Is Stock Market Decline Done for Now?

A decline of -10% or more from the most recent peak is considered a “correction”.

Some Wall Street bulls are noting a decline in bond yields yesterday that they believe indicates the recent selloff may have played itself out. Bears, however, suspect the yield dip is just a blip on the radar with many still predicting 10-year yields will top +2% by the end of the first quarter and perhaps ultimately push towards 2.3% to 2.55 before topping out.

“Bubbles” driven by the Fed’s easy-money policies

The pullback in stock prices has created a more “risk off” mentality that has also bled into other alternative assets like cryptocurrencies that bears believe are massive “bubbles” driven by the Fed’s easy-money policies.

New and ongoing issues that threaten to contribute or extend existing inflationary pressures in 2022 have led to some dramatic recalculations of the Federal Reserve’s upcoming tightening cycle, in turn increasing the downward pressure on more rate-sensitive stocks.

As recently as early-December, most Wall Street insiders were anticipating the Fed would increase rates four times, in increments of 25-basis points. Now, expectations are growing for two hikes of 50-basis points, along with perhaps two hikes of 25-basis points. There has also been some speculation that the initial rate hike, which is expected in March, could be one of the larger 50-basis point moves, an outcome that some worry could send shockwaves through global financial markets.

Another dramatic shift is the expectation that the Fed will begin reducing its nearly $9 trillion balance sheet this year, which Wall Street at one point expected to begin no sooner than 2024.

The Fed meets next week on January 25-26. Ahead of that, investors are anxious to see policy updates from other global central banks, starting today with Bank of Canada, then the European Central Bank on Friday. Bank of Canada is widely expected to hike its benchmark interest rate amid unrelenting inflation similar to what we’ve witnessed in the U.S.

The ECB, on the other hand, is expected to maintain its current policy, with most officials still betting inflation will recede with the pandemic. Unfortunately, current signs point to even higher global energy prices ahead, which will ultimately translate to higher gasoline prices for consumers, as well as higher operating costs for businesses that will also likely get passed along.

Oil prices rose again yesterday after a pipeline explosion that will temporarily halt some exports added to existing disruptions and global supply concerns.

The latest data shows that global oil inventories have continued to shrink into 2022 as several OPEC+ members struggle to meet their production increases.

Data to watch

Today, economic data includes the Philadelphia Fed Index and Existing Home Sales for December. It’s worth noting that December Housing Starts and Permits data released yesterday both came in far above trade expectations.

November numbers were also revised upward. Earnings releases include American Airlines, Baker Hughes, CSX, Netflix, PPG, The Travelers Company, and Union Pacific. Next week we’ll start getting into the big tech giants and other corporate bellwethers like Apple, Boeing, Caterpillar, IBM, McDonalds, Microsoft, Tesla, and Verizon.

Some bullish insiders suspect good results from just a few of America’s leading companies could lure investors back in, possibly setting the stage for a massive rebound, especially if the Fed delivers a less hawkish than expected policy update next week.

On the flip side, many are worried that if Apple, Microsoft, or Tesla were to roll over it could trigger a sizable selloff. I think we are clearly at an inflection point with the Fed changing direction and over 40% of our fund and money managers being too young to ever trade or invest in both a rising rate and rising inflation environment. It will be interesting to see how some chose to navigate these waters.

BHP listing shift set to trigger funds rush

By Tom Westbrook

SYDNEY (Reuters) – A change in corporate structure at BHP Group is likely to unleash a wave of selling in London and an even bigger buying surge in Sydney, with investors braced for a potentially bumpy end to the world’s biggest listed miner’s dual listing.

Shareholders on Thursday approved a company proposal to abandon a two-decade-old structure with listings in London and Sydney in favour of a single primary listing in Australia as part of a sweeping overhaul of BHP founded 137 years ago as Broken Hill Proprietary in Australia.

BHP Group Plc will drop out of the FTSE 100 and other related indexes, while beefing up the size and value of the Australian listing from January 31, when the changes take full effect.

The plan, unveiled in August last year, aims to make it easier for BHP to allocate capital and analysts expect it foreshadows future acquisitions and dealmaking.

The Australia-listed entity will swell from about 6.5% to comprise 10.7% of the S&P/ASX 200 index, based on an estimate from financial services firm Wilsons Advisory.

That means index-tracking funds will need to sell BHP in London and buy more of it in Sydney and possibly quickly, brokers said, while active managers who wish to remain overweight will also need to add eventually.

“Everyone’s trying to work out if the market is long or short (Australia-listed) BHP Ltd, come implementation day,” said John Lockton, head of Australian equities at Wilsons Advisory in Sydney.

He expects buying in Australia “will swamp forced selling” in London. “I think for the most part it will basically happen on the day, but there will be some trying to pre-empt … after (Thursday’s) vote,” he added.

The deal could prompt the sale of about 140 million London-listed shares – worth 3.5 billion pounds ($4.8 billion) at Wednesday’s closing price – based on an estimate by advisory firm Grant Samuel in a report commissioned by BHP.

Wilsons estimates probable buying of between 90 million and 250 million shares in Sydney.

BHP has yet to announce the results of its shareholder vote, although proxy tallies show that scrapping the dual listing won overwhelming support. It had been unanimously recommended by the company board. BHP was not immediately available for comment on Thursday.

BIGGER AUSTRALIAN

S&P Dow Jones Indices had said it will increase BHP’s weighting in the ASX 200 on Jan. 31 and FTSE Russell has said it will delete BHP from its UK index series on the same day.

There are signs some investors have moved in advance.

A discount on the London shares has evaporated in recent months as investors have bought into the cheaper stock ahead of its conversion into Australia-listed shares.

Passive investment giant Vanguard, already the biggest owner of BHP’s Australian shares, said it will be able to purchase London stock ahead of Jan. 31 on behalf of Australian funds.

Short interest in the Aussie shares has also more than doubled to 9.5% since plans for the corporate structure changes were announced last August, based on regulatory data. Turnover has increased, possibly as funds buy in but hedge against any hitches in the deal.

“I’d expect that to unwind pretty quickly,” said Mathan Somasundaram, chief executive of Sydney-based research firm Deep Data Analytics

When the dust settles, index funds will also be owning a re-shaped ASX 200 with even more exposure to resources and especially iron ore and its biggest buyer – China.

“It reinforces the value nature of that equity bourse versus something like the Nasdaq,” said George Boubouras, head of research at K2 Asset Management in Melbourne, a BHP shareholder, referring to the concentration of miners and financials which account for more than half the index.

“It may be the type of equity bourse you want to be holding in calendar 2022 in a global rising interest rate environment.”

($1 = 0.7338 pounds)

(Reporting by Tom Westbrook. Editing by Jane Merriman)

U.S. insurer Travelers posts record profit on investment returns

(Reuters) – Property and casualty insurer Travelers Cos Inc reported a record quarterly profit on Thursday as higher returns from its investments cushioned the hit from a rise in catastrophe-related claims.

The New York-based company, a component of the Dow Jones Industrial Average Index, is seen as a bellwether for the insurance sector as it typically reports before its peers.

The insurer said it earned a core income of $1.29 billion, or $5.20 per share, in the fourth quarter ended Dec. 31, compared with $1.26 billion, or $4.91 per share, a year earlier.

Analysts on average had expected a profit of $3.86 per share, according to Refinitiv IBES data.

Travelers’ pre-tax net investment income jumped 10% to $743 million, driven by higher returns on its private equity and real estate partnership.

Its net written premiums rose 10% to $7.9 billion.

Travelers said the catastrophe losses it incurred in the quarter mainly stemmed from tornado activity in Kentucky, windstorms in multiple U.S. states and a wildfire in Colorado.

Devastation from tornadoes that slammed parts of the United States in December are expected to push the insurance industry’s 2021 bill for weather-related claims well above the predicted $105 billion, industry experts have said.

Travelers reported a combined ratio of 88%, compared with 86.7% a year earlier. A ratio below 100% means the insurer earned more in premiums than it paid out in claims.

(Reporting by Noor Zainab Hussain in Bengaluru; Editing by Aditya Soni)

Stocks slip in Europe as investors refine Fed hike bets

By Huw Jones

LONDON (Reuters) – European stocks fell on Thursday as cautious investors continued to assess how far and fast the U.S. Federal Reserve will begin raising interest rates this year.

