Market Wrap – Bad Moon Rising for Tech Ahead of Fed

Stock markets gave up yesterday’s Bear Market rally with ease and spent much of the day trying to recover only to fail as the FOMC began its two-day policy meeting and the specter of energy woes and Ukraine overhung. The CME FedWatch Tool indicates there is only a 5.6% probability of a rate hike tomorrow. The market is looking forward to much and the balance of market support versus inflation risk. MSFT earnings after the close disappointed while TXN surprised. Volatility stepped up with MSFT dropping $20 then bounced $30 after earnings. We look at the indices, Gold, Copper, BTC, ETH and Natgas and oil in the podcast. Oil moved around with geopolitical risks in the Ukraine and risk assets bouncing off the lows. Market chatter continues of the Fed raising the target range for the fed funds rate by 50 basis points at its March meeting.

Enjoy live commentary from Our Trading Room at YouTube as the day wraps up – feel free to like and share

Live on YouTube:

In today’s post market wrap live from the trading room traders discuss the patterns through the options and futures markets that have played out perfectly from last week to today. We discuss trading psychology, risk management and trader development in today’s markets. Listen to our technical and market psychology read on the day. Join the Traders Community Podcast crew @traderscom @knovawave @Mahdavi4 @MetaJohnny1 plot out 2022.

Around the table today was packed with our outlook on the Fed Reserve FOMC, Ukraine and US energy policy and global disorder. Topics included Bitcoin and NFT’s, geopolitics, domestic political influence and distortions, reading sentiment, patterns and order flow. De-risking may threaten progress that has been achieved on since the COVID bailout. It also has the potential to reverse some of the progress made in protecting downside risk if banks close or restrict access to money.


Market Closes

Energy

  • March WTI crude oil (CLH22) on Tuesday closed up +2.29 (+2.75%). Last week the high price reach reached $87.10, a new seven year high. The low last week was on Monday at $81.58.
  • Baker Hughes reported Friday that active U.S. oil rigs in the week ended Jan 21 fell by -1 rig to 491 rigs, down slightly from the prior week’s 1-3/4 year high of 492 rigs.  U.S. active oil rigs have risen sharply from the Aug-2022 15-year low of 172 rigs, signaling an increase in U.S. crude oil production capacity.
  • March RBOB gasoline (RBH22) closed up +6.05 (+2.52%).
  • February Nymex natural gas (NGG22) on Tuesday closed up by +0.026 (+0.65%).
  • Maxar on Tuesday said that above-normal temperatures are expected across the eastern U.S. from Jan 30-Feb 3, and above-normal temperatures are expected across the northern and central U.S. from Feb 4-8.  
  • Geopolitical concerns in Ukraine are underpinning European gas prices and sparked short-covering in U.S. nat-gas prices.  Goldman Sachs warned Monday that Russian gas flows to Europe could be curtailed for “an indefinite period” if sanctions hit Russia’s Nord Stream 2 nat-gas pipeline to Germany due to escalating tensions over Ukraine.
  • BNEF data showed gas flows to U.S. export terminals Tuesday were up +20% y/y at 13.02 bcf, just below the Dec 19 record of 13.1 bcf.
  • Baker Hughes reported Friday that the number of active U.S. natgas drilling rigs in the week ended Jan 21 rose by +4 rigs to a 2-year high of 113 rigs.  Active rigs have recovered sharply from the record low of 68 rigs posted in July 2020 (data since 1987).

