The unholy correlation? Or so it seemed.
Wall Street, which is far more than just Wall Street in the year 2021, as has been the case for probably the better part of two decades, was in risk-off mode. It was ugly. It was broad. There was still no panic, but there were some folks, who were getting pretty close. I have the DM's to prove it.
Something turned. Markets that had been sharply lower moved the other way. The flow of capital is exactly what turned. Risk-on? From the depths of heck? So it seemed.
It also seemed to the casual observer that equities sold off with, and then rallied with cryptocurrencies, which would appear to be the most unholy of correlations. That question moved around behind the scenes as well. Were stocks selling off and then rallying based on movement in cryptocurrency markets?
While at a glance, the causal answer might be "sure looks like it," the fact is that the answer is fuzzy. Yes, the markets are distinctly different. There was also indeed some cross-market impact. Equity markets are infinitely more liquid than are crypto markets, and though there is some crossover, there is not broad crossover in who participates, or how many participants are trading those markets. Not that there is no crossover at all.
One thing we know is that we are smart enough to figure this out. So, let's dig in.
Major U.S. equity indices gapped lower on Wednesday's open. The Nasdaq Composite was down as much as 1.7% early on, but the charts of the S&P 500 illustrates best what happened.
Readers will see the S&P 500 testing its own 50-day simple moving average (SMA) early, passing that test, and screaming higher to close at the day's highs (still down 0.3%). In slow motion, it looked like this:
Keep in mind that the 50-day SMA now stands at 4081. The level had been cleared shortly after 11:00 ET, experienced one retest and then moved on, only to be retested again after the 14:00 release of the FOMC Minutes that showed a lack of consensus at the committee on when to start talking about tapering the central bank's asset purchase program.
Okay, specifically bitcoin. As most readers know, this asset class trades 24/7, so there is already a partial candlestick for Thursday, which has retraced much of the Wednesday candle. It becomes difficult to illustrate a 30% decline followed by a 30% rally using a daily chart and try to accurately tell a tale.
I thought that maybe after learning that 775,000 cryptocurrency trading accounts had to be liquidated on Wednesday worth approximately $8.6 billion, in the crypto version of a margin call, that maybe the traders that could afford to "HODL" were possibly draining funds from equity accounts in order to sustain positions in crypto accounts.
Readers will see that bitcoin sold off at close to 13:00 ET, spiking quickly lower and recovering off of the lows just as quickly. It does not take much imagination to figure that this is where that peak liquidation occured. Or perhaps some tie in with the exchange outages that occurred. Hence, it does seem logical that enough equity trading accounts were drained 90 minutes or so earlier as crossover traders were informed that either more funds needed to be deposited in their crypto accounts or those accounts would be toast.
Correlation? Not exactly. One market impacting the other? Logical, as in what we see in certain days when events that first impact debt markets, though a much larger beast, go on to also impact both equity and commodity markets.
As morning light approaches, U.S. equity index futures are trading lower. For the most part, U.S. equities traded slightly lower on Wednesday. Only the Nasdaq 100 was able to turn green by day's end as the (using sector SPDR ETFs as proxies) two "growth" sectors, Technology ( (XLK) ), and Communication Services ( (XLC) ) led the move higher, especially late in the day, after the Fed Minutes, which may not be exactly what you and I might have expected.
Growth came in first and second, as defensive sectors finished in places three through six, and the five cyclical sectors took the bottom five slots in our daily performance tables. It's almost as if price discovery were controlled by pre-programmed algorithms or something.
Wake up, people. This is game-able. It does not mean that this truly represents the free market forces of demand versus supply. This is how the meeting of supply and demand is reduced to small trades timed in microseconds in order to distort outcome. Understand that the goal is often to distort outcome.
Breadth on Wednesday was pretty doggone negative. Losers beat winners at both of New York's primary equity exchanges, while declining volume also beat advancing volume at both locales as well. Surprisingly, up at the Nasdaq, where the 100 did go green and the Composite came very close, declining volume simply pasted advancing volume by more than 7 to 2. The silver lining might be that with all of that intraday volatility, aggregate trading volume contracted at the Nasdaq, and really moved sideways as 11 Wall Street.
