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The Market is Deeply Oversold And Looking For A “Dovish” Fed

As we will discuss, the market is deeply oversold and looking for a "dovish" Fed to spark buying. Traders and investors will be laser-focused on the Fed…

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This article was originally published by Real Investment Advice

As we will discuss, the market is deeply oversold and looking for a “dovish” Fed to spark buying. Traders and investors will be laser-focused on the Fed meeting adjourning at 2 pm ET. Of importance, the decision on taper and their characterization of the economic recovery and inflation. If they do elect to announce a taper schedule, the pace of tapering and any caveats that may delay tapering will be of utmost importance.

Like yesterday markets are opening up a half to one percent higher. Will they hold onto the gains, unlike yesterday? The answer likely lies with the Fed at 2 pm.

What To Watch Today

Economy

  • 7:00 a.m. ET: MBA Mortgage Applications, week ended September 17 (0.3% during prior week)
  • 10:00 a.m. ET: Existing home sales, month-over-month, August (-1.7% expected, 2.0% in July)
  • 2:00 p.m. ET: FOMC policy decision

Earnings

Pre-market

  • 7:00 a.m. ET: General Mills (GIS) is expected to report adjusted earnings of 89 cents per share on revenue of $4.30 billion

Post-market

  •  4:10 p.m. ET: KB Home (KBH) is expected to report adjusted earnings of $1.62 per share on revenue of $1.57 billion
  • 5:05 p.m. ET: BlackBerry (BB) is expected to report adjusted losses of 7 cents per share on revenue of $166.80 million

Politics

Market Deeply Oversold – Looking For Some “Dovish” Tones

The rolling correction over the last 3-weeks has pushed the market into deeply oversold conditions on a short-term basis. Such provides plenty of “fuel” for a decent rally over the next month or two given some news to spark buying. Today, the Fed could do the trick with Jerome Powell delivering his post-FOMC press conference with a “dovish” tone. With Congress battling over the debt ceiling, the Treasury running out of money, and the risk of a Government “Shutdown” looming, the Fed has all it needs to provide plenty of “caveats” to its “taper” plans.

Fear Greed Index Near Lows

Another reason for near-term bullish optimism, is that both the AAII bullish allocation and the “Fear/Greed” index are near their respective lows. Combined with the oversold market conditions, such typically provides a buying catalyst as traders reposition themselves in equity risk.

Trading Game Plan for the S&P 500

The markets are trading well in overnight trading following yesterday’s flat-trading day. The bounce provides us with another set of levels, in addition to the 50, 100, and 200-dmas, to guide our trading. The graph below shows the Fibonacci retracements from the recent high to low. If this rally proves to be a bull trap, it is likely to give up between the 38% retracement (4395) and the 62% retracement (4451). There is also a gap between 4400 and 4430.

It is common for such gaps to fill and then reverse direction. If the market surges higher through the gap and retracement levels, the outlook becomes more bullish. A rally above the 4451 retracement level and well through the 50dma (4436) will likely lead to new highs. Conversely, the 50 dma (4436) may prove to be resistance. The first line of support is yesterday’s lows and the 100dma (4328). A break of the recent low leaves a target of 4106, the 200dma.

Follow Up to Monday Market Mayhem

Easy Lending Standards

Employment and inflation tend to get the headlines as far as rationales for the Fed to take action. As we consider what the Fed may do tomorrow, we should also consider lending standards. The graph below shows the lending standards for large banks’ credit card customers are as easy as they have been in 20 years. On its own, very easy lending standards, as we have, push the Fed toward a more hawkish stance. Easy borrowing conditions incentivize personal consumption. More consumer activity, especially given current supply line problems, is likely to further agitate inflationary conditions.

Chinas & Evergrande. Will They or Won’t They?

In addition to concerns with China, Evergrande, and possible contagion, the markets are also grappling with Wednesday’s Fed meeting. In what was likely a purposeful leak last week, the WSJ laid the groundwork for a taper announcement Wednesday and the reduction in asset purchases in November. With the U.S. and foreign markets skidding yesterday some are asking how the Fed might react. In a Bloomberg interview, ex-New York Fed President, Bill Dudley, warns “They’re not going to react to small market moves and defer the tapering on that basis. They have to change their economic forecast,” he said Monday during an interview on Bloomberg Television with Lisa Abramowicz, Tom Keene and Jonathan Ferro. “At this point, it’s really premature to reach that conclusion.”

The post The Market is Deeply Oversold And Looking For A “Dovish” Fed appeared first on RIA.

Economics

Slowing Down, Yes, But To What?

A couple of Economists have caused some noise by reviewing consumer confidence estimates in the United States, associating big declines in them with imminent…

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A couple of Economists have caused some noise by reviewing consumer confidence estimates in the United States, associating big declines in them with imminent recession, and then pointing out such substantial drops in both of the major consumer sentiment surveys just recently. If valid, their correlations would seem to suggest a US contraction.

