S&P 500 refused to decline below strong 4,115 support, and market breadth nuances together with crypto indicate that the buyers are to build on Friday‘s intraday reversal, and push through 4,136 into 4,149 at least.
It‘s that value, semiconductors, financials and Russell 2000 held up relatively well during the second half of Friday‘s session. If accompanied by HYG at least keeping pace (which is questionable on Monday), the buyers can push through 4,154.
Fresh attack on 4,115 wouldn‘t be mounted easily in spite of the many signs portending it, Monday‘s Empire State manufacturing would likely feed into the narrative that the worst is over – in terms of economic contraction, earnings and banking sector with disinflation to supposedly rule now even in core data, which I have my doubts about though as LEIs keep still declining and the lull in real estate and CRE loans would prove elusive.
(…) PACW woes being as indicative of unsolved banking situation as the increased Fed loans to banks (over $90bn now, which is an increase of $10bn this week). That‘s what happens when the original incentive to withdraw deposits in search of better yields in T-Bills and money market funds, is still there – 3m yield after the two-day plunge is at 5.20% while the 6m is at 5.14%. This has a profound effect on commercial banks‘ ability to extend credit, the real economy‘s lifeblood, as commercial real estate remains in the wings.
While we haven‘t seen a genuine earnings recession yet (the data thus far aren‘t wildly underperforming the downgraded Q1 expectation), we‘re in as a minimum for P/E contraction as LEIs keep pointing down, the Fed remains restrictive, and market leaders prefer to squeeze value sales while volume sales aren‘t exactly rising (i.e. the pie is not growing much) while doing share buybacks to boost profitability (EPS).
Thus far any weakness outside of Big Tech was unable to force S&P 500 lower much – so, the question is what would make tech shake a little. As I wrote earlier, any straw can break the camel‘s back – it may or may not be a big one.
Similarly the USD is in a vulnerable position, propped up by the debt ceiling drama slowly moving to center stage (next week some more). Holding above 101 key support breaking which can usher significant downside, the dollar is likely to rise solidly above 102, which would of course keep exerting pressure on real assets the way it did in precious metals and copper yesterday. Note that crypto had been indicatively weakening for quite a while already, so that sums up the intermarket case of what to expect in stocks in the weeks ahead.
Yields went up on Friday, especially on the long end of the curve, USD continued its newly minted ascent, and the next attempt to bid Big Tech higher is ahead. I would be though looking for a meaningful undershoot in retail sales on Tuesday, especially in core turning even slightly negative.
That would be of course as risk-off catalyst as much as Friday‘s consumer confidence was – revealing that we haven‘t reached the worst in the economic contraction by far, no matter how well housing data hold up Wednesday (and they this month would given the reprieve in rates).
Individual markets‘ analysis with charts and extra commentary follows.
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Let‘s move right into the charts (all courtesy of www.stockcharts.com) – today‘s full scale article contains 8 of them.
As Fed pause in June remains the base case even if rate hike is a bit too much underappreciated right now, the short end of the curve will continue levelling off while yields of Treasuries of longer than 10-year duration, would strive to rise even if faced with deteriorating economic prospects so as to reflect rising inflation expectations.
The greatest disconnect certainly persists in that markets expect the Fed to cut rates significantly even if Powell is reluctant. I just don‘t see 175bp cuts till 1H 2024 is over, and no great rate moves this autumn either – fiscal policy is already loose enough, and had been holding up markets.
Friday‘s consumer confidence served only to expect more and sooner Fed easing, no matter the beat in consumer long-term inflation expectations up to 3.3%.
Yet, we‘ll be dealing with debt ceiling (sending USD up already as I told you), weaker commercial bank credit creation with sharply up bankruptcies that‘s bringing up credit crunch talk – and buy the dippers are already looking forward for the future discount no matter how the weakness in my key risk-on metrics progresses.
Bond prices volatility is cooling off, but I‘m afraid the banking crisis isn‘t yet over, and the current reprieve would be erased.
Gold, Silver and Miners
Sure that respite proved temporary, and precious metals aren‘t yet out of the woods even if silver improves next (rise above $24.40 is necessary for interim stabilization). The levels given in the chart should hold, especially in silver short-term, and this applies to the $2,000+ figure in gold during next week too.
Crude Oil
Crude oil isn‘t likely to drop much more from here, no matter fresh recessionary data, which would be overpowered by an upcoming (Jun/Jul) OPEC+ new production cuts (if necessary).
Copper
Too weak rebound off $3.72, better look down to $3.55 if a solid grind lower on still restrictive Fed and progressively more deteriorating real economy develops and takes precious metals down below the nearest supports described.
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