Also keeping a lid on risk taking were the tech-laden U.S. Nasdaq entering correction territory on Wednesday, a sell-off in bonds, still elevated crude oil prices and increased political tensions over Ukraine.

But Chinese stocks were a bright spot after the country cut benchmark mortgage reference rates to ease pressure on its property sector.

The STOXX index of 600 European companies was down 0.17% at 480 points, below its life-time high of 495.46 points hit in the first week of trading this year. Blue-chip indexes in Frankfurt, Paris and London were all lower.

Gains in Asia helped to counter the pullback in Europe to keep the MSCI all country stock index in positive territory, up 0.16% at 728 points, but still down about 3.8% so far this year.

“There is a tonne of caution now,” said Seema Shah, chief strategist at Principal Global Investors.

“The key factor that markets are thinking about is Fed tightening,” she said.

Rising U.S. interest rates could dent global growth prospects and the earnings outlook for international companies.

A Reuters poll of economists showed they expect the Fed to tighten monetary policy at a much faster pace than thought a month ago to tame high inflation.

Shah said the year opened with elevated valuations in markets and the sell-off in bonds since then has fuelled a growing sense of caution as markets ask if they have priced in enough Fed rate hikes.

“That’s what’s driving a lot of the caution at the moment. Even with four hikes, the question is, is that enough and should we get ahead of this continued forecasting that we have been seeing,” Shah said.

European Central Bank head Christine Lagarde said euro zone inflation will decrease gradually over the year, adding that the ECB did not need to act as boldly as the Fed because of a different economic situation.

Analysts said global growth still remained solid but investors wanted reassurance of that in the earnings season now unfolding.

ASIA PERKS UP, UKRAINE EYED

Asian share markets broke a five-day slide, pushing higher on Thursday as China underscored its diverging monetary and economic picture by cutting benchmark mortgage rates.

China’s blue-chip CSI300 index rose 0.9% on the day. Shares of Chinese property developers boosted gains in the broad index amid hopes that government measures would help ease a funding squeeze in the embattled sector, even as another developer warned of default.

Seoul’s Kospi rose 0.7% and Australian shares gained 0.14%. In Tokyo, the Nikkei added 1.11%.

Analysts at ING said geopolitical risks, notably the possibility of Russia invading Ukraine, could continue to weigh on global shares, adding to existing pressure from the rising rates outlook.

U.S. President Joe Biden predicted on Wednesday that Russia will make a move on Ukraine, saying a full-scale invasion would be “a disaster for Russia” but suggesting there could be a lower cost for a “minor incursion.”

“Markets may soon start to take into account a greater risk of a conflict flare-up between Russia and Ukraine, which is one reason why stocks may continue to sell and why Treasury yields aren’t on a one-way ticket higher,” ING said.

Fed rate hike worries pushed U.S. Treasury yields to two-year highs on Wednesday, and taking Germany’s 10-year yield into positive territory for the first time since May 2019.

On Thursday U.S. yields edged up, but remained below their highs in the previous session.

The benchmark U.S. 10-year yield rose to 1.839% from a U.S. close of 1.827%, and the policy-sensitive two-year yield touched 1.0433% compared with a U.S. close of 1.025%.

The pause in Treasury yields’ march higher kept the greenback in check, with the dollar index, which measures the greenback against six major peers, edging down to 95.527 as commodity currencies benefited from high oil prices.

The U.S. dollar traded little changed against the Japanese yen at 114.21 and, and rose 0.06% against the euro to $1.1350.

In commodity markets, oil prices eased off elevated levels after touching their highest levels since 2014 on Wednesday on strong demand and short-term supply disruptions.

Global benchmark Brent crude was last down 0.9% at $87.58 per barrel and U.S. crude fell 0.3% to $86.68 per barrel. [O/R]

Gold paused after marking its best session in three months a day earlier. Spot gold was little changed at $1,840 an ounce.

(Additional reporting by Andrew Galbraith; Editing by Simon Cameron-Moore, Gerry Doyle and Susan Fenton)

E-Mini Dow Rebounds Overnight after China Cuts Key Rates

March E-mini Dow Jones Industrial Average futures are edging higher Thursday after recovering from earlier weakness as China cut its key lending rates. The news fueled a rally in the Asian stock markets with Hong Kong’s Hang Seng index jumping 3% as property and tech stocks rebounded. This move encouraged U.S. short-sellers to cover their positions.

At 05:07 GMT, March E-mini Dow Jones Industrial Average futures are trading 35091, up 181 or +0.52%.

On Wednesday, the Dow fell for a fourth day in a row as investors continued to react to a spike in 10-year Treasury note yields to a two-year high of 1.90%. It started the year at about 1.5%.

In stock related news, Boeing Co lost 3.52%. Caterpillar Inc was off by 3.10% and American Express Co fell 2.88%.

In economic data, investors are expecting numbers on jobless claims and existing home sales Thursday.

Daily March E-mini Dow Jones Industrial Average

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through the intraday low at 3858 will signal a resumption of the downtrend. A move through 36390 will change the main trend to up.

The main range is 33000 to 36832. The E-mini Dow is currently testing its retracement zone at 35046 to 34625. This zone is controlling the near-term direction of the market.

The minor range is 36390 to 34858. Its 50% level at 35624 is the first upside target and potential resistance.

The short-term range is 36832 to 34858. Its retracement zone at 35845 to 36078. Is the last potential resistance before the 36390 main top.

Daily Swing Chart Technical Forecast

The direction of the March E-mini Dow Jones Industrial Average futures contract on Thursday is likely to be determined by trader reaction to 34910.

Bullish Scenario

A sustained move over 34910 will indicate the presence of buyers. The first upside target is 35046.

If taking out 35046 generates enough upside momentum then look for the rally to possibly extend into the 35624 pivot over the short-run.

Bearish Scenario

A sustained move under 34910 will signal the presence of sellers. Taking out 34858 will indicate the selling is getting stronger. This could trigger a further break into 34625, followed by 34547.

The main bottom at 34547 is a potential trigger point for an acceleration to the downside with 33860 the next likely downside target price.

For a look at all of today’s economic events, check out our economic calendar.

Inflation at a 40-year High, Risk-off Market Sentiment, and Geopolitical Uncertainty Create a Perfect Storm Scenario for the Precious Metals

Three primary concerns have elevated the bullish market sentiment that has already been in play in the precious metals markets, today however it seemed as though these concerns were magnified.

The primary concern is the current level of inflation in the United States which according to the most recent data provided by the government is at 7%. The last time inflationary pressures were this high was in 1982, 40 years ago. Also, market participants are focusing on inflationary concerns in regards to upcoming action by the Federal Reserve at the upcoming FOMC meeting which will begin on Tuesday, January 25, and conclude exactly a week from today. Lift-off, a term used to describe the initiation of interest rate hikes is almost a certainty.

Fedwatch tool

It is assumed that the Federal Reserve will announce the date they will begin lift-off at next week’s FOMC. According to the CME Group’s FedWatch tool, the probability that the first-rate hike will occur in March of this year is 94%.

Unquestionably, U.S. corporations have become addicted to borrowing money for free. The realization that this monetary policy that was enacted by the Federal Reserve to rebuild the economy in the United States is coming to an end is now sinking in. U.S. equities have been under pressure and trading to lower values for four out of the last five trading days.

In the case of the NASDAQ composite since January 12, the tech-heavy index has lost just over 6% in value. The Standard & Poor’s has lost approximately 4.2% of value, and the Dow Jones industrial average has declined by approximately 3.61%.

Lastly, although only a small component of the recent shift in market sentiment of both U.S. equities and the precious metals markets is the geopolitical tension that is building as Russian troops continue to mount on the border of Ukraine.

Any of these three factors could have a dramatic impact on market sentiment for both U.S. equities and the precious metals markets. However, the combination of all three factors existing simultaneously has created a perfect storm environment moving the precious metals dramatically higher today.

