Traders Market Weekly: Bull or Bear Trap Ahead of the Fed?

October 30 – November 6, 2022

FEAR NOT Brave Investors

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Image: From The San Francisco Call, 15 January 1911. LIBRARY OF CONGRESS

The Week That Was – What Lies Ahead?

Contents

Click on the links below to navigate to the relevant section.

Editorial

The confluence of events that helped reverse acute global de-risking and deleveraging dynamics that began with the Treasury and currency markets last Friday continued this week. The S&P500 jumped 4.0% this week, the index’s two-week rally has been 8.9%’s rally. This week was fed by some brutal short covering, an already short market got shorter on disappointed earnings from Alphabet, Amazon, Meta, Spotify, Texas Instruments, Boeing and Microsoft and Zillow laying off more staff. For index futures, the players were already short and with such exposed gamma and actually positive earnings elsewhere the bear trap was set and sprung.

The housing market continues to be imploding, something the Fed needs to be very wary of or the building comes crumbling down. New home sales declined 10.9% month-over-month in September. US home prices in August according to CoreLogic Case-Shiller fell -1.32% in August from July, the second month-over-month decline since January 2019.

The strong earnings were not unexpected from big oil and gas, Valero, Halliburton, ExxonMobil, Chevron and Shell all delivered record or near record numbers. There were also positive surprises from likes of PACCAR, Ford, Intel and Apple. In an uber bear market, it doesn’t take much. The Bank of Canada raised the target for its overnight rate by 50bps to 3.75%. ECB raised 75bps but didn’t seem keen to push the envelope. The BOJ signaled more of the same. US GDP was stronger than expected but PCE was steady. Consumer confidence is low with such high prices. There was the successful debut of the Mobileye IPO. Elon Musk completed his Twitter deal. Many catalysts to ignite short covering,

A reminder the spark was last Friday WSJ’s Nick Timiraos indicated the Fed will raise rates by another 75 basis points at the November meeting but will then possibly consider a smaller increase at the December meeting. San Francisco Fed President Daly said she thinks stepping down on the pace of rate increases will help preserve market structure. Daly said that policymakers should start planning for a reduction in the size of interest-rate increases, though it’s not yet time to “step down” from large hikes. Now we head into another FOMC.

China Breaking Records, Not the Ones You Want

Xi Jinping secured a historic third term as general secretary at China’s 20th Communist Party Congress. He has stacked the system with blind followers and dismissed prominent rivals. An apt description is China is continuing its long march toward personalistic autocracy. A market already hurt by China simply sold more.

  • Hong Kong’s Hang Seng index sank 8.3% for the week, ytd losses now 36.5%.
  • The Hang Seng China Financials Index’s dumped, now down 29% ytd.
  • The Shanghai Composite dropped 4%
  • Growth oriented ChiNext lost 6.0%.

Meanwhile Chinese Bank CDS are imploding, the Yuan is collapsing further. The Chines property market, the largest in the world shivers at devouring speed as evidenced by China’s developer bonds.

China is faced with post-bubble structural adjustment within a dysfunctional credit system. The market is clear in its pricing China must change the trajectory of monetary inflation to avert financial collapse. Xi waxes lyrical in his denial relying on the CCP cult ‘Chinese modernization offers humanity a new choice for achieving modernization,’

Chinese developer stocks were smashed 7%. China’s number two developer Vanke CDS surged 230 this week to a record 941 bps. Vanke bond yields surged almost six percentage points to 16.8%, after beginning the year at 3.0%. Number one developer Country Garden, with yields (3 1/8 of’ 25) closing Friday at 100%. Country Garden bonds this week is now in that toxic club of bonds trading at less than 10 cents on the dollar.

China Bank CDS

  • Bank of China CDS spiked again this week to a high of 159 bps, before closing Friday up four to 138 bps.
  • Industrial and Commercial Bank CDS Tuesday spiked to 160 bps (ended the week up 8 to 144bps).
  • China Construction Bank spiked to 159 bps (up one to 145bps).
  • China Development Bank CDS rose to 151 bps (up 3 to 132 bps).
  • China sovereign CDS traded up to 138 bps, the high since February 2016, before ending the week down one to 119 bps.

Chinese high yield dollar bonds Index was up over 100 bps to yield a record 28.2%. The Yuan fell another 0.5% versus the dollar (down 12% y-t-d) to the lowest seen since January 2008.

Liquidity Draining from the World Financial System 

“The latest bout of global financial volatility has heightened concerns about regulators’ continuing failure to resolve liquidity problems with US Treasuries — the debt that serves as a benchmark for the world. It’s getting harder and harder to buy and sell Treasuries in large quantities without those trades moving the market. Market depth, as the measure is known, last Thursday hit the worst level since the throes of the Covid-19 crisis in the spring of 2020, when the Federal Reserve was forced into massive intervention.”

October 6 – Bloomberg (Liz Capo McCormick)

The market rupture is a tripod of destruction unfolding. Firstly, financial asset overvaluation has swung way past any sound underlying economic wealth structure. Secondly over-leverage in crowded bets. Thirdly we have greed enthused, as always in these cycles, risk engineering, transfer and management that ignores or understands bifurcation and contagion outcomes.

The pattern of trashing interest rate-sensitive technology stocks and early-stage companies with no pathway to profits continued globally these issues posted huge losses again. The only support is coming from government assisted ‘fake markets’ such as solar. We all know how transitory that can be.

Leverage has become toxic, a development that if not addressed will have deep and with far-reaching sequels. It’s not too farfetched to suggest that the markets are on the verge of a rupture that would be difficult to contain. Should the crisis of confidence dynamics that hit Britain feed into other markets a powerful global contagion could be unleashed. The markets are dislocated, and financial stability is at risk. A sobering thought is the UK is just the initial first world pension system in this cycle facing the harsh reality of a steep devaluation of assets and the prospect of widespread insolvencies and debilitating negative sentiment.

