In Flanders Field (excerpt)
In Flanders Field the poppies blow
Between the crosses, row on row
That mark our place, and in the sky,
The larks, still bravely singing, fly,
Scarce heard amid the guns below
We are the dead; short days ago
We lived, felt dawn, saw sunset glow
Loved and were loved, and now we lie
In Flanders Field
- John McCrae (1915)
Got Ugly Fast
There was shooting on Thursday in the eastern region of Ukraine known as Donbas. In a statement, Ukrainian Defense Minister Olesky Reznikov wrote, "Illegal armed groups supported by Russia, increased provocations." There were reports of injuries to Ukrainian soldiers, civilians and damage to a school as well as other buildings.
The area is used to conflict and has been engaged in a certain level of strife between allegedly Russian-backed separatists and the Ukrainian military that has taken roughly 14,000 lives since the Russian invasion, occupation and annexation of Ukraine's Crimean peninsula in 2014.
From the White House, US President Joe Biden warned of imminent contact between Russian and Ukrainian forces at the border. Biden said, "Every indication we have is they're (Russia) prepared to go into Ukraine and attack Ukraine. My sense is it will happen in the next several days." The US had warned of the potential for a "false flag" operation as justification for any initiation.
For their part, Russian officials have claimed that no invasion was underway and no invasion was planned. Russia also then took the step of expelling US deputy chief of mission in Moscow, Bart Gorman, as US Secretary of State Anthony Blinken changed plans to address the United Nations Security Council in New York. Blinken also invited Russian Foreign Minister Sergei Labrov to continue with efforts on the diplomatic side.
At nearly the same time on Bloomberg TV, Ukraine's ambassador to the US, Oksana Markarova, said, "We will never give up on our sovereignty, we will never give up on our territorial integrity, we will never give up on our Euro-Atlantic aspiration." Therein lies the rub. Ukraine has applied for NATO membership. Putin does not want Russia bordering territory guaranteed protection by NATO forces.
Slivers of Hope
By Thursday night, it had become apparent that all hopes for a diplomatic solution, or at least the extension of the diplomatic effort, had not been lost. Russian Foreign Minister Lavrov had agreed to talk with Secretary Blinken next week, while Russian Defense Minister Sergei Shoigu and US Secretary of Defense Lloyd Austin had agreed to speak via telephone on Friday (today).
In the meantime, President Biden is expected to host a call with the heads of state of the UK, Canada, France, Germany, Italy, Poland and Romania as well as leadership of the European Union and NATO this weekend while Secretary Blinken will meet his counterparts at the Munich Security Conference.
Marketplace
After what was both a broad and a deep beatdown across financial markets on Thursday, European equity markets are trading anywhere from flat to mildly green as US equity index futures are showing at least some kind of an attempt to rebound off of Monday's selloff that closed near the session's lows. Investors sold risk assets from start to finish on Thursday while seeking refuge in traditional safe haven assets such as US Treasury securities, and precious metals. One thing I think we have learned in recent days is that cryptocurrencies, Bitcoin in particular, are more closely correlated to other risk assets than many had thought and do not provide increased value as a hedge against market volatility in the way that precious metals have.
What do the S&P 500, S&P Midcap 400, Nasdaq Composite, Nasdaq 100 and Russell 2000 all have in common? They all gave up between 2% and 3% on Thursday. The Dow Jones Industrials "out-performed" at -1.78%. In almost alarming fashion, the S&P 500 once again surrendered its 50 day simple moving average (SMA)...
...but at least did maintain contact. The line is not lost until there is no contact, and no visible attempt to re-establish contact. This could be a problem for the Nasdaq Composite.
Readers will note that for the second time in four sessions, the Nasdaq Composite failed to make contact with its 2-day exponential moving average (EMA) and did not appear to make any attempt to do so. That said, though closing almost 300 points lower, the Nasdaq Composite did maintain contact with the potentially psychologically important 14,000 level. Readers will also note that the Nasdaq Composite came perilously close to suffering a "death cross" (50-day SMA crossing below 200-day SMA) on Thursday.
Breadth
Loser beat winners at the New York Stock Exchange by a rough 3 to 1 and at the Nasdaq by about 7 to 2. Advancing volume comprised 23.4% of the composite for NYSE-listed stocks and 18% of composite volume for Nasdaq-listed names. Aggregate trading volume increased on Thursday from Wednesday across the board, which for me means across my four checkpoints -- NYSE-listed aggregate trading volume, Nasdaq-listed aggregate trading volume, S&P 500 subordinate aggregate trading volume, and Nasdaq Composite aggregate trading volume. The action on Thursday implies increased professional participation, but not at the level seen two weeks ago as stocks were rising. Certainly there has been a reduction of risk, but there in no way has been a broad surrender up and down Wall Street.
