Market Wrap – War Drums = Stocks Down Oil Up Feb 11, 2022

Markets continued as expected after yesterday’s ABC. The S&P 500 fell 1.9% as war drums Geopolitical louder on fears of a Russian invasion of Ukraine. The Nasdaq composite fell 2.8%, Dow (-1.4% and Russell 2000 -1.0%. WTI Closed above $94. Geopolitical safe haven saw a decline in Treasury yields and an increase in hedging premium (the CBOE Volatility Index rose 14.4% to 27.36). Gold futures settled $3.40 higher. We look at the indices, $AAPL, Earnings plays, Gold, Copper, BTC, ETH, Natgas and oil in the podcast. We talk through to today’s action and where to now …

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 & Kimo plot out 2022.

Around the table today was packed with the Fed, geopolitics, domestic political influence and distortions, reading sentiment, patterns and order flow. After hours UAA AFRM UBER and AAPL earnings and chart pattern review. This is a high-risk earnings season. We got the Bear Market rally resolution which has angered the BTFD quotient.

We look at the indices, Gold, Copper, BTC, ETH, Natgas, and oil in the podcast. 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) settled up or $3.25, to $93.09/bbl. 
  • Around The Barrel – Crude Oil Draws 4766kbbls as Refinery Utilization Rises 1.5%
  • March RBOB gasoline (RBH22) closed up +7.32 (+2.75%).  
  • March Nymex natural gas (NGH22) on Friday closed down by -0.018 (-0.45%).  A new 2-week low.   Nat-gas prices under pressure on the outlook for warmer U.S. temperatures, which would reduce heating demand for natgas.  
  • Maxar said today that warmer weather, expected across the Midwest from Feb 16-20, would make its way into eastern states near the end of the period, with above-normal temperatures in the East from Feb 21-25.  
  • Into The Vortex – EIA Reports Natural Gas Storage Fell -222 Bcf 
  • Geopolitical concerns in Ukraine are underpinning European gas prices and sparked short covering in U.S. natgas prices.  Goldman Sachs warned last Monday that Russian gas flows to Europe could be curtailed for “an indefinite period” if sanctions hit Russia’s Nord Stream 2 natgas pipeline to Germany due to escalating tensions over Ukraine.
  • BNEF data showed gas flows to U.S. export terminals Friday rose +1% y/y at 12.7 bcf just below the Dec 19 record of 13.1 bcf.

Metals and FX

  • The dollar index Mar ’22 (DXH22) Friday rose +0.518 (+0.54%) and posted a 1-week high. 
  • April gold (GCJ22) futures settled $3.40 higher (+0.19%) to $1,840.80/oz, 2-3/4 month high on Geopolitical risks.
  • March silver (SIH22) closed down -0.153 (-0.65%)
  • Bitcoin Feb 22 Futures settle Friday -1790 42390

Stocks

For The Day

  • Dow industrial average fell -503.53 points or -1.43% at 34738.07. For the week, Dow fell -1.00%. The Dow all-time high close at 36952.65.
  • S&P index fell -85.42 points or -1.90% at 4418.65. S&P has its worst 2-day performance since October 2020 (-3.6%). For the week, S&P fell -1.88%. The S&P all-time high close at 4818.62.
  • NASDAQ index fell -394.48 points or -2.78% at 13791.16. Nasdaq had its worst 2-day performance since Sept 2020 (down -4.8%). For the week, Nasdaq fell -2.18%.
  • Russell 2000 fell -21.01 points or -1.02% at 2030.14 The Russell 2000
  • CBOE Volatility Index rose 14.4% to 27.36
  • NYSE Adv 910 Dec 2255 Vol 1.1 bln
  • Nasdaq Adv 1348 Dec 3007 Vol 5.1 bln

S&P 500 sector watch:

  • 9 of the 11 S&P 500 sectors closed lower
  • Information technology (-3.0%), consumer discretionary (-2.8%), and communication services (-2.5%) hit.
  • Energy sector rose 2.8% as oil prices climbed back above $93 per barrel ($93.09, +3.25, +3.6%). The utilities sector (+0.01%) was little changed.