Metals and FX

  • The U.S. Dollar Index on Tuesday rose +0.047 (+0.05%).  The dollar on Tuesday extended Monday’s advance up to a new 2-week high.
  • February gold (GCG22) on Tuesday closed up +10.80 (+0.59%)
  • March silver (SIH22) closed up +0.096 (+0.40%). 
  • Bitcoin up at 36,647 after breaking through 39600 low

Stocks

  • Again, the declines in stocks despite lower interest rates suggesting safe haven buying or bond v equity asset allocation.
  • The Dow and S&P had their worst week since October 20, 2020 
  • Dow industrial average erased an 816-point decline to up 226 points at the high, then spun lower into the close and closed down -66.77 points. It fell 1600 points or -4.57% last week. The Dow is down -6.18% from its all-time high at 36952.65.
  • S&P index was down -123.02 points at the low to be just 0.88 down at the high before closing down -53.68. The S&P fell -5.68% last week. The S&P is down -7.07% from its all-time high at 4818.62.
  • NASDAQ index was down -441 point (or -3.18% decline) at the lows.  to be down just -73.50 points or -0.53% at the high.  The NASDAQ closed down -down -315. 82 points or -2.28%. Last week the NASDAQ fell -7.53% The NASDAQ index is down 15.1% from its all-time high seen in November.
  • Russell 2000 increased 45.59 points or 2.29% at 2033.511 off the low, the Russell 2000 traded at 1931.43.  Closed -15.16% from its all-time high. The Russell 2000 closed off its 52-week low.
  • CBOE Volatility 29.90, +1.05, +3.6%
  • NYSE Adv 1337 Dec 1922 Vol 1.2 bln
  • Nasdaq Adv 1883 Dec 2419 Vol 4.9 bln

Recall Last Week: JP Morgan quant maestro Marko Kolanovic was out with a comment near lows that didn’t go unnoticed.

“Near term we recommend buying the dip on US indices given oversold conditions… though medium term we favor EM/China/Europe on a regional basis on improving activity and easing headwinds, and the UK on valuation.”

Marko Kolanovic Jan 10 2022
  • We stay positive on equities and expect omicron will ultimately prove a positive for risk assets, as this milder but more transmissible variant speeds the transition from pandemic to endemic with a lower human toll,
  • As this wave fades, it will likely mark the end of the pandemic
  • omicron’s lower severity and high transmissibility crowds out more severe variants and leads to broad natural immunity
  • signs of supply constraints potentially passing their worst point

Recall back in October he said to buy the dip because fears of higher yields were overdone adding the market could absorb higher yields. “We don’t expect a broad market selloff unless yields were to rise above 250-300 bps (US 10y), which we don’t foresee in the near term,” From there the S&P 500 rose 11.5%.

Perhaps this time it’s’ different but nevertheless the algorithms liked it that day but from then ……… not so much

Ark of the Covenant not as it appears

ARK ETF

  • ARKK 73.54▲ 2.02 (2.82%)
  • ARKG 48.12▲ 1.51 (3.25%)
  • ARKX 16.49▲ 0.02 (0.12%)
  • ARKF 31.31▲ 0.30 (0.97%)
  • ARKW 92.88▲ 1.64 (1.80%)

Cboe Daily Market Ratios:

Cboe Daily Market Statistics

S&P 500 sector watch:

  • 9 of the 11 S&P 500 sectors closed lower
  • Information technology (-2.3%), communication services (-2.2%), and consumer discretionary (-1.8%) sectors underperformed with steep losses.
  • Energy (+4.0%) and financials (+0.5%) sectors only sectors that closed higher 

Markets YTD

  • Dow Jones Industrial Average -5.6% YTD
  • S&P 500 -8.6% YTD
  • Russell 2000 -10.8% YTD
  • Nasdaq Composite -13.5% YTD

Europe

  • U.K.’s FTSE 100: Closed +74.31 points, or +1.02% at 7,371.46.
  • Germany’s DAX: + 0.75% to 15,123.87
  • France’s CAC 40: +50.17 +0.74% 6,837.96
  • Italy’s FTSE MIB: +0.18% to 26,019.94.
  • Spain’s IBEX 35: +61.70 +0.73%
  • STOXX Europe 600: +3.23 (+0.71%)