More kerosene was thrown on the fire when Goldman Sachs slashed its year-end target for the S&P 500 Index to 3600 from 4300, arguing that a dramatic shift in the outlook for interest rates moving higher from the FOMC will weigh on valuations for US equities.

The higher interest rate scenario in Goldman’s valuation model supports a price-earnings multiple of 15 times, down from 18 times previously. The update by FedEx of their earnings and announced $2.9 billion in cost savings highlighted the global risk. Goldman said the risks to its latest forecast are still skewed to the downside because of the rising odds of recession that would widen the yield gap and potentially push the US equity benchmark to a trough of 3150.

Ahead is Jobs, Central Banks and More

More central bankers:

Another week ahead with major central banks from the Federal Reserve to the Bank of England and the RBA as well as regional central banks like Norges and Bank Negara. What they communicate and how the market interprets it are becoming increasingly important as cycle rate peaks may be drawing closer.

Clearly inflation is high and volatile, but evidence of market frailties should also be treated more seriously by central banks and specifically from the standpoint of confidence in their guidance and actions. If they didn’t learn that from the taking down of a UK Chancellor, a fiscal plan, and even a Prime Minister then even we would be surprised. Last Fridays WSJ’s Nick Timiraos  and San Francisco Fed President Daly suggests they did.

Click here to see the Full Week Ahead List Below


Independence – Never Take It for Granted Traders

“In aggregate, the market goes from order to disorder, and on that journey little pockets of order can form, including in commodities, bonds, stocks, currencies that circle back and reorder disorder. Then there is us the market player that reflects through order and disorder in an ever-evolving loop towards independence. It all starts with gravity and ends with equilibrium and back we go.” KnovaWave “The rules of market flux”

The Fed has kicked off its first real tightening campaign since 1994, with securities markets already at the brink of illiquidity and dislocation. Markets could soon be screaming for assurances of the Fed’s “buyer of last resort” liquidity backstop, while the Fed is prepared to begin withdrawing liquidity by selling Treasuries and MBS.

Another important aspect is the Fed doesn’t Control corporate pricing or wage decisions. Let us be clear geopolitical, climate change developments and what an out of depth, politically motivated administration are outside the Fed’s sphere of influence. There has been over $5.1 Trillion new “money” in 126 weeks, it’s a reasonable conclusion the Fed has lost control of Inflation.

Volatility

The VOLX`s underlying instrument is the Mini VIX™ Future. The CBOE Volatility Index (VIX) is an up-to-the-minute market estimate of expected volatility. The VIX is calculated using a formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls (options) on the S&P 500.

When the VIX is highly reactive, VIX related products can serve as potentially effective hedging tools, when the VIX is not very reactive, traditional hedging techniques may be a better choice.

Monetary inflation is running wild. In 2021 Federal Reserve Credit expanded $1.391 TN or 19% to a record $8.742 TN. The Fed’s balance sheet inflated a mindboggling $5.015 TN, or 135%, in the 120 weeks since QE was restarted in September 2019. Federal Reserve Assets have now inflated 10 times since the mortgage finance Bubble collapse.

We need to grasp all the risks to be wary off and received plenty of flak from it. We always talk here about expect the unexpected and now that is front and center, gage the market’s reaction, the market is always right and that’s why we focused on the crowd psychology aspect over the past few weeks.

“We have a market trying to interpret the Fed who is trying to find out how they can interpret their long-only portfolio at a risk parity where rates cannot rise.”

– MoneyNeverSleeps

Our weekly reminder for risk. The downside is clear with the absence of moral hazard from repeated Federal Reserve market bailouts in an environment of some would say obscene liquidity pumps. Pure greed is the other part, not wanting to miss out on fees. The obvious question is, how deeply ingrained is this attitude through the markets? How do we ween the markets off this continuous dip feed? At this point the Central Banks have kicked that answer down the road.


Part A – Stock Markets

Weekly Highlights – USA

Indices

  • S&P500 jumped 4.0% (down 18.2% y-t-d)
  • Dow Jones Industrial Average rose 5.7% (down 9.6%).
  • S&P 400 Midcaps rose 5.3% (down 14.3%),
  • Small cap Russell 2000 jumped 6.0% (down 17.7%).
  • Nasdaq100 gained 2.1% (down 29.3%).
Major US Stock Indices

US Markets YTD

  • Dow Jones Industrial Average: -9.6% YTD
  • S&P Midcap 400: -14.3% YTD
  • S&P 500: -18.2% YTD
  • Russell 2000: -17.7% YTD
  • Nasdaq Composite: -29.0% YTD

Sectors

  • Utilities surged 6.6% (down 7.1%).
  • Banks rallied 5.9% (down 20.9%)
  • Broker/Dealers surged 7.2% (down 4.6%)
  • Transports jumped 7.0% (down 17.6%).
  • Semiconductors rose 4.1% (down 38.3%).
  • Biotechs jumped 5.5% (down 10.5%).
  • While bullion declined $13, the HUI gold equities index increased 1.4% (down 23.2%).
11 Sector SPDRs as well as the 500 component stocks last week.

Biggest SPX Stock Winners and Losers Last Week

Major US Indices

Cboe Daily Market Statistics

Cboe Daily Market Statistics

Global Stock Market Highlights

This image has an empty alt attribute; its file name is SP-500-Earnings-Forward.png

Highlights – Europe Stocks

  • U.K.’s FTSE equities index increased 1.1% (down 4.6% y-t-d).
  • France’s CAC40 rallied 3.9% (down 12.3%).
  • German DAX equities index recovered 4.0% (down 16.6%).
  • Spain’s IBEX 35 equities index surged 4.9% (down 9.1%).
  • Italy’s FTSE MIB index rose 4.5% (down 17.6%). 

Germany’s benchmark Blue Chip DAX 30 index (Deutscher Aktienindex) expanded to 40 companies on 20 September adding 10 new members to the German stock index from the MDAX which will be reduced from 60 to 50 members.