Nine of the 11 S&P sector SPDR ETFs closed in the green as defensive groups led by Consumer Staples (XLP) took four of the top five slots on the daily performance tables. "Growthy" sectors took two of the bottom three as Communications Services (XLC) and Technology (XLK) sandwiched Consumer Discretionaries (XLY) , all falling between 2.66% and 2.99%.
Industry-specific indices that took particularly horrific beatings on Thursday would be the Dow Jones US Automobiles Index (-4.7%), led lower by Tesla (TSLA) , followed by the Dow Jones US Internet Index (-3.95%), the Dow Jones US Software Index (-3.83%) and the Philadelphia Semiconductor Index (-3.74%).
Kerosene to the Fire
There were two impactful forces that keyword-reading, high-speed algorithms picked up on during the Thursday session as traders and investors tried to assess the situation in eastern Europe. First, the Philly Fed. The Philadelphia Fed Manufacturing Index is probably the most focused-upon regional manufacturing survey released by any Federal Reserve district bank. For February, Philly showed a deceleration in growth at the headline, which does not look too bad, but also across key subcomponents such as New Orders, Shipments, and Unfilled Orders. That got some attention. These three are the lifeblood of any manufacturing sector survey. The only saving grace might have been that it also appeared that Prices Paid may have decelerated.
After that, it was off to Columbia University in New York where our pal, St. Louis Fed President James Bullard, who is never afraid to speak his mind, spoke. Bullard expressed his opinion that bringing down inflation may require the Fed to overshoot the mythical "neutral target" interest rate. Bullard repeated his view that the Federal Open Market Committee (FOMC) should jack the fed funds rate by 100 basis points by July 1 and start with the balance sheet management program in the second quarter. Bullard said, "If you want to put downward pressure on inflation, you'd actually have to get to neutral - go beyond neutral, and I think that's a major concern of mine - we're not really in a position to do that right now, but we have to get in a position to do that."
I like and respect Bullard. I really do. I like his honesty and his openness. I guess he and so many others just do not see the need for increased finesse in approaching a change in the trajectory of monetary policy that I do. I agree 100% in getting to the balance sheet sooner rather than later. I certainly disagree with adding to the balance sheet in February knowing that the reduction of asset holdings is on the table at the March meeting. The good Lord knows that I have stated over and over that the Fed should have stopped buying mortgage-backed securities now 13 months ago. Those mistakes were made. Easy money on the front end was not one of them.
Reducing the size of the balance sheet is going to be as experimental as expanding the balance sheet was. This should be the focus as such action removes excess liquidity from the economy through the back door. My meaning is that Wall Street will feel it before Main Street. Main Street must be protected for as long as possible. Increase short-term rates, but methodically, and with no intentional shocks. Let the natural demand destruction that we already see within so many components of so many macroeconomic data points work on inflation in conjunction with an ebbing "wealth effect" as that excess liquidity drains. Be not afraid to be careful. The last thing we need is panic at the central bank. Use a scalpel rather than a sledgehammer. It isn't supposed to be easy.
Trading Notes
--Northrop Grumman (NOC) closed once again in position to move on the $400 level.
The shares are not quite overbought and clearly benefit when sabers are rattled globally. Fact is, NOC and fellow Sarge fave Lockheed Martin LMT, which both rallied on Thursday, will likely sell off on news of increased diplomatic efforts on Friday. Northrop still needs the $409 pivot to unlock my $490 target price.
--I did add to my Nvidia (NVDA) long position as advertised on Thursday at Real Money.
Retaking the 21-day EMA is key for NVDA's immediate future. Approaching the 50-day SMA prior to expressing a technically overbought condition is key longer term.
Economics (All Times Eastern)
10:00 - Existing Home Sales (Jan): Expecting 6.11M, Last 6.18M SAAR.
10:00 - CB Leading Indicators (Jan):
Expecting 0.2% m/m, Last 0.8% m/m.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 516.
The Fed (All Times Eastern)
10:45 - Speaker: Reserve Board Gov. Christopher Waller.
11:00 - Speaker: New York Fed Pres. John Williams.
13:30 - Speaker: Reserve Board Gov. Lael Brainard.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (DE) (2.23), (PPLN) (.32)
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