Market Wrap – Fed Speaks Hawkish, Markets Give It All Back

Stock markets gave up another Bear Market rally after initially soaring on the FOMC statement that was orderly. Selling took hold with hawkish talk from Powell about strong employment, economy and problematic inflation. U.S. Treasuries finished Wednesday with losses across the curve. Oil was back around 7-year highs and natural gas gave up a 6% gain to go negative. Volatility continued after hours with Tesla despite record earnings fell from 943 to 879 and back to 938. Volatility reign supreme in a pass the parcel market. The specter of energy woes and Ukraine overhang. We look at the indices, $TSLA, $INTC, Gold, Copper, BTC, ETH, Natgas and oil in the podcast. Oil moved around with geopolitical risks in the Ukraine and risk assets bouncing off the lows after the EIA storage report.  

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 & Kimo 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 the Fed, 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 Wednesday closed up +1.75 (+2.04%) Settled at a 7-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 +6.06 (+2.46%). gasoline posting a 3-1/2 month high.
  • February Nymex natural gas (NGG22) on Wednesday closed up by +0.224 (+5.53%).
  • Nat-gas prices Wednesday jumped to a 1-1/2 week high and settled sharply higher on forecasts for cold U.S. temperatures to linger into next month, which will boost heating demand for natgas.  Maxar said Wednesday that a Northeast winter storm would bring below-normal temperatures to the East Coast from Jan 31 Feb 4, and temperatures will remain below normal in the eastern part of the U.S. from Feb 5-9.
  • 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 Wednesday were up +1.8% w/w at 12.8 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 rose 0.6% to 96.48. The dollar extended Monday’s advance up to a new 2-week high.
  • February gold (GCG22) settled $22.80 lower (-1.2%) to $1,829.70/oz ahead of the Fed.
  • March silver (SIH22) closed down -0.089 (-0.37%). 
  • Bitcoin down at 36,480 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 reached a high up 517.94 points. Dow fell -129.64 points or -0.38% at 34168.08. It fell 1600 points or -4.57% last week. The Dow is down -6.6% from its all-time high at 36952.65.
  • S&P index reached a high at up 97.65 points. S&P fell -6.61 points or -0.15% at 4349.86 The S&P fell -5.68% last week. The S&P is down -7.26% from its all-time high at 4818.62.
  • NASDAQ index reached a high at up 463.40 points.  The NASDAQ closed down -down -315. 82 points or -2.28%. Last week the NASDAQ fell -7.53% The NASDAQ index is down 17.3% from its all-time high seen in November.
  • Russell 2000 fell -27.56 points or -1.38% at 1976.46.  Closed -16. 52% from its all-time high. The Russell 2000 closed off its 52-week low.
  • CBOE Volatility 31.96+0.80 (+2.57%) At close: 04:15PM EST
  • NYSE Adv 1014 Dec 2253 Vol 1.2 bln
  • Nasdaq Adv 1241 Dec 2857 Vol 5.7 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 69.07▼ 1.73 (2.44%)
  • ARKG 45.68▼ 1.01 (2.16%)
  • ARKX 15.99▼ 0.26 (1.60%)
  • ARKF 29.77▼ 0.71 (2.33%)
  • ARKW 87.28▼ 2.21 (2.47%)

Cboe Daily Market Ratios:

Cboe Daily Market Statistics

S&P 500 sector watch:

  • 9 of the 11 S&P 500 sectors closed lower
  • Nine of the 11 S&P 500 sectors closed in negative territory
  • Real estate (-1.7%) and materials (-1.0%) sectors with losses of at least 1.0%.
  • Information technology (+0.7%) and financials (+0.3%)

Markets YTD

  • Dow Jones Industrial Average -6.0% YTD
  • S&P 500 -8.7% YTD
  • Russell 2000 -12.0% YTD
  • Nasdaq Composite -13.4% YTD

Europe

  • European Stoxx 600 climbed 1.68%.
  • U.K.’s FTSE 100 gained 1.33%,
  • Germany’s DAX surged up 2.22%
  • France’s CAC 40 moved up 2.11%,
  • Switzerland’s SMI ended 1.28% up.
  • FTSE MIB 30 was the best performer jumping 571.11 points, or 2.19%, to close at 26,600.

Asia

  • ASX All Ordinaries Index closed for Australia Day
  • Hang Seng Index HSI 24,289.90 +46.29 +0.19%
  • Nikkei Stock Average 225 27,011.33 -120.01 -0.44%
  • Shanghai Composite Index 3,455.67 +22.61 +0.66%
  • South Korea, Kospi declined 0.41% to close at 2,709.24.
  • Singapore’s Straits Times index jumped 0.91%.
  • India closed for holidays

Bonds

  • U.S. Treasuries finished Wednesday with losses across the curve. 2-yr Treasury note yield, which tracks expectations for the fed funds rate, rose six basis points to 1.08% (touched 1.15% post-settlement a fresh Jan high).
  • 2-yr: +6 bps to 1.08%
  • 3-yr: +11 bps to 1.37%
  • 5-yr: +8 bps to 1.65%
  • 10-yr: +7 bps to 1.85%
  • 30-yr: +4 bps to 2.17%
  • $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

  • New home sales increased 11.9% month-over-month in December to a seasonally adjusted annual rate of 811,000 units (Briefing.com consensus 765,000) from a downwardly revised 725,000 (from 744,000) in November. On a year-over-year basis, new home sales were down 14.0%.
  • Deceleration seen in sales of higher-priced homes (over $400,000), which suggests prospective buyers could be starting to show some price resistance (i.e., fear of buying at near-term top) as this slowdown occurred before the big jump in rates, and stock market sell-off, in January.
  • The Advance report for International Trade in Goods for December showed a deficit of $101.0 billion, versus a revised $98.0 billion (from $97.8 billion) in November. The Advance report for Retail Inventories for December rose 4.4%, while the Advance report for Wholesale Inventories for December rose 2.1%.
  • The weekly MBA Mortgage Applications Index fell 7.1% following a 2.3% increase in the prior week.
  • The Bank of Canada left its overnight rate at 0.25%, as expected.

Premarket

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

  • Denmark will lift all coronavirus restrictions on Tuesday.
  • The Italian parliament will continue voting for president after yesterday’s second round failed to produce a winner.
  • British Prime Minister Johnson is resisting renewed calls to resign after the publishing of a report that details several parties that the government held during the coronavirus lockdown.
  • France’s January Consumer Confidence fell to 99 from 100 (expected 98).
  • Italy’s December non-EU trade surplus reached EUR4.74 bln (last surplus of EUR4.22 bln).
  • Swiss January ZEW Expectations rose to 9.5 from -10.8.

Asia

  • The Bank of Japan expects that Japan’s CPI will briefly rise to 1.5% in the first half of the year.
  • Japan’s December Leading Index rose 1.7% m/m (last 1.5%) and Coincident Indicator increased 3.0% m/m (expected 3.8%; last 1.1%). November Corporate Services Price Index was up 1.1% yr/yr (expected 1.0%; last 1.1%).
  • South Korea’s January Consumer Confidence rose to 104.4 from 103.8.
  • Singapore’s December Industrial Production rose 4.3% m/m (expected 0.9%; last 1.8%), increasing 15.6% yr/yr (expected 12.0%; last 14.1%).

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:

Advance estimate for Q4 GDP, the weekly Initial and Continuing Claims report, Durable Goods Orders for December, and Pending Home Sales for December on Thursday. 

Earnings we are watching before tomorrow’s open:

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!