Default !! Russia defaulted on that nation's foreign currency debt on Sunday night for the first time in more than a century as the grace period on approximately $100M in interest payments due on May 27th expired.
Russia had defaulted on $40B in local debt in 1998, the year of the ruble's collapse as Boris Yeltsin's government declared a moratorium on foreign debt, but this is the first actual Russian default on foreign denominated debt since the Bolsheviks repudiated the Czar's debt-load in 1918.
The interesting facet of this particular default is that Russia insists that it has the funds necessary to cover any payments due, and has been forced by sanctions and banks unwilling to handle or exchange Russian currency into a position where it can not service debt payments in currency other than rubles.
All As...
G7 leaders met in the Bavarian Alps in pursuit of a deal that would impose "price caps" on Russian oil and perhaps natural gas. The idea is to limit the ability of Moscow to benefit from high prices for crude oil and other energy commodity products. Leaders will meet for a second day on Monday (today) and for a third day on Tuesday, as non-G7 nations such as India, Argentina, South Africa, Senegal, and Indonesia join the discussion. It is believed that Russian oil-related revenues have not necessarily decreased due to European and North American restrictions on Russian crude, and that message needs to get across.
The idea here is to make it more difficult for Russia to fund the war in Ukraine. Under the price capping scheme currently under consideration, Europe would limit both the availability of shipping and insurance services that currently enable the global transport of exported Russian oil. The concept will need the cooperation of nations currently taking advantage of discounted Russian energy commodity products
The US, UK, Japan, Canada and potentially the entire G7 are also expected to announce a ban on imports of Russian gold as soon as early this week.
And As...
NATO meets in Madrid this Tuesday through Thursday, and Russia is expected to be designated as the "most direct and immediate threat to NATO security." NATO will agree, without sharing detailed operational plans for obvious reasons, to an overhaul of its approach to the defense of its Baltic member states. NATO secretary-general Jens Stoltenberg said "I can assure you that we have been able to protect countries bordering Russia for decades, adjusting our presence in light of the threat assessment. We have done that before and we will do it again.
Asian-Pacific, non-NATO powers such as Australia, New Zealand, Japan, and South Korea have been invited to join the summit in Madrid in what has to be seen as a clear message to Beijing regarding Taipei's autonomy as the alliance otherwise focuses on Russia.
Markets...
The Past Week
The ball rolled in a different direction last week. Debt and equity securities rallied side by side as commodity prices were beaten severely. The catalyst? There was but a glimmer of hope that as tightening of monetary conditions has impacted the US economy on top of the ongoing war in Eastern Europe, on top of bogged down supply lines primarily caused by Chinese lockdowns, and on top of the removal of absurd levels of fiscal support through irresponsible deficit spending had brought the US economy to recession's doorstep, that this reality could temper or balance the heat of consumer level inflation.
Should inflation cool on its own, or because of that just mentioned rapid-fire volley of negative inputs, the Federal Reserve "might" not have to be quite as aggressive as previously thought or feared in the implementation of tighter policy.
Friday was an exceptionally strong day for US markets on exceptional trading volume thanks to the Russell Rebalancing. We, therefore, must discount using Friday's trading volume as any kind of conviction-defining signal. The S&P 500 ran 3.06% to end the week up 6.45%, while the Nasdaq Composite screamed 3.34% higher to finish the week up 7.49%. The Russell 2000 enjoyed a 3.1% move to the upside on Friday, closing out the week up 6.01%. Three of the week's four trading days present as green candles for most of our favorite equity indices. The S&P 500 has now posted four up sessions in five and five in seven.
Treasury markets rallied alongside equities as the US Ten Year Note paid 3.13% by week's end, down from 3.23%. I see the Ten Year Note yielding 3.16% this morning. The week's highlight economically had been the twin testimonies of Fed Chair Jerome Powell before both the Senate Banking Committee and House Financial Services Committee. Powell came off as motivated on the inflation front, but with just enough "dovishness" mixed in to give markets reason for pause. The macro was a bit light last week. Both the S&P Global (formerly Markit) Manufacturing and Services June Flash PMIs missed expectations by a wide margin, though still printed in expansionary territory. May New Home Sales printed up from April, but that did not mask the fact that April and May were the two worst months for New Home Sales since the spring of 2020.
About the Fed and monetary policy... Futures markets trading in Chicago went out on Friday night pricing in an 83% probability for a 75 basis point increase made to the target for the Fed Funds Rate on July 27th. That's down from nearly 100% less than two weeks earlier. The likelihood, according to these markets, for an additional 75 basis point rate hike in September has dropped to 24%, with a 12% chance for just a 25 basis point increase. In other words, these markets have gone from sure to un-sure, which in this case, was/is good for stocks.
For the past week, 10 of the 11 S&P sector-select SPDR ETFs shaded a deep hue of green over the four days, with cyclicals and defensive type sectors dominating the marketplace. Consumer Discretionaries (XLY) and Health Care (XLV) ran 8.25% and 8.22%, respectively, while three other sector ETFs gained as much as 7% and another two as much as 6% for the week. Given the selloff across the commodity complex, Energy (XLE) finished in last place for the week (again), down 1.49%, while Materials (XLB) , though impacted in much the same way, managed to gain 2.76% over the same time frame.