Ark of the Covenant not as it appears

  • ARK ETF
  • ARKK 71.90▼ 1.86 (-2.52%)
  • ARKG 48.54▼ 1.12 (2.26%)
  • ARKX 16.46▼ 0.26 (-1.55%)
  • ARKF 31.71▼ 0.80 (-2.46%)
  • ARKW 92.19▼ 2.82 (-2.97%)

US Markets YTD

  • Dow Jones Industrial Average -4.4% YTD
  • S&P 500 -7.3% YTD
  • Russell 2000 -9.6% YTD
  • Nasdaq Composite -11.9% YTD

Cboe Daily Market Ratios:

Cboe Daily Market Statistics

Europe

  • STOXX Europe 600: 469.57 -2.78-0.59% (+1.61% for the week)
  • Germany’s DAX: -0.5% (+1.4% for the week)
  • U.K.’s FTSE 100: -0.1% (+2.0% for the week)
  • France’s CAC 40: -0.5% (+0.9% for the week)
  • Italy’s FTSE MIB: -0.8% (+1.3% for the week)
  • Spain’s IBEX 35: -1.0% (+2.5% for the week)

Asia

Back from Lunar New Year:

  • Japan’s Nikkei: CLOSED (+0.9% for the week)
  • Hong Kong’s Hang Seng: -0.1% (+1.4% for the week)
  • China’s Shanghai Composite: -0.7% (+3.0% for the week)
  • India’s Sensex: -1.3% (-0.8% for the week)
  • South Korea’s Kospi: -0.9% (-0.1% for the week)
  • Australia’s ASX All Ordinaries: -1.1% (+1.3% for the week)

Recall Last Month: 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

US For January

  • S&P and Nasdaq have their worst month since March 2020
  • Nasdaq has its worst January since 2008
  • S&P and Nasdaq have their best 2-day gain since November 2020
  • Tesla fell 11% in January
  • Amazon fell 10%.
  • Dow, -3.32%. The Dow was down -8.77% at the month’s low
  • S&P -5.3%. The S&P was down -11.4% at the month’s low
  • Nasdaq -8.98%. The Nasdaq was down -16.3% at the month’s low
  • Russell 2000, -9.8%. It was down -15.34% at the month’s low

Bonds

After U.S. Treasuries ended Thursday sharply lower with shorter tenors and the spot 7-yr yield flat with the 10-yr yield safe haven buying came to the fore Friday. The 2-yr yield fell four basis points to 1.52%, and the 10-yr yield fell eight basis points to 1.96%. The 2-yr yield increased by 20 bps for the week while the 10-yr yield rose three basis points, resulting in a tightening of the 2s10s spread to 44 bps from last Friday’s 61 bps. 

  • 2-yr: -4 bps to 1.52% (+20 bps for the week)
  • 3-yr: -6 bps to 1.74% (+19 bps for the week)
  • 5-yr: -8 bps to 1.87% (+8 bps for the week)
  • 10-yr: -8 bps to 1.96% (+3 bps for the week)
  • 30-yr: -5 bps to 2.26% (+3 bps for the week)

The probability for a half-point hike in March decreased to 50.2% from 93.8% yesterday, according to the CME FedWatch Tool. 

Fed 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%.

Key Earnings Reviews

News Highlights

USA

White House National Security Advisor Jake Sullivan commented that no final decision has been made by President Putin but added that Russia has all forces in place for “major military action”. Further, officials believe that a false flag operation is also a possibility, and that Russia is looking for a pretext to justify a possible invasion.

The pandemic in the U.S. has improved after the 7-day average of new U.S. Covid infections fell to a 1-1/2-month low Thursday at 206,569. 

The preliminary reading for the University of Michigan Consumer Sentiment Index for February was not good. It slumped to 61.7 (Briefing.com consensus 67.5) from the final reading of 67.2 for January. The February reading marks the lowest level for the index since November 2012.

