Traders Market Weekly: Political Risks and Central Banks

October 22 – 28, 2022

FEAR NOT Brave Investors

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Image: Expect the Unexpected

The Week That Was – What Lies Ahead?

Contents

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

Editorial

Last week we said, ‘Expect the Unexpected’, well you got it. We had the calamity that is British politics with Liz Truss’s resigning in the shortest stint as PM ever. Moody’s cut its outlook on its rating for UK government debt to negative. We had a continuing of the collapse of bond markets and the soaring US dollar. USDJPY trading to 151.94, 32-year highs which brought invention from the BoJ. Mortage rates are at 2007 levels over 7%.

We had earnings misses from Tesla, Charles Schwab and Alcoa, another 30% wipeout on SNAP but beats from Netflix. Bank of America, Goldman Sachs, Freeport-McMoRan and Schlumberger. Friday the market opened morbidly ahead of another large options expiration by the close it had all reversed.

The stock market closed a strong week on a strong note. For the S&P 500 sectors, energy was the top performer this week with a gain of 8.1%. Information technology came in second place with a gain of 6.5%. Utilities (+2.0%) and consumer staples (+2.2%) were the weakest.

Price action in the Treasury and currency markets provided the basis for today’s rally after market participants reacted to the 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. May Fed funds now price 4.87%, down from 5.03% on Wednesday. Futures markets reversed higher on the report.

Then San Francisco Fed President Daly (not an FOMC voter) in a fireside chat hosted by the University of California Berkeley 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.

“It should at least be something we’re considering at this point, but the data haven’t been cooperating,”

At the November meeting, “we might find ourselves, and the markets have certainly priced this in, with another 75 basis-point increase, but I would really recommend people don’t take that away as, it’s 75 forever”.

Then Saint Louis Fed President Bullard (FOMC voter) tapped in and said he hopes to get a deflationary process going in 2023, adding that the job market remains strong, according to Bloomberg.

The 10-yr note yield reached 4.32% overnight and the 2-yr note yield hit 4.64%. These comments precipitated buying interest in the Treasury market, which fueled broad buying interest in the stock market. The 10-yr note yield settled at 4.21% and the 2-yr note yield settled at 4.51%. The yield still rose 20 basis points this week.

Energy complex futures settled mixed. WTI crude oil futures rose 0.5% to $84.91/bbl. Natural gas however has shown the dramatic nature of commodities, speculation and one-way crowded trades. It has fallen from over $10 another 7.8% today to $4.95/mmbtu. One just marvels at how much call premium was wasted in this move by the punters and newfound experts on this move

China Breaking Records, Not the Ones You Want

While many mainstream talking heads missed the point with President Xi Jinping’s speech at the CCP convention as they focused on Western market short term outcomes. This group took comfort from Xi signaling no change in priority for maintaining China’s economic growth model. This is simply denial as is Xi, with the belief there isn’t a bubble, despite the clear evidence of a deflating, perilous economy. Xi’s consistent creation of a cult of personality blinds many from the structural perils shifting beneath.  

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,’

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.

  • Country Garden (#1 developer) yields surged another 10% to almost 77%.
  • Evergrande yields spiked 23% points (250%),
  • Sunak 30 % (164%),
  • Lonfor 17% (165%)
  • Kaisa 33% (220%).

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 Inflation, Big Bank Earnings and More

More central banks:

The bond markets effective dismissal of the UK mini budget and then their prime minister underlines the shifting sands. Political designs and fiscal policy are being taken to task. Political risk shapes now fiscal policy developments as we saw in the UK. Australia is next up with its budget. Another busy week for the central bankers.

We will see further policy tightening led by the ECB and the Bank of Canada while the Bank of Japan probably stands pat. In the emerging nations we get Brazil and Columbia on deck. Decisions taken by the ECB as they relate to funding programs to the banking sector could meaningfully impact broad market risk appetite as a key risk.

We get global updates on macro indicators including PMIs, inflation reports and GDP readings as well as a deluge of earnings reports including about 160 S&P500 companies and releases across other markets.

