SalesForce at 4.8%. It also holds Apple, albeit at a lesser weight. The Dow’s three top holdings, accounting for a fifth of the index. Those are UNH, GS, and HD. That compares to the NASDAQ’s top three holdings AAPL, MSFT, and AMZN account for nearly a third of the index. While the Dow has MSFT and other tech companies, a bet on the Dow is a bet against the world’s largest technology companies. Currently, the FAANG stocks driving the NASDAQ’s outperformance are considered both high growth and safety stocks. That narrative must change before the Dow has a fighting chance.
Crypto news: BlockFi partners with $437 billion investment fund; EY sponsors Chainlink ‘hackathon’ event
Cryptocurrency lending firm BlockFi has partnered with Neuberger Berman to offer crypto-based products to the US investment manager’s customers. BlockFi,…
Cryptocurrency lending firm BlockFi has partnered with Neuberger Berman to offer crypto-based products to the US investment manager’s customers.
BlockFi, along with Celsius and Nexo, is one of the crypto industry’s big three lending services. It made the announcement on Monday and revealed the joint venture will include the development of exchange-traded funds (ETFs) and “other traditional structures.
The partnership’s products and strategies will be formulated and delivered by a newly created entity called BlockFi Nb.
With the Mastercard and Bakkt collab news barely a day old, it seems we’re in institutional crypto adoption season, although that’s pretty much been the case for the past 12 months.
“We are witnessing a significant shift in investor sentiment towards digital assets, and we believe that digital assets should be considered in modern portfolios,” said Greg Collett, president of the joint venture.
Another casual Monday for crypto.
1) BlockFi launches partnership with $420+ billion firm
2) Facebook investing $10 billion into metaverse
3) Citi announces crypto infrastructure plans
4) Mastercard announces crypto cards
5) VanEck Bitcoin ETF launches tomorrow
— Yano (@JasonYanowitz) October 26, 2021
Neuberger Berman is a New York-based, 82-year-old independent investment management firm that looks after US$437 billion in client assets as of September 30. The firm’s main holdings reside in equities, fixed income, hedge funds and real estate.
Also making news: EY, Chainlink, GBTC, Uniswap, Rand Paul
• “Big Four” accounting firm Ernst & Young is sponsoring the Chainlink Fall 2021 Hackathon, running until Nov 28. The event gives crypto startups pitching opportunities with VCs.
• Grayscale’s GBTC (which is as close to a Bitcoin ETF as you’ll get in the US without actually being one), delivered better returns last week than the market’s new BTC ETFs.
• Decentralised exchange Uniswap is set to gain more exposure. Swiss digital asset issuer Valour is launching the first ever exchange-traded product (ETP) tracking the UNI token.
• US Republican Senator Rand Paul has stated that he thinks it’s possible Bitcoin could become the world reserve currency if more people lose faith in governments.
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Oil in wait-and-see mode, gold moves up
Oil consolidates at the highs Oil markets probed the upside overnight, helped along by another large spike in natural gas prices. However, oil lacked the…
Oil consolidates at the highs
Oil markets probed the upside overnight, helped along by another large spike in natural gas prices. However, oil lacked the momentum to maintain those intra-day highs as the US dollar started strengthening. With a lack of new headline drivers to sustain the moves. Brent crude finished 0.28% higher at USD 85.95 and WTI finished 0.50% lower at USD 83.75 a barrel, having traded as high at USD 85.35 intra-day. Asia has adopted a wait-and-see approach this morning, possibly on China nerves, leaving both contracts almost unchanged.
The US API Crude Inventories will be oil’s next volatility point, with a low print likely to lead to more price gains. However, the price action overnight does suggest that short-term upward momentum is waning as the trade gets ultra-crowded and the RSI indicators on both contracts remain overbought. Another 3 million barrel jump in inventories could spur some short-term long covering and see oil’s long-predicted sharp move lower finally occur to wash out some of the weak speculative longs. Once again though, I will reiterate that the overall environment for oil remains very constructive and any sharp sell-off is likely to see an equally sharp recovery. Of the two, WTI looks more vulnerable as it is more heavily traded by specs and Brent crude is more aligned to the international physical market.
The overnight highs at USD 86.70 and USD 85.40 a barrel for Brent and WTI form initial resistance. Trendline support at USD 83.40 and USD 79.70 a barrel should be the limit for any downside correction. Only a daily close below those levels suggests a deeper correction is possible.
Gold’s price action remains constructive
Gold staged another impressive rally overnight and there is no doubt that its price action is becoming more constructive towards further gains. Gold rose 0.85% to USD 1807.80 an ounce before some long-covering saw it fall 0.25% to USD 1803.20 an ounce in Asia. The rally is made more impressive by the fact that the US dollar has continued strengthening against the major currencies overnight. In contrast, US bond yields eased across the curve, and it looks like gold is taking its cues from them for now.
Gold has now recorded a daily close above USD 1800.00, and more importantly, the 100 and 200-day moving averages at USD 1793.50 and USD 1790.25 an ounce. One must respect the price action in these circumstances, especially when it appears not to be driven by fast-money gnomes. Therefore, gold has formed a nice layer of support between USD 1790.00 and USD 1800.00 now followed by USD 1780.00 an ounce. Initial resistance is at USD 1814.00 followed by the formidable zone of daily highs between USD 1832.00 and USD 1835.00 an ounce.
Gold continues to slowly but surely, form what appears to be the second shoulder of a longer-term inverse head and shoulders pattern. In the bigger picture, a rise through USD 1835.00 an ounce, would trigger the multi-month inverse head-and-shoulders technical pattern and swing gold’s outlook back to positive, targeting a move back above USD 2000.00 an ounce.