We’re meant to take these seriously for one of those academics, David Blanchflower of Dartmouth, had once “set interest rates at the BOE during the 2008 financial crisis.” Hardly a good place to start winning converts.

He and his co-author Alex Bryson of UCL are pretty adamant:

The economic situation in 2021 is exceptional, however, since unprecedented direct government intervention in the labor market through furlough-type arrangements has enabled employment rates to recover quickly from the huge downturn in 2020. However, downward movements in consumer expectations in the last six months suggest the economy in the United States is entering recession now.

The Conference Board’s more optimistic measure has indeed become far less lofty very quickly. And while the University of Michigan’s sentiment index never rebounded near as much, it has likewise fallen backward when it should be surging in recovery. The latter’s newly released preliminary assessment for October 2021, increasingly free from delta COVID’s influences on governments, wasn’t good; slightly lower after a slight gain in September.

Scraping along the bottom:



Whether this means recession or not may be beside the point. What is the point is how even academic Economists can’t help but notice how the US and global Economy is not in any shape like what’s been said all year and predicted for the rest. I seem to recall the term “red hot” being thrown around by unassailable luminaries as if a certainty.

The economy certainly had accelerated earlier but not for economic reasons; the non-economic interference of global fiscal policies, especially those of the US federal government.

Typically, academics see such intervention as thoroughly positive not just in the short run more so believing these programs dependably contribute much to the intermediate and longer-term trajectory – even as experience consistently shows they never do.

Since April or May, a global slowdown at first denied has slowly become practically undeniable as more and more the weak data comes back and sticks around. This is also true of “inflation”, the other side of transitory, the downslide of the camel humps in whichever consumer, producer, or now trade price index.



The third of the BLS’s series after first the CPI then next PPI is import prices, along with export prices. Even the latter, export prices, which have been more impressive than the far less impressive import index (though it might seem from mainstream commentary it would be the other way around), these indices are more clearly bending.

Toward what? Recession?

Not necessarily. Given consumer confidence as well as more substantial indications like real yields (TIPS; see: below), it may be a more reasonable question to ask whether or not the global economy ever actually got out of the last one.

If that’s really the case, then for all Uncle Sam’s efforts all it did was fool people into believing inflation and recovery (which many, maybe the vast majority still believe) when in fact those weren’t really happening. That technically makes this current weak spot at least a slowdown, but more appropriate one toward an economy merely reverting to its actual economic state increasingly unbound by non-economic interventions.



The growing response to the downshift is somewhat interesting; “everyone” is beginning to sense and admit the weakness, but they won’t let go of the inflation. Therefore, more and more the term stagflation is being thrown around regardless of the recession question – because people have been led to believe inflation is something it is not.

As I noted recently, however, if this really is serious and enduring weakness, a reversion back to the non-recovery state, the type of “flation” has already been decided.

The Economist considers this as higher potential for “stagflation”, a term popularized during and about the Great Inflation of the 1970’s. It also made a comeback around 2010 and 2011 – not that anyone remembers now. Quite simply, without the money for inflation what’s left is just the stagnation; which very succinctly and accurately describes the decade which followed 2010 and 2011.

Is this time really different? So far, the stagnation is proceeding almost as if right on schedule; the non-central bank schedule.

No need to call it stag-deflation because that’s just redundant. In other words, as the renewal of stagnation grows larger on the horizon, settling the label’s other half is already being taken care of.

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Economics

China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

One week ago we discussed why the "worst case" scenario for China’s…

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China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

One week ago we discussed why the "worst case" scenario for China's property crisis is gradually emerging; to this we can now add that China's worst case energy crisis scenario is also about to be unleashed as cold weather swept into much of the country and power plants scrambled to stock up on coal, sending prices of the fuel to record highs.

Electricity demand to heat homes and offices is expected to soar this week as strong cold winds move down from northern China, according to Reuters with forecasters predicting average temperatures in some central and eastern regions could fall by as much as 16 degrees Celsius in the next 2-3 days.

Shortages of coal, high fuel prices and booming post-pandemic industrial demand have sparked widespread power shortages in the world's second-largest economy. Rationing has already been in place in at least 17 of mainland China's more than 30 regions since September, forcing some factories to suspend production and further disrupting already broken supply chains.

On Friday, the most-active January Zhengzhou thermal coal futures closed at a record high of 2,226 per tonne early. The contract has risen almost 200% year to date.

China's three northeastern provinces of Jilin, Heilongjiang and Liaoning - also among the worst hit by the power shortages last month - as well as several regions in northern China including Inner Mongolia and Gansu have started winter heating, which is mainly fuelled by coal, to cope with the colder-than-normal weather.