Palladium gained 5.09% in trading today the largest percentage gain of the four precious metals traded on the futures exchange. After factoring in a gain of $96.90 palladium futures are currently fixed at $2001.50. Platinum futures gained 4.58% and after factoring in today’s gain of $44.90 is currently fixed at $1024.40. Silver futures gained 2.99% taking the most active March futures contract to $24.195, after factoring in today’s gain of $0.70. Lastly, gold futures basis the most active February contract is currently fixed at $1840.70 after gaining $28.30 or 1.56%.

Gold daily chart 19.01.22

All of the precious metals had strong upside breakouts today with gold blowing past the current resistance level of $1833. Our technical studies currently indicate that the next level of resistance comes in at $1851.60. The studies also indicate that the former resistance level could become the new support level at $1830.

For those who would like more information simply use this link.

Wishing you as always good trading and good health,

Gary S. Wagner

 

Earnings Season Brings Worries to Wall Street

What is wrong with the banking sector?

Goldman Sachs yesterday became the latest to fan worries about declining profit margins after the bank reported a +33% jump in compensation which contributed to a -13% decline in Q4 profits.

The escalating costs mirror similar results disclosed by fellow big banks JPMorgan and Citigroup, as well as numerous other companies that have already reported or issued earnings warnings in recent weeks.

Just over 4% of S&P 500 companies have released Q4 earnings, and about 60% of those have cited a negative impact from higher labor costs on current and/or expected future earnings.

10-Year Treasury yield

Stock prices are also facing headwinds from a big jump in bond yields. The 10-Year Treasury yield hit 1.88%, the highest since before the pandemic hit and up from a low of 1.36% in early December.

This is largely a reflection of the U.S. Federal Reserve’s more hawkish monetary policy shift that is widely expected to now bring four or five interest rate hikes in 2022. However, there is a lot of uncertainty surrounding the exact timing and degree of those hikes, with many on Wall Street worried that ongoing labor market tightness, supply chain disruptions, Covid-related shutdowns, and geopolitical tensions will continue to drive costs even higher.

That in turn would likely mean even more aggressive action from the Federal Reserve.

There’s a lot of talk that the 10-Year could eventually push to 2.3% or even 2.5%. the market had to deal with a similar jump in the 10-Year back in 2013 during the “Taper Tantrum” or when the Fed had to start reversing their easing policy that had been associated with the US housing crisis global market meltdown.

If you remember, the stock market went through a fairly rough patch that year as the Fed shifted policy but eventually the market selloff stabilized and stocks rebounded to have a good year. this time around, however, many Wall Street insiders are talking about how the double whammy of escalating costs and higher interest rates is driving a shift away from so-called “momentum” stocks and back toward old school investment fundamentals.

Meaning investors are turning away from hot, trendy stocks that have defied gravity-and lacked profits-in favor of companies with proven track records and good cash flows.

Inflation fears are also once again being exacerbated by the oil market with prices hitting a seven-year high, the highest level since October 2014. The latest jump stems largely from deteriorating relations between fellow OPEC members after Yemen’s Iran-aligned Houthi group attacked the United Arab Emirates overnight on Monday. A Saudi-led coalition retaliated with airstrikes on the Houthi group. The renewed tensions between the UAE and Saudi Arabia raise the risk of more disruptions to the already tight global oil supply outlook.

Data to watch

Today, investors will be digesting Housing Starts and Permits for December, both of which are expected to pull back slightly from last months results.

On the earnings front, today’s highlights include Alcoa, Bank of America, Discover, Fastenal, Kinder Morgan, Morgan Stanley, Procter & Gamble, State Street, United Airlines, United Health, and U.S. Bancorp.

I still think there’s some rough sailing and uncertainty in the waters ahead… Also keep in mind, the Nasdaq 100 is quickly approaching its 200-Day Moving Average. Bulls want to argue that we are going to see a big bounce higher once we test that level. Bears argue that a close below that level could bring on a wave of heavy computer based technical selling. I’m not sure who is going to come out correct but I expect we see some extremes as the battle plays out… stay nimble!

Think About This… Perhaps +40% of fund managers have never traded or invested in a rising rate and rising inflation environment.

For a look at all of today’s economic events, check out our economic calendar.

Investors Focus on the Next FOMC Meeting, 10-year Treasuries and Dollar Strength

This month’s FOMC meeting is scheduled to begin one week from today, on January 25, and conclude on the following day.

U.S. equities vis-à-vis the Dow Jones industrial average had its strongest decline this year. The Dow lost 542.42 points, a decline of 1.51%, and is currently fixed at 35,369.39 points. Yields on the U.S. 10-year Treasury Note gained 10.5 basis points taking the current yield to 1.877%, the highest level since January 2020. The 30-year Treasury bond gained 7.7 basis points taking the yield to 2.192%. The short-term two-year Treasury Note yield broke above 1%, the first occurrence of short-term treasury yields at this level in two years. Lastly, the U.S. dollar rose sharply in trading today, gaining 0.66% or 0.629 points taking the dollar index to 95.78.

U.S. equities, Treasury yields, and the dollar all reacted to the assumption that market participants are anticipating that the Federal Reserve will begin an aggressive series of rate hikes tightening their current accommodative monetary policy to curtail the spiraling level of inflation, which is currently fixed at 7% based upon government data released last week vis-à-vis the CPI (consumer price index).

On Tuesday, January 11, Chairman Jerome Powell speaking before the Senate banking, housing and urban affairs committee in regards to his re-nomination, said, “As we move through this year … if things develop as expected, we’ll be normalizing policy, meaning we’re going to end our asset purchases in March, meaning we’ll be raising rates over the course of the year. At some point perhaps later this year, we will start to allow the balance sheet to run off, and that’s just the road to normalizing policy.”

The Fed Chairman acknowledged that the Federal Reserve had greatly underestimated the speed at which inflationary pressures have risen and indicated that the monetary policy of the Federal Reserve needed to pivot in regards to their dual mandate, which had been focusing on maximum employment in lieu of their acceptable inflationary target of 2%.

The chairman said that it is appropriate to focus upon inflationary pressures at this point. As such, the expectations of rate hikes this year have dramatically changed, with market participants now factoring in three or four interest rate hikes this year.

Although multiple asset classes had strong reactions to the possible actions of the Federal Reserve next week, it was dollar strength that most affected gold prices today. As of 4:25 PM EST, gold futures basis, the most active February 2022 Comex contract, had a modest to fractional decline resulting in a loss of $3.10 or 0.17% and is currently fixed at $1813.30.

Gold daily chart

However, the three other precious metals which trade on the futures exchange all had moderate to strong price gains. Silver led the way with the most active March contract gaining 2.63%, fixing current pricing to $23.52. Platinum gained 1.58%, a net gain of $15.20 with the most active March 2022 futures contract fixed at $979.80, and lastly, palladium gained 1.11%, taking the most active March contract to $1899.

Kitco Gold Index

Gold pricing actually had fractional gains before factoring in dollar strength. This can be clearly illustrated by the KGX (Kitco gold index). As of 4:28 PM, EST spot gold is currently fixed at $1813.60, based upon normal trading adding $4.00 worth of value and dollar strength taking away $9.60.

Our technical studies indicate that the low achieved today in February gold futures which occurred at $1804.70, is just above a key and critical support level, which is based upon the 61.8% Fibonacci retracement level fixed at $1804.60. Our studies also indicate that current resistance is at $1833.30, ,mkbased on a 38.2% Fibonacci retracement level. The data set used for our retracements begins at $1758, the low of November 3, and concludes at $1879.50, the highs achieved on November 16.

Wishing you as always good trading and good health,

For those who would like more information simply use this link.

Gary S. Wagner

Goldman Weakness Sends Dow Toward 35066 – 34649 Target Zone

March E-mini Dow Jones Industrial Average futures fell sharply Tuesday as government bond yields hit COVID-era highs and after Goldman Sachs reported disappointing earnings.

Treasury yields posted strong gains after the cash market was closed Monday due to the Martin Luther King Jr. holiday. The closely watched 2-year yield broke above 1% for the first time since February 2020, the month before the pandemic declaration that sent the U.S. economy into recession. The 2-year Treasury is seen as a gauge of where the Federal Reserve will set short-term borrowing rates.

At 22:00 GMT, March E-mini Dow Jones Industrial Average futures are trading 35296, down 500 or -1.40%.