For the short-term, equities will likely return to responding to yield spreads and dollar valuations more than anything else. As for cryptos. this crisis appears to have passed.
The next crisis? Whenever U.S. and or European authorities decide that they have had enough. Whenever these authorities decide that cryptocurrency exchanges must be regulated as are other financial exchanges. I have said this before, and this is just conjecture: The only reason in the world that I can think of that U.S. and European authorities have dragged their feet in cracking down on cryptocurrency markets is that they must have figured out a way to track transactions.
If I were someone using these markets for nefarious purposes, the time to fear that possibility is potentially at hand.
You Probably Know...
...That while the Fed officially clings to the stance that the economy still has a long way to go and still requires support for what will be some time, enough time to signal in advance any intention to draw back on accommodation. However, the Minutes released from the late April meeting contain this line: "A number of participants suggested that if the economy continued to make rapid progress toward the committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases."
Yes, April Employment came in cold and April inflation came in hot since that meeting. Do those two prints pair off in terms of policy interpretation?
Here's what the Fed can do now without hurting the economy. Readers know I have been pounding the table on this. STOP buying mortgage-backed securities. Housing markets do not need the support. The middle and lower classes have been priced out of home ownership and this only slows family or household formation. I mean, gee whiz, act like you have a thought in your heads. Would this cause a spike in mortgage rates? Yes. Would that impact the value of real estate? Yes. Isn't that against my best interests? Who cares. Maybe we can let more people through the door this way. We win as one. We lose as one.
Yes, I started out poor. I had to work very hard, and still do. Many folks my age like to knock on the work ethic of the younger generation. I do not. Who among us can deny that though we had to work hard, the opportunity was there. Is it really there for this younger demographic? The low end jobs that we all took are suddenly available. This is true. That will not put anyone in their own home, nor will it create new households. There is already work being done on the wage front. Now we have to allow those wages earned to do their magic, or face what could be a generational loss of that "can do" spirit.
You Probably Did Not Know...
...That the European Financial Stability Report was also published on Wednesday. Our friends across the pond are generally upbeat about vaccination and the general trajectory of their economy. However, the report warns that the flood of fiscal support and monetary stimulus is building up dangerous imbalances. (Sarge says: Wow, such candor.) The ECB goes on to warn that events in the U.S. could negatively impact Europe.
The ECB acknowledges the potential for more upward surprises in U.S. inflation, that could force bond yields higher without economic growth as a companion. For you young ones out there, we used to call this "stagflation."
Check out this line from the report: "A 10% correction in U.S. equity markets could therefore lead to a significant tightening of euro-area financial conditions, similar to around a third of the tightening witnessed after the coronavirus shock in March 2020."
Does that sound to you like they trust us to do the right thing? No, we do not owe them anything. We do owe it to ourselves to be far less reckless going forward. Crisis era demands forced emergency response. The economy is already in post-crisis mode. Policy needs to be more agile.
...The Advanced Micro Devices (AMD) plan to repurchase $4 billion worth of outstanding common stock. Go Lisa, go Lisa, go Lisa. That said, the time to add was not Wednesday, and may not be Thursday.
Better to buy (my opinion) either on a retest of the recent $72 lows as that spot has been tested for a week straight or on momentum, as there are key moving averages to the north that could provide resistance starting at $77 and not clearing until beyond $84. That's more traffic than you'll see on the Long Island Expressway on the Friday night of Memorial Day weekend.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 473K.
08:30 - Continuing Claims (Weekly): Last 3.665M.
08:30 - Philadelphia Fed Manufacturing Index (May): Expecting 42.9, Last 50.2.
08:30 - CB Leading Indicators (Apr): Expecting 1.3% m/m, Last 1.3% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +71B cf.
The Fed (All Times Eastern)
18:05 - Speaker: Dallas Fed Pres. Robert Kaplan.