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 rallied 4.7% (down 21.3% y-t-d),
  • Dow recovered 4.9% (down 14.5%).
  • S&P 400 Midcaps rose 3.0% (down 18.6%),
  • Small cap Russell 2000 rallied 3.6% (down 22.4%).
  • Nasdaq100 jumped 5.8% (down 30.7%).
Major US Stock Indices

US Markets YTD

  • Dow Jones Industrial Average: -14.5% YTD
  • S&P Midcap 400: -18.6% YTD
  • S&P 500: -21.3% YTD
  • Russell 2000: -22.4% YTD
  • Nasdaq Composite: -30.6% YTD

Sectors

  • Utilities gained 1.9% (down 12.8%).
  • Banks increased 0.7% (down 25.2%),
  • Broker/Dealers jumped 4.0% (down 11.0%).
  • Transports advanced 1.5% (down 23.0%).
  • Semiconductors surged 8.1% (down 40.8%).
  • Biotechs gained 1.5% (down 15.2%).
  • With bullion gaining $13, the HUI gold equities index recovered 6.8% (down 24.2%).
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 rallied 1.6% (down 5.6% y-t-d).
  • France’s CAC40 rallied 1.7% (down 15.6%).
  • German DAX equities index recovered 2.4% (down 19.9%).
  • Spain’s IBEX 35 equities index rose 2.2% (down 13.4%).
  • Italy’s FTSE MIB index rallied 3.0% (down 21.1%). 

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 slipped 0.7% (down 6.6% y-t-d)
  • South Korea’s Kospi index was unchanged (down 25.7%).
  • India’s Sensex equities index gained 2.4% (up 1.8%).
  • China’s Shanghai Exchange Index fell 1.1% (down 16.5%)

 Highlights – Australian Stocks

  • Australia’s ASX All Ordinaries: Australia’s ASX All Ordinaries: -0.8% Friday (-1.20% for the week)
  • On Friday the energy sector was the only sector higher, up 2%. Large gains in coal miners. Whitehaven jumped 4.6% to $10.49, New Hope leapt 7.7 % to $7.42, to a fresh record high. Its share price has more than trebled this year.

 Highlights – Emerging Markets Stocks 

EM equities reacted to currency valuation

  • Brazil’s Bovespa index surged 7.0% (up 14.4%)
  • Mexico’s Bolsa index rose 3.7% (down 11.6%)
  • Turkey’s Borsa Istanbul National 100 index surged 8.5% (up 111.8%).
  • Russia’s MICEX equities index jumped 4.8% (down 46.0%).

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, 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 that level is 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. We do have a weekly cloud twist; however, the energy is waning without sharp impulse. 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 at the weekly Tenkan after bouncing back to test that Tenkan and Kijun after the reaction here off the June lows and sphere of influence. 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 volatility soared but ended a down week with gains in most tenors while the long bond underperformed, recording its seventh consecutive loss. Shorter tenors began rising off their lows and accelerated after The Wall Street Journal reported that the FOMC is on track to raise the fed funds rate range by 75 bps in November and will debate how to signal smaller hikes in the future. Later in the day, San Francisco Fed President (non-voter) Daly struck a similar tone. This week alleviated some of the recent pressure on the 2s10s spread, widening it by 19 bps to -30 bps.

Investment-grade bond funds posted outflows of $3.623 billion, and junk bond funds reported negative flows of $144 million (from Lipper).

Bond Auctions

Yield Watch

  • 2-yr: -9 bps to 4.51% (+1 bp for the week)
  • 3-yr: -11 bps to 4.52% (+3 bps for the week)
  • 5-yr: -9 bps to 4.35% (+8 bps for the week)
  • 10-yr: -1 bp to 4.21% (+20 bps for the week)
  • 30-yr: +9 bps to 4.31% (+33 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 4.22%, up +0.20 w/w (1-yr range: 1.08-4.22) (12 year high)
  • Credit spread 2.23%, up +0.13 w/w (1-yr range: 1.65-4.31)
  • BAA corporate bond index 6.48%, up +0.23 w/w (1-yr range: 3.13-6.48) (10 year+ high)
  • 30-Year conventional mortgage rate 7.32%, up +0.22% w/w (1-yr range: 2.75-7.14) (new 20 year high intraweek)

Yield Curve

  • 10-year minus 2-year: -0.26%, up +0.23% w/w (1-yr range: -0.52 – 1.59)
  • 10-year minus 3-month: +0.20%, down -0.10% w/w (1-yr range: -0.01 – 2.04) (inverted on Monday)
  • 2-year minus Fed funds: 2-year minus Fed funds: +1.40%, down -0.03% 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 added two bps to 6.94% (up 385bps y-o-y) – the high since April 2002.
  • Fifteen-year rates jumped 14 bps to 6.23% (up 390bps) – the high since August 2007.
  • Five-year hybrid ARM rates declined 10 bps to 5.71% (up 317bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 7.18% (up 400bps) – the high since December 2008.
Mortgage News Daily October 21, 2022

Highlights – Federal Reserve

  • Federal Reserve Credit declined $4.2bn last week to $8.721 TN.
  • Fed Credit was down $180bn from the June 22nd peak. Over the past 162 weeks, Fed Credit expanded $4.994 TN, or 134%.
  • Fed Credit inflated $5.910 Trillion, or 210%, over the past 519 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt last week gained $10.0bn to $3.335 TN. “Custody holdings” were down $146bn, or 4.2%, y-o-y.
  • Total money market fund assets slipped $3.7bn to $4.585 TN. Total money funds were up $67bn, or 1.5%, y-o-y.
  • Total Commercial Paper jumped $31.4bn to $1.287 TN. CP was up $97bn, or 8.2%, over the past year.