In stock related news, Goldman Sachs shares dropped nearly 7% on Tuesday after the bank missed analysts’ expectations for its fourth-quarter earnings. Goldman’s operating expenses surged 23% on increased pay for Wall Street employees.

Daily March E-mini Dow Jones Industrial Average

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through Tuesday’s low at 35135 will signal a resumption of the downtrend. The next main bottom is 34547.

A trade through 36390 will change the main trend to up. This is highly unlikely but due to the prolonged move down in terms of price and time, the market remains vulnerable to a closing price reversal bottom.

The main range is 33300 to 36832. Its retracement zone at 35066 to 34649 is the primary downside target area. This zone is controlling the near-term direction of the market. We could see a technical bounce on the first test of this area.

The new short-term range is 36832 to 35135. If there is a short-covering rally then its retracement zone at 35984 to 36184 will become the primary upside target.

Short-Term Outlook

The direction of the March E-mini Dow Jones Industrial Average early Wednesday is likely to be determined by trader reaction to 35296.

Bearish Scenario

A sustained move under 35296 will indicate the presence of sellers. This should lead to a quick test of 35135, followed by 35066.

Look for a technical bounce on the first test of 35066, but if it fails then look for the selling to possibly accelerate toward the Fibonacci level at 34649.

Bullish Scenario

A sustained move over 35296 will signal the presence of buyers. The first upside target is 35518. Overcoming this level could trigger a further rally into 35984 – 36184.

For a look at all of today’s economic events, check out our economic calendar.

The Week Ahead – Earnings, Central Bank Chatter and a Busy Economic Calendar in Focus

On the Macro

It’s a busy week ahead on the economic calendar, with 63 stats in focus in the week ending 21st January. In the week prior, 44 stats had been in focus.

For the Dollar:

Key stats include Philly FED Manufacturing and initial jobless claims due out on Thursday.

Other stats include NY Empire State Manufacturing and housing sector data. These stats should have a muted impact on the markets, however.

In the week ending 14th January, the Dollar Spot Index fell by 0.58% to 95.165.

For the EUR:

ZEW Economic Sentiment figures for Germany and the Eurozone will be the key stats early in the week.

Finalized December inflation figures for member states and the Eurozone in the week will also draw interest.

At the end of the week, however, expect Eurozone consumer confidence figures to also influence. The markets will be looking for the effects of rising consumer prices on sentiment.

On the monetary policy front, the ECB monetary policy meeting minutes are due out on Thursday, with ECB President Lagarde scheduled to speak on Friday.

For the week, the EUR rose by 0.44% to $1.1411.

For the Pound:

It’s an important week ahead on the economic calendar.

On Tuesday, claimant counts and the UK’s unemployment rate will be in focus.

Inflation and retail sales figures due out on Wednesday and Thursday will also be key, however.

The stats through the week should give the BoE the numbers it needs to decide what’s next on the policy front.

On the monetary policy front, BoE Gov. Bailey is scheduled to speak on Wednesday.

The Pound rose by 0.64% to end the week at $1.3675.

For the Loonie:

It’s a relatively quiet week ahead on the economic calendar.

Inflation figures will be in focus on Tuesday, ahead of retail sales and employment figures on Friday.

With the markets expecting a hawkish BoC, this week’s stats could seal the fate of the Loonie near-term.

The Loonie ended the week up 0.72% to C$1.2552 against the U.S Dollar.

Out of Asia

For the Aussie Dollar:

Westpac consumer sentiment and employment figures will be in focus. While consumer sentiment is important, expect the employment numbers to be key. Another sharp pickup in hiring could force the RBA to reconsider its current stance on cash rates.

The Aussie Dollar rose by 0.36% to $0.7207.

For the Kiwi Dollar:

Business confidence figures for the 4th quarter get things started on Tuesday. We have seen business confidence wane recently, so the markets will be expecting some weak numbers.

Of greater significance will be electronic card retail sales figures due out on Wednesday.

At the end of the week, Business PMI numbers will also draw interest, however.

The Kiwi Dollar ended the week up by 0.37% to $0.6804.

For the Japanese Yen:

It’s a relatively quiet week ahead. Key stats are limited to trade data on Thursday and inflation figures on Friday. We don’t expect the numbers to move the dial, however.

On Tuesday, the BoJ also delivers its first monetary policy decision of the year. No surprises are expected…

The Japanese Yen rallied by 1.19% to ¥114.190 against the U.S Dollar.

Out of China

It’s a big week, with 4th quarter GDP numbers due out on Monday. Expect the numbers to set the tone for the week. Disappointing growth figures could bring into question market optimism towards the global economic outlook.

Other stats on Monday include fixed asset investments, industrial production, and retail sales figures. Barring dire numbers, however, these should have a limited impact on the markets.

On the monetary policy front, the PBoC will also be setting loan prime rates on Thursday.

The Chinese Yuan ended the week up by 0.39% to CNY6.3528 against the U.S Dollar.

Geo-Politics

Nothing new to consider in the week ahead, with China and Capitol Hill and Russia continuing to be the key areas of focus.

COVID-19

COVID-19 news updates will remain a key area focus. Risk aversion could hit should a new strain of the virus appear in a developed economy.

Corporate Earnings

It’s also corporate earnings season, with a number of big names releasing results that could test support for riskier assets.

Gold Has Gained Value During 4 of the Last 5 Weeks

Gold daily chart

Gold continues to trade in a range-bound manner, but over the last five weeks, gold prices have gained value during four of those weeks. Although gold has traded lower yesterday and today, ending the week with a moderate gain of 0.6%. For the most part, we have seen gold trade through the eyes of the weekly chart with a succession of higher lows. What has been lacking is a series of higher highs based upon the high achieved in June 2022 when gold topped out at $1920.

KGX Index

U.S. equities had mild to moderate gains, with both the Standard & Poor’s 500 and the NASDAQ composite closing higher on the day. However, the Dow Jones industrial average did close lower by 0.56%.

For the most part, market participants and analysts have factored in a much more aggressive Federal Reserve with the anticipation of three or four interest rate hikes this year. The current assumption based on information released from the Federal Reserve is that each rate hike will be ¼%. That means that if they move forward with this more aggressive monetary policy, they will raise rates only 1% this entire year which would take the Fed fund rate from its current fix of zero to ¼%. This means that by the end of 2022 fed funds rate would be fixed between 1% and 1 ¼%.

With recently released data in regards to current inflationary pressures, the Bureau of Economic Statistics has confirmed what analysts and Americans have known for quite some time, and that is that inflationary pressures continue to spiral to higher levels with the CPI (consumer price index) now fixed at 7% in December year over year.

This brings us to the current dilemma faced by the Federal Reserve. The Federal Reserve’s more hawkish or aggressive monetary policy cannot curtail the current rise of inflationary pressures to any great degree. Many analysts, including myself, acknowledge that the Federal Reserve’s Monetary Policy as it stands with a more hawkish demeanor cannot have any dramatic effect on the cost of goods and services by themselves. Any real hope of seeing inflationary pressures diminish must be accomplished through a combination of actions by the administration as well as the monetary policy of the Federal Reserve.

As the data has clearly illustrated, the current level of inflation is based upon the high pent-up demand during the first year and ½ of the recession which in essence began in March 2020. As we approach the second anniversary of the onset of the recession, which is a direct result of a global pandemic in many ways, we are much closer to understanding the new Covid-19 virus.

However, that understanding has indicated that we are far from having any real handle on eradicating the virus. What is happening is that the virus has had a global impact as new waves created by mutations or variants of the original virus strain continue to wreak havoc on economies worldwide. It seems as though the question of what a new normal will look like at the end of the pandemic contains the real possibility that there will not be a conclusion or a point in time when the Covid-19 virus simply does not exist. Rather it is beginning to seem likely that global citizens health organizations and countries will learn more effective measures to deal with the rapid spreading of variants as they emerge.

This might mean that we are currently experiencing the new “normal,” and life, as we know it from the pre-pandemic days, will never completely return. As such people will continue their daily lives with this issue and learn to adapt to it.

Wishing you as always good trading and good health,

For those who would like more information simply use this link.

