[Chart courtesy of MarketWatch.com]

1. Moving the markets

Despite a negative news environment, traders ignored most of the headlines and the fact that US factory orders tumbled in February and scored their biggest drop since April 2020.

Also sounding a word of caution was this chart (hat tip to ZH) suggesting that the March melt up, AKA a short-cover rally, may be showing some momentum fatigue and nearing its end with most shorts now fully covered thereby eliminating them as a future driving force—except today, when they suddenly came to life again.

None of the above mattered, as the major indexes seemed to climb a wall of worry by ending the session with solid gains led by the much beaten-up tech sector, sort of a relief rally.

Equities and bonds are still sending diverging indications about the economy, which look to be depending on the headline news of the day, as yield curve inversions are pointing towards a recession, while cease-fire talks in Ukraine appear to change by the moment. Both are contributing to market- and economic uncertainties, but they should not be over-analyzed on a day-to-day basis.

With “value” having had the upper hand YTD over “growth”, today was opposite day, with the latter outperforming the former, which allowed the Nasdaq to be the top dog for this session. Even the “unprofitable tech stock basket” managed a long overdue rebound.     

Gold had a positive session, as did the US Dollar, which continued its upward swing for the 3^rd day in a row.

In the end, it’s all about market expectations of rate hikes and future rate cuts, as this chart demonstrates.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

While the Dow peeked above its unchanged line early on, that visit was an ephemeral one because the index shortly thereafter joined the S&P 500 and Nasdaq in the red. The slipping and sliding continued throughout the session with dip buyers being conspicuously absent.

Things got worse mid-day after Russia reported that they were ready for a “final stage” of the Donbas liberation and that other tasks had been completed, as ZH reported:

The markets having soared on optimism yesterday amid chatter of Russian forces retreating, Ukrainian President Zelensky poured some cold water on that hope by noting that Russia is sending new forces during a speech to the Norwegian parliament. He also warned that he sees risk in the Black Sea from Russian mines.

His comments follow a statement from the Kremlin said there are no breakthroughs in talks with Ukraine.

That was good news for Gold, with precious metal jumping and closing the day with a +1.15% gain, while Crude Oil joined the party by advancing +2.84%.

And just like that, yesterday’s peace optimism got put on hold assisted by some hawkish talk by various Fed mouth pieces. Even a decent ADP jobs report could not offset the reality of the moment. A short squeeze attempt hit a brick wall leaving the major indexes to follow the path of least resistance.

For a change, bond yields backed off their recent highs with the 10-year dropping 5 bps. The US Dollar fell back to almost touch the lows of the month.  

In terms of future rate hikes, and subsequent rate cuts, this chart presents the latest update with the markets now expecting 9 more hikes in 2022, creating a recession, which then will be followed by 3 cuts in 2023/24. The latter is what stocks have been focusing on.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

The winning steak continued and was supported by increased hopes that a Russian-Ukraine ceasefire may be on deck, despite the warring parties saying that they are not close to deal. Phrases like “nothing is agreed upon, unless everything is agreed upon,” took the starch out of the early bounce by mid-day, but the major indexes recovered and stormed into the close.

Financial and economic news were anything but encouraging but traders ignored the facts and stuck to their conviction that this impressive March bounce will continue and not be of limited duration.

As ZeroHedge reported, one of the most widely followed yield curves (2s10s) inverted today, which means the 2-year bond yields more than the 10-year one, an anomaly that has in the past signaled a countdown to a recession.

As Deutsche Bank’s Jim Reid notes this morning, there has never been such a directional divergence possibly because the Fed has never been as behind the curve as they are today.

For a sense of just how far behind, The Taylor Rule suggests given the current inflation rate and unemployment rate, The Fed needs to hike by an absurd sounding 1155bps (11.55%) to get back to ‘normal’…

On the economic side, ZH pointed out that Job Openings are stubbornly stuck at an all-time high with 5 million more than unemployed workers.

Then we learned that Inflation Expectations had hit record highs as ‘Hope’ crashed to 8-year lows, which is not exactly giving the economy a thumbs up.

But, none of that mattered, as the usual short-squeeze was activated and helped the bulls to regain the upward momentum, which was lost mid-day.

The divergence between bonds and stocks has been nothing short of spectacular during the past 10 days, as bonds got monkey hammered while stocks spiked. The spread between the two is now the 5^th biggest since the 2008 meltdown.

How long can that last?

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