Global Bond Watch

Highlights – European Bonds

  • Greek 10-year yields jumped 11 bps to 5.04% (up 372bps y-t-d).
  • Italian yields declined four bps to 4.75% (up 358bps).
  • Spain’s 10-year yields added two bps to 3.53% (up 297bps).
  • German bund yields rose seven bps to 2.42% (up 259bps).
  • French yields gained three bps to 2.97% (up 277bps).
  • The French to German 10-year bond spread narrowed four to 55 bps.
  • U.K. 10-year gilt yields sank 28 bps to 4.05% (up 308bps).

Highlights – Asian Bonds

  • Japanese 10-year “JGB” yields added a basis point to 0.26% (up 19bps y-t-d). Above the BOJ’s 25 bps ceiling.
  • The dollar yen breached 150 for the first time since the bursting Bubble days of August 1990. The Bank of Japan was said to have aggressively intervened to support the yen.
  • With a shaky BOJ juggling a collapsing currency and faltering bond market peg, there’s every reason to expect markets to launch an aggressive and sustained assault.

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 fell 2.1% (up 12.2% y-t-d).
  • Spot Gold rallied 0.8% to $1,658 (down 9.4%).
  • Silver surged 6.3% to $19.42 (down 16.7%).
  • WTI crude slipped 56 cents to $88.05 (up 13%).
  • Gasoline added 1.2% (up 20%),
  • Natural Gas sank 23.2% to $4.96 (up 33%).
  • Copper gained 1.5% (down 22%).
  • Wheat declined 1.0% (up 10%),
  • Corn slipped 0.8% (up 15%).
  • Bitcoin was little changed this week at $19,200 (down 59%).
Weekend October 14, 2022

BDI Freight Index

  • The Baltic Exchange’s dry bulk sea freight index on Friday, extended losses for the third straight session on Friday falling 1% to a more than one-week low of 1,819 points. The overall index, which factors in rates for capesize, panamax and supramax shipping vessels, was down for a second straight week, down by 1%
  • The capesize index, which tracks iron ore and coal cargos of 150,000 tonnes, declined by 1.9% to 2,071 points.
  • Average daily earnings for capesizes which typically transport 150,000-tonne cargoes such as coal and steel-making ingredient iron ore used in construction, slipped 2.9% to $17,175 per day
  • The rate for the C14 roundtrip voyage, the benchmark iron ore route between Brazil and China collapsed 19.4% over the week to hit $10,705 per day on Friday.
  • The panamax index, which tracks about 60,000 to 70,000 tonnes of coal and grains cargoes, decreased by 0.8% to 2,144 points. and marked a weekly rise of about 3%
  • Average daily earnings for panamaxes which usually carry coal or grain cargoes of about 60,000 to 70,000 tonnes, gained 3% to land $19,293 per day on Friday.
  • The supramax index added 2 points to 1,678 points.
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 last week 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 has 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 rallied 0.8% to $1,658 (down 9.4%).
  • Silver surged 6.3% to $19.42 (down 16.7%).

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 approached its September high in early action Friday but fell nearly 2.0% from its best level of the day. It ended the day lower by 1.0% at 111.78, losing 1.3% for the week. (Up 16.9% y-t-d)
  • For the week on the upside, the New Zealand dollar increased 3.4%, the Brazilian real 3.2%, the Australian dollar 2.9%, the Canadian dollar 1.8%, the South African rand 1.5%, the euro 1.4%, the Norwegian krone 1.4%, the Swedish krona 1.2%, the British pound 1.2%, the Singapore dollar 0.8%, the Swiss franc 0.8%, the Mexican peso 0.8% and the Japanese yen 0.7%.
  • On the downside, the South Korean won declined 0.8%. The Chinese (onshore) renminbi declined 0.53% versus the dollar (down 12.09% y-t-d).
Weekend October 23, 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