Gary S. Wagner

 

The Weekly Wrap – U.S Inflation and FED Commentary Delivered a Choppy Week for the Markets

The Stats

It was a quieter week on the economic calendar, in the week ending 14th January.

A total of 44 stats were monitored, which was down from 63 stats in the week prior.

Of the 44 stats, 19 came in ahead forecasts, with 19 economic indicators coming up short of forecasts. 6 stats were in line with forecasts in the week.

Looking at the numbers, 19 of the stats reflected an upward trend from previous figures. Of the remaining 25 stats, 23 reflected a deterioration from previous.

For the Greenback, it was back into the red. In the week ending 14th January, the Dollar Spot Index fell by 0.58% to end the week at 95.167. A 0.65% slide on Wednesday did most of the damage as the markets responded to U.S inflation figures. In the week prior, the Index had risen by 0.07% to 95.739.

Out of the U.S

It was a big week for the Dollar. In the first half of the week, FED Chair Powell testimony and December inflation figures were key drivers.

While the FED Chair talked of the need to hike rates, there was no mention of the need for more than 3 this year. This was taken as a positive for the riskier assets and negative for the Dollar.

On Wednesday, another spike in inflation failed to spook the markets. This was in spite of the U.S annual rate of inflation at its highest since 1982. An easing in energy prices for the first time since the uptrend was taken as a sign of a possible topping out.

Jobless claims failed to impress on Thursday, with initial jobless claims increasing from 207k to 230k in the week ending 7th January.

Retail sales figures for December wrapped things up on Friday. In December, retail sales fell by 1.9% versus a forecasted 0.1% decline. Core retail sales tumbled by 2.3% versus a forecasted 0.2% rise.

Out of the UK

Retail sales were in focus early in the week. In December, the BRC Retail Sales Monitor was up 0.6% year-on-year versus a forecasted 0.3% increase. In November, retail sales had been up by 1.8%.

More significantly, however, were manufacturing production and GDP numbers at the end of the week.

The stats were skewed to the positive, supporting the more hawkish outlook on BoE monetary policy.

Manufacturing production rose by 1.1% in November versus a forecasted 0.2%. In October, manufacturing production had risen by 0.1%.

Month-on-month, the economy grew by 0.9% in November, following 0.2% growth in October, which was also Pound positive.

In the week, the Pound rose by 0.64% to end the week at $1.3675 In the week prior, the Pound had risen by 0.41% to $1.3588.

The FTSE100 ended the week up by 0.77% following a 1.36% gain from the previous week.

Out of the Eurozone

Key stats included Eurozone unemployment, industrial production, and trade data for November.

The stats were skewed to the positive. The Eurozone’s unemployment rate fell from 7.3% to 7.2%, with industrial production up 2.3% in the month. Production had fallen by 1.3% in October.

Trade data was EUR negative, however, while finalized inflation figures for France and Spain had a muted impact on the EUR. The Eurozone’s trade balance narrowed from a €3.3bn surplus to a €1.5bn deficit in November. It was the Eurozone’s first goods trade deficit since January 2014.

From the ECB, the Economic Bulletin sent mixed signals, while suggesting that inflation was more than just transitory.

For the week, the EUR rose by 0.44% to $1.1411. In the week prior, the EUR had fallen by 0.08% to $1.1361.

The DAX30 slipped by 0.40%, with both the CAC40 and the EuroStoxx600 ending the week down by 1.05% respectively.

For the Loonie

There were no material stats for the markets to consider. The lack of stats left market sentiment towards BoC monetary policy to influence, with the markets expectations of an imminent move delivering support.

An upswing in crude oil prices in the week was also Loonie positive.

In the week ending 14th January, the Loonie rallied by 0.72% to C$1.2552 against the Greenback. In the week prior, the Loonie had fallen by 0.05% to C$1.2643.

Elsewhere

It was a bullish week for the Aussie Dollar and the Kiwi Dollar.

The Aussie Dollar rose by 0.36% to $0.7207, with the Kiwi Dollar gaining 0.37% to end the week at $0.6804. A Friday sell-off limited the upside for the week.

For the Aussie Dollar

Retail sales and trade data were in focus, which delivered mixed results.

Key, however, was a 7.3% jump in retail sales in November versus a forecasted 3.9% increase. In October, retail sales had risen by 4.9%.

Australia’s trade surplus narrowed from A$11.22bn to A$9.423bn in November. Economists had forecasted a surplus of A$10.60bn.

For the Kiwi Dollar

Economic data was limited to building consents, which had a muted impact on the Kiwi Dollar in the week.

For the Japanese Yen

There were no material stats to provide the Yen with direction in the week.

The Japanese Yen rallied by 1.19% to ¥114.190 against the U.S Dollar. In the week prior, the Yen had fallen by 0.42% to ¥115.560.

Out of China

It was a relatively busy week on the economic data front. Inflation and trade data were in focus in the week.

In December, inflationary pressures eased, with China’s annual rate of inflation softening from 2.3% to 1.5%. China’s annual wholesale rate of inflation softened from 12.9% to 10.3%. These were positive for riskier assets, however.

Trade data was upbeat for December. China’s USD trade surplus widened from $71.72bn to $94.46bn. Exports were up 20.9% year-on-year, while imports increased by 19.5%. Exports been up by 22.0% and imports up by 31.7% in November.

In the week ending 14th January, the Chinese Yuan rose by 0.39% to CNY6.3528. In the week prior, the Yuan had ended the week down by 0.34% to CNY6.3778.

The Hang Seng Index ended the week up by 3.79%, while the CSI300 slid by 1.98%.

E-mini Dow Runs into Retracement Zone Resistance at 36331

March E-mini Dow Jones Industrial Average futures are trading lower late in the session on Thursday. Technology components of the blue chip average were the biggest drag. Microsoft Corp was down 4.23%. Salesfore.com Inc lost 3.87% and Apple Inc declined by 1.90%.

The catalysts behind the selling pressure were higher Treasury yields, nervousness ahead of the start of earnings season, and a vaccine mandate defeat in the Supreme Court by the Biden administration.

At 21:37 GMT, March E-mini Dow Jones Industrial Average futures are trading 35988, down 172 or -0.48%.

A rise in Treasury yields is contributing to the late session sell-off. Yields bounced back from early session weakness after Fed Governor Lael Brainard said the U.S. central bank would be in a position to start what could be several interest rate hikes this year “as soon as” it completes winding down its bond purchases, expected to happen in March.

Prices fell further after the Supreme Court blocked President Biden’s Covid vaccine mandate for large private businesses. However, the conservative majority court allowed similar requirements to stand for medical facilities that take Medicare or Medicaid payments.

Daily March E-mini Dow Jones Industrial Average

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 36832 will change the main trend to up. A move through 35521 will signal a resumption of the downtrend.

The short-term range is 36832 to 35521. Its retracement zone at 36177 to 36331 helped stop the rally at 36390 on Thursday. This indicates a potentially bearish secondary lower top may be forming.

The minor range is 35521 to 36390. The E-mini Dow is currently testing its pivot at 35956.

The next two potential support levels come in at 35690 and 35346.

The main support controlling the near-term direction of the E-mini Dow is 35066 to 34649.

Short-Term Outlook

Trader reaction to 35956 should determine the direction of the March E-mini Dow early Friday.

Bearish Scenario

A sustained move under 35956 will indicate the presence of sellers. This could trigger a break into 35690, followed by the main bottom at 35521.

Bullish Scenario

A sustained move over 35956 will signal the presence of buyers. This could lead to a retest of 36177 to 36331, followed by 36390.

Taking out 36390 could trigger an acceleration to the upside.

For a look at all of today’s economic events, check out our economic calendar.

Stocks slip, bonds steady after inflation palpitations

By Koh Gui Qing

NEW YORK (Reuters) – Nervous global stock markets tumbled on Thursday as the dollar wilted, after a drumbeat of hawkish remarks from Federal Reserve officials made clear that U.S. interest rates could rise as soon as March, putting an end to ultra-easy monetary conditions.

Fed Governor Lael Brainard became the latest and most senior U.S. central banker to signal that rates will rise in March to fight inflation, saying that the Fed “has projected several rate hikes over the course of the year”.