 Highlights – Asia Stocks

  • Japan’s Nikkei Equities Index increased 0.8% (down 5.9% y-t-d)
  • South Korea’s Kospi index rallied 2.5% (down 23.8%).
  • India’s Sensex equities index increased 1.1% (up 2.9%).
  • China’s Shanghai Exchange Index sank 4.0% (down 19.9%). 

 Highlights – Australian Stocks

  • Australia’s ASX All Ordinaries: Australia’s ASX All Ordinaries: -0.9% Friday (+1.60% for the week)
  • On Friday mining stocks fell 4% weighed down the market after iron ore prices hit $US82.45 a ton in Singapore on Thursday, its lowest price since May 2020. Prices have now fallen more than 50 per cent from their peak in March. Fortescue Metals shed 8.2%, while BHP and Rio Tinto closed 5 % lower.

 Highlights – Emerging Markets Stocks 

EM equities reacted to currency valuation

  • Brazil’s Bovespa index dropped 4.5% (up 9.3%)
  • Mexico’s Bolsa index rose 4.2% (down 5.9%). 
  • Turkey’s Borsa Istanbul National 100 index declined 1.4% (up 108.8%).
  • Russia’s MICEX equities index recovered 6.1% (down 42.8%).

Technical Analysis

S&P 500

Daily: SPX spat the June & October lows with impulse through the tenkan and Kijun energized by the daily cloud twist. The completive wave came off extreme fear and bear that ended with relief. Recall last time we rallied through the daily Tenkan to retest May’s break. Kijun is key and we blew through it with a 1-2, the down sweep was fueled by the spit of the Kijun set the wave 3 or C up with power to close at the June lows. On the downside the Kijun and those June lows now critical and is our trading Bear/Bull pivot in a high vol scenario. Watch each measured 3 wave move on the 240 & Murrey Math highlighted in the podcast. The prices pulled through the downward cloud pulled by the twist ‘helium contusion’ on the completive.

Tracing back from highs the fuel from the top of the channel after completing 3 waves off ATH, accelerated after broke the Tenkan through to the 4600 OI where it reversed with impulse back to Tenkan Bulls this a (ii) of a 5. Bears this is 1-2 of (i) completive V of degree. We watch if this low was a (iii), (a) or C. We have to respect the number of alternatives of degree of 5. With such trends keep it simple resistance is Tenkan and Kijun and watch for ABC. From no fear to panic is the driving element.

For fractal purposes, SPX completed 5 waves up where it reversed with impulse with energy fueled from the power impulse down from +1/8 ATH spit of a spit fail. On the way down (just like up) it accelerated after it broke the Tenkan through the rejected Kijun and then through the median after tapping 8/8.

Daily S&P 500 3 waves

The breakup was from above the 200dma. The balance from sharp reversal after the initial 3 wave down from the SPX wave 5 extension as Covid19 fed impulse accelerated under the Tenkan. From there we had seen the ABC or 1-2-3 spinning around the 61.8% of the move. Support began at the October 2019 lows. A manic wave 5 or 3 of some degree was a resolution for the ages. Note the 100% extension from the emotive element and MM levels when the spit kicks in. A manic wave 5 or 3 of some degree was a resolution for the ages. Note the 100% extension from the emotive element and MM levels when the spit kicks in

Weekly:

The S&P 500 held the sphere of influence from Nov 2020 reversed higher after spitting the 38% and key lows. Last week we said “We do have a weekly cloud twist; however, the energy is waning without sharp impulse.” We got the sharp impulse right to weekly Kijun. For major cycles we watch the S&P 500 over 4,231, the 50% retracement of losses from the Jan. 3 & June 16 close. Since 1950 there has never been a bear market rally that exceeded the 50% retracement then gone on to make new cycle lows. Is this time different, as we tested and spat those June lows?

Key support is the 38% correction and the previous low. Power came from rejecting the cloud as one would expect in a 3 or C. We have Kijun. the Tenkan and 50wma all above i.e impulse right to the weekly cloud is needed for cycle switching. For that you would have to break the Kijun and 50wma.

On the way up each new high evolved after testing Tenkan key support on the way and we are now getting a retest as resistance. We reiterate this needs to be recovered for a resumption of the uptrend meanwhile the bear market plays out. Watch Tenkan this week and watch for Kijun reaction. Extensions are difficult to time, keep it simple.

S&P500 Weekly Outlook

THE KEY: Key for the impulse higher was the spit or retest of MM 8/8 and Tenkan San, which held with the previous highs and Tenkan.  To repeat “We look for 3 waves down and reactions to keep it simple with the alternatives in the daily.”  Keep an eye on the put/call ratio with recognition to the sheer size of contracts AND keep in mind the stimulus distortion. The spit per channel fractal and Adams rule launched back over the cloud where we were encased AND we are back testing it. Watch if a spit or clear break support as Chikou rebalances

A reminder that Apple Inc $AAPL, Microsoft Corp $MSFT, Amazon.com Inc $AMZN, Facebook Inc $FB, and Google-parent Alphabet Inc $GOOGL make up approximately 23% of the total weight of the S&P 500. With that comes gyrations that are an outsized impact on broader markets

NASDAQ 100

The down move saw Nasdaq spit the weekly Kijun and a 1-2 off tenkan we spat MM 5/8 after holding the key 61.8% Fib. We watch the Tenkan & Kijun confluence above, the breakup level and between the 38/50 Fibs. The Nasdaq is well behind the S&P pace with the weekly cloud and 50wma well above. Support the 61.8% retest.

Recall ATH was after it broke and held the weekly Tenkan to see a spit of a spit fail which is completive of 5 of some degree with Chikou rebalancing. Watch Chikou for divergence for continuation or failure. Divergence with Russell also a clue.

NASDAQ Record Highs

Dow Jones

The Dow led the indices and closed above the weekly Tenkan after closing and testing last week. Prior test after the reaction off the June lows and sphere of influence. Support is the channel and Fibs. Tenkan and Kijun after the reaction empowered. Support is the channel and Fibs.

