[Chart courtesy of MarketWatch.com]

1. Moving the markets

While the major indexes closed off their intra-day lows, they nevertheless scored another loss, as several rally attempts did not hold, and south we went.

As I pointed out last week, the massive rebound, that propelled the Nasdaq some 6.5% higher on Monday and Tuesday turned out to be another head fake with the index surrendering all gains over the next 3 trading days:

The baseball term “Going, going, gone…” clearly applies here, as bear market bounces can be fast and furious, but they usually tend to fall apart quickly, as we witnessed.

Adding more insult to injury was today’s session, which pushed the index down by another -1.04% to its lowest in over 2 years, as tech shares continue to be hardest hit in this environment of spiking interest rates.

As a result, we saw more of the same weakness, despite the US bond markets being closed. However, bond futures traded and added more pain to equities via higher yields, the continuation of which we may see tomorrow. Fortunately, during the end of the session, yields came off their highs.

Despite the BoE recent attempt to bail out their bond markets, and efforts to present a new plan, their market broke again with their 30-year Gilt (bond) yields racing higher by a stunning 29bps and almost reaching last month’s high, when the bank slammed on the emergency brake.

Since all Central Banks are tied at the hip, some of England’s issues could very well travel across the Atlantic and affect markets here in the US. My point is that bonds are no longer the ‘safe haven’ they were advertised to be and not being exposed to them is a wise investment decision.

The Fed’s Brainard offered these words of wisdom:

Fed is attentive to risks of further adverse shocks, aware that [market] moves could interact with financial vulnerabilities.” However, she also noted that the “1970s taught [policymakers] that there are risks to easing prematurely”.  

In other words, there was no “dovish pivot” present in these remarks, which was disappointing to the always hopeful bullish crowd.

The US Dollar continued its 4-day comeback to one-week highs, as ZeroHedge noted, which caused gold to get hit, with the precious metal dropping below its $1,700 level.

High volatility will remain with us, as Wednesday’s monthly Producer Price Index (PPI) and Friday’s CPI could wreak havoc with markets—in either direction.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Overnight weakness, followed by an early dump, with the Dow dropping some 400 points, was reversed as bullish sentiment prevailed causing traders and algos to pull the major indexes out of a hole and back to within striking distance of their respective unchanged lines.

After two days of strong gains, the widely followed S&P 500 closed lower by a moderate amount, as the index gave back -0.19%, which was a nice recovery off the session’s lows. However, the S&P was not able to hang on to its 3,800 level, which it had crossed intra-day.

Today’s action reflected a moment of pause and deliberation as to how durable the current advance might be. After all, this rebound was based on nothing but hope that the Fed will make, or be forced to, a dovish pivot. So far, there have been no indications.

Bloomberg elaborated on the turnaround:

One giant options transaction may have sparked the S&P 500’s bounce on Wednesday, according to Wells Fargo & Co. The trade, which involved buying and selling call options tied to the index at a cost of around $31 million, probably helped fuel a recovery that saw the benchmark gauge erase a 1.8% decline.

A better-than-expected jump in jobs, as per ADP, showed an increase of 208k jobs vs. an expected 200k, but more important will be Friday’s non-farm payroll report.  

Bond yields jumped but did not affect equities negatively, despite the 10-year climbing 12bps to end the session at 3.754%. The US dollar, after a 5-day down streak, showed signs of life again and rebounded almost 1%.

Crude Oil jumped as well, due OPEC now being in the process of reducing daily production. Ouch!

Gold bounced erratically but managed to defend its $1,700 level.

As ZeroHedge noted, financial conditions have eased notably over the last 3 days, which is not what the Fed wants to see. My conclusion is that they are not ready to pivot anytime in the very near future.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

For the second day in a row, the markets rebounded sharply based on the idea that the Fed is due to pivot and implement a more dovish stance with its monetary policy. Never mind that all this is merely perception and not reality at all.

But to the frontrunning traders and algos none of that matters and reality is simply ignored, despite John Williams, President of the NY Fed, giving a speech, which included the following nuggets:

• Inflation is far too high.
• Our job of cooling demand and reducing inflationary pressures is not yet done.
• The drop in commodities prices is “not enough” to “bring down” the “broad-based inflation” caused by goods demand as well as labor and services demand.

Hmm, I don’t see a hint of a pivot and neither did other observers, leading Morgan Stanley’s strategist Mike Wilson to issue a host of warnings:

• Stocks will continue to fall even after the Fed pivots
• They will likely be headed lower for the foreseeable future, as volatility across equities, bonds, commodities, and currencies could remain elevated
• As interest rates continue to rise and the Fed keeps shrinking its balance sheet, it could risk provoking a crisis somewhere in the world, or even in the U.S. This is because higher interest rates create a drag on the U.S. economy by making it more expensive for corporations and households to borrow money, while a stronger dollar makes it more difficult for emerging economies to pay back debt denominated in dollars.

For sure, after the beating equities have taken this year, a periodic rebound is to be expected, and we have seen this pattern repeated throughout 2022, yet every time lower lows were subsequently made:

Will this time be different?

Analyst Graham Summers summed the outcome up like this:

The Fed will no doubt pivot at some point… but it’s not doing so now. And the market’s action has made the likelihood of a pivot MUCH lower.

So, enjoy the relief rally… but don’t plan on it lasting for long. Because the Great Crisis… the one to which 2008 was a warm-up, has finally arrived.

On the economic front, we saw the biggest crash in job openings on record (outside of global Covid lockdown), as ZeroHedge posted. Openings tumbled to just about 10 million from a revised July print of 11.1 million. Ouch!

Financial conditions eased as bond yields and the US Dollar fell, but ZeroHedge offered this caution, which goes along with the above:

However, if anything, the market’s action over the last two days makes a Fed pivot less likely any time soon. With both Treasury yields and the dollar falling, rate and liquidity pressures are much lower than they were last week… reducing the pressure on Powell to go full ‘Bank of England’… and round and round goes the big reflexive wheel of leverage.

Despite the violent market behavior of the recent past, the analog to 2008-2009 is still on target.