UK growth cools and is there still more downside to this market pullback?

Morning Note

Reopening can’t come soon enough: UK GDP expanded by a meagre 0.8% in May, led by indoor hospitality, but held back by a global chip shortage hitting car production. The monthly growth rate was below the 1.5% forecast and leaves the economy 3.1% below its February 2020 pre-pandemic size.

Stocks sold off on Thursday. The kind of worries that have seen narrowing breadth and overbought conditions for the major indices broke over the broader market. Concern about China regulatory pressure on big tech, and concerns about antitrust stuff in the US have gnawed away at the margins. Worries about the rise of the Delta variant globally are also a factor – Tokyo’s decision to ban spectators was taken as a warning that Covid the pandemic is far from over. The biggest worry it seems it this sense that we have hit peak growth – and hit peak expectations a couple months back as evidenced by the top in the commodity market. The last one-two months has seen mega cap growth do all the lifting as the reflation trade unwinds but even with lower rates we saw the market come off yesterday, so there is just this broad sense of being overblown after a 5% rally for the S&P 500 in the last fortnight, while the Treasury market is not making much sense at all and the recent plunge in yields is apparently without any justification and being explained away as a technical thing. This is true but it is not entirely the whole story, and we now face the risk of the 10yr being at 1% at year end and not 2%. Or at least that is what the market seems to be saying – in fact I’d expect once this flushing out of the market (painfully), normal service will resume with the Fed beginning to signal the taper in Aug/Sep.

The US 10yr note yield rallied off a low at 1.25% to reach 1.33% this morning. US equity indices finished Thursday down but well off the lows. The S&P 500 fell 0.86% to 4,320 after hitting a session low of 4,289. The Dow Jones declined 260pts but was about that much off the low of the day by the close. The S&P 500 could still drop another 100 pts to the 4215 area to perform the tap on the 50-day SMA that has been a feature of recent pullbacks. After running up 5% in just two weeks it was ripe for a pause, if not a deeper pullback – the 50day line looks appealing. Current trailing PE of 30 for the S&P 500 suggests it’s heavily overbought – earnings season kicks off next week and with high expectations and the broad market +15% YTD it could be a sell the news affair.

Still a bull market: corrections like these are seen as ‘healthy’, rotation is about positioning for growth not running for cover. Bank of America’s closely followed Flow Show notes that ‘poor level of yields and Wall St dependent Fed remain key reasons why stocks and credit investors still believe in TINA’. Futures this morning indicate a higher open on Wall Street.

The Dow transports index slipped 3% with Biden taking aim at rail and sea shipping with an executive order addressing competition in the US economy. Pain for meme stocks continued with AMC, GME falling sharply in early trade before ending the day higher in an impressive turnaround. Meanwhile, the US is to place more Chinese companies on its blacklist. San Francisco Fed president Mary Daly warned on prematurely declaring victory over the pandemic.

Signs of inflation cooling? China’s factory gate price growth cooled in June, as the rollover in the commodity market following the May peak eased cost pressures. China’s producer price index still rose 8.8% in June, but this was down from the 9% growth in May.

The FTSE 100 is higher in early trade Friday to recover some of the ground lost on Thursday when it declined 1.7%. Continues to tread a 3-month range as the 78.6% Fib level at 7.155 continues to prove a tough nut to crack.

FTSE 100 performance as indicated on multi-symbol chart.

S&P 500: Looking for the 50-day tap on the S&P 500 before the weakest hands are flushed out?

S&P 500 performance indicated on a chart.

EURUSD: looking for a breakout of the trendline, potential bullish crossover on the daily MACD coming?

EURUSD chart showing currency pairing performance.