Asia

  • Japan’s Nikkei: +0.2%
  • Hong Kong’s Hang Seng: -1.2%
  • China’s Shanghai Composite: UNCH
  • India’s Sensex: -2.6%
  • South Korea’s Kospi: -1.5%
  • Australia’s ASX All Ordinaries: -0.7%

Bonds

  • U.S. Treasuries the day on their lows with the 10-yr yield revisiting its opening level from Friday, the 2-yr yield returned to yesterday’s starting level. 
  • 2-yr: +5 bps to 1.02%
  • 3-yr: +1 bp to 1.26%
  • 5-yr: +5 bps to 1.57%
  • 10-yr: +5 bps to 1.78%
  • 30-yr: +5 bps to 2.13%
  • $55 bln 5-yr note auction was met with strong demand to follow an equally strong 2-yr note auction on Monday.
  • Strong U.S. 20-year Treasury Bond Auction with High Yield of 2.210% – TRADERS COMMUNITY

Odds of a March 15-16 FOMC meeting via the CME FedWatch Tool:

  • There is a 100% probability of a rate hike of at least 25 basis points in March to 0.25-0.50%.
  • There is a 93.4% probability of a rate hike to 0.50-0.75% in June.
  • There is an 80.2% probability of a rate hike to 0.75-1.00% in September. 
  • There is a 74.9% probability of a rate hike to 1.00-1.25% in December.

Fed announce planned $40B QE purchases from January 14 to February 11

The Fed taper is at $40B per month and is supposed to be reduced by another $20B in February. If they continue that schedule, the taper will be down to $0 in March. The taper would be complete, and the Fed can look to tighten.

What a world we live in the Fed is to continue to buy treasuries, whilst debating balance sheet reduction at the same time. Confusing?

Fed officials saying policy is accommodative, inflation is not transitory. We may need to tighten 4 times in 2022, but we will continue to buy bonds and mortgages at a $40B and then $20B clip.

Granted, it is small change vs what it was, and the balance sheet is near $9T so what’s another $60B or so, but if you are looking to stop accommodation, stop the extra accommodation.

As a result, one of the risks into the next meeting is if the Fed just says “we will not be buying any more treasuries after this tranche is complete”.

What You Need Know About Quantitative Tightening QT Bifurcations Explained – TRADERS COMMUNITY

Most of us are familiar with QE but what is QT? When the Fed reduces its balance sheet it is known as quantitative tightening, the flipside of quantitative easing. The US Federal Reserve at its December FOMC put the world on notice that tighter financial conditions are ahead. What does it mean? The possible Bifurcations would make Mandelbrot wince.

Where did it all start?

The Federal Reserve System Chairman Jerome Powell took a decidedly hawkish tone today at last month’s FOMC and the release of Minutes which sent US stock markets sharply lower. That day in the Treasury market the 2-yr yield, which tracks expectations for the fed funds rate, rose seven basis points to 0.83%. The 10-yr yield settled the session four basis points higher at 1.71%, with growing expectations for a run-up to 2.00%.

Earnings

News Highlights

USA

  • The Conference Board’s Consumer Confidence Index dropped to 113.8 (Briefing.com consensus 112.0) from a downwardly revised 115.2 (prior 115.8) in December. The dip came after three consecutive monthly increases but is still well above the 87.1 reading registered in the same period a year ago.
  • The November FHFA Housing Price Index increased 1.1% m/m following a 1.1% increase in October, and the November S&P Case-Shiller Home Price Index increased 18.3% yr/yr following a revised 18.5% increase (from 18.4%) in October.

