A holiday-shortened week began uneventfully with little of interest coming over the newswires and markets simply drifted along the path of least resistance, which is currently downwards.
Things soon began to pick up steam to the downside though, as the Chinese city of Chengdu extended COVID lockdowns for the majority of its 21 million residents due to rising infection numbers, dimming the demand outlook for oil and sending the price of crude oil and stocks lower. Then a new report from the Institute for Supply Management showed unexpected US growth in the services sector from a month ago. New orders and business activity actually accelerated from a month previous. Hardly evidence of an economic slowdown. Chalk up yet another justification for the Fed’s program of aggressive interest rate rises and the market’s sinking feeling grew stronger.
Fed chair Jerome Powell then notably failed to walk back his previously extremely hawkish comments in a speech he gave on Thursday where he made it clear (yet again!) that the central bank is thoroughly committed to tackling inflation and staying aggressive until it falls back to its 2% target.
Powell's appearance followed the decision of the European Central Bank (ECB, see EXPLAINER: FINANCIAL TERM OF THE WEEK, below) to raise interest rates in the EuroZone by 0.75% on Thursday. The ECB's target rate is now above zero for the first time since Kelly Clarkson came out with the rather dubious assertion in 2012 that anything that doesn’t kill you somehow actually makes you stronger. The ECB’s rate hike (following a 0.50% increase as recently as July) was the biggest increase since Britney invited her baby to hit her one more time in the early days of Europe’s monetary union in 1999.
The bank is moving aggressively to combat record levels of inflation even as an energy crisis puts Europe on the brink of recession and the bank made it clear that rate rises would not stop there. The death of Queen Elizabeth II, while sad, had little effect on markets although trading activity may slow in the UK with an official period of mourning and likely upcoming additional national holidays for the funeral and Charles III’s coronation.
Nothing chair Powell said dampened the expectations of a 0.75% rise in interest rates at the next Fed meeting on September 21st, with markets pricing that probability at 84%. The size of the rate increase and its frequency over the coming weeks and months is The Journey.
It is, however, important to keep in mind that the more important variable here is not The Journey, but The Destination. This is the Terminal Rate when it comes to interest rates. That is to say; at what level and when the Fed will stop hiking rates.
The Journey by which the Fed reaches The Destination is less important than exactly where that final destination ends up being. Market expectation for the Terminal Rate is currently a little over 4.0% by March 2023 and keeping an eye on how this number moves up or down is probably more important than analyzing the shit out of a single rise of half or three-quarters of a percent in September, which is simply a milestone on the way to The Destination.
After taking an initial dive at Powell’s comments, the market then decided that, actually, there was nothing new here and prices stabilized quickly. An over-sold bounce was always going to happen after a miserable three weeks and investors were just looking for a catalyst.
Fed-Speak, for once, was a bit more more dovish than hawkish and it was this that provided the needed spark for that inevitable oversold bounce. In a speech, deputy chair Lael Brainard seemed to make a deliberate point of noting the risks involved in raising rates too quickly as well as too slowly and highlighted recent progress indicating that the rising rate of inflation may have topped.
Indeed, if Powell hadn’t explicitly ruled it out a week earlier, her speech would have given hope to those who used to believe in a Fed pivot back to lower rates sometime soon, but it was enough to trigger an over-sold bounce that lasted right the way through to Friday’s close, leaving markets meaningfully higher for the shorter week (see LAST WEEK BY THE NUMBERS, below), essentially erasing the previous week’s steep losses.
OTHER NEWS:
Natural gas trouble (part 2) .. Natural gas prices surged 36% in Europe in a day after Russia announced it was halting the flow through its Nordstream gas pipeline. European natural gas prices are now up over 400% from a year ago.
Russia said its main gas supply pipelines would remain closed indefinitely, fueling fears of gas rationing in the European Union this winter. Russia said the shutdown was due to “technical reasons,” but European officials accused Russia of weaponizing energy prices in retaliation for sanctions imposed following its invasion of Ukraine. The Nordstream pipeline has typically supplied Europe with about a third of the gas imported to continental Europe from Russia.