Russell 2000

The small cap Russell RUT bounced in double bottom off 1600 5/8 confluence which was the Nov 2020 breakup. Russell 2000 Resistance Tenkan and Kijun, note previous rejections. This is the index showing more of the fast money crowd and is trading like it. Needs to get traction in here for bulls. 7/8 & 8/8 support collapsed on the way down and is now major resistance.

Russell Index Negative Divergence to NASDAQ

Semiconductors SMH

Semiconductors SMH clean with reaction from above reverted with retest & break of the triple top patterning in a pennant. From there been a fractal on each exhaustion. Pull from Chip players $ON $TSM $NVDA $ASML $AMD $QCOM $AVGO $TXN $INTC $AMAT $LRCX $XLNX

VanEck Vectors Semiconductors ETF

NVidia $NVDA

NVidia’s latest slide was off earnings, back to lows at 4/8 after a failed breakup retest from May 2021. NVidia is a clear leader of #SOX #SMH look for cues there and ABC failures for changes. Above is the Key Break (mauve) and Tenkan to a flat cloud. Support the recent low at the 61.8% extension.

Nvidia NVDA stock chart

Apple $AAPL

Heading into another Earnings Apple held the sphere of influence after retesting 7/8 & break up. Kijun and Tenkan are about to touch, with earnings we watch for a kiss of death at the cloud as the story. Apple & other mega-cap names dominant the major indices, and a plethora of funds that hold it as a core position. The Vanguard Mega-Cap Growth ETF (MGK) delta is important to watch.

Apple AAPL Stock Chart

A firm rejection at $175 at +2/8 triggered a waterfall down for Apple. On the way up Apple gently motored up to new ATH over the massive $160 then $170 thru to $180 gamma level on the way down these levels became key energy levels all the way to $132. Support held at the May break (just like NVDA) where from there it spat the cloud pulled by a flat Tenkan and Kijun as it rebalanced Chikou. The old channel break and MM 8/8 is now key. Remember the impact $AAPL has, at least short term on all the major indices.

ARKK ETF

The ARK Innovation ETF (ARKK) finally found some support at -1/8, 78% off highs and the 423.6% extension! The fund is filled with growth stocks and was the top-performing U.S. equity fund tracked by Morningstar in 2020, it has not been a pretty slide.

The ARKK ETF trading clinically, tested triangle breakdown and failed off 50 WMA. Some work at support at 61.8% of whole move and then wrecked again. Clear crowd behavior, we saw ATH in NASDAQ & SPX, yet this couldn’t raise a bid – very telling negative divergence. $ARKK rebalanced Chikou at week’s end

Ark ARKK ETF Stock Chart

Part B: Bond Markets

Inflation Matters

Inflation with Henry Kaufman

Kaufman is the legendary chief economist and head of bond market research at Salomon Brothers is someone who knows Inflation.  Henry Kaufman in an interview with Bloomberg’s Erik Schatzker Jan 14, 2022:

 “I don’t think this Federal Reserve and this leadership has the stamina to act decisively. They’ll act incrementally. In order to turn the market around to a more non-inflationary attitude, you have to shock the market. You can’t raise interest rates bit-by-bit.”

“The longer the Fed takes to tackle a high rate of inflation, the more inflationary psychology is embedded in the private sector — and the more it will have to shock the system.”

“‘It’s dangerous to use the word transitory,’ Kaufman said. ‘The minute you say transitory, it means you’re willing to tolerate some inflation.’ That, he said, undermines the Fed’s role of maintaining economic and financial stability to achieve ‘reasonable non-inflationary growth.’”

The rubber is meeting the road as the trifecta of rising interest rates, the Russian invasion of Ukraine and surging costs continues to weigh, this has been no surprise to us here and shouldn’t have been to the market and PTB. You can only play with fire for so long before you get scorched!

With all the redirection of blame at the Fed about inflation one has to understand it is a global phenomenon outside the Fed’s Control. With the war drums louder than ever the supply chain issues are out of control. The Federal Reserve is not in control of global energy and commodities prices.

Everything points to powerful inflationary dynamics and a Federal Reserve so far “behind the curve.”

Bond Watch

“This is shaping up to be the most volatile year for Treasuries in over a decade, as uncertainty about the impact of aggressive Federal Reserve tightening whipsaws yields. The yield on 10-year US notes has traded in a range of at least 10 bps in 50 of 95 trading days so far in 2022. That puts it on track for an annual rate of more than 130 episodes, which would be the highest since 2009.”

May 18 – Bloomberg (Garfield Reynolds)

Treasuries

Weekly Recap

U.S. Treasuries retreated on Friday, snapping their three-day streak of gains.  This week’s action put renewed pressure on the 2s10s spread, compressing it by eleven basis points to -41 bps. The Wall Street Journal’s Fed insider said that the central bank is unlikely to deviate from its plan to announce another 75-bps rate hike on November 2 while Blackrock expects that the November statement will include “pivot language” that will signal a less aggressive path going forward. 

Investment-grade bond funds posted outflows of $363 million, while junk bond funds reported inflows of $2.796 billion (from Lipper).

Bond Auctions

Yield Watch

  • 2-yr: +9 bps to 4.42% (-9 bps for the week)
  • 3-yr: +12 bps to 4.41% (-11 bps for the week)
  • 5-yr: +10 bps to 4.19% (-16 bps for the week)
  • 10-yr: +7 bps to 4.01% (-20 bps for the week)
  • 30-yr: +4 bps to 4.13% (-18 bps for the week)

“Government bond prices around the world are moving in tandem, reducing investors’ ability to diversify their portfolios and raising concerns of being blindsided by market gyrations. Correlations between currency-adjusted returns on the government debt of countries such as the U.S., Japan, the U.K. and Germany are at their highest level in at least seven years, data from MSCI showed, as central banks around the world ramp up their fight against inflation.”

