1. Moving the markets

Despite positive earnings from Microsoft and Google after the close yesterday, the troubles of First Republic Bank (FRC) continued today and overshadowed all news with the stock sliding another 30% on top of yesterday’s 50% dump.

As I have repeatedly pointed out, there is never just one cockroach, a theory which appears to be correct again, as concerns about the banking system were moved to the front burner once more. If FRC gets downgraded by regulators, that would impair their ability to borrow from the Fed, which then would pretty much assure its demise.

In the end, the markets closed in the red for the second day, except for the Nasdaq, which eked out a gain thanks to Microsoft and Google.

Looking at the big picture, we saw surprisingly better than expected Durable Goods orders, which surged 3.2% MoM, but when looking under the hood, it was not as great as the headline number indicated. Offsetting that was the banking system debacle and the debt ceiling anxiety, all of which combined to sink 2 of the 3 major indexes.

Bond yields were mixed today but rebounded off yesterday’s lows, yet the 2-year was unable to reclaim its much fought-over 4% level.  

The US Dollar dropped and popped but closed lower, while gold followed suit but was unable to hang on to its mid-day gains.

As we are nearing the end of April, volatility has picked up considerably, which today pulled our Domestic TTI back below its long-term trend line—but only by a small margin. Please see section 3 below for more details.  

1. Moving the markets

I was pondering yesterday if, in the absence of a bullish driver, the markets might take the path of least resistance, which would be down. That was the case today, as the major indexes opened in the red, with the bears taking over and manhandling any bullish sentiment with utter ease, thereby assuring a red close.

First Republic Bank’s (FRC) latest earnings set the negative mood and spiked concerns about a broadening of the banking crisis, something that I have posted about since the SVB breakdown.

Shares of FRC got clobbered at the rate of over 49%, after deposits dropped 40% but allegedly have now stabilized. Promises of trimming expenses and slashing headcount did nothing to stem the tide, because investors remained concerned that FRC would experience a similar destiny as Silicon Valley Bank.

Other earnings reports were mixed, but all eyes are now on the report cards of the big boys like Microsoft and Alphabet, which are due out after the close today. Maybe they can restore some bullish sentiment.

Economic news did nothing to relieve traders of uncertainty, as the Fed’s Services Index dumped to its weakest since Covid, while the Confidence index slumped, and the US Home Growth popped a tad but remained at its slowest in a decade. The combined effect was a further drag on the Citi Surprise Index.  

Bond yields plunged with the 2-year again dropping below its 4% level. The US Dollar rebounded despite lower bond yields, and gold made two attempts to reclaim its $2k level but failed. Still, the precious metal gained 0.36% on the session.    

I think the markets are too complacent about the upcoming debt ceiling debacle. After all, we are stuck in the middle of an ongoing banking crisis and a deteriorating economy.

Hmm…

1. Moving the markets

In a repeat of last week’s activity, the major indexes spent most of the session vacillating near their respective unchanged lines but managed to slightly close in the green, with the Nasdaq being the exception.

Earnings season, economic data, upcoming Central Bank actions, and geopolitical tensions kept traders and algos on edge causing the indexes again to tread water, as uncertainty reigned supreme. Regarding economic data, manufacturing slumped to post-Covid lows, as the 12^th straight month of contraction became a reality.

Data provider FactSet announced that, through this morning, 76% of S&P 500 companies beat sharply reduced earnings estimates, while Refinitiv added that S&P 500 companies overall are projected to decline 5.2% for this past quarter.

The fact that a technical debt default is a real possibility, according to this chart, has been largely ignored by the financial markets, even though this CDS (Credit Default Swap) has now risen to its highest level ever. Go figure…

Mid-April’s short squeeze has lost its upward momentum, and the “most shorted” stocks are now acting like they are supposed to, namely drift lower.  

Bond yields retreated from Friday’s high, but May’s rate-hike odds moved higher and are now signaling a 92% chance of a 0.25% hike next week.

The US Dollar weakened after an early bounce and closed at 4-day lows. That helped gold to rebound, but it was not enough for the precious metal to crack its $2k level.  

Observing this directionless behavior over the past week, I am wondering if the next breakout will be to the downside, which appears to be the path of least resistance.