Travel boom .. In another sign of the airline industry's recovery from its COVID-related slump, the number of Labor Day weekend air travelers in the U.S. surpassed pre-pandemic levels for the first time. The Transportation Safety Administration (TSA) reported that it had screened 8.76 million passengers between Friday September 2nd and Monday September 5th. That was 102% of the volume recorded during the 2019 holiday. Friday was the busiest travel day, with 2.48 million people screened.
Despite the increased number of fliers, just 0.6% of the more than 90,000 flights scheduled on U.S. airlines were canceled and only 16% were delayed.
Turbulence at BBBY .. Gustavo Arnal, the CFO of Bed Bath & Beyond (BBBY) who leapt to his death from a Manhattan skyscraper (ruled a suicide by the New York City medical examiner), had faced a “pump and dump” allegation less than two weeks earlier, it was reported last week.
Arnal’s death marks the latest chapter in a turbulent period for the troubled home goods retailer and meme stock phenomenon. BBBY stock skyrocketed earlier this year based on the usual manic meme stock phenomena but was brought crashing down to earth last month after activist investor and GameStop (GME) chairman Ryan Cohen disclosed he was selling a large stake in the company. A lawsuit filed in the United States District Court for the District of Columbia alleges that both Arnal and Cohen were engaged in a pump and dump scheme involving BBBY stock.
Frozen Apple .. Never mind better battery life or a fancier camera, the biggest innovation from the latest product launch from Apple (AAPL) was a price freeze. It says a lot about the state of the economy that the consumer electronics company famous for its talent at extracting cash from its loyal customers is choosing not to raise prices, holding the cost of its iPhone 14 range at the same level as its predecessor. Holding prices steady while inflation ramps up its costs looks like a valuable goodwill gesture, but it actually removes one reason for not upgrading handsets as the company seeks to protect its $200 billion franchise.
UNDER THE HOOD:
Last Thursday’s reflex rally sprung from deeply over-sold short term conditions, pushed Buying Power into a dominant position over Selling Pressure (see below) and provided welcome relief from the relentless selling since the August 16th high. The rally was, however, entirely predictable as a reaction to the levels to which prices had so quickly fallen.
Unfortunately, a return to below-average trading volumes on both of last week’s up-days left the conviction of the buyers in question. Smaller defensive sectors are leading the bounce (I’m looking at you, Utilities and Materials) and Small Cap stocks are lagging, and all on low volume.
That is the exact opposite of what we would expect to see in a legitimate, sustainable risk-on uptrend. It is, however, exactly what you would expect to see in a rally driven mostly by opportunistic investors buying simply because overall prices had fallen so far and so fast and with the probable intention of dumping their purchases once they turn meaningfully profitable - rather than because of a high degree of conviction that the skies have finally cleared and it’s time to back up the truck and load up on stocks.
Trends in other core technical indicators have now fallen back from their recent brief recoveries and sit once again below their respective moving averages, making it more difficult to view Thursday and Friday’s rebound as a lasting advance.
What is likely needed for a sustainable return to a bull market is selling exhaustion in a crescendo of supply or spectacular demand reinvigoration among buyers in a high-volume environment, preferably all happening at about the same time. None of these scenarios are even close to being in place at this point.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
This coming week is all about the latest inflation data, with potentially massive implications for Federal Reserve policy and the economy in general. The retail Consumer Price Index (CPI) for August comes out on Tuesday and the average economist estimate is for the index to be up 8.1% from a year earlier, slowing from July's 8.5% annual rate of increase. The Core CPI, which excludes food and energy, is expected to accelerate to 6.1% year over year however, up from 5.9% in July.
Wednesday will see the release the August Producer Price Index (PPI), the wholesale version of CPI, which is forecast to have risen 8.9% from a year earlier.
Other economic data to be released next week includes August Retail Sales and a pair of sentiment indicators: The National Federation of Independent Businesses' Small Business Optimism Index and the University of Michigan's Consumer Sentiment Index.
A handful of companies will report earnings and host investor days, including Oracle, Adobe, Starbucks and Humana. A shareholder meeting at Twitter on Tuesday will vote on Musk's proposed $44 billion acquisition.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 18% (down from 22% the previous week)
→Neutral: 29% (up from 28% the previous week)
↓Bearish: 53% (up from 50% the previous week)
Net Bull/Bear spread .. ↓Bearish by 35 (Bearish by 28 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays
Source: American Association of Individual Investors (AAII).