  • Who’s next? The UK is an outlier
  • The UK’s next choices are key to restoring credibility
  • Australia’s Budget won’t repeat the UK disaster…
  • …but inflation and wages are the RBA’s next risks
  • BoC: A case for more rather than less
  • ECB: Rates and the thorny issue of bank lending
  • BoJ unlikely to alter course
  • BanRep could deliver another jumbo hike
  • Brazil’s central bank likely to reaffirm its done
  • Eurozone inflation likely to take off again
  • Fed’s preferred inflation gauge to follow CPI higher
  • GDP: US, China, Canada, Eurozone, SK
  • Global PMIs to inform supply chain developments
  • Other global macro releases
  • Earnings

Global Central Bank Watch

  • Monday, October 24, 2022, None Seen
  • Tuesday, October 25, 2022, None Seen
  • Wednesday, October 26, 2022, 10:00 CAD BoC Monetary Policy Report: Bank of Canada policy rate decision 11:00 CAD BOC Press Conference. Full press conference hosted by Governor Macklem and Senior Deputy Governor Rogers 18:00 BRL Banco Central do Brasil. Copom held its policy rate unchanged at 13.75% at its September meeting and is expected to do the same.
  • Thursday, October 27, 2022, 08:15 EUR ECB Deposit Facility Rate 08:15 EUR ECB Marginal Lending Facility 08:15 EUR ECB Interest Rate Decision European Central Bank is widely expected to hike all of its policy rates by 75bps and for the second consecutive time. 08:45 EUR ECB Press Conference COP Colombia’s central bank is widely expected to launch another big rate hike. Most of consensus expects a hike of 100bps with some going as high as 200bps 22:30 JPY BoJ Interest Rate Decision. The Bank of Japan is expected to leave its -0.1% policy balance rate and around 0% 10-year yield target with its implied 25bps ceiling when it delivers its fresh decisions.
  • Friday, October 28, 2022 None Seen

Economic Data Watch

Key indicators to consider including global PMIs with the Eurozone, US, UK, Australia and Japan updating estimates on Monday. Also watch for inflation updates and GDP growth estimates.

  • US, Manufacturing and Services PMI.  Housing Price Index, August S&P Case-Shiller Home Price Index; October Consumer Confidence, New Home Sales; weekly crude oil inventories, Advance Q3 GDP, Durable Orders, weekly natural gas inventories, Personal Income, Personal Spending, PCE Prices, Core PCE Prices, Pending Home Sales and final October University of Michigan Consumer Sentiment.
  • Canada updates GDP growth on Friday
  • Europe, France, Germany, Italy and Spain update CPI this coming Friday. Eurozone Q3 GDP growth Friday across individual countries. Germany’s economy is expected to mildly contract while France and Spain are expected to post mild expansions.
  • UK, The UK Conservatives have pledged to choose a new leader to replace ousted PM Truss by no later than Friday.
  • China, Q3 GDP is expected plus September updates for exports, industrial output, retail sales and the jobless rate.
  • Japan Tokyo CPI during October (Wed) and Japan’s jobless rate during September (Thursday)
  • Australia its budget on Tuesday (4:30amET) and just ahead of Australia’s Q3 CPI update
  • New Zealand

