October had been a piece of cake. For as tough as September felt, October, with just a few days left, had been easy money for net-long portfolios.
October had been a month of figuring out just how much cash one really needs to keep in reserve, and of how quickly whatever excess cash that had been built up in late August could be redeployed.
Wednesday, the worm turned and turned quickly at that. We had almost forgotten that sometimes Mr. Market can still land a ham-sized fist squarely upon that beaming smile of yours. Don't worry. You still look nice in photos.
Late Wednesday, markets experienced the algorithmic version of a panic. Sell programs hit the market like heat-seeking missiles, as buy programs were withdrawn just as quickly. The race for the exits was on as Father Time steadily marched toward that closing bell. Funny thing is that closing prices still matter for investors, as establishing net asset values for mutual funds happens but once a day -- for most of us, the close of the regular session only matters because it is a high-volume trading event.
I don't keep track of when I do most of my trading, but I would imagine that I trade just as often if not more often during what used to be considered pre-opening or after-hours trading. Especially if the market for a given security that I am involved in retains a decent level of off-regular hours liquidity. I would say that for most traders, married to P/L ratios and not net asset values, the 8 p.m. (ET) ARCA close is often a much bigger deal than is any other exchange closes.
O Canada!
The true north, strong and free. It's not every day that events north of the U.S. border have such a deep impact upon U.S. financial markets. That is precisely what happened on Wednesday.
The Nasdaq Composite closed essentially flat after having been up a good percentage point mid-session. The small-cap Russell 2000 and S&P 600 were simply pasted, leading equities into the red as the reflation trade took a pounding.
With the exception of Consumer Discretionaries ( XLY) , cyclical sectors took the bottom four spots on the sector select SPDR ETF daily performance tables. Energy ( XLE) finished the day in 11th place of 11 sectors as WTI crude futures prices dropped from more than $85 per barrel to less than $82 in less than 24 hours.
Financials ( XLF) took 10th place as the Treasury security yield curve suffered a fairly severe flattening as investors fled the short end but still piled into the long end. Remember, we talked about that "stalling" that impacted Nasdaq names on Tuesday? Well on Wednesday, both the Nasdaq Composite and Nasdaq 100 technically finished in the green, and on not increased, but still elevated trading volume.
Though green, those two indices managed to close both Tuesday and Wednesday at the bottom of the day's range. In addition, within that misleading performance losers beat winners at the Nasdaq by a decisive 5 to 2, while declining volume comprised 56% of the aggregate. Down at 11 Wall Street, losers beat winners by an identical ratio, while declining volume comprised an incredible 78% of the composite.
Didn't See That Coming
On Wednesday, The Bank of Canada (Canada's central bank) surprised us all by ending it's quantitative easing (bond buying) program quite abruptly as the Bank now clearly prioritizes getting a grip on consumer-level inflation. Wall Street did expect the BOC to taper on Wednesday, and by taper, I mean to cut weekly purchases of Canadian paper in half (to roughly $811M US).
Investors sold Canadian sovereign debt rather hard. The 2-year paid as little at 0.87% in the morning, and as much as 1.06% at night. As for currencies, the U.S. dollar bought as much as C$1.243 just before the announcement and as little as C$1.231 just seconds later.
Incredibly, and this is not a criticism, but a dynamic, the BOC moved to tighten monetary policy or at least remove accommodation even as it also reduced its outlook for 2021 Canadian GDP growth to 5.1% from the 6.0% projection made in July.
The reaction in U.S. markets for U.S. paper was almost as immediate as the Federal Reserve bank has their own dog and pony show, complete with plate spinners and jugglers scheduled for next Wednesday (Nov. 3) afternoon. A tapering that is expected to last a little longer than what we see up north is expected to kick off at that clambake.
In the U.S., the yield for the 2-Year Note has ramped higher...
... and higher. In overnight trade, last night's 0.50% yield has become this morning's 0.54% yield.
Meanwhile, U.S. 10-Year paper made like the honey badger, and you know what they say about the honey badger.
After yields for the 10-Year peaked on Oct. 21, the past week has been nothing short of pure global demand for long-dated U.S. sovereign paper.
This has forced compression upon our two most important Treasury yield spreads. The Fed considers the 3-month/10-year spread its most reliable signal for coming economic contraction, while much of Wall Street watches the 2-year/10-year as well.