Indeed, data released on Thursday that pointed to rapidly tightening U.S. labor market conditions presaged the supply bottlenecks and persistent inflation pressures that could come, further unsettling investors already nervous about imminent rate hikes.

MSCI’s gauge of stocks across the globe had shed 0.92%, as stocks in Europe and the United States slipped into the red.

After spending much of the day nursing modest declines, U.S. stocks deepened losses toward the end of the session. The S&P 500 lost 1.4%, the Nasdaq Composite dropped 2.5%, and the Dow Jones Industrial Average lost 0.5%.

The pan-European STOXX 600 index ended flat as losses in defensive stocks were matched by gains in automakers and technology stocks on hopes of improving semiconductor supply. [.EU]

“We do not think the returns from many financial assets will be as good in 2022 as they were in 2021,” said John Higgins, chief markets economist at Capital Economics.

“For a start, we envisage a sell-off in government bonds in most places, reflecting the outlook for monetary policy. And, in general, we foresee an underwhelming performance from equities, including in the United States and China.”

Data released on Wednesday had showed U.S. consumer price inflation bounding 7% on an annual basis in December, the highest since 1982. While the report was widely expected, it left investors almost certain that U.S. rates will rise in March.

“As we see it, the inflation story is going to persist for a good while longer yet,” said Manulife Asset Management’s global macro strategist, Eric Theoret.

“We have had a tremendous acceleration in the Fed’s tightening,” he added. Theoret pointed out that when the U.S. central bank raised interest rates in 2015, it waited two years before shrinking its balance sheet, whereas this time it could begin by the end of the year.

“The challenge from here is how the global economy responds to this normalization.”

In bond markets, where borrowing costs have raced to keep up with rate hike expectations this year, 10-year U.S. Treasury yields edged down to 1.7006%, though analysts say they are almost certain to climb higher this year against a backdrop of rising rates. Germany’s 10-year yield bobbed near -0.086% having approached positive yield territory for the first time since May 2019.

European Central Bank Vice President Luis de Guindos became the latest to warn that the current spike in inflation was not going to be as transitory as originally expected. Upmarket Swiss bathroom goods giant Geberit had seen its shares slide too as it warned it was now impossible to predict how much raw materials prices would rise this year.

It is a busy period for bond issuance as countries and companies look to beat the rise in rates. Italy was due to sell up to 7 billion euros of three- and seven-year bonds later, and Ireland was eyeing a bumper sale. The week is also set to be a record one for emerging market corporate debt sales with nearly 30 taking place.

“It is a record in my time,” said Omotunde Lawal, head of emerging markets corporate debt at Barings. “Most people are swamped, but you can see why with as many as four Fed hikes now priced in.” (Graphic: global cbanks, https://fingfx.thomsonreuters.com/gfx/mkt/gdpzykbekvw/cbank%20sheet.JPG)

DOLLAR DOLDRUMS

In the currency markets, the dollar continued to slip toward a two-month low against a basket of currencies, with the dollar index down 0.139% at 94.873.

The euro was a big beneficiary of the move and was steady at $1.14530, up 0.1% on the day, while sterling and the yen also extended recent gains. [/FRX]

The pound is up more than 4% from December lows and traders have so far shrugged off a political crisis enveloping Prime Minister Boris Johnson, who apologized on Wednesday for attending a party at his official Downing Street residence in May 2020 during a coronavirus lockdown.

The central bank of New Zealand has begun hiking rates too, and the New Zealand dollar climbed 0.2% to $0.68625, the highest in almost two months.

“The (U.S.) dollar does not have to increase because the Fed is readying a tightening cycle,” said Commonwealth Bank of Australia strategist Joe Capurso.

“It is not a simple equation of Fed hikes equals dollar increases. The dollar is a counter-cyclical currency which decreases as the world economy recovers.”

In Asia, Chinese blue-chips dropped 1.6% after data showing mainland bank lending fell more than expected in December, causing property and consumption sectors to sink.

MSCI’s broadest index of Asia-Pacific shares outside Japan was flat after recording its biggest daily gain in a month on Wednesday. Japan’s Nikkei lost nearly 1% after surging nearly 2% a day earlier.

Oil prices ticked lower in commodity markets too, a day after hitting their highest in nearly two months. [O/R]

U.S. crude fell 1.36% to $81.52 per barrel and Brent was at $83.86, down 0.96% on the day.

A softer dollar did not bolster bullion prices, which were instead weighed down by the prospect of rising rates. Spot gold dropped 0.2% to $1,822.08 an ounce. U.S. gold futures fell 0.65% to $1,821.20 an ounce. [GOL/]

(Additional Reporting by Tommy Wilkes in London and Andrew Galbraith in Shanghai; Editing by Tomasz Janowski, Toby Chopra, Jonathan Oatis and Alexandra Hudson)

Stock Bulls Remain on Unstable Footing. Here Is Why

The US Consumer Price Inflation Index (CPI) rose 7% over the past year before seasonal adjustments, the steepest climb in prices since June 1982. Stripping out food and energy costs, which tend to be more volatile even in non-pandemic times, inflation rose to 5.5% between December 2020 and December 2021 — the biggest annual jump since February 1991.

Inflation issue

Interestingly, excluding gas and used cars, December inflation was 3.7%. The prices of cars and trucks surged +37% in December, furniture prices hiked +17%, and 49% of small businesses surveyed in December said they will increase the prices of goods and or services sold in 2022.

One thing that is worrisome is the fact protein prices (meat, poultry, fish, and egg prices) have surged +18% since December 2019. Food inflation along with fuel inflation could cause the US consumer to pull back so we need to be paying close attention. But even though prices went through the roof last year, they are still nowhere near the historic highs from the 1980s. Inflation peaked in the spring of 1980 at +14.8%.

Remember, however, then-Fed Chair in the early 80s, Paul Volcker, made it his mission to squash inflation. Volcker raised interest rates to +19% in 1981, prompting a recession, however, in 1982. I’m not looking for any type of crazy rates like back in the early-80’s but if the Fed has to raise rates fast and far enough to stop inflation the economy could certainly feel some negative ripple effects.

Covid influence

I know the second major Covid variant Delta extended the inflationary shock waves and this recent resurgence from Omicron is causing even more supply-side complications. I know many bulls are saying that we are again at peak inflation and we will soon start to ease back but who would have ever thought we would be two years in and still peaking with new daily reported Covid cases at over +1.5 million. If new variants of Covid continue to come in waves who know when inflation peaks…

The government injecting billions of dollars into the economy and paying Americans to stay home via stimulus checks when Covid case numbers started to push past 10,000 daily, and now that we are exceeding one million new cases per day all the talk is about the Fed removing stimulus and the need for Americans to get back to some type of normalcy. Now here we are full-circle… In the famous words of the Grateful Dead, “What a long strange trip it’s been.”

The December Producers Price Index is out today and expected to show an annual inflation rate of +9.8% after hitting +9.6% in November, the fastest pace on record. Higher prices for energy, wholesale food, and transportation and warehousing have been the biggest contributors to the pickup in producer inflation.

Bulls believe that once the current Covid wave subsides, consumers will once again dedicate a higher percentage of their spending to services. That will in turn alleviate the crushing demand being placed on manufacturers and the transportation sector, ultimately helping to bring down prices for both raw materials and labor.

That’s the theory at least. It’s worth noting that that exact pattern was starting to develop late last year as the Delta-driven wave was subsiding and consumers were starting to feel more comfortable doing things like go to restaurants, travel, and visit the gym. As we know, that was totally derailed by the rise of the Omicron variant that is currently roiling nearly every aspect of the global supply chain.

Bulls are cautiously optimistic that the Omicron wave will be short-lived with most experts predicting it will peak by the end of January. The big question is what kind of damage will it do to already overly stressed supply chains in the interim? Inflation trends may also depend on how things shake out in the labor market. If workers remain in short supply and wages continue moving higher, it will likely limit how much inflation eases.

Today, investors will be listening closely to several Federal Reserve members that are scheduled to deliver comments, including Fed Governor Lael Brainard who will testify before the Senate Banking Committee as part of her nomination for Fed Vice Chair.

On the earnings front, the key highlights will be Delta Air Lines and Sanderson Farms.

