US pre-markets: futures extend losses

Equities
Investments

Scores on the doors midway through the European session and an hour before the US cash open: in summary, not good. As per the morning note, China risks abound with eyes on the Evergrande contagion. Markets also have one eye on inflation and the Fed meeting this week, plus the German election coming on Sunday. Many people – most investors seemingly – have been eyeing a correction in Sep/Oct after such a solid ramp this year and they’re getting one, it seems. If you have the Fed post max-accommodation – that is, on a path to tightening not loosening, inflation sticking around much more than optimists had thought, earnings growth stalling, and the economy past peak growth, you have the kind of perfect powder keg for a pullback and Evergrande may be the spark to set it off. Add to that a German election and an energy crisis in Europe and it is not the ideal backdrop for risk. The end game is not set here – a lot depends on what Beijing is prepared to do – or when it thinks it has sent a strong enough message to indebted companies in the property sector.

Euro Stoxx 600 down 2.3%, set for worst day since Dec 2020. DAX – 2.7% – its life as a 40-constituent index not off to the best start. FTSE 100 –1.7%, not as badly hit – make-up of the index and some pronounced sterling weakness alleviating some of the worst effects. Basic materials -4%, led by Anglo American -6% as iron ore prices collapse. Polymetal, Sainsbury’s, Astra and IAG managing to rally but 9:1 decliners to advancers tells the story of the day.

US futures keep extending losses – no signs of let up today and whilst we can expect some bounce at some point when cash equities are open for trade this may well get a lot uglier before it’s better. Dow called off 650pts, biggest decline since July 19th, while the S&P 500 is called down roughly 80pts at 4,353 for its biggest fall since May – looking perhaps to test the 100-day SMA at 4,326. Tails up for volatility longs with VIXX is north of 24 and highest since July 19th. There were ~10% corrective moves in Sep 20 and Oct 20 – a similar move would see SPX return to test its 200-day SMA near 4,100.

The 5-min chart for e-minis shows how relentless the selling has been this morning – not a freefall, but very steady.

US 10yr yields slipping sharply to 1.31%, on track for biggest decline in 5 weeks – reflects broader market tensions around the sell-off and the potential fallout Evergrande could have on the Chinese property sector and therefore growth. Gold not doing an awful lot despite the risk-off sentiment and drop in yields as the dollar is catching some very solid bid, keeping the metal’s progress in check around $1,760.

Bitcoin continues to feel the heat as the entire crypto space gets a pounding today. Who knew the crypto market was so correlated to Chinese property stocks…suffice to say this is not an uncorrelated asset. Bitcoin -9% with a $42k handle as it tests the Aug lows.

Bitcoin Chart 20.09.2021 PM

The FTSE 100 keeps making new lows today – the rally of 6% from Jul 19th through to the August peak is now in jeopardy as the index trades around 6,840. Looking for a bounce here, perhaps to around 6,900 but longer-term momentum clearly with the bears. That July swing low around 6,800, which sits right on the 23.6% retracement so we look to this level to offer some near-term support. If this cracks – and we look to see what kind of follow through we get when the US cash equities open at 14:30 for a guide – then we consider the next level to watch out for is around 6570, the 38.2% retracement.

UK 100 Futures 20.09.2021

US pre-mkt: Another wobble as US inflation surges to 13-year high

Equities
Forex
Indices

A Volcker-era inflation print: US inflation surged in April, with the year-over-year CPI reading coming in at 4.2%, the highest since Sep 2008 and easily beating the 3.6% expected. Prices rose 0.8% month-on-month, ahead of the 0.2% forecast. A 10% increase in used cars and trucks was the most eye-catching reading with sub-indices (see table below).

The gauge of core inflation made for even more interesting reading, at +0.9% mom and +3% yoy (see chart below). The mom reading was the highest since 1982 when Volcker was in full inflation-busting mode. We can look to lots of things like base effects, supply chain trouble, reopening, pent-up demand, stimulus effects etc as being behind this jump in pricing. Nevertheless, it’s happening; and this perfect storm for inflationary pressures is not about to go away immediately, even if it does, in the end, prove transitory. Yes, it’s predicted – albeit a little hotter than expected – but it’s still bound to stoke worries in the markets about inflation and rising nominal yields. Keep your eyes on the wage growth and job openings for the real inflationary pressure.

As we have noted previously, we can expect a series of hot prints this summer; the Fed has made it clear it will look past these as it thinks inflation will be transitory. We shall only really know if that is the case in a few months’ time. Until then expect gyrations as data shows strong inflation and growth, even if it’s largely predicted.

