1. Moving the markets

A variety of factors combined to knock down equities with the 10-year bond yield getting whacked around like a rubber ball in a trampoline factory.

First, General Motors dropped some 7%, which weighed heavily on the broad market as the automaker missed earnings expectations, but it managed to issue a positive guidance for the remainder of the year.

Second, in economic news, the private ADP payroll survey confirmed a weakening environment with a meager gain of only 330k jobs for July vs. expectations of 653k. This could be a harbinger of things to come when the Labor Department’s official jobs report will be posted on Friday. However, at times, one report is not indicative of the other.

Third, an early short squeeze in the bond market set up a negative tone with the 10-year yield dipping to below 1.13%, after which all hell broke loose. The cause was remarks from Fed Vice Chair Richard Clarida opining that “the Fed may be much closer to tightening than last week’s FOMC release implied.”

Ouch, no one saw that one coming and bond yields responded to that much hawkishness by spiking straight up to almost 1.19% before easing back to 1.16%, as this chart shows.

The US Dollar index first dumped to 6-week lows and then pumped on Clarida’s hawkish remarks. Gold followed suit and rode its own rollercoaster and ended up slightly in the green. Despite this wild ride, the losses for the major indexes were moderate with the Nasdaq escaping unscathed.

Observing equity reaction to even the slightest hint of rising bond yields just goes to show the market’s total dependence on low rates/yields. Unfortunately, yields will have to go up at some point, as rising rates will be the only tool available to deal with the ever-increasing inflationary threat.

If you were around in 1980, you’ll recall that this is how then Fed Chairman Volker reigned in the crisis. And no, this time will not be different.  

1. Moving the markets

A sloppy opening and quick pullback put the major indexes on the defensive with all three of them sinking into the red. It was a reversal from yesterday’s action when an early pump turned into a late dump.

Bond yields proved to be the stabilizing factor with 10-year yields rebounding from Monday’s drop to nearly five-month lows, which was repeated early this morning, and giving stocks a good enough reason to follow suit. Remember, that sliding bond yields indicate economic weakness, while rising ones, within reason, account for economic expansion.

Factory orders printed better-than-expected and lent support to the theme that the economy is still in expansion mode, at least for this day. Lately, econ reports paint at best a mixed picture, which is why we are seeing some of these extreme moves in the markets.

The US Dollar bounced off its lows and, together with rising bond yields, kept gold in check with the precious metal ETF GLD closing just about unchanged.

The ongoing battle between Small Caps (VBK) and “value” (RPV) was clearly won by the latter with a solid gain of +1.37%, while the former barely stayed in the green.

August started the month with two opposite trading days and increased volatility, as the latest headline news continues to be the dominating factor for market direction.

1. Moving the markets

An early rally hit the skids with the major indexes giving back all their substantial initial gains. The exception was the Nasdaq, which managed to end up fractionally above its unchanged line.

Contributing to this sudden transformation in sentiment were the same old standbys, as Covid variants and slowing economic growth overwhelmed strong earnings reports.

The dead giveaway, that the economy is not all it can be, became obvious as bond yields tumbled just as they did last week when the same issues surfaced. The 10-year crashed to the 1.15% level before rebounding into the close.

The cause of this sudden change of heart, was the Manufacturing ISM survey, the index of which fell to its lowest in 2021, with the “soft” data now starting to catch “down” to hard data’s reality, as ZeroHedge put it.

That created havoc in the bond and stock markets, the latter of which were spooked some more after the Fed’s Waller warned in the last hour that good jobs data reports could move the timetable for the Fed by possibly “tapering early and fast.” To traders that means the punchbowl of easy money could be endangered, so stocks dumped off their early highs.

In the end, it was only this morning’s unrealized gains that were given back, as the major indexes barely crossed their unchanged lines into the red. Whether this is a harbinger of things to come remains to be seen.

The US Dollar index went the other way by selling off early on but rallying back into the close. Despite this chaotic back and forth, gold managed to come back from an early pullback and ended unchanged.

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