Investors ready for U.S. earnings as inflation worries run high

By Caroline Valetkevitch

NEW YORK (Reuters) – U.S. companies will post results in the coming weeks on the final quarter of 2021 as investors worry about inflation’s impact on earnings and pressure on the Federal Reserve to speed up the timeline for kicking off interest rate hikes.

The concerns, along with caution tied to the fast-spreading COVID-19 Omicron variant, have driven a recent market sell-off, led by Nasdaq and shares of technology and other big growth companies that have benefited from low interest rates.

Year-over-year profit growth for S&P 500 companies is expected to be lower in the fourth quarter than it was in first three quarters of 2021 but still strong at 22.4%, according to IBES data from Refinitiv.

Huge profit gains earlier in 2021 were fueled by a rebound from the economic downturn in the early stages of the pandemic.

It’s “nearing the end of the very easy comparisons that we had relative to 2020,” said Bill Northey, senior investment director at U.S. Bank Wealth Management. “Those easy comparisons will begin to wane as we move into 2022.”

Last year’s strong market performance – with the S&P 500 gaining 26.9% for the year – was on the back of massive profit growth, so corporate outlooks for 2022 will be key this earnings period, Northey said.

Earnings growth for all of 2021 is estimated at about 50% compared with 8.6% for 2022, while the forward price-to-earnings ratio for the S&P 500 was last at 21.7, compared with its long-term average of 15.5, according to Refinitiv DataStream.

JPMorgan Chase is due to report Friday and will kick off the reporting period along with Citigroup and Wells Fargo.

Heading into earnings season, bank shares have rallied with U.S. Treasury yields as focus has turned to rate hike expectations.

Analysts expect big U.S. banks to show an increase in fourth-quarter core revenues, thanks to new lending and rising Treasury yields.

Both the S&P 500 bank index and financial index hit record highs last week. Minutes released last week from the Fed’s December meeting showed some policymakers want to tighten policy even faster.

With inflation among their top worries, investors will also watch for signs supply chain bottlenecks may be easing. U.S. economic reports have offered some hope on that front.

Last week’s report on U.S. services industry activity included tentative signs the supply logjam in that sector is starting to break up.

Transportation snags at ports and other areas have led to bigger expenses for companies and higher costs for consumers.

Bottlenecks have hit retailers especially hard, and investors will watch for how they affected holiday sales.

S&P 500 companies have been maintaining record profit margins, with many able to pass on higher expenses to customers, but that may not continue.

“We expect margins not to be a record this quarter” but still high, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices in New York.

The stock market has seen investors rotating out of technology-heavy growth shares and into more value-oriented stocks that tend to do better in a higher interest-rate environment. Still, some investors say technology company results could be much better than Wall Street expects.

Results from big tech and other mega-cap companies start next week, with Netflix due to report on Jan 20.

Recent results from some chip companies including Micron Technology were upbeat, said Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, Georgia.

“That gives me confidence we should get good reports out of the chips sector,” he said. “I’m optimistic.”

Energy, materials and industrials sectors are expected to post the biggest year-over-year earnings gains in the fourth quarter, according to Refinitiv data.

Energy has been by far the strongest S&P 500 sector performer in early 2022, with the S&P 500 energy index up about 14% since Dec. 31, supported by tight supply, following a whopping 48% gain in 2021.

Results from oil majors ExxonMobil and Chevron are due in a couple of weeks.

But all 11 of the S&P 500 sectors are slated to show profit growth for the fourth quarter of 2021, while revenue growth for the period is seen at 12.1%. That growth level would also be lower than in recent quarters, based on Refinitiv data.

(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and David Gregorio)

US Fed Playing With Fire – Bubbles May Burst While Bond Yields & Metals Rally

As a result, traders quickly attempt to adjust their capital allocation levels as risk assets, technology, and US major indexes roll lower because of expected Fed Rate Hikes and other Hawkish activities.

We will explore how the US Fed’s comments and potential future actions may prompt significant market trends in 2022 and beyond. We’ll also attempt to identify how and when the US Fed may disrupt the US markets. We know the actions of the US Fed will prompt some significant trends over the next 12 to 24 months. We know certain assets will likely rise in value as fear settles into the markets because of rising interest rates and deflating asset bubbles. It is just a matter of understanding how the speculative asset bubble of the past 8+ years and how the US Fed may move to pop these speculative bubbles soon.

Asset Bubbles Everywhere, The Global Markets Continue To Froth

Asset bubbles, such as those created in Cryptos, the US stock market, US Real Estate, and the art/collectible market over the past 5+ years, have visualized the US Fed’s easy money results in terms of bubbles.

Take a look at this chart showing the growth in certain asset classes since the start of 2019. It is incredible to think that these asset classes have rallied so far and so fast in just over 35 months:

  • The Grayscale Bitcoin ETF rallied more than 1200%.
  • The Technology sector rallied more than 200%. Real Estate rallied more than 85%.
  • The S&P 500 rallied more than 94%.

The US Federal Reserve’s move to lower interest rates after the 2018 market collapse, which resulted in a December 24, 2018, Christmas Bottom, prompted an incredible rally phase where traders followed the US Fed in piling into assets. As long as the US Fed continued buying assets and kept interest rates near zero, global traders had no reason to fight the US Fed.

Chart

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(Source: StockCharts.com)

Is The US Fed About To Pop The Bubble From The Stratosphere?

Our research suggests the US Federal Reserve is changing its policy a little late into the game. However, it appears the US and global markets have already “rolled over” in terms of growth trends and expectations. This SPY to QQQ ratio chart highlights that the US markets entered a peaking phase in late July/August 2020 and reached an ultimate peak in February 2021.

Chart

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(Source: TradingView.com)

S&P 500 PE Ratio Suggests Investors Are ALL-IN For The Next 90+ Years

In other words, it appears traders have reached their ceiling in terms of what they believe the US Fed is capable of doing at this stage in the rally. For example, the PE Ratio of the US Stock market ending in 2021 ended just below 30, with a historical high for 2021 near 37. The historical mean is 15.96 – which is still relatively high for the US stock market.

Remember, a PE level of 15.96 means any investor buying in at those levels would need a minimum of 15.96 years of a company handing over “every penny of revenue” to the investor (excluding all costs, payrolls, taxes, fees, and other operating expenses) to cover the PE multiple of the investment. So a PE level of 30, as we see at the end of 2021, suggests that stock price valuation levels are at least 60 to 90+ years ahead of real returns.

The only thing that can change this historic level of speculation in the markets is a deleveraging/revaluation event.

Graphical user interface, chart, histogram

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(Source: multpl.com)

From the US Fed’s Actions To How Traders Should Prepare For Shifting Markets

This first part of our ongoing research into the US Fed’s actions and where they are telegraphing their intents will continue. Part II of this article will investigate how traders should read into these shifting markets and where we’re attempting to highlight what has taken place over the past 3 to 5+ years.

We’ve managed to live through an incredible event in history. I can only think of one other time when a global superpower extended this type of credit and support for the worldwide economy. That was the Roman Empire many thousands of years ago.

What we experience over the next 20 to 40+ years could be the biggest and most incredible opportunity of your lifetime. The process of deleveraging all this debt and working all this capital through the global markets over the next few decades may present one of the most incredible investment/trading opportunities anyone has ever seen in over 1500 years.

Look for my Part II to this article, and we’ll continue exploring the current shifts in the US and global stock and asset markets.

Finding The Right Strategies That Will Help You Navigate Through Bulls & Bears

If you have struggled with finding opportunities over the past year or so and want to know which are the hottest sectors, or how to protect and grow your capital, then please take a minute to review my Total ETF Portfolio – Triple-Strategy Trading Plan to help you profit from these big market transitions.

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

I invite you to learn more about how my three Technical Trading Strategies can help you protect and grow your wealth in any type of market condition by clicking the following link:   www.TheTechnicalTraders.com

Chris Vermeulen
Founder and Chief Market Strategist of The Technical Traders Ltd.

 

E-mini Dow Ready to Challenge 36177 – 36331 Resistance

March E-mini Dow Jones Industrial Average futures are inching higher early Wednesday while trying to follow-through to the upside after a choppy trade, but higher close the previous session.