US CPI chart showing inflation spike.Table showing y-o-y CPI percentage increases.

Market reaction: Nasdaq futs predictably fell, benchmark 10-year yields rose to 1.65%. 10-year TIPS breakeven inflation rate rose to 2.591%, the highest since 2013. S&P 500 futs were weaker too but pared some losses ahead of the open. NDX set to open around 13,175, a wee bit above yesterday’s lows under 13,100. Vixx spiked above 23 before settling into the mid-22s.

The FTSE 100 tumbled to day lows at 6,950 on a broad algo-like reaction to the data before rallying to 7,000 again investors woke up and remembered that higher inflation is net good for the UK market since it’s weighted to cyclicals not tech. Strong inflation readings ought to support the UK blue chip index. The dollar caught some bid initially, with DXY spiking to 90.67 on higher yields before giving them all back in short order to sit around 90.30 at pixel time.

Cluster of indices charts showing reactions to US inflation spike.

EURUSD moved in a wide range on the release and is now trending to the upside.

EUR/USD chart from 12th May 2021.

US pre-market: selling unabated

Equities
Indices

US futures looking lower ahead of the cash equity open on Wall Street with NDX at 13,120 and the S&P 500 around 4150, implying about a 30pt lower open for the broad market. Dow being called about 200pts lower at 34,520. European stocks have extended losses with all the main bourses over 2% lower on the day. The USD is offered with the dollar index testing yesterday’s lows at the 90 round number support. Despite all the inflation chatter Treasuries not moving much with 10s barely holding 1.60%. Tesla is -7% in the pre-market and I expect ARK to have another bad session. Apple also -2% on high volume, with Palantir and Nio both -9% among the most active traded ore-mkt. Virgin Galactic called down 20% after losses of $0.55 a share were twice what was expected. Novavax declined -13% as it delayed plans to seek vaccine approval until the third quarter.

Just a few random thoughts and pointers here about what’s going on.

Inflation expectations are key – although we’ve not seen bond react too much thus far (Fed put) this is bound to be impacting the discount rate, which is going disproportionately affect growth/momentum. US 5y break evens at 2.71% or thereabouts are a multi-year high and being replicated to an extent in moves in other markets. Due to the pandemic (shut downs, savings) and the policy response (ultra- low rates, massive monetary growth and fiscal stimulus aka helicopter money), we have a perfect storm of wage-push, cost-push and demand-pull pressures that won’t be as transitory as the Fed thinks. Ultimately it goes back to the question asked by the great Paul Tudor Jones about a year ago: can the Fed suck all this money back out of the system as quickly as it injected it. The answer then was almost certainly no, and post the recent policy shift and vast pro-cyclical stimulus it is clearly absolutely no. So we have inflation worries and, as described on multiple occasions last year, the worry is that the Fed allows inflation expectations to become unanchored as per the 1970s. Too much spending, too much free money and too much dislocation for anything but. Higher taxes might help but they seem ‘too’ well targeted at the higher end of the spectrum to tamp anything down.

On the inflation and macro outlook, there is a degree of trepidation post jobs report and pre-CPI with that hot China PPI number sandwiched in between not helping. Can’t stress enough that the jobs report indicates inflation (be it of the stag kind or not) as wage push comes to fore and outstrips raw material/supply chain pressures and demand side pressures.

Stocks that are held long by hedge funds by definition part of problem. The GS hedge fund VIP index underperforming broader market. Could be related to prime brokers tightening leverage post Archegos. We may be witness a self-fulfilling HF selling cycle, that is, the more stocks fall the more the dealers sell and HF are ultimately forced to liquidate.

It’s a bit indiscriminate – lots of the big reflation plays off heavily which suggests this is a ‘sell everything’ kind of day (which could be why bonds are not moving as impetus to buy and drive yields down is offsetting the inflation stimulus to sell and drive yields up). This seems very similar to the sort of tech bleed we saw last September when we thought the macro picture was understood and tech looked a little overbought, whilst broader markets were not so much since it was well before the big Nov rotation began. If similar to that period then we might expect a similar 10-15% move off the all-time highs back to the March lows around 12,200, and it could take three months to regain. That is assuming there are not deeper problems ahead – a Fed taper tantrum is still ahead.

We’ve run up a fair bit and the technical setup was extended with US stocks in particular looking overbought. Although broken the 50-day line NDX yet to see real dislocation yet with the March lows still not tested yet. These are important levels to watch and for now we wait for the big tech/FAANG + Tesla + ARK nexus for the key market guide.

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