UK Faces ‘Plan B’ Peril: COVID Multiplies The Economic Threat
UK Faces ‘Plan B’ Peril: COVID Multiplies The Economic Threat
Authored by Bill Blain via MorningPorridge.com,
“T’was the best of times,…
UK Faces ‘Plan B’ Peril: COVID Multiplies The Economic Threat
“T’was the best of times, t’was the worst of times …”
The risks of Plan B and a further Covid Lockdown are multiplying. It will clearly impact markets, but the real economic effects of Covid combined with energy costs, supply chains and bleak company earnings forecasts may be pushing us towards stagflation anyway.
“How to address the biggest economic shock in 300 years?” asked UK Chancellor Rishi Sunak while doing his pre-budget politicking last week. Whatever you believe or don’t believe about Covid, Sunak is quite right to consider it at the centre of the on-going economic crisis. Markets should factor that reality accordingly – which boils down to a very simple question: how much will Covid force Central Banks and Governments to act to stabilise the global economy?
This week pay attention to the UK Budget on Wednesday on how Chancellor Sunak addresses the ongoing critical-care needs of the UK by stepping away from his previous “policy-mistake” sounding mention of austerity spending cuts and tax-rises to make noises about increased “levelling out” spending. Hanging over everything will be the question – how much more economic pain could Covid inflict?
It’s a tough question. A new lockdown would be economic suicide. The UK government plans to ride it out – but the history of the last 19 months says they won’t hesitate to make a U-Turn and institute Plan B if they think their credibility is on the line if the numbers of infections surge and the health service looks swamped. That’s a potential trade: should you sell UK stocks now on the likelihood the government will panic? (And buy-them back almost immediately as the Bank of England stops the noise about a rate cut and QE taper.)
But… another question is how much will rising infection numbers cause the economy to contract anyway? How much has confidence already been dented?
Here in Blighty, It’s a tale of two headlines:
Daily Telegraph: Coronavirus cases to slump this winter, say scientists.
The papers looks like it boils down to a political split – which may reflect the UK’s national pride in our venerable National Health Service. How much we are prepared to sacrifice to protect the sacred cow of the NHS has become a badge. The left-leaning, Labour supporting Daily Mirror is peddling one set of scientific views, while the daily journal of the Conservative Party, the Torygraph, finds another set of white-coats to quote.
What does the threat of Plan B or further lockdowns mean for the UK economy? A quick glance round the motorway service stations we stopped in yesterday shows many more people wearing masks, and I’ll be interested in how many people start working from again as the perceived threat level rises.
I wonder how rationally people consider the pandemic. The vector for the rise in infections is schoolchildren being children – their interactions will diminish this week due to mid-term holidays. Back in September, a British Medical Journal report (How is vaccination affecting hospital admissions and deaths?) said 84% of hospital admissions before July had not been vaccinated, although rates of vaccinated infections were rising – their conclusion was simple: unvaccinated people are 3 times as likely to go to hospital and 3 times more likely to die. There is a broad consensus the efficacy of vaccines wanes after 5-6 months – hence booster shots.
Maybe the best way to move forward is the Swedish solution of taking personal responsibility to rising infection numbers? However, research in the Guardian earlier this year suggests that strict-lockdown Denmark and easy-going Sweden experienced similar levels of economic dislocation, but Sweden suffered a death rate 5 times higher than Denmark! It’s down to behaviour – Sweden kept the schools, offices, shops and pubs open, but people got careful, stopped going out and kept the kids at home anyway.
As the supply chain crisis continues, and energy prices go through the roof, we already know it’s going to be a tough holiday season – retailers warning of toy shortages and price hikes on scarce Turkeys. It impacts consumer behaviour – we all want to spend, but if we can’t because of rising prices and falling incomes, and it feels dangerous to do so – then what effect does that have on spending patterns? It’s got to be negative.
We’re seeing the supply chain effects beginning to hit corporate results – an increasing number of firms have been giving lacklustre holiday earnings guidance. Intel took a spanking last week on the back of expectations of a downbeat outlook. Snap got pummelled on the back of a disappointing Q3 number. This week is big for Big Tech earnings – and names from Apple to Amazon could be pummelled by supply chain shortages and the problems these cause meeting holiday demand.
Headlines about a downbeat Apple sales forecast have consequences – not just in making global consumers a little more depressed about the future.
The very first thing junior economists learn about is multiplier effects – on consequences as lay-people call them. A company finds it can’t get it full allocation of Christmas units to sell so it cuts advertising, cuts stuff overtime and starts planning to cut investment in new plants, warehouses and future spending. Repeat over the whole economy, and with everyone with less in their pockets… as “transitory” inflation feels increasingly permanent, and you’ve got a perfect recipe for stagflation.
I often get accused of being a misery-guts and far too negative about the state of the global economy. My own market mantras include the classic: “Things are never as bad as you fear, but never as good as you hope”.
Think about that for a moment. Covid caused the greatest economic downspike in 300 years, but the actions of swift government interventions to prop up commerce and fuel consumer spending kept the global economy functional, but wobbly. The markets quickly began to anticipate recovery and upside – yet these remain vulnerable to the news and perceptions around this Coronavirus.
Covid fears are multiplying again. Renewed Covid instability on the back of lockdown news from China, Europe, Australasia, wherever, will continue to roil markets. Supply chains remain fractured and the consequences of the virus effects on the global economy will continue.
Get used to it…
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