October 10 – Reuters (Davide Barbuscia)

Key Rates and Spreads

Rates

  • 10-year Treasury bonds 4.00%, down -0.22 w/w (1-yr range: 1.08-4.22) (12 year high)
  • Credit spread 2.30%, up +0.04 w/w (1-yr range: 1.65-4.31)
  • BAA corporate bond index 6.30%, down -0.18 w/w (1-yr range: 3.13-6.48) (10 year+ high)
  • 30-Year conventional mortgage rate 7.04%, down -0.28% w/w (1-yr range: 2.75-7.38) (new 20 year high intraweek)

Yield Curve

  • 10-year minus 2-year: -0.41%, up +0.15% w/w (1-yr range: -0.52 – 1.59)
  • 10-year minus 3-month: -0.09%, down -0.29% (1-yr range: -0.01 – 2.04) (inverted last Monday)
  • 2-year minus Fed funds: +1.33%, down -0.07% w/w
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

Instability is pronounced, credit defaults are on track to rise in North America, Europe, Asia, and Australia, according to a survey by the International Association of Credit Portfolio Managers. The economic slump is likely to occur later this year or in 2023, according to the survey.

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates jumped 14 bps to 7.08% (up 394bps y-o-y) – the high since April 2002.
  • Fifteen-year rates rose 13 bps to 6.36% (up 399bps) – the high since July 2007.
  • Five-year hybrid ARM rates surged 25 bps to 5.96% (up 340bps) – the high since November 2008.
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps to 7.07% (up 394bps).
Mortgage News Daily October 21, 2022

Highlights – Federal Reserve

  • Federal Reserve Credit dropped $19.4bn last week to $8.701 TN. Fed Credit was down $199bn from the June 22nd peak.
  • Over the past 163 weeks, Fed Credit expanded $4.975 TN, or 133%.
  • Fed Credit inflated $5.890 Trillion, or 210%, over the past 520 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt last week increased $2.0bn to $3.337 TN.
  • “Custody holdings” were down $150bn, or 4.3%, y-o-y.
  • Total money market fund assets were little changed at $4.584 TN. Total money funds were up $25bn, or 0.6%, y-o-y.
  • Total Commercial Paper rose $13.6bn to $1.301 TN. CP was up $121bn, or 10.2%, over the past year.

Global Bond Watch

Highlights – European Bonds

  • Greek 10-year yields sank 56bps to 4.48% (up 316bps y-t-d).
  • Italian yields collapsed 57 bps to 4.18% (up 300bps).
  • Spain’s 10-year yields fell 38 bps to 3.15% (up 259bps).
  • German bund yields sank 31 bps to 2.10% (up 228bps).
  • French yields fell 36 bps to 2.61% (up 242bps).
  • The French to German 10-year bond spread narrowed about five to 51 bps.
  • U.K. 10-year gilt yields sank 58 bps to 3.48% (up 251bps). 

Highlights – Asian Bonds

  • Japanese 10-year “JGB” yields declined a basis point to 0.25% (up 18bps y-t-d). 

Federal Reserve Gives All Banks a Pass in Annual Bank Stress Test

The Federal Reserve released its annual bank stress test after the market last quarter. All 34 large banks tested remained well above their risk-based minimum capital requirements, and the Fed announced no restrictions relating to dividends and buybacks. With the dismal state of the economy through soaring inflation and record low consumer sentiment these tests were keenly watched. Banks suffered slightly more hypothetical losses in the 2022 severe test than last year, posting $612 billion in projected losses as capital ratios fell to 9.7%. Read More Here.


Part C: Commodities

“Commodity markets are struggling to shake their months-long liquidity crisis that’s brought an era of erratic swings in the value of the world’s raw materials. The giant price fluctuations that followed Russia’s invasion of Ukraine roiled markets for everything from natural gas to crude oil and metals. Trading activity in most raw material markets has sunk to low levels. Open interest in oil last week hit the lowest since 2015, while natural gas, sugar and aluminum futures holdings all remain at or near the lowest levels in years. In out-of-control power and gas markets, spiking prices are limiting the number of contracts traders can hold because of surging collateral requirements. In oil, macro investors have pulled bets on raw materials as an inflation hedge after central banks began hiking rates. All the while, some traders have turned their backs on the London Metal Exchange after the crisis in nickel trading earlier this year.”

September 13 – Bloomberg (Alex Longley and Yongchang Chin)

Highlights

  • Bloomberg Commodities Index increased 0.4% (up 12.7% y-t-d).
  • Spot Gold declined 0.8% to $1,645 (down 10.1%).
  • Silver dipped 0.8% to $19.23 (down 17.4%).
  • WTI crude rallied $2.85 to $87.90 (up 17%).
  • Gasoline surged 9.2% (up 30%),
  • Natural Gas gained 3.9% to $5.68 (up 52%).
  • Copper declined 1.3% (down 23%).
  • Wheat fell 2.5% (up 8%),
  • Corn slipped 0.5% (up 15%).
  • Bitcoin jumped 7.6% this week, or $1,450, to $20,620 (down 55.5%).
Weekend October 14, 2022

BDI Freight Index

  • The Baltic Exchange’s dry bulk sea freight index on Friday, extended losses for the third straight week. Friday falling 78 points, or about 4.8%, to 1,534.. The overall index, which factors in rates for capesize, panamax and supramax shipping vessels, was down for a second straight week, down by 16%.
  • The capesize index, which tracks iron ore and coal cargos of 150,000 tonnes, declined by 78 points, or about 4.5%, to 1,670 Friday and dropped 19.4% in its worst week since late August.
  • Average daily earnings for capesizes, which typically transport 150,000-tonne cargoes such as coal and steel-making ingredient iron ore used in construction, fell $648 to $13,852.
  • The panamax index shed 83 points, or about 4.4%, to 1,817. It fell 15.3% for the week, also a worst since late August.
  • Average daily earnings for panamaxes, which usually carry coal or grain cargoes of about 60,000 tonnes to 70,000 tonnes, dropped $750 to $16,350.
  • The supramax index fell 89 points to 1,483.
Baltic Dry Index Weekly

Aluminum (Alcoa)

We analyze Alcoa as a surrogate to Aluminum given its high beta relationship and more liquid aspect as an investment vehicle.