The S&P 500 now trades at 16.9 times forward looking earnings, up from 15.8 times one week ago. This is still well below the S&P 500's five year average of 18.6 times, but just about spot on the ten year average of 16.9.
Just Another Relief Rally?
As I wrote in this space a week ago, I expected a rally into the end of June. Was this that? Are we ahead of schedule? Yes, to a degree, and I don't know. While the precipitous declines across the broader commodity complex, (energy, agricultural, industrial metals) will surely help on the inflation front, at least part of my projected pop going into month's (quarter's) end, was based on the drastic underperformance of equities relative to debt securities over the past 30 (90) or so days. Both asset classes rallied hard last week, muddying my expectations for mandated pension fund balances this week that might favor equity allocation.
The S&P 500 is "only" down 5% month to date and 13.5% quarter to date after last week, after having been down 11% and 19%, respectively. There will be some kind of reallocation, but unless there is some kind of early week unwind of last week's price discovery, it will not carry the impact that we expected a week or two weeks ago. Some of that expected price discovery has clearly already happened.
On the other hand, if lower commodity prices are indeed here to stay for at least a little while, the Fed can be less aggressive than recently feared, and then a soft landing for the US economy does become possible. No prediction. That said, there is a possible path forward. As far as the economy is concerned, the Bureau of Economic Analysis will put their second revision and final look at Q1 GDP to the tape on Wednesday morning. Q1 GDP, readers will recall, is coming off a revised estimate of -1.5% (q/q SAAR) "growth." Considering the current quarter, the Atlanta Fed will update its running snapshot of second quarter growth (currently at 0.0%) later on today (Monday). This is where the recent breakdown in copper and other industrial and energy related commodities may have signaled trouble.
Earnings
Second quarter earnings season unofficially gets under way when the big banks report in about two and a half weeks. Currently, according to FactSet, S&P 500 earnings growth is seen at 4.3% year over year. This would be the lowest pace of growth for any quarter since Q4 2020. Revenue growth for the quarter is seen at 10.3%. For the full year, earnings are expected to grow 10.4% on revenue growth of 10.7%. Both sets of numbers are seen as overly optimistic by a growing cadre of market watchers.
As far as individual sectors are concerned, for the second quarter, Energy is seen as having grown earnings 215% on revenue growth of 44.5%, while the Financials are expected to print earnings growth at -21.7% on revenue growth of 3.1%, and the Utilities are seen "growing" earnings -9.8% on revenue growth of 1.3%.
The week ahead will be a quiet one for earnings, though there are a few that do stand out as notable. Among those will be Nike (NKE) this evening and Micron Technology (MU) on Thursday evening. Both stocks have taken a beating over recent weeks.
In focus will be Nike's performance in China as both Barclays and Morgan Stanley have published research notes forecasting softer sales in that region.
As for Micron, the firm specializes in memory (DRAM and NAND) and memory could be seen as a proxy for business to business technology sales broadly. Expect the chips as a group to move on this report, regardless of whether or not these other firms are involved in memory storage.
Leader of The Pack?
Can't say we didn't give a "heads up" here. The Financial sector SPDR (XLF) popped an impressive 3.69% on Friday, with the KBW Bank Index up an even more impressive 4.24% in the wake of news of the Fed's stress tests last Thursday evening. We had set up long positions in Bank of America (BAC) and Wells Fargo (WFC) going in. Bank of America failed to impress (not that anyone came close to failing) during stress tests. BAC only gained 0.72% on Friday. While I would expect that both of these two banks might outperform in an expansive net interest margin environment, I don't know what additionally BAC will be able to do for shareholders when that news breaks this week, possibly tonight.
Wells Fargo, on the other hand, hit the ball out of the park on Friday, running 7.55% for the session, tops among US large cap banks.
Readers will see a WFC in a much better technical position than the stock had been in just recently. As the stock had been mired in a downtrend since February, Relative Strength suddenly lurches toward a neutral reading, as the stock's full Stochastics Oscillator climbs out of the nether regions. The stock's daily MACD appears to be on the verge of a bullish crossover of the 26 day EMA by the 12 day EMA, though all three components, including the nine day EMA. remain in negative territory.
What we also see here is contact made by the stock on Friday with its own 21 day EMA. That average currently stands at $40.97, a level that the stock did pierce on Friday but failed to hold. There will likely be a second attempt made on Monday morning. A take of that green line, with some kind of positive news related to returns to shareholders could allow the stock to run (opinion) as much as $8, which would roll up the 50 day SMA and put the 200 day SMA ($48.48) in play. Can it hold that line if it gets there? I don't know. I am concerned with the 21 day EMA first. I do know that if WFC sees anything close to $48 this week, I'll say "sold to you" and take my leave with the intention to reinitiate after the algos also take their profits.
Economics (All Times Eastern)
08:30 - Durable Goods Orders (May): Expecting 0.0% m/m, Last 0.4% m/m.
08:30 - ex-Transportation (May): Expecting 0.3% m/m, Last 0.3% m/m.
08:30 - ex-Defense (May): Expecting 0.2% m/m, Last 0.3% m/m.
08:30 - Core Capital Goods (May): Last 0.3% m/m.
10:00 - Pending Home Sales (May): Expecting -3.5% m/m, Last -3.9% m/m.
10:30 - Dallas Fed Manufacturing Index (June): Expecting +1.0, Last -7.3.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (JEF) (.51), (NKE) (.82)
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