1. Moving the markets

Despite a rollercoaster ride in the futures market overnight, and a plunge in the Chinese stock market of -6.4%, its largest one-day drop since 2008, US sentiment remained positive after the opening bell rang.

It’s all about earnings and forward guidance this week, with 46% of S&P members reporting. However, inflation data and bond yields will always be on centerstage with traders now “whispering” that the Fed might be stepping off the gas pedal regarding their hiking pace with a “pause” to be hopefully on deck.

All the above is not based on facts, but merely wishful thinking, but so far it has had the desired effect of keeping the bullish theme alive. We have seen this pattern numerous times this year, but all prior attempts eventually died on the vine, and new yearly lows were subsequently made. Only time will tell if this “melt up” has enough legs to eventually generate a new “Buy” signal (section 3).

Economically, things looked pretty dire as Manufactu9irng and Service PMIs, tumbled into contraction, as ZeroHedge reported:

• US Manufacturing 49.9 (contraction), below 51.0 exp and down from 52.0 prior
• US Services 46.6 (contraction), below 49.5 exp and down from 49.3 prior.

Of course, nobody calls it a recession anymore, so we’re in tune with the fact that bad news is good news for the markets, as the eventual “Powell Pivot” hope (from hawkish to dovish) is all that matters. Go figure…

Even higher bond yields could not keep equities down, as the 10-year swung wildly and closed at 4.255%, near its recent highs. The US Dollar meandered aimlessly and so did Gold, with neither having much to show for in the end.

1. Moving the markets

Despite Netflix’s beating of earnings and revenue, and its shares rallying some 13%, it was simply not enough to overcome the negatives of surging bond yields, which indicated that inflation fears have not subsided and won’t soon.

As a result, the major indexes gave back some of their gains of the past two days, but they held up better than expected given the solid crossing of the 4% level by the 10-year yield, which closed higher by almost 12-bps to end the session at 4.128%, its highest point since July 2008.

For sure, today’s menu of bad news was not good news for the markets for a change, with UK inflation (back above 10%), Ukraine tensions, ugly housing starts, hawkish Kashkari comments and more UK government chaos could not get traders and algos to push the ‘Buy” buttons, as ZeroHedge lamented.  

Rate-hike expectations shifted into more hawkish mode (higher rates) followed by higher subsequent rate-cut expectations, meaning that the prior terminal rate, the moment in time when the Fed is expected to pivot, has been pushed up a notch to about 4.977%.

This also means that the market is now pricing in a full 75-bps increase for November with odds of a 75-bps hike having risen to 60%. Unless the Fed suddenly changes its mind and pauses, rates will continue to ratchet higher and exert more pain into the equity arena.  

9 out of the 10 S&P sectors ended the session in the red with the lowly exception of Energy, which advanced over 3%. The US Dollar reversed its recent slide punishing Gold in the process.

1. Moving the markets

Despite an early 500-point jump in the Dow, supported by strong earnings reports (Goldman Sachs, Lockheed Martin), volatility set in with the major indexes tumbling off their lofty levels. The cause was Apple reporting that it will be cutting iPhone 14 production less than 2 weeks after its debut.

Added ZeroHedge:

The news that there is just not enough demand for the trinkets and beads of the world’s largest company makes one wonder if the consumer is really as strong as the talking heads would like everyone to believe.

Uncertainty reigned and trading was choppy, as many investors seem to lack conviction that this rally has legs. According to my count, we have seen 5 occurrences when, after a rebound, the indexes dumped to make lower lows each time, which is a hallmark of bear market behavior.

This SPY chart demonstrates what the bulls had to put up with in 2022:

Will this current rebound be different?

Today, another short squeeze helped the bullish cause with the major indexes closing in the green. Bond yields chopped around and ended slightly lower with the 10-year losing its 4% level by closing at 3.99%.

Gold retreated a tad, but Crude Oil stumbled and is threatening to break the $80 barrier to the downside. With the current administration’s plan to announce more SPR releases to lower the price of gasoline at the pump, and a weakening economy, we could see the black gold take a dump into $70s.