Check these two spreads out:
Just look at that damage, especially for the 2-year/10-year. Why would foreign investors chase the U.S. 10-Year Note? Simple. Demand for yield, where real yield exists, my young padawan.
On Wednesday night, at least it was Wednesday night in N.Y., the Bank of Japan (Japan's central bank) cut its expectations for economic growth and inflation. In fact, while most of the world struggles with the forces of supply chain shortage-inspired inflation (which is a big reason why it is indeed transitory, please wake up. Cathie Wood is right about this), the BOJ just cut projected inflation for the current year to 0.0% from 0.6%. That's right. Flat.
This also means that the BOJ will likely stay ultra-accommodative forever. Well, at least for a very long time.
So, you're a Japanese fixed-income investor. Inflation in your country is bordering not on disinflation but outright deflation. Your nation's 10-Year pays 0.09%, but the U.S. 10-Year paper pays 1.55%. The U.S. dollar buys about 114 yen, up from about 109 one month ago. The trade is a no-brainer for someone in that position.
Pressure!
Speaking of economic growth, and the signals that a flattening yield curve sends, the Bureau of Economic Analysis will publish its first estimate for U.S. Q3 GDP this morning on a quarter-over-quarter basis once it has been salted, peppered, and then annualized.
Much of Wall Street, as you can see below, is still between 2% and 3% on this number. The Atlanta Fed's GDPNow model, however, which is a real-time snapshot (not a prediction) based upon data already received but not on projections for data yet to be reported, is running at a very paltry 0.2%.
This is coming off of a 6.7% pace for Q2 and a 6.1% pace for Q1. The concept of a strong economic recovery has started to look further and further away, and it happened quickly. Supply-chain constraints have worsened. The Delta variant proved harsher and its impact lasted longer than anyone expected. Sure, there will be some inventory building, and the consumer tried to be strong, but government spending will have drifted off, residential investment will be lower than projected, business fixed investment will be "iffy," and the trade deficit has been worse than a low-budget monster movie.
All this as any hope for an agreement across D.C. Democrats on how to proceed on the Biden administration's social spending/climate change package appears to be fading away.
While investors have eagerly priced a smaller overall increased tax burden or even no tax increases at all back into financial markets, have they really priced out the economic growth that such a fiscal spend would also provide? Yield curve says no. Fact is that an especially poor GDP print today, could ignite some urgency on the left in these negotiations.
Last Night
Ford Motor ( F) ... beat, beat and raised. Yowza.
My $17 price target has been breached this morning. I will be making a small sale as my code of discipline demands. A new price target is currently under construction.
I'll write up a new opinion for you as soon as I have one. Ford has been a very big winner for us, already more than a double, I suspect it still may be.
Tonight
Thursday night. Basically the Super Bowl of earnings season. Apple ( AAPL) and Amazon ( AMZN) are set to report.
Look at Apple. Wall Street unofficially expects to see EPS of $1.24 on sales sof about $85B. Whispers are for more. Much more. Does it matter? Maybe not to investors. What matters will be how Tim Cook addresses the current quarter and next year.
Will those awesome new iPhones, Macs, iPads, AirPods, and Apple Watches get to market in significant enough numbers or in a timely enough fashion for the holidays? That, and growth in the high-margin services sector are what will matter tonight.
What can we say about Amazon? The stock still has not recovered from Q2 earnings three months ago. No longer do we hear any talk about a stock split (could use that Beach Boys song this morning).
Look, the health of the e-commerce business will be a big deal obviously. Adobe projects a 10% increase in U.S. holiday spending this year. AWS will matter greatly, of course.
What I want to hear, and Amazon better stress, is that Amazon is less impacted by the changes made to Apple's iOS operating system than are so many others. Amazon needs no help in tracking consumer activity across its site. Actually silence on this front coupled with a robust pop in advertising sales would be enough for me.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 290K, Last 290K.
08:30 - Continuing Claims (Weekly): Last 2.481M.
08:30 - GDP Economic Growth (Q3-adv): Expecting 2.2% q/q, Last 6.7% q/q SAAR.
10:00 - Pending Home Sales (Sep): Expecting 1.0% m/m, Last 8.1% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +92B cf.
11:00 - Kansas City Fed Manufacturing Index (Oct): Last 10.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: ( AMT) (2.36), ( CAT) (2.21), ( CMCSA) (0.76), ( HSY) (1.98), ( MA) (2.19), ( MRK) (1.55)
(Ford, Amazon, Apple, Mastercard and Starbucks are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
