Markets continued down from yesterday trend breaks. Oil traded at new 5-year highs; U.S. Treasuries ended Wednesday with solid gains across the curve. Again, stock markets lower from more de-risking effort attributed to angst over rising interest rates and potential earnings disappointments. CME’s FedWatch Tool is pricing in the probability of four rate hikes in 2022. 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
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 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.
- February WTI crude oil (CLG22) on Wednesday closed 86.96 up +1.53 (+1.79%)
- March WTI crude oil (CLH22) on Wednesday closed 85.80 up +0.97
- February RBOB gasoline (RBG22) closed up +2.52 (+1.04%)
- February Nymex natural gas (NGG22) settled on Wednesday closed down by -0.252 (-5.88%).
- Freezing temperatures as a major winter storm sweeps the U.S. East Coast. Atmospheric G2 on said Wednesday that well below-normal temperatures are expected across the central and eastern U.S. from Jan 24-28, which will boost heating demand for nat-gas.
- BNEF data showed gas flows to U.S. export terminals Wednesday were up +16.6% y/y at 12.6 bcf, just below the Dec 19 record of 13.1 bcf.
Metals and FX
- The U.S. Dollar Index declined 0.2% to 95.56 back towards a 2-month low.
- February gold (GCG22) futures settled $30.80 higher (+1.7%) to $1,843.20/oz, their highest settle since November 2021.
- March silver (SIH22) Wednesday closed up +0.739 (+3.15%).
- Bitcoin flat at 41675 after breaking back above the channel and retesting 39600 low
- The declines in stocks despite lower interest rates suggesting safe haven buying or bond v equity asset allocation.
- The Dow Jones Industrial Average fell -339.82 points or -0.96% at 35028.64. All-time high at 36952.65.
- S&P index fell -44.32 points or -0.97% at 4532.70 under its 100 dma at 4575.95. All-time high at 4818.62
- NASDAQ index fell -166.63 points or -1.15% at 14340.27 & closed again below its 200 dma for the first time since April 2020. Over 11% from the all-time intraday high.
- Russell 2000 fell -33.44 points or -1.6% at 2062.78 closes 17% from its all-time high
- Apple 166.23▼ 3.57 (2.10%) under key recent 168.17 low
- Apple $3 trillion at $182.86
- NYSE Adv 1016 Dec 2292 Vol 942.1 mln
- Nasdaq Adv 1443 Dec 2879 Vol 4.6 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
- ARKK 75.69▼ 1.22 (1.59%) prior 77.06▼ 3.18 (3.96%)
- ARKG 47.77▼ 0.91 (1.87%) prior 48.70▼ 2.88 (5.58%)
- ARKX 17.01▼ 0.13 (0.76%) prior 17.14▼ 0.41 (2.34%)
- ARKF 33.08▼ 0.29 (0.87%) prior 33.39▼ 1.63 (4.65%)
- ARKW 97.76▼ 1.19 (1.20%) prior 98.95▼ 3.58 (3.49%)
Cboe Daily Market Ratios:
S&P 500 sector watch:
- 9 of the 11 S&P 500 sectors closed lower
- Consumer staples (+0.7%) and utilities (+0.5%) sectors closed higher.,
- Consumer discretionary (-1.8%), financials (-1.7%), and information technology (-1.4%) sectors were the weakest
- Dow Jones Industrial Average -3.6% YTD
- S&P 500 -4.9% YTD
- Russell 2000 -8.1% YTD
- Nasdaq Composite -8.3% YTD
- German DAX, +0.1%
- France’s CAC, +0.4%
- UK’s FTSE 100, +0.3%
- Italy’s FTSE MIB -0.5%
- Spain’s Ibex unchanged
- Japan’s Nikkei: -2.8%
- Hong Kong’s Hang Seng: +0.1%
- China’s Shanghai Composite: -0.3%
- India’s Sensex: -1.1%
- South Korea’s Kospi: -0.8%
- Australia’s ASX All Ordinaries: -1.0%.
- After Treasuries got wrecked yesterday U.S. Treasuries ended Wednesday with solid gains across the curve after reversing the 10-yr yield went to a fresh two-year high. 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%.
- 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”.
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%.
- Morgan Stanley Revenue Increased in Wealth Management and Investment Management – TRADERS COMMUNITY
- Bank of America Consumer and Global Banking Earnings Expected to Gain with Higher Interest Rates – TRADERS COMMUNITY
- Goldman Sachs Miss Earnings Expectations First Time in Seven Quarters as Trading Revenue Fell – TRADERS COMMUNITY
- BlackRock Delivers Fourth Quarter Earnings in A Changing Interest Rate Environment – TRADERS COMMUNITY
- Citigroup Fourth Quarter Earnings Challenged by Consumer Banking Restructure – TRADERS COMMUNITY
- Wells Fargo Under New Management Deliver Fourth Quarter Earnings – TRADERS COMMUNITY
- World’s Biggest Bank JPMorgan Kicks Off Fourth Quarter Earnings Season – TRADERS COMMUNITY
- Big Banks JPMorgan, Citi and Wells Fargo Kick Off Earnings Season with Blackrock – TRADERS COMMUNITY
US housing starts rose in December 1.4% to a seasonally adjusted annualized rate of 1.702 mln units versus a consensus 1.650 mln from a revised 1.678 mln units in November (from 1.679 mln). Housing demand remains strong although high prices for building materials, lumber, supply constraints and labor shortages. Building permits rose 9.1% to a seasonally adjusted 1.873 mln in December up from a consensus 1.702 mln and a revised 1.717 mln in November (from 1.712 mln).
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.
- Procter & Gamble (PG 158.26, +1.53): +1.0% after beating top and bottom-line estimates and raising its FY22 revenue guidance.
- UnitedHealth (UNH 463.00, +2.01): +0.4% after beating top and bottom-line estimates and reaffirming its FY22 guidance.
- Bank of America (BAC 47.75, +1.49): +3.2% after beating EPS estimates.
- Morgan Stanley (MS 97.01, +3.00): +3.2% after beating EPS estimates.
- Fastenal (FAST 59.60, +1.21): +2.1% after beating top and bottom-line estimates.
- Eurozone’s November Current Account surplus EUR23.60 bln (last surplus of EUR18.10 bln).
- November Construction Output -0.18% m/m (last 0.64%)
- Germany’s December CPI 0.5% m/m, as expected (last -0.2%); 5.3% yr/yr, as expected (last 5.2%)
- U.K.’s December CPI 0.5% m/m (expected 0.3%; last 0.7%); 5.4% yr/yr (expected 5.2%; last 5.1%). December Core CPI 0.5% m/m (expected 0.2%; last 0.5%); 4.2% yr/yr (expected 3.9%; last 4.0%). December Input PPI -0.2% m/m (expected 0.7%; last 1.5%) and Output PPI 0.3% m/m (expected 0.6%; last 1.0%). December RPI 1.1% m/m (expected 0.7%; last 0.7%); 7.5% yr/yr (expected 7.1%; last 7.1%)
- Australia’s prime minister is expected to call a federal election for the second half of May
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 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
Earnings we are watching before tomorrow’s open
Open: American Airlines (AAL), Travelers (TRV), Baker Hughes (BKR), Fifth Third (FITB), KeyCorp (KEY), Northern Trust (NTRS), Regions Fincl (RF), M&T Bank (MTB), First Horizon (FHN)
Close: Netflix (NFLX), PPG Industries (PPG), CSX (CSX), Intuitive Surgical (ISRG), SVB Financial Group (SIVB), Bank OZK (OZK)
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!