The blue chip average posted a two-sided trade as investors absorbed remarks from the Federal Reserve that interest rates are likely to rise this year, as expected.

In comments to U.S. lawmakers, Federal Reserve Chairman Jerome Powell said he expected the Fed would raise rates and end its asset purchases this year, but that the central bank had made no decision about the timing for tightening monetary policy.

At 14:29 GMT, March E-mini Dow Jones Industrial Average futures are trading 36151, up 23 or +0.06%. In the cash market on Tuesday, the Dow settled at 36252.02, up 183.15 or +0.51%.

The best performing stock in the Dow was Boeing Co, which closed up 3.206%. This was followed by Chevron Corp, which rose 2.286% and Salesforce.com, which gained 2.269%.

Daily March E-mini Dow Jones Industrial Average

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 35521 will signal a resumption of the downtrend. A move through 36832 will take out a bearish closing price reversal top and signal the resumption of the uptrend.

The minor range is 36832 to 35521. The E-mini Dow is currently testing the lower end of its retracement zone at 36177 to 36331. Trader reaction to this zone will determine the short-term direction of the average.

The short-term range is 34547 to 36832. Its 50% level at 35690 is support. This level underpinned the market on Tuesday.

The intermediate range is 33860 to 36832. Its 50% level at 35346 is another potential support level. Monday’s selling stopped just above this level.

The main retracement zone support is 35066 to 36649. This zone is controlling the near-term direction of the market.

Short-Term Outlook

The direction of the March E-mini Dow Jones Industrial Average on Wednesday is likely to be determined by trader reaction to 36177 and 36331.

Bearish Scenario

A sustained move under 36177 will indicate the presence of sellers. With the main trend down, they are going to try to form a potentially bearish secondary lower top. This could trigger an acceleration to the downside with 35690 the next downside target, followed by 35521 and 35346. These are the last potential support levels before the major retracement zone at 35066 to 34649.

Bullish Scenario

The first sign of strength will be overcoming 36177. A sustained move over 36331, however, could trigger the start of an acceleration to the upside with 36832 the next major upside target.

For a look at all of today’s economic events, check out our economic calendar.

U.S. stocks bounce, investors digest news of 2022 rate hikes

By Koh Gui Qing

NEW YORK (Reuters) – U.S. stocks bounced and Treasury yields retreated on Tuesday in choppy trade as investors absorbed remarks from the Federal Reserve that interest rates are likely to rise this year, as expected.

In comments to U.S. lawmakers, Federal Reserve Chairman Jerome Powell said he expected the Fed would raise rates and end its asset purchases this year, but that the central bank had made no decision about the timing for tightening monetary policy.

“Inflation is running very far above target. The economy no longer needs or wants the very accommodative policies we have had in place,” Powell said in his testimony.

The Dow Jones Industrial Average closed up 0.51%, the S&P 500 added 0.92%, and the Nasdaq Composite climbed 1.41%.

The pan-European STOXX 600 index rose 0.84% and MSCI’s gauge of stocks across the globe gained 0.94%.

“Comments from Fed Chair Jerome Powell reassured investors that the Fed is prepared to tighten monetary policy to maintain price stability,” analysts at Australia’s ANZ Bank said in a note.

Inflation pressures prompted the Fed in December to flag plans to tighten policy faster than expected, possibly even raising rates in March, though that was before it became clear just how fast the Omicron coronavirus variant would spread.

Some investors were relieved that the Fed did not sound more hawkish than the market had anticipated, and this helped Treasury yields pull back a touch from two-year highs struck earlier.

Benchmark 10-year Treasury yields retreated to 1.741%, after hitting an almost two-year high above 1.8% overnight.

Two-year Treasury yields, which are highly sensitive to interest rates, dipped to 0.8966%, down from a high of 0.945% last seen in February 2020. [US/]

The recovery in risk appetites weighed on the dollar. The dollar index, which measures the currency against a basket of six major currencies, fell 0.34% to 95.614. A softer dollar lifted the euro up 0.3% to $1.13670. [USD/]

The weaker dollar benefited bullion, and spot gold added 1.2% to $1,822.75 an ounce. U.S. gold futures gained 1.34% to $1,822.50 an ounce. [GOL/]

U.S. December consumer inflation data will be released on Wednesday with headline CPI expected to hit a red-hot 7% year- on-year, boosting the case for rates to rise sooner rather than later.

GRAPHIC – Bloomberg Barclays index

https://fingfx.thomsonreuters.com/gfx/mkt/egvbkjjqepq/Pasted%20image%201641850886841.png

“We continue to believe liftoff in March is increasingly likely. How these debates are settled will likely have implications for post-liftoff rate hikes,” Nomura economists said in a report, referring to U.S. monetary policy.

“In particular, we believe comments regarding earlier runoff and less aggressive rate hikes support our view that the Fed will slow the pace of rate hikes to two per year in 2023.”

Oil rose to nearly $82 a barrel, supported by tight supply and hopes that rising coronavirus cases and the spread of the Omicron variant would not derail a global demand recovery.

U.S. crude recently rose 3.82% to $81.22 per barrel and Brent was at $83.72, up 3.52% on the day.

Stronger risk appetites supported bitcoin, which rose 2.1% to $42,722.21, after dropping below $40,000 the previous day for the first time since September.

(Reporting by Karin Strohecker, Sujata Rao and Tommy Wilkes in London and Anshuman Daga in Singapore; Editing by David Goodman, Gareth Jones, Mark Heinrich and Cynthia Osterman)

Is The “don’t fight the Fed” Approach Still Good for Traders?

Just as experienced traders and investors were on board with the Fed easing and propping up the economy, they are now not wanting to stand in the way as the Fed tries to slow things down a bit.

Wall Street insiders are hoping to get more clues as to just how “hawkish” the U.S. central bank might be leaning when Fed Chair Jerome Powell delivers testimony before the Senate Banking Committee today as part of his renomination process.

In very brief pre-prepared comments that were released yesterday, Powell pledged “to prevent higher inflation from becoming entrenched,” but didn’t mention any details in regard to interest rates or the Fed’s asset holdings.

Supply and demand issues

Powell noted that the economy was facing “persistent supply and demand imbalances” as a result of the pandemic reopening. Wall Street veterans are thinking the Fed will make three or four increases this year. Goldman is now forecasting four rate hikes with some insiders thinking five or six rate hikes might now be in the mix, i.e. perhaps a couple of half-point moves in rates might happen rather than the smaller quarter-point bumps.

A growing number also expect that the central bank will begin reducing its $8.8 trillion balance sheet as soon as this summer.

Anticipation of a more hawkish Fed saw 10-year Treasury yields climb to their highest levels of the pandemic last week, though they did ease a bit yesterday. In and of itself, the rise in bond yields is not surprising as investors have been anticipating this would happen in 2022 as the Fed begins lifting interest rates.

However, the climb has started sooner than many expected. The speed at which yields soared last week – +25 basis points – in particular, is tripping up the bulls, with some on Wall Street anticipating the benchmark 10-year could test +2% by the end of the first quarter. Bears are warning that investors may still be underestimating how far the Fed will need to lift its benchmark rate this year to keep inflation under control.

On the other hand, Bulls still expect current higher prices will find relief as supply chain dislocations and labor shortages normalize.

The road to both resolutions is proving longer and more complicated than most hoped, though, with the current Covid wave again threatening global supply chains and sidelining workers.

Transportation in China and US

A suspension of trucking services in several parts of China’s Zhejiang province has slowed the transportation of manufactured goods and commodities through the port of Ningbo, one of the world’s most important ports.

Some Chinese factories have had to stop work due to the trucking snags, too, as they can’t receive raw materials or ship out goods.

U.S. ports on both coasts are also reporting a build-up in ships waiting to unload due to dockworkers calling in sick. Cargo backups are also once again building as transportation and warehousing staff levels suffer.

The only economic data due today is the NFIB Small Business Optimism Index. It’s the Consumer Price Index tomorrow, and the Producer Price Index on Thursday that investors are really anxious to see, with worries growing that big jumps could spur even more hawkish policy moves from the Fed. On the earnings front, Albertsons is the main highlight.