Calm before the storm. Market’s traded off slightly in a bumpy day of trade where numbers didn’t matter but tarmac talk saved the day. Markets started the day soft, trading to session lows by mid morning largely ignoring economic numbers that suggested that inflation was slightly lower than expected. Later in the session President Trump passed some positive comments on a potential trade resolution with China as he was heading to Air Force One. Markets initially traded up sharply into the green but ultimately faded into the close. Interestingly, in the interim, the FOMC minutes were released with a slightly more hawkish tone and markets appeared to yawn, indicating that a trade resolution in Buenos Aires is the main focus of the market. Rightly so! Powell’s speech did not even hint at any change in policy and was completely consistent with Fed minutes released yesterday. Perhaps linguistics experts could have interpreted Powell’s tone as being dove-ish, but the numbers suggest nothing new and equity markets for the most part are beginning to brace for higher interest rates. In fact, the bond markets’ reaction to Powell’s speech were the best indicator as 10 year yields only moved 2 basis points versus the overwhelmingly positive response by stock markets. Hmm. The biggest challenge to stocks going forward will be continued growth in earnings which are already showing some signs of negative impacts from trade issues. Those impacts will only worsen if a resolution can’t be achieved. Remember that a second step up of tariffs will kick in on January 1st if there is no resolution. Additionally, China has yet to deploy their full arsenal of responses to the the US tariffs. That said, all eyes should be on the G-20 dinner tomorrow night. Even a verbal agreement or a framework of deal would be a very positive sign for risk assets. If nothing comes out of the talks, well, it’s going to be a tough holiday season for traders.
Let’s take a quick look at where we are in the major indices (please refer to my attached daily chartbook). The S&P500 slipped -0.11% yesterday, just below resistance at 2747 and its 200 day moving average. The index will get support at 2700 below and remains risk off (chart 4). The VIX index is is around 19.82, only slightly lower than it was prior to Wednesday’s equity rally indicating that we are not yet through the thick of it. The Dow Jones Industrial Average closed down slightly in the session and will get strong support at 25115 (Fibonacci and 200 day simple moving average) and resistance above from its 25548 Fibonacci line (chart 6). The small cap Russell 2000 closed down -0.33% yesterday right on its 1525 Fib support line. This is positive for the index which has not traded at these levels in many sessions (chart 7). I can’t stress enough that the success of this index will be critical if we are to hope for a resumption of the secular positive trend. When investors regain their faith in smaller cap stocks, which are largely trading at discounted multiples, it is a good sign for the broader market. The NASDAQ 100 closed slightly in the red yesterday as traders gave the speculative tech and growth stocks that dominate the index a break after trading up +3.1% on Wednesday. The index is right on a support level of 6892 and it will get resistance at its Fibonacci 6964 level (chart 8). In addition to the S&P500, the Dow, R2K, and NASDAQ all remain risk off. Crude oil started off yesterday morning trading below $50 for the first time since October of 2017 after a Saudi oil minister suggested that they were willing to consider production cuts at the next OPEC meeting causing it to trade up and close over $51 per barrel (chart 11). The dollar has weekend a bit after Powell’s speech as would be expected. Remember that a higher rate environment, amongst other things, strengthens the currency as investors must buy US Dollars in order to purchase treasuries (chart 13). The opposite holds true when yields are going down or, in this case, perceived as not going up as fast as previously thought (you might have to re-read that sentence, but it is true). Finally, 10 year yields came close to the magical 3% level yesterday before trading up later in the session and they will begin today’s session at 3.01%.
This morning we will receive the Chicago Purchasing Managers index which is expected to come in at 58.5 up slightly from last month’s 58.4. Other than that all eyes will be on Buenos Aires today for some signs of progress on the world economic stage. Traders will bolster positions readying themselves for the week ahead, especially Monday where traders will have their first chance to react to the weekend’s news out of Argentina. Next week we will also get some manufacturing numbers, durable goods orders, and the monthly employment situation. The monthly employment situation is always a market mover and will be closely watched as weekly employment numbers have been showing some small, but heretofore ignored, signs of weakening. Traders will certainly need to get their rest this weekend in preparation for next week – it will be a busy one for sure. Have a great weekend and please call me if you have any questions.