  • Illumina (ILMN 354.64, -3.44): -1.0% despite beating top and bottom-line estimates. 
  • Affirm (AFRM 52.70, -5.98): -10.2% on top of yesterday’s 21% earnings-driven decline. AFRM was downgraded to Underperform from Hold at Jefferies.  
  • Zillow (ZG 54.19, +6.33): +13.2% after beating top and bottom-line estimates and saying the home segment wind-down process is running smoothly. 
  • Expedia (EXPE 206.00, +8.48): +4.3% after beating EPS estimates. 
  • Cleveland-Cliffs (CLF 19.45, -1.50): -7.2% after missing top and bottom-line estimates.

Europe

  • Germany’s January CPI 0.4% m/m, as expected (last 0.4%); 4.9% yr/yr, as expected (last 4.9%)
  • U.K.’s Q4 GDP 1.0% qtr/qtr (expected 1.1%; last 1.0%); 6.5% yr/yr (expected 6.4%; last 7.0%).
  • December Construction Output 2.0% m/m (expected -0.9%; last 1.9%); 7.4% yr/yr (expected 7.7%; last 3.6%).
  • Q4 Business Investment 0.9% qtr/qtr (expected 2.6%; last -0.8%); -0.8% yr/yr (last 3.2%). December Industrial Production 0.3% m/m (expected 0.1%; last 0.7%); 0.4% yr/yr (expected 0.6%; last -0.2%). December trade deficit GBP12.53 bln (expected deficit of GBP12.50 bln; last deficit of GBP12.70 bln)
  • Swiss January CPI 0.2% m/m (expected 0.1%; last -0.1%); 1.6% yr/yr (expected 1.5%; last 1.5%)
  • European Central Bank President Lagarde repeated that ending asset purchases is a condition for raising rates, adding that a rate hike “would not solve any of our current problems.” She repeated her belief that inflation will decelerate during the course of the year.
  • Germany’s Chambers of Industry and Commerce raised the domestic inflation forecast for the year to 3.5% from 2.5% and lowered the domestic GDP growth forecast to 3.0% from 3.6%.

Asia

  • New Zealand’s January Business NZ PMI 52.1 (last 53.7) and January Electronic Card Retail Sales 3.0% m/m (last 0.3%); 5.7% yr/yr (last 4.2%). Q1 Inflation expectations 3.27% (expected 3.11%; last 2.96%)
  • The Bank of Japan will purchase 10-yr JGBs on Monday in response to the recent rise in yields.
  • South Korea’s exports decreased 12.6% yr/yr during the first ten days of February, though Lunar New Year celebrations took place during that time, a week earlier when compared to 2021. Per-day exports were up 14.2%. Chip exports were up 7.4%.
  • There was speculation that the People’s Bank of China will ease policy next week.

Looking ahead:

  • Monday:  Chatter on Ukraine and Russia, Fed bets with Bullard
  • Tuesday: January PPI (prior 0.2%), Core PPI (prior 0.5%), and February Empire State Manufacturing survey (prior -0.7) at 8:30 ET and December net Long-Term TIC Flows (prior $137.40 bln) at 16:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -8.1%) at 7:00 ET; January Retail Sales (prior -1.9%), Retail Sales ex-auto (prior -2.3%), and January Import/Export prices at 8:30 ET; January Industrial Production (prior -0.1%) and Capacity Utilization (prior 76.5%) at 9:15 ET; February NAHB Housing Market Index (prior 83) and December Business Inventories (prior 1.3%) at 10:00 ET; weekly crude oil inventories (prior -4.76 mln) at 10:30 ET; and $19 bln 20-yr Treasury bond auction results at 13:00 ET
  • Thursday: January Housing Starts (prior 1.702 mln), Building Permits (prior 1.873 mln), weekly Initial Claims (prior 223,000), Continuing Claims (prior 1.621 mln), and February Philadelphia Fed survey (prior 23.2) at 8:30 ET; and weekly natural gas inventories (prior -222 bcf) at 10:30 ET
  • Friday: January Existing Home Sales (prior 6.18 mln) and January Leading Indicators (prior 0.8%) at 10:00 ETCOT Reports

Fed Week Ahead

Monday: Bullard

Tuesday: Nothing so far

Wednesday: FOMC minutes

Thursday: Bullard again Mester

Friday: Evans Waller Brainard (but topic is central bank digital currencies)

Earnings we are watching next week:

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!