Market Wrap – Stock Markets De-Risking with Oil & Interest Rates Higher

Markets continue to be rattled by Geopolitical fissures from Kazakhstan to Ukraine to UAE and Iran. Political incompetence from London to Washington and so much more aren’t smoothing the situation. Oil traded at 5-year highs; the 10-year note hit the highest level in seven years. The VIX traded back up with stock markets lower from more de-risking effort attributed to angst over rising interest rates and potential earnings disappointments after $GS sold off. CME’s FedWatch Tool is pricing in the probability of four rate hikes in 2022. Market chatter 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

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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 @mayhem4markets plot out 2022.

Around the table today was packed with 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 proecting downside risk if banks close or restrict access to money.

Market Closes

Energy

  • February WTI crude oil (CLG22) on Tuesday closed up +1.61 (+1.92%)
  • February RBOB gasoline (RBG22) closed up +1.28 (+0.53%)
  • February Nymex natural gas (NGG22) settled on Tuesday up by +0.021 (+0.49%).
  • Freezing temperatures as a major winter storm sweeps the U.S. East Coast.  Atmospheric G2 on Tuesday said significantly colder temperatures are expected across the majority of the central and eastern U.S. from Jan 23-27, and that below-normal temperatures are expected across the eastern half of the U.S. from Jan 28-Feb 1. which should boost heating demand for natural gas
  • BNEF data showed gas flows to U.S. export terminals Tuesday were up +2.1% w/w at 12.3 bcf, just below the Dec 19 record of 13.1 bcf.

Metals and FX

  • The U.S. Dollar Index on Friday increased 0.5% to 95.76 bouncing off a 2-month low.
  • February gold (GCG22) futures on Tuesday closed down -4.10 (-0.23%),
  • March silver (SIH22) closed up +0.574 (+2.50%). 
  • Bitcoin flat at 42375 after breaking back above the channel and retesting 39600 low

Stocks

  • The declines in stocks despite lower interest rates suggesting safe haven buying or bond v equity asset allocation.
  • The Dow Jones Industrial Average fell -543.34 points or -1.51% at 35368.46. All-time high at 36952.65.
  • S&P index fell 85.74 points or -1.84% at 4577.10 just above its 100 dma at 4575.95. All-time high at 4818.62
  • NASDAQ index fell -386.85 points or -2.60% at 14506.91 & closed below its 200 dma for the first time since April 2020. Over 10% from the all-time intraday high.
  • Russell 2000 fell -66.23 points or -3.06% at 2096.22 closes 16% from its all-time high
  • Apple 169.80▼ 3.27 (1.89%) just above key recent 168.17 low
  • Apple $3 trillion at $182.86
  • NYSE Adv 516 Dec 2818 Vol 1.0 bln
  • Nasdaq Adv 817 Dec 3602 Vol 5.0 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.

Ark of the Covenant not as it appears

ARK ETF

  • ARKK 77.06▼ 3.18 (3.96%)
  • ARKG 48.70▼ 2.88 (5.58%)
  • ARKX 17.14▼ 0.41 (2.34%)
  • ARKF 33.39▼ 1.63 (4.65%)
  • ARKW 98.95▼ 3.58 (3.49%)

Cboe Daily Market Ratios:

Cboe Daily Market Statistics

S&P 500 sector watch:

  • 10 of the 11 S&P 500 sectors closed lower
  • The energy sector was the only S&P sector to rise +0.4% its monthly gain to roughly 17%,
  • 2.5% (information technology) to 0.7% (real estate)

Markets YTD

  • Dow Jones Industrial Average -0.1% YTD
  • S&P 500 -0.8% YTD
  • Nasdaq Composite -2.9% YTD
  • Russell 2000 -3.1% YTD

Europe

Asia

  • Japan’s Nikkei: -0.3%
  • Hong Kong’s Hang Seng: -0.4%
  • China’s Shanghai Composite: +0.8%
  • India’s Sensex: -0.9%
  • South Korea’s Kospi: -0.9%
  • Australia’s ASX All Ordinaries: -0.1%

Bonds

  • Treasuries got wrecked today. The 2-yr yield rose seven basis points to 1.03%, the 10-yr yield popped nine basis points to 1.87%, and the 30-yr yield took off seven basis points to 2.18%.
  • 2-yr: UNCH at 0.89%
  • 3-yr: -1 bp to 1.20%
  • 5-yr: -1 bp to 1.48%
  • 10-yr: -1 bp to 1.71%
  • 30-yr: -2 bps to 2.06%

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 being buying any more treasuries after this tranche is complete”.