We have seen $AA retest the previous high after the +3 Spit as the Chikou rebalanced. We have the Gap below at +1/8 confluence. We move to 240 for this pennant resolution.

Alcoa

Copper

Copper rebounded sharply off the 50wma but again has failed on the cloud spit and channel break. The flattening Weekly Tenkan and Kijun acted as a magnet to close right there. #HG power spits have quickly rebalanced back into the wide channel. Copper had been a leader in the risk on movement for commodities.

Weekly Copper Outlook
Copper Supply Crunch

Lumber

Lumber prices were a leading indicator of the supply-chain problems and inflation that followed pandemic lockdowns.

Lumber futures for July delivery ended Friday at $695.10 per thousand board feet, down 52% from a high in early March. On-the-spot wood prices have plunged, too. Pricing service Random Lengths said Friday that its framing composite index, which tracks cash sales, fell about 12% last week to end at $794. That is down from $1,334 in March, just before the Federal Reserve raised interest rates for the first time since 2018.

Lumber Futures

Grains

Wheat

KnovaWave analyze US Wheat futures given its high beta relationship and more liquid aspect as an investment vehicle.

Wheat closed under the Tenkan this week again after its recent rally was reversed between the 50 and 61.8% Fibs. It had been drawn higher by the flat weekly cloud and supported by 0/8 which held. The contract stabilized after it continued its sharp impulsive collapse fueled from when it retested and broke the Tenkan (orange). This came about after a failure at retesting the 8/8 move and high after it spat 8/8, and the minimum target. It had completed a measured 4/8 correction off highs then broke key support at 38% then 50% and 50wma confluence in the freefall. From here Wheat support at that $700 cloud confluence with the breakup level at 61.8% resistance, then Kijun and Tenkan.

Wheat ETF WEAT

Full Report:

Corn

Corn replicated last week’s price action as it recovered from its freefall in June it has worked its way up spitting off Kijun at the 7/8 near the top of the weekly cloud after Tenkan and 50wma was recaptured last month. Earlier in the year Corn had topped out at the highest since 2012 in Chicago at +1/8 and corrected with impulse back to break the Tenkan which it swiftly did a spit of a spit after bouncing off 720, which also the price successfully retested the high from April 2021. From here we saw Tenkan fail again, and empowered selling smashed through previous high, Kijun and 7/8 confluence. Which is back where we are. The 50wma is now support with the cloud and 6/8 below. All these levels are now significant.

Corn Futures Outlook

Full Report:

Soybeans

Soybeans rejected new lows at the bottom of trendline to close higher on the week. The 50 wma and the tenkan are both under the Kijun providing heavy resistance. We sit near the January breakup. The weekly cloud and Murray mingle around the $13.9/bushel benchmark.

Recall beans broke down from the bull pennant framed by +4/8 and +1/8 with the Kijun unable to sustain support right at the breakout. Support at the 50wma gave way to under the futures pivot at $15/bushel benchmarks and at the close of the week was a magnet to the recovery bounce. Pressure came from futures spitting the Weekly +4/8 over $17.50/bushel three times. The market needs to rebalance that energy.

Soybeans Weekly Outlook

Full Report:

Energy

For complete Oil and Natural Gas Coverage please visit our dedicated publications ‘Around the Barrel’ and ‘Into the Vortex.’ – Weekly Analysis and Outlook for Energy Traders and Investors

WTI Weekly KnovaWave Shape
US Natural Gas KnovaWave Weekly Grid

Key Energy Reports

Precious Metals

  • Spot Gold declined 0.8% to $1,645 (down 10.1%).
  • Silver dipped 0.8% to $19.23 (down 17.4%).

Gold

Gold futures back testing the median after another rejection at the Tenkan (orange). Needs gets impulse off this ABC off this cloud or double top gains more weight and it follows silver weakness The yellow metal is consolidating after it accelerated after breaking the weekly triangle higher. Gold has bounced after support at it’s uptrend line since the August 2021 bottom and Kijun. It garnered strength after rebalancing after manic rise to +5/8 weekly rebalance of Chikou in 5 waves. To be bullish we need to stay above the triangle. Murrey Math resistance, watch Fibs & Chikou.

Gold Weekly
Gold in Perspective

Silver

Silver, like Gold bounced under the cloud base. Back underr 50wma after spitting Tenkan providing support after reversed. Closing under weekly Kijun which is now resistance. Major support is previous lows

Silver Weekly Outlook

Part D: Forex Markets

John Maynard Keynes, 1920: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.”

Highlights

  • The U.S. Dollar Index fell 1.1% to 110.75 pausing near its 50-day moving average (110.88). (Up 15.8% y-t-d). 
  • For the week on the upside, the British pound increased 2.8%, the Swedish krona 2.1%, the Norwegian krone 2.0%, the South Korean won 1.3%, the euro 1.0%, the New Zealand dollar 1.0%, the Mexican peso 0.7%, the Australian dollar 0.5%, the Canadian dollar 0.3%, the Singapore dollar 0.3%, and the Swiss franc 0.2%. 
  • On the downside, the Brazilian real declined 2.5%, and the South African rand slipped 0.3%. The Chinese (onshore) renminbi declined 0.30% versus the dollar (down 12.36% y-t-d).
Weekend October 28, 2022

For our complete Forex Weekly Analysis and Outlook visit our Forex Traders Weekly Outlook:

Charts and commentary via KnovaWave on the US Dollar, Euro, Japanese Yen, British Pound, Euro Pound, Swiss Franc, Canadian Dollar, Australian Dollar, New Zealand Dollar, Turkish Lira, Mexican Peso. Currency dynamics are complex. There are myriad facets to analyze and contemplate that influence all markets.

Bitcoin

Bitcoin continues to perform technically to perfection. Impulse begets impulse. To understand panic, understand greed. $BTC tested the top of a rising channel after the preceding sharp downturn which was the downside breakout of an earlier bearish flag, after breaking downside a H&S top and then down it went….

