SURPRISE! Complacency Gets Whacked as Strong Data, a Flopped 5-Year Auction and an Oil Spike Send Yields, VIX and Stocks Reeling
Things You Need to Know
- Surprise – just when you think nothing can go wrong!
- Eco data comes in strong.
- 5-year Treasury auction ‘failed to impress.’
- Oil spikes, bond yields spike, and the VIX spikes.
- Global bonds under pressure
- Xi Xi on the agenda – don’t hold your breath.
Ok – here we go…on Tuesday, all was good in the world – Investors were celebrating another Nasdaq record – tech stocks were on fire, bond yields had retreated to 4.94%, oil was down, gold was lower, supposed talk with Iran pointed to the possibility of a deal, and the VIX suggested complete complacency – as if nothing could go wrong…in fact, in yesterday’s note – I finished it off with this comment about the VIX (note the bold italics).
The VIX continues to push lower – closing down 0.06 cts at 14.15 – leaving it at levels last seen in December BEFORE the whole Middle East conflict even began – which is a bit odd for me, but what it says is that investors are pushing this conflict (just like they did with Russia/Ukraine) and everything that goes with it, to the back burner – with every tick lower, they become increasingly more complacent.
And complacency becomes an issue when the market begins pricing in almost no possibility of a negative surprise……
Well, guess what, sports fans? SURPRISE!. Yesterday, after stronger-than-expected eco data, oil turned higher, bond yields spiked, Gold got whacked, stocks got punched in the face, and the VIX surged. At the end of the day – it was ‘less’ pretty than it was on Tuesday….
The Dow lost 352 pts or 0.7%, the S&P ended the day down 58 pts or 0.75%, the Nasdaq choked – losing 308 pts or 1.2%, the Russell lost 51 pts or 1.8%, the Transport sank even further into the black hole – losing 148 pts or 0.75%, the Equal Weight S&P gave up 58 pts or 0.7%, while the Mag 7 – in an odd way – also gave back 308 pts or 0.8%.
Bond yields, which were already higher after the early morning eco data pointed to a stronger economy – spiked even higher AFTER the treasury’s $70 billion 5 yr note auction FAILED to impress – Investors telling Scotty – that they wanted a HIGHER yield for loaning him any money, and that only added pressure to the sell off…….the 2 yr yield up 14 bps to 4.89%, the 5 yr exploded – adding 23 bps at one point to yield as much as 5.03% before settling at 5.01%, the 10 yr added 18 bps to settle at 5.11% (after trading as high as 5.13%) while the 30 yr 12 bps to end the day at 5.39%.
And to add more fuel to the fire – WTI (oil) did a 180 and rose 2.4% or $2.20/barrel to end the day at $92.71. Diesel – which is at the core of the inflation issue and all the recent angst is not helping and is now trading at a national average of $6.52/gal, a near-record high, and it’s trading at over $8 in CA. And this matters because it puts upward pressure and higher costs on everything…. truckers, farmers and construction equipment. And guess what else? Those higher costs do not just disappear – businesses will pass them along and the diesel ‘squeeze’ will keep inflation alive.
And the even better eco data did not offer any relief to the bond market either……– this is where the ‘Good news is Bad news’ argument comes into play….. S&P Global’s preliminary September survey showed US business composite activity jumping to 58.4, the strongest reading since July 2021. Yes hiring picked up, but so did input costs…. businesses pointing in part to rising fuel and transportation costs.
Manufacturing PMI and Services PMI were also much stronger than expected. And so, you ask – but this is GOOD news, why the temper tantrum? Because when the Fed is trying to bring inflation down, strong economic reports, rising demand, and rising costs RAISE the possibility that rates have to go higher. Add in comments from Fed Governor Michael Barr, who said, ‘more tightening will likely be needed,’ and WHACK – down we go…
And btw – the VIX – shot up 9.1% by 1 pm – taking it right up to the trendline…
And we haven’t even discussed the tone between Iran and the US (and the rest of the world), never mind the upcoming midterms that are now only weeks away – and are suggesting a complete repudiation of anything Trump, adding anxiety to the mix, and while all this will not price stocks in the long term, it will create plenty of short-term chaos.
Look, let’s say it for what it is – Americans are angry now…what was supposed to be a 6-week Middle East conflict is now a 9-month war – with no end in sight, oil, which was supposed to settle down, has not, the inflation risk is on center stage, and the bond vigilantes are holding Kevy Warsh hostage. Fed Fund futures are now putting the odds of an October AND December rate hike at 80%. Which means the 3 rate cuts that we were pricing in at the beginning of the year are turning into 3 rate hikes at the end of the year!
And the bond selloff has spread globally. Overnight bonds in Japan, Australia and New Zealand came under pressure while in Europe – the German Bund, French ‘OATS” (Obligations Assimilable du Tresor), Italian & Greek bond yields are all higher and as you can imagine – that is putting pressure on global stocks.
And today – will be all about the Trump/Xi Xi meeting in DC. My gut says it’s a big ‘nothing done’ –I mean is anyone really expecting anything to come out of this meeting? And even if it does, do you really think it is going to solve the ‘bond market problem’ Absolutely not…. or to put it another way – NFW!.
Eco data today includes Initial and Cont. Jobless Claims, New Home Sales, Building Permits and the Kansas City Fed Manufacturing activity. If they all point to a stronger economy, then we can expect more selling pressure.
US futures are lower…..now, it’s 4:30 am, so a lot can change, but right now Dow futures are pointing down by 225 pts, the S&P’s -45, the Nasdaq is down 290, and the Russell is lower by 12. Yes, that can and most likely will change as the sun rises, but for now, it is what it is.
European markets are all lower – down between 0.3% and 0.8%.
Gold, which lost $75 yesterday, is down another $20 this morning, now trading at $4,268/oz. So, I guess the trendlines at $4,306. $4,315 did not provide any support. The chart now suggests we could see gold trade down to the $ 4,180-ish range unless, of course, the narrative changes.
The Transports – which broke their long-term trendline last week have only gotten weaker since we discussed it on Monday, and that is not helpful. It is now at a pivotal point….a failure to hold right here (19,700)– could see it trade down another 6% or so….to levels last seen in January/February and if that happens, we can expect continued weakness in the broader market.
The S&P closed yesterday at 7,706 down 58 pts. Yesterday’s action saw us slice right through near-term support at 7,720 like a hot knife through butter! The short-term trendline support is down at 7,630 – that’s a 90-pt move (1.2%) – I wouldn’t be surprised if we tested it today.
Take good care,
Kp
Kenny Polcari is a partner and Chief Market Strategist at Slatestone Wealth – A boutique wealth advisory firm with $2 billion dollars of investor assets under management. In this role, his responsibilities range from market and economic analysis to investor education interpreting the ever changing economic and market landscape on behalf of Slatestone and how those impacts may affect future investment and planning strategies on behalf of their clients. With more than 40 years of industry experience as a member of the NYSE serving institutional investors both at home and abroad – he is a seasoned and well-known voice on the markets. You may recognize him from his many years serving as a market analyst on Fox Business and CNBC or his ‘Trader Talk’ Podcast on the Yahoo Finance Channel. For more, please visit his Substack HERE.
Disclaimer. Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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