On the rebound
Key themes and stocks discussed today:
US stocks corrected lower, with fatigue setting in near the record highs for the SPX. The risk of a 5% to 10% corrective selloff is high, with the major bank stocks missing earnings expectations over the past week. The reporting season has the bar again set relatively low, so the catalyst could be the Fed pushing back on March rate cuts. The US 10yr climbed back above 4%, and there will be massive issuance on the supply front in the coming weeks.
International markets, including the ASX200, Topix and FTSE100, are also vulnerable and will likely follow. Fed governors will probably push back on the rate cuts that many last year thought were coming in March. I continue to see this as a mid-year event.
The dollar looks to be on the rebound, with a rally ensuing that could weigh on commodities and gold. A rebound will not change our bearish outlook for the dollar. Any weakness in gold will likely attract central bank buying with good technical support now present at $1950/$2000.
The ASX200 slipped to a 4-week low as risk sentiment soured. Data showed that Australian consumers feel glum thanks to cost-of-living concerns and elevated interest rates.
Iron ore is correcting along with the diversified miners. However, downside risks look to be minimal. Iron ore has strong technical support at $120 and below. At lower levels, Rio and BHP could be in buying territory.
China stocks ascended on hopes today’s data dump won’t be as bad as feared. Hong Kong stocks, on the other hand, slumped to a 14-month low on Tuesday, given the risk-off sentiment prevailing in most markets.
The Hang Seng has been unable to break above the primary downtrend. A retest of the October 22 lows looks probable in the months ahead, potentially confirming a “double bottom”.
The rally in Japanese stocks took a breather on profit-taking. I view this as a healthy breather after the melt-up year-to-date.
European stocks generally trended lower, still suffering from recent comments from ECB officials downplaying rate cut hopes.
Notable mentions today include the KBW Bank Index, US$, gold, SPX, ASX200, Hang Seng, iron ore, Goldman Sachs, Morgan Stanley, Apple, HUB24, Rio Tinto, Yum China, Nomura, Experian and Diageo.
Good morning,
At the time of writing, the US benchmarks opened moderately lower as resistance levels at record highs for the S&P500 continue to prove formidable. Bank earnings were mixed, with Goldman reporting a decent beat and Morgan Stanley missing. Yields have risen across the curve as bonds sell-off. The dollar rebounded strongly, with the DXY lifting nearly 1%, which in turn weighed on commodities. Gold was lower, but only moderately so, following escalating tensions in the Middle East and the Red Sea.
Despite a late afternoon rally, all the major indices remained below water at the close. The Dow finished -0.62% lower, while the S&P500 slipped -0.37%, and the Nasdaq fared best, down just -0.19%. Bond yields rose across the curve, with the 2yr adding 2bps to 4.23% while the 10yr added 6 bps, breaking above 4%. Commodities were weaker, with WTI crude down 1% to $72 and gold easing 0.3% to $2044.
US banks were under pressure, with many majors missing guidance. Wells Fargo, Bank of America, Citigroup and JPMorgan Chase are all lower since reporting on Friday. Despite the weakness in bank stocks, the sector does not look in danger of rolling over technically.
The KBW Bank Index still looks technically constructive. Following the breakout from the primary two-year downtrend, the index has consolidated above $90. This is encouraging. The index does not look technically vulnerable at this stage, despite the earnings misses by many of the majors.
On Tuesday, UBS boosted its 2024 year-end target for the S&P 500 to 5,150, representing a nearly 8% upside from current levels. This is one of the more aggressive price targets amongst the major investment banks. There is still plenty of dispersion between the bullish and bearish camps. Morgan Stanley’s target is nearly 1000 points below UBS.
Fed Board Governor Christopher Waller is due to comment today after Atlanta Fed President Raphael Bostic warned about cutting rates too soon. I continue to see this as a mid-year event rather than in the first quarter.
Equity markets continue to tread water amidst what could be a 5% to 10% correction. Investors got ahead of themselves in the final months of last year, looking ahead to rate cuts as early as March. Going by the recent rhetoric from most Fed governors, this will be unlikely until mid-year. For now, the oversold dollar looks like it can rebound back to resistance at 104, while bonds are also coming for sale ahead of a big supply of new issuance.
On the rebound? The Dollar index breakout above near-term resistance raises the scope for a further rebound to 104/105. This could weigh temporarily on commodities and precious metals. I don’t think the rally in gold will be significantly compromised. The US dollar is unlikely to attract much support beyond March, when markets will be looking ahead to Fed rate cuts.
Gold has had three significant advances at the 2050 level since the record high was established in 2020, over four years ago. Since the lows at $1650 in ’22, gold has established a series of higher reactionary lows on each successive pullback. In my view, the technical setup is very encouraging. Whilst a rebounding dollar might weigh once again on gold, it will be accumulated aggressively, in my view, by the central banks. Support is now quite strong between $1950/2000.
In terms of what the exact catalyst will be when the big breakout finally arrives, it is a difficult one. It could be either a sliding US dollar or an expected geopolitical event – most likely in the Middle East. The deterioration of what is occurring in the Red Sea and the escalating tensions with Iran, Syria, Iraq and the US is concerning. Australia is now sending a warship in a sign that the allied front is broadening. Events need to be watched closely.
This week, JP Morgan provided some colour around where they see the markets moving near term, saying that “we expect a choppy January that then gives way to more market upside given the strength of the economy, improving earnings, and a Fed who is done tightening. So far, this is playing out with the first week of the year seeing the SPX lose 1.5% and then gaining 1.8% last week. What’s next? Positioning Intel flags the potential for a 5% pull back.”
JPM noted that the end of December saw the end of the largest hedge fund short covering period. “In this context, the S&P 500 often experiences a ~5% drawdown over the next month and High short interest stocks often fall 10-12%. So far, US High short interest stocks have fallen >10%, but the S&P 500 has held up well. So, is this time different? Possibly, but it’s not clear we’re out of the woods yet and we still think the SPX could fall.”
JPM believes that stocks should rally further ahead in coming months and cited several factors. “Growth Reboot – the US appears to be experiencing a rolling recession (asynchronous slow down across sectors) and we could see a rolling recovery take hold with growth data inflecting higher as soon as this week. If we continue to see growth without inflation this could result in a steeper yield curve, additive for Cyclicals and a broadening of the rally.”
“The Fed – the combination of rate cuts and a slowing/halting of QT is a powerful tailwind and some clients think
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