Recall Bitcoin exploded higher following it’s correction impulsively upon completing 5 waves up at +2/8. Each Tenkan and Kijun tap saw an explosive kiss of death until we completed 3 waves to around 28,000. From there we have seen extreme volatility.

Looking back Bitcoin put in a high of $63,000 around Coinbase, the largest US crypto exchange successfully went public which signaled profit-taking. The recent high over $68,000 came after the launch over the Bitcoin ETF, Bitcon. From that high we have 2 main alternatives a V of a 1 of a V. For bears it a completive five with impulse right to the 50wma – an incredible 26% fall in a Friday night session. That’s impulse! We watch for an ABC to develop here support is the 50wma and bottom of the weekend cloud.

Bitcoin KnovaWave Weekly Outlook
Bitcoin Mania in Perspective

On the Risk Radar

Fed Warnings on Possible Medium To Long Term Risks

 Geopolitical Tinderbox Radar

Turkey Geopolitical
Turkey Risk Monitor

Economic and Geopolitical Watch

Banks

Major banks kicking off earnings this quarter, including BlackRock (BLK), Citigroup (C), First Republic Bank (FRC), JPMorgan Chase (JPM) and Wells Fargo (WFC).

Earnings expectations for the banks on the S&P500

Major US Banks Deliver Mixed Results in Q3, 2022

The major money cents banks released earnings with many strong results for Q3. Mainly from the interest rate spreads on the positive side. We see a reversal of loss reserve releases from the pandemic kitty as the economy slides into recession.

Banks are benefiting from the Federal Deposit Insurance Commission intending to ease the Volcker Rule, which restricts banks from making large investments into venture capital. The Volcker Rule was enacted in the wake of the 2008 financial crisis, and the new changes could potentially free up billions in bank capital.

Akio Morita mistakes

The Week Ahead – Have a Trading Plan

What Macro and Micro Risks and Opportunities Lie Ahead this week

Global Watch

Next Week’s Risk Dashboard via Scotiabank

  • Central bank surprises and market frailties
  • The Great FOMC PivNot
  • The BoE and the Sunak dividend
  • Canada’s mini budget needs a steady hand
  • US payrolls: waiting for the dip
  • Canada’s very tight labor market
  • RBA to hike, wages the next risk
  • Brazil’s Presidential election is a toss up
  • Norges expected to hike, reinforce future cut guidance
  • PMIs: US, China, India, Brazil
  • Eurozone inflation to be a hot one
  • NZ wages to inform RBNZ bias
  • BoC’s Macklem to face the heat
  • Bank Negara likely to hike again

Global Central Bank Watch

  • Monday October 31, 2022, 10:30 RBA Interest Rate Decision that is widely expected to raise the target rate by another 25bps to 2.85%.
  • Tuesday November 01, 2022, 03:20 AM RBA Gov Lowe Speech 6:30pm Bank of Canada Governor returns to deliver parliamentary testimony before the Senate Committee on Banking, Commerce and the Economy 06:50 PM BoJ Monetary Policy Meeting Minutes
  • Wednesday November 02, 2022, 01:00 PM Fed Interest Rate Decision. 01.30 PM FOMC communications will be lighter this time around with just a statement and Chair Powell’s press conference.
  • Thursday November 03 202212:00 AM RBA Kearns Speech. Bank Negara Malaysia is forecast to hike its overnight rate by 25bps to 2.75% on Thursday. Norges Bank is expected to hike its deposit rate by 25bps to 2.5% on Thursday. 07:00 AM Bank of England’s next move on Thursday at 7amET. A 75bps rate hike is widely expected within the consensus of economists and in terms of market pricing.
  • Friday November 04, 2022, 07:15 AM BoE Pill Speech

Economic Data Watch

Key indicators to consider including the outcome of Brazil’s election, China’s and India’s PMIs, another pair of regional central bank decisions, testimony by BoC Governor Macklem and SDG Rogers and other global macro readings.

  • US Tuesday probable decline in JOLTS job openings in September. Construction spending, a weaker ISM-manufacturing reading and probably a significant rise in auto sales based upon industry guidance. Wednesday ADP private payrolls measure for October. Thursday productivity-adjusted labor costs (unit labor costs) and productivity growth, ISM-services is likely to soften and factory orders should post mild growth. Nonfarm payrolls will be updated for the month of October on Friday. Forecasts of 150,000 new jobs with an unemployment rate around 3½% amid trend wage growth of 0.3% m/m and cooler year-over-year growth to a sub-5% rate.
  • Canada Trade for the month of September. The S&P manufacturing PMI for October (Tuesday). Minister Freeland tables her mini–Budget Thursday after local markets close. Canada updates labor market conditions in October and Ivey public- and private-sector PMI for the same month on Friday.
  • Brazil The final run-off in Brazil’s Presidential election pits incumbent Jair Bolsonaro against former President Luiz Inacio Lula Da Silva on Sunday and with polls indicating a very tight race. Brazil will update its PMIs (Friday) and industrial output (Tuesday).
  • Europe, Eurozone inflation during October on Monday. A reading over 10% y/y with core inflation toward 5% is likely. Eurozone GDP growth is also expected to cool in the add-up to releases from some individual countries. Eurozone unemployment rate and producer prices; Germany jobless rate, domestic and international trade and factory orders; Switzerland CPI, consumer confidence and retail sales; and Turkey inflation rate. Also, updated S&P PMIs will be released.
  • UK, BoE’s monetary indicators, S&P Global PMIs and Nationwide housing prices are to be released.
  • China, China’s purchasing managers’ indices start of the week’s trading. Manufacturing is expected to slip into contraction with the non-manufacturing PMI posted no growth. Private Chinese PMIs arrive later in the week.
  • Japan Tokyo CPI during October (Wed) and Japan’s jobless rate during September (Thursday)
  • Australia Trade balance, retail sales, home loans, and building permits for September and PMIs for October
  • New Zealand New Zealand updates Q3 wage growth and jobs that could influence RBNZ watchers (Tuesday).

