I guess investors will have to be happy with how Tuesday turned out. In response to the Bank of Japan's change in policy, the US dollar softened versus the Japanese yen as the US Dollar Index weakened overall. This allowed US equity markets to find a toehold, so as to at least stop the recent slide, even if calling Tuesday an "up" day would be something of a stretch.
This was certainly a positive for most commodities priced in US dollars, such as crude, gold, corn, and wheat, etc.
What the Bank of Japan did alone does not really constitute a tightening of monetary policy. By broadening the bands of yield curve control from =/-0.25% to +/- 0.5%, the BOJ will now have to purchase fewer JGBs (longer maturities Japanese sovereigns) in order to suppress interest rates there.
I really think this move was expected, but probably not at this time. Hiruhiko Kuroda's 10 year term at the helm of the BOJ is set to end in March. Most central bank watchers probably expected something like this to have to wait for Kuorda's successor.
Is this the first step towards a more hawkish BOJ? That depends on just who replaces Kuroda. Remember, Japanese policy has been to try to create inflation. So far, we have seen nothing to make us think that this will change drastically. Perhaps, the problem is that the BOJ had become too dominant a player in Japanese sovereign debt markets.
The move had a negative impact on longer dated non-Japanese sovereign debt as well, as this reduces the cross border carry trade, putting a lift in or steepening US and European yield curves. Remember that Japan is currently the largest holder of US sovereign debt. Just take a look at what happened to the US Ten Year/Two Year yield spread on Tuesday...
Now, take a gander at the US Ten Year/Three Month yield spread...
Sure, still badly inverted, but a whole lot less so.
Equity Markets
The good news is that major US equity market indexes finally ended their losing streaks. To say any ground lost since last Tuesday was really made up would be to exaggerate. The S&P 500 gained a whopping 0.1%, while the Nasdaq Composite gained one stinking point or 0.01%.
Looking around, small-caps led, with the Russell 2000 "soaring" 0.54%, while the Philadelphia Semiconductor Index surrendered 0.62% and the Dow Transports were scorched for a loss of 1.34% as investors fled both United Parcel Service (UPS) and FedEx (FDX) (unnecessarily, as things turned out) ahead of FDX earnings.
The narrow margin of victory for the bulls was really just a loss of momentum for the bears. We'll see now if positive overnight reactions to the above mentioned FDX earnings and to Nike (NKE) earnings on Tuesday night can extend into the Wednesday regular session. On Tuesday, across the 11 S&P sector-select SPDR ETFs, only Energy (XLE) at +1.51% and Discretionaries (XLY) at -1.16% closed up more than 0.68% or down more than 0.22%.
Breadth was especially vanilla. Winners beat losers by very narrow margins at both of New York's primary exchanges. Advancing volume took a 62.3% share of composite NYSE-listed trade, but just a 46% share of that metric across Nasdaq-listings. Aggregate trading volume was up very small across those listings at both exchanges, while trading volumes decreased day over day across the S&P 500.
What the major indexes have to do in order to make any kind of run at establishing some kind of Santa Claus Rally this year would be to reconnect with their respective 50 day SMAs (simple moving averages) Remember, the SC Rally does not traditionally start until this coming Tuesday and runs through the following Tuesday. That's it. Just six trading days.
The S&P 500 needs to rally 0.5% in order to reach that blue line, and 7.3% to reach last Tuesday's high of 4,100, which is starting to look like the second peak of a double top reversal pattern with a relatively shallow pivot.
The Nasdaq Composite is in a tougher spot, having not even touched its 50 day SMA since last Thursday. This index needs to rally 3.6% to reach that line and 9.7% to reach the high point of last Tuesday.
Trade Update
According to Bloomberg News, Tesla (TSLA) CEO Elon Musk has surrounded himself with a small "trusted" group at Twitter and is looking for a suitable replacement that could run Twitter for him since losing a "straw poll" held on the platform. The stock of Tesla has suffered as Musk's focus has been on the social media platform that he overpaid to acquire.
For those who like to follow my trades but maybe do not follow me on Twitter, I did exit the Tesla trade that I profiled here at Real Money on Monday after suffering an 8% loss, which is the level where readers know I cap losses. I am flat that name.
DC Visit
Ukrainian President Volodymyr Zelenskyy will leave Ukrainian territory for the first time since the Russian/Soviet invasion back in February and address a joint session of Congress on Wednesday night at the invitation of President Biden. The event will provide a platform for the Biden administration to announce the deployment of a Patriot anti-air battery to the Ukrainian armed forces as part of a roughly $1.8B security aid package.
The US will not be providing aircraft, armored vehicles, or the long-range US Army Tactical Missile System that Ukraine had requested. To date, the US has authorized $54B in funding for Ukraine and the Ukrainian military with another $45B through the end of fiscal 2023 (September 30th) included in the still un-passed spending bill that is currently pending. The Patriot is a Raytheon Technologies (RTX) product, while the most modern projectiles that it fires are manufactured by Lockheed Martin (LMT) .
Nike (NKE) Rocks!
The shares of Nike (NKE) are popping some 12% overnight in response to the firm's fiscal second quarter results that blew expectations away. Yes, this makes the bear put spread that I outlined for you on Tuesday ahead of the event max profitable. Owning the equity would have been more profitable, but also came with considerably more risk at the time.
Nike posted GAAP EPS of $0.85 on revenue of $13.32B, easily beating estimates for both the top and bottom lines. Nike Direct sales were up 16%, or 25% adjusted for currency. NIKE Brand Digital sales increased 25%, 34% adjusted for currency. Wholesale sales increased 19%, 30% adjusted for currency.
North American sales popped 30%, as sales increased 19% in the Asia & Latin America region. Sales from the Greater China region suffered a contraction of 3%, which is better than feared. Gross margin did decrease by 300 basis points, which was slightly better than expected , while inventories of $9.3B were up a disappointing 43%, but still down sequentially from $9.7B.
While the firm has used the balance sheet to steer its way through this period, that balance sheet remains strong with a current ratio of 2.69, a quick ratio (sans those inventories) of 1.78, and a cash to debt ratio of 1.19. Nice job, Nike.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.42%.
07:00 - MBA Mortgage Applications (Weekly): Last +3.2%.
10:00 - Existing Home Sales (Nov): Expecting 4.2M, Last 4.43M SAAR.
10:00 - CB Consumer Confidence (Dec): Expecting 101, Last 100.2.
10:30 - Oil Inventories (Weekly): Last +10.231M.
10:30 - Gasoline Stocks (Weekly): Last +4.496M.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (CCL) (-.89), (CTAS) (3.03), (TTC) (1.08)
After the Close: (MU) (-.01)
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