Meanwhile, even though Beijing has taken a slew of measures to contain coal price rises including raising domestic coal output and cutting power to power-hungry industries and some factories during periods of peak demand, so far all measures have failed with coal surging by 40% in just the past three days. Beijing has also repeatedly assured users that energy supplies will be secured for the winter heating season, and went so far as to order energy firms to "secure supplies at all costs." Well, the energy firms heard it, because on that day, thermal coal closed at 1,436 yuan. Two weeks later it is some 800 yuan higher.

Unfortunately for Beijing, the power shortages are expected to continue into early next year, with analysts and traders forecasting a 12% drop in industrial power consumption in the fourth quarter as coal supplies fall short and local governments give priority to residential users.

Earlier this week, we reported that China undertook its boldest step in a decades-long power sector reform when it allowed coal-fired power prices to fluctuate by up to 20% from base levels from Oct. 15, enabling power plants to pass on more of the high costs of generation to commercial and industrial end-users. read more

Steel, aluminium, cement and chemical producers are expected to face higher and more volatile power costs under the new policy, pressuring profit margins.

Meanwhile, the latest Chinese "data" on Thursday showed factory-gate inflation in September hit a record high; but since thermal coal is the one commodity that correlates the closest to PPI, absent a sharp drop in coal prices in the next few weeks, expect the next PPI print to be far higher. Meanwhile as the power crisis leads to further shutdowns in domestic production, some banks - such as Nomura - have gone so far to predict that China's GDP is set to shrink in coming quarters.

China, which laughably aims to be "carbon neutral" by 2060 even as its president announced he will skip the COP26 UN Climate Change Conference in Glasgow, has been "trying" to reduce its reliance on polluting coal power in favor of cleaner wind, solar and hydro. But coal remains the source for some 70% of China's electricity needs.

Of course, China is not the only nation struggling with power supplies, which has led to fuel shortages and blackouts in many European countries. and threatens to send US heating bills up as much as 50% this winter. he crisis has highlighted the difficulty in cutting the global economy's dependency on fossil fuels as world leaders seek to revive efforts to tackle climate change at talks next month in Glasgow.

China will strive to achieve carbon peaks by 2030, Vice Premier Han Zheng said in a video message at the Russian Energy Week International Forum, according to state-run news agency Xinhua late on Thursday. He also said that China and Russia are important forces leading the energy transition and they should cooperate and ensure smooth progress of major oil and gas pipeline and nuclear power projects.

Translation: Russia better save that nat gas and not ship it to Europe as China will soon be needed even BCF Russia an provide. As for China

 

Tyler Durden Fri, 10/15/2021 - 22:50
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Economics

Aluminum Shortages Next As “Magnesium Supply Dries Up”

Aluminum Shortages Next As "Magnesium Supply Dries Up"

This week, the largest US producer of aluminum billet used to make automobiles and…

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Aluminum Shortages Next As "Magnesium Supply Dries Up"

This week, the largest US producer of aluminum billet used to make automobiles and building supplies told customers and business associates that output capacity might be curtailed in 2022 due to a lack of magnesium supply.

"In the last several weeks, magnesium availability has dried up, and we have not been able to purchase our required magnesium units for all of 2022," Matalco Inc. President Tom Horter said in the letter obtained by S&P Global Platts

Difficult-to-source supplies of raw materials and soaring energy prices are adding to the headwinds, Horter said in the letter. 

"The purpose of this note is to provide this advanced warning that, if the scarcity continues, and especially if it becomes worse, Matalco may need to curtail production in 2022, resulting in allocations to our customers," he said. 

Horter said his company will source as much magnesium as possible and other raw materials, such as silicon, to maintain its planned production output for 2022. The warning comes as he told customers they should have contingency plans if supplies tighten. 

Aluminum billet cannot be produced without magnesium, which is a strengthening agent and allows it to be strong enough to be used in structural applications, such as automobile frames, engine blocks, and body panels. 

"We will provide an update in a couple of weeks," Horter said. "In the meantime, you may want to consider letting your customer base know of this silicon and magnesium availability crisis and also let them know that other products or inputs needed for making billet or slab may also reach a crisis point."

Horter added other challenges such as the cost of energy, labor, and shipping are increasingly mounting. 

Alcoa is another major US aluminum producer that also warned about shortages of magnesium and silicon. Without these two ingredients, both manufacturers cannot produce aluminum billet products. A reduction in US output would tighten global supply even further. 

The macro backdrop of the aluminum industry is a complicated one. First, a military coup in Guinea last month stoked concerns over the supply of bauxite, a sedimentary rock with high aluminum content. Then the closure of energy-intensive smelters in Asia and Europe have tightened global supplies and forced LME prices to record highs. 

The latest surge in industrial metals will continue to pressure inflation higher. 

So much for the Federal Reserve's "transitory" narrative. Higher costs will push up prices for new cars and other products made of aluminum.

Tyler Durden Fri, 10/15/2021 - 22:10
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