US Data Focus

  • Monday: October Chicago PMI (Briefing.com consensus 47.1; prior 45.7) at 9:45 ET
  • Tuesday: September Job Openings (prior 10.053 mln) at 9:00 ET; September Construction Spending (Briefing.com consensus -0.5%; prior -0.7%) and October ISM Manufacturing Index (Briefing.com consensus 50.0%; prior 50.9%) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 1.7%) at 7:00 ET; October ADP Employment Change (Briefing.com consensus 198,000; prior 208,000) at 8:15 ET; weekly crude oil inventories (prior +2.59 mln) at 10:30 ET; and November FOMC Decision (Briefing.com consensus 3.75-4.00%; prior 3.00-3.25%)
  • Thursday: Weekly Initial Claims (Briefing.com consensus 222,000; prior 217,000), Continuing Claims (prior 1.438 mln), September trade balance (Briefing.com consensus -$71.00 bln; prior -$67.40 bln), preliminary Q3 Productivity (Briefing.com consensus 0.5%; prior -4.1%) and preliminary Q3 Unit Labor Costs (Briefing.com consensus 4.2%; prior 10.2%) at 8:30 ET; September Factory Orders (Briefing.com consensus 0.3%; prior 0.0%) and October ISM Non-Manufacturing Index (Briefing.com consensus 55.2%; prior 56.7%) at 10:00 ET; and weekly natural gas inventories (prior +52 bcf) at 10:30 ET
  • Friday: October Nonfarm Payrolls (Briefing.com consensus 220,000; prior 263,000), Nonfarm Private Payrolls (Briefing.com consensus 225,000; prior 288,000), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.3%), Unemployment Rate (Briefing.com consensus 3.6%; prior 3.5%), and Average Workweek (Briefing.com consensus 34.5; prior 34.5) at 8:30 ET

Earnings and Event Watch

US Stocks Watch

Investors (and algos) will focus on the conference calls and outlooks. Last quarter everyone expected the worse, we saw critical updates on production in coronavirus impacted regions and if there is extended halting of operations weighing on multi-nationals. 

Analysts are expecting same-quarter seasonally unadjusted earnings to be up by only about 3% y/y from about 10% in Q2 as the softening economy and higher borrowing costs bite. FactSet expects the softest earnings growth by this measure since the early days of recovery in 2020 Q3.

Events

  • Monday. Wolfspeed (WOLF) will host an Investor Day event. The two-day Gabelli 46th Annual Automotive Aftermarket Symposium begins on October 31 Wallbox NV (WBX), Dana Inc. (DAN), AutoNation (AN) and CarParts.com.
  • Tuesday Chinese automakers Nio (NIO), Li Auto (LI), and XPeng (XPEV) with updates on September deliveries due in. The three-day LA Blockchain Summit Ocugen (OCGN) will host an in-person Research & Development Day
  • Wednesday Boeing Company (BA) will hold a key investor conference by webcast.
  • Thursday The National Retail Federation will hold a media call to release its forecast for 2022 holiday retail sales. Target (TGT), Best Buy (BBY), Dick’s Sporting Goods (DKS), and Walmart (WMT) following the Amazon (AMZN) guidance shocker. AMD (AMD) will hold a livestream event with the tagline “together we advancegaming.” The chipmaker plans to unveil the next generation of AMD Radeon graphics and provide details on the new high-performance, energy-efficient AMD RDNA 3 architecture.
  • Friday Shareholders with VMWare (VMW) meet to vote on the Broadcom (AVGO) deal.

Earnings

Earnings Highlights This Week:

  • Monday includes
    • ON Semiconductor (ON) XPO Logistics (XPO), Loews Corporation (L) Stryker (SYK), NXP Semiconductors (NXPI), IMAX (IMAX) Avis Budget Group (CAR).
  • Tuesday includes
    • BP Plc. (BP) Uber Technologies (UBER) Pfizer (PFE) Caesars Entertainment (CZR), Toyota Motor (TM) Eli Lilly (LLY), Fox Corp. (FOXA), Molson Coors (TAP), Sysco Corp. (SYY) Airbnb (ABNB) TuSimple (TSP) and Chegg (CHGG) and Clorox (CLX).
  • Wednesday includes
    • Paramount Global (PARA) Yum! Brands (YUM) Qualcomm (QCOM), CVS Health (NYSE:CVS), Brinker International (EAT), Cedar Fair Entertainment (FUN), Ferrari (RACE), Humana Inc. (HUM), GlaxoSmithKline (GSK), Melco Resorts (MLCO), Booking Holding (BKNG), Yum Brands (YUM) Tupperware Brands (TUP) and Fastly (FSLY and Estee Lauder (EL)
  • Thursday includes
    • Cheniere Energy (LNG) Marriott International (MAR) Peloton Interactive (PTON) Coinbase (COIN), Royal Caribbean Cruise (RCL), Restaurant Brands (QSR), Barrick Gold (GOLD), Cigna Corp. (CI), ConocoPhillips (COP), Hyatt Hotels (H), Kellogg (K), Penn National Gaming (PENN), Papa John’s International (PZZA), Stellantis (STLA), Under Armour (UAA), Shake Shack (SHAK), Amgen (AMGN), Paypal (PYPL), Starbucks (SBUX), and Moderna (MRNA) Nikola (NKLA) LendingTree (TREE)and Wayfair (W).
  • Friday includes
    • DraftKings (DKNG) Dominion Energy (D), Duke Energy (DUK) Hershey (HSY) Cinemark (CNK) and fuboTV (FUBO) and Cardinal Health (CAH)
For Q3 2022, the estimated earnings growth rate for the S&P 500 is 2.9%. If 2.9% is the actual
growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q3 2020 (-5.7%).

IPO Wrap

US IPO Week Ahead:


Focus on yourself and what YOU CAN INFLUENCE, set your trading plan and goals in be set for 2022.

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Real Time Economic Calendar provided by Investing.com.

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