Premarket

  • Johnson & Johnson (JNJ 160.00, -2.97): -1.8% despite beating EPS estimates on below-consensus revenue and guiding FY22 EPS and revenue above consensus.
  • IBM (IBM 131.00, +2.18): +1.7% after beating top and bottom-line estimates, although the company expects software segment growth to be at the low end of the mid-single-digits. 
  • American Express (AXP 160.00, +1.07): +0.7% after posting better than expected Q4 results, guiding revenue above consensus, and announcing plans to increase its dividend by approximately 20%. 
  • Verizon (VZ 53.25, +0.29): +0.6% after beating EPS estimates and guiding FY22 EPS above consensus.
  • 3M (MMM 176.00, +3.20): +1.9% after beating EPS estimates. 
  • NVIDIA (NVDA 224.10, -9.62): -4.1% amid a report from Bloomberg indicating that the company is getting ready to end plans for its acquisition of Arm Holdings.

IMF Cuts 2022 Global Growth With US, China and EU all Downgraded – TRADERS COMMUNITY

The International Monetary Fund on Tuesday downgraded its 2022 global growth forecast to 4.4% in its World Economic Outlook report. The IMF said it expects global gross domestic product to grow 0.5% less than previously estimated. The revision is largely due to lower growth in the world’s two largest economies: the U.S. and China. Rising Covid-19 cases, supply chain disruptions and higher inflation have hampered the economic recovery.

Europe

  • Germany’s January ifo Business Climate Index 95.7 (expected 94.7; last 94.8). January Current Assessment 96.1 (expected 96.3; last 96.9) and Business Expectations 95.2 (expected 93.0; last 92.7)
  • U.K.’s December Public Sector net borrowing GBP16.10 bln (expected GBP15.22 bln; last GBP14.00 bln) and January CBI Industrial Trends Orders 24 (expected 22; last 24)
  • Spain’s December PPI 35.9% yr/yr (last 32.2%)

Asia

  • Japan’s December BoJ Core CPI 0.9% yr/yr (expected 0.7%; last 0.8%)
  • South Korea’s Q4 GDP 1.1% qtr/qtr (expected 0.9%; last 0.3%); 4.1% yr/yr (expected 3.7%; last 4.0%)
  • Australia’s Q4 CPI 1.3% qtr/qtr (expected 1.0%; last 0.8%); 3.5% yr/yr (expected 3.2%; last 3.0%).
  • December NAB Business Survey 8 (last 12) and NAB Business Confidence -12 (last 12)

US December CPI +7.0% y/y largest Increase in Consumer Inflation since June 1982 – TRADERS COMMUNITY

US CPI in December rose 0.5% m/m in December (consensus +0.4%). Core CPI rose 0.6% (consensus +0.5%). On a year-over-year basis, total CPI is up 7.0% (versus 6.8% in November) and core CPI is up 5.5% (versus 4.9% November). Inflation remains persistently high as Central Bankers keep trying to reassure us that soaring inflation will come under control.

US Added Lowest New Jobs In 12 Months in December with Just 199,000 But Wages Higher – TRADERS COMMUNITY

US in December added 199k non-farm payrolls jobs, less than forecasted 450k. November previous 210K revised to +249K. Wages increased more than expected and the jobless rate fell to the lowest since February 2020 to 3.9%. US Average Hourly Earnings (M/M) rose 0.6%. Change in private payrolls +211K Change in manufacturing payrolls +26K

Looking ahead:

Earnings we are watching before tomorrow’s open:

Earnings tomorrow include:

  • Boeing
  • AT&T
  • Abbott
  • progressive
  • Kimberly-Clark
  • Corning

All those companies will report before the opening. Companies reporting after the close include:

  • Tesla
  • Intel
  • Lam research
  • ServiceNow
  • Seagate
  • Xilinx

On Thursday morning:

  • MasterCard
  • McDonald’s
  • Valero
  • The Blackstone Group
  • Dow
  • Altria
  • Southwest

After the close on Thursday:

  • Apple
  • Robinhood
  • Visa
  • Western Digital
  • US Steel

Finally on Friday:

  • Chevron
  • Caterpillar
  • Phillips 66
  • Colgate-Palmolive

Trust you all had a great day, sleep well and get your trading plan sorted.

Any questions please feel free to ask them below. Trade Smart!

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