US Data Focus

  • Monday: Preliminary October IHS Markit Manufacturing PMI (prior 52.0) and preliminary IHS Markit Services PMI (prior 49.3) at 9:45 ET
  • Tuesday: August FHFA Housing Price Index (prior -0.6%), August S&P Case-Shiller Home Price Index (prior 16.1%) at 9:00 ET; October Consumer Confidence (prior 108.0) at 10:00 ET; and $42 bln 2-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -4.5%) at 7:00 ET; September advance goods trade deficit (prior -$87.30 bln), September advance Retail Inventories (prior 1.4%), September advance Wholesale Inventories (prior 1.3%) at 8:30 ET; September New Home Sales (prior 685,000) at 10:00 ET; weekly crude oil inventories (prior -1.73 mln) at 10:30 ET; and $43 bln 5-yr Treasury note auction results at 13:00 ET
  • Thursday: Advance Q3 GDP (prior -0.6%), advance Q3 Chain Deflator (prior 9.0%), weekly Initial Claims (prior 214,000), Continuing Claims (prior 1.385 mln), September Durable Orders (prior -0.2%), and Durable Orders ex-transportation (prior 0.2%) at 8:30 ET; weekly natural gas inventories (prior +111 bcf) at 10:30 ET; and $35 bln 7-yr Treasury note auction results at 13:00 ET
  • Friday: September Personal Income (prior 0.3%), Personal Spending (prior 0.4%), PCE Prices (prior 0.3%), Core PCE Prices (prior 0.6%), and Q3 Employment Cost Index (prior 1.3%) at 8:30 ET; September Pending Home Sales (prior -2.0%) and final October University of Michigan Consumer Sentiment survey (prior 59.8) at 10:00 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 – October 24. Nevada Gaming Control Board to report gaming win tallies for September. MGM Resorts (MGM) and Caesars Entertainment (CZR) Caterpillar (CAT) will display four electric machine prototypes at a trade show in Munich, Germany.
  • Tuesday – October 25 3-day LD Micro 15th Annual Main Event Conference will begin. Including Backblaze (BLZE), BitNile Holdings (NILE), Blue Star Foods Corp. (BSFC), Comstock (LODE), Electrameccanica Vehicles (SOLO), Energous Corporation (WATT), Riot Blockchain (RIOT), Salem Media Group (SALM), Ayro (AYRO), and Fathom Holdings (FTHM).
  • Wednesday – October 26 Wayfair (W) will host a second Way Day this year. McDonald’s (MCD) will start to sell Krispy Kreme (DNUT) doughnuts in select restaurants for the first time.
  • Thursday – October 27 IEA will publish World Energy Outlook. Walmart (WMT) will host a discussion on the company’s responsible sourcing strategy. ThinkEquity Conference Incl: Nano Dimension Ltd. (NNDM), Blink Charging (BLNK), Citius Pharmaceuticals (CTXR), Draganfly (DPRO), Plus Therapeutics (PSTV), and Sono-Tek Corporation (SOTK).
  • Friday – October 28 Deadline hits for Elon Musk’s acquisition of Twitter (TWTR) to close. A closing could have some implications for Tesla (TSLA). FDA’s Oncologic Drugs Advisory Committee will meet to review Y-mAbs Therapeutics’ (YMAB) Biological License Application for its omburtama product candidate.

Earnings

Earnings Highlights This Week:

  • Monday includes
    • Packaging Corporation of America (PKG), Aerojet Rocketdyne (AJRD), HSBC Holdings (HSBC) and Dorman Products (DORM) Discover Financial Services (DFS) Calix (CALX) Aaron’s Holdings (AAN) Logitech International (LOGI)
  • Tuesday includes
    • Raytheon Technologies (RTX) Microsoft (MSFT) Meta Platforms (META) Alphabet Inc. (GOOGL) General Motors (GM) Coca-Cola (KO), 3M Company (MMM), General Electric (GE), Halliburton Company (HAL), JetBlue Airways (JBLU), Kimberly-Clark Corp. (KMB), Moody’s Corporation (MCO), Archer-Daniels Midland (ADM), Biogen (BIIB), Cleveland-Cliffs (CLF), and United Parcel Service (UPS) Valero Ebergy (VLO), Visa (V), Chipotle (CMG). Nabors Industries (NBR), Tenable Holdings (TENB)
  • Wednesday includes
    • Boeing Co. (BA) Kraft Heinz (KHC) Bunge (BG), Canada Pacific (CP), Driven Brands (DRVN), O’Reilly Automotive (ORLY), Harley-Davidson (HOG), US Steel (X), Norfolk Southern Corp. (NSC), ThermoFisher (TMO), Wingstop (WING), Waste Management (WM), Hilton Worldwide Holdings (HLT), Bristol-Myers Squibb (BMY), General Dynamics Corp. (GD) Ford Motor (F), Meta Platforms (META), Sleep Number (SNBR), LendingClub (LC)
  • Thursday includes
    • Amazon (AMZN) Credit Suisse (CS) Apple Inc. (AAPL) Intel Corporation (INTC) Ford (F), McDonald’s Corporation (MCD), Caterpillar (CAT), Southwest Airlines (LUV), Altria Group (MO), Anheuser-Busch InBev (BUD), Cameco Corp. (CCJ), International Paper (IP), Keurig Dr Pepper (KDP), Merck & Co. (MRK), Mastercard (MA), Shopify (SHOP), Textron (TXT), T-Mobile (TMUS), Pinterest (PINS), L3Harris Technologies (LHX), and Comcast Corporation (CMCSA) Comcast (CMCSA), Southwest Airlines (LUV), Mammoth Energy Services (TUSK), Cazoo Group (CZOO), Hertz Global (HTZ)
  • Friday includes
    • ExxonMobil Corporation (XOM) Colgate-Palmolive (CL) Chevron Corporation (CVX), DaVita (DVA), AbbVie (ABBV), Church & Dwight (CHD) U.S. Silica Holdings (SLCA), Cumulus Media (CMLS), Bloomin’ Brands (BLMN)
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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