Why not?

Key Treasury Bond Auctions Along Yield Curve Next Week with Newly Hawkish Fed – TRADERS COMMUNITY

Following the turmoil in the market last week following 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

Goldman Sachs Miss Earnings Expectations First Time in Seven Quarters as Trading Revenue Fell – TRADERS COMMUNITY

Goldman Sachs, America’s largest investment bank reported worse than expected fourth earnings Tuesday. It was the first miss by $GS in seven quarters as trading revenue fell and gains on its portfolio of equity investments diminished. The trading goliath followed three of the largest U.S. lenders, JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) reporting mixed results last week. Trading activity has been weak. Both $JPM and $C saw fixed- income trading down double digits at both banks.

Around The Barrel – U.S. Crude Oil Outlook as Geopolitical Risks Grow – TRADERS COMMUNITY

WTI Oil futures continue to rally as the Macro world unravels with Omicron, Kazakhstan and the Middle East. EIA reported US Crude last Week crude drew -4553Kbbl (incl -2468kbbl draw at Cushing). Gasoline stocks grew +7961kbbl. Utilization fell 1.40% to 88.3%. Production -100k to 11,700 kbpd.

  • Empire State Manufacturing Survey for January dropped to -0.7 (consensus 25.0) from 31.9 in December.
  • Activision Blizzard (ATVI 90.00, +24.61, +37.6%) has agreed to be acquired by Microsoft (MSFT 303.00, -7.20, -2.3%) in a deal worth $68.7 billion, or $95.00/share, in cash. The transaction includes Activision Blizzard’s net cash. 

Europe

  • Germany’s ZEW Economic Sentiment survey beat estimates due to optimism that the current headwinds will be temporary.
  • European Economic Commissioner Gentiloni repeated the view that drivers of inflation will “gradually reduce.”
  • The Italian parliament will begin voting for the country’s next president on Monday.
  • Germany sold 5-yr debt and Spain sold 3-month debt to good demand.
  • Eurozone’s January ZEW Economic Sentiment 49.4 (expected 29.2; last 26.8)
  • Germany’s January ZEW Economic Sentiment 51.7 (expected 32.0; last 29.9) and ZEW Current Conditions -10.2 (expected -8.5; last -7.4)
  • U.K.’s November three-month employment change 60,000 (expected 125,000; last 149,000). November Average Earnings Index + Bonus 4.2% yr/yr, as expected (last 4.9%). November Unemployment Rate 4.1% (expected 4.2%; last 4.2%)
  • Italy’s November trade surplus EUR4.163 bln (expected surplus of EUR4.230 bln; last surplus of EUR3.891 bln)
  • Swiss December PPI -0.1% m/m (expected 0.4%; last 0.5%); 5.1% yr/yr (last 5.8%)

Asia

  • The People’s Bank of China lowered its medium-term lending facility rate by ten basis points to 2.85% and it may also lower its loan prime rate on Thursday.
  • Tokyo and nine other prefectures have reportedly requested new coronavirus measures from the Japanese government.
  • The Bank of Japan made no changes to its policy stance, keeping its interest on excess reserves at -0.10%, as expected. The central bank raised its current CPI assessment for the first time since 2014.
  • North Korea conducted another missile test.
  • Japan’s November Industrial Production 7.0% m/m (expected 7.2%; last 1.8%) and November Capacity Utilization 8.0% m/m (last 6.2%)

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

United Health $UNH Bank of America $BAC Proctor & Gamble $PG US Bancorp $USB) ASML $ASML State Street $STT Citizens Financial Group $CFG Fastenal $FAST Prologis $PLD Comerica $CMA

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!