LAST WEEK BY THE NUMBERS:
finviz.com
- Last week’s best performing US sector: Materials (two biggest holdings: Linde, Sherwin-Williams) - up 5.0%
- Last week’s worst performing US sector: Consumer Defensive (two biggest holdings: Proctor and Gamble, Coca-Cola) - up 0.6%
- The NASDAQ-100 pretty much exactly tracked the progress of the S&P 500
- US Markets rose by more than International Developed Markets and by a lot more than Emerging Markets
- Mid Cap stocks outperformed both Large and Small Cap
- Growth and Value performed equally well
- The proprietary Lowry's measure for US Market Buying Power is currently at 169 and rose by 11 points last week and that of US Market Selling Pressure is now at 149 and fell by 14 points over the course of the week. Buying Power flipped into a dominant position over Selling Pressure on Thursday.
- SPY, the S&P 500 ETF, is now slightly above its 50-day and slightly below its 90-day moving averages but still below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 51**. SPY ended the week 14.9% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, is slightly below both its 50-day and its 90-day moving averages and still below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 49**. QQQ ended the week 24.0% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended the week lower at 22.8 and has now fallen back below its 50-day and 90-day moving averages as well as its long term trend line.
ARTICLE OF THE WEEK:
This week .. El Salvador’s disastrous Bitcoin experiment is now a year old. The flood of wildly optimistic tweets by American crypto bros at the time praising President Bukele’s bizarre decision have all aged rather badly, as the country has deteriorated into pretty much a failed state with rampant gang violence and resulting government repression compounding an economic catastrophe brought about in no small part by the country’s adoption of Bitcoin as legal tender at the urging of, and directly assisted by, US-based Bitcoin evangelists and influencers.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
The European Central Bank (ECB) is the central bank responsible for monetary policy of the European Union (EU) member countries that have adopted the Euro currency. This currency union is known as the Eurozone and currently includes 19 countries. The ECB's primary objective is price stability in the Euro area.
The European Central Bank is headquartered in Frankfurt, Germany. It has been responsible for monetary policy in the Euro area since 1999, when the Euro currency was first adopted by some of the EU members at the time.
The ECB Governing Council makes decisions on eurozone monetary policy, including its objectives, key interest rates and the supply of reserves in the Eurosystem comprising the ECB and national central banks of the eurozone countries. It also sets the general framework for the ECB's role in banking supervision.
The Council consists of six executive board members and a rotation of 15 national central bank governors. Instead of an annual rotation of voting rights, as for regional Federal Reserve bank presidents, the ECB rotates voting rights monthly.
Central bank governors from the top five countries by the size of their economies and banking systems—as of May 2022, Germany, France, Italy, Spain, and the Netherlands—share four voting rights, while the central banks of the other countries vote only slightly less frequently at 11 months out of every 14.
The ECB's mandate is for price stability and it targets an annual inflation rate of 2% over the medium term. Like the Federal Reserve's inflation targeting, it is symmetrical, so that inflation too low relative to its target is viewed as negatively as inflation above it. The 2% target provides a buffer against the risk of a destabilizing deflation during a recession.
The primary responsibility of the ECB, linked to its mandate of price stability, is formulating monetary policy. Monetary policy decision meetings are held every six weeks, and the ECB is transparent about the reasoning behind the resulting policy announcements. It holds a press conference after each monetary policy meeting, and later publishes the meeting minutes.
The Eurosystem comprises the ECB and the central banks of Eurozone countries. The Eurosystem manages the euro currency and supports the ECB's monetary policy. The parallel European System of Central Banks includes all central banks of EU states, including those that have not adopted the Euro.
The ECB is also the EU body responsible for banking supervision. In conjunction with national central bank supervisors, it operates what is called the Single Supervisory Mechanism (SSM) to ensure the soundness of the European banking system. The SSM enforces the consistency of banking supervision practices for member countries—lax supervision in some member countries contributed to the European financial crisis. The SSM was launched in 2014. All euro area countries are in the SSM and non-Euro EU countries can choose to join.
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