The Day So Far
Equities continue to recover ground in the wake of ‘Black Monday’, the S&P breaking through 1950 resistance this morning and shaping up for a test of the February lows of 1975. The Dax is 300 points above the 10,000 handle, having now recovered some 1000 points from the Monday lows amidst signs that investors are already starting to look beyond the dramatic selloff witnessed in recent weeks. So is that ‘it’; the big bear market the bears had been calling out for so long? Well, despite the selloff so far I still don’t think that major institutional investors will return in large size to US equities for now as valuations remain high, earnings growth negligible and no longer will the Fed act as another tailwind for stocks. Interestingly, some big hedge fund managers, the likes of Ray Dalio have been suggesting that the next major Fed policy move will in fact be to ease rather than tighten in light of all the macro uncertainty currently. Indeed, Fed’s Dudley yesterday produced some dovish commentary, further rowing back from the ‘rate hike is coming in September’ meme.
Aside from the rally in equities, the Department of Energy released their latest crude oil inventory data, showing that supply contracted by 5.5m barrels and also that US production fell for another week to its lower level in more than 3 months, from 9.34 million barrels a day to 9.33 million. While these may be small changes for now, they hint that US producers are feeling the pain of this collapse in prices and that demand within the world’s largest economy is strong. WTI has charged back above the $40 handle this morning as the S&P broke above 1950 resistance.
The Afternoon View
This afternoon we look set for more risk-on, especially now the S&P has broken 1950 resistance and crude is beginning to point tentatively towards an improving economic outlook. As I have said many times, the world is in need of some good news and yesterday’s durable goods smashing expectations seems to have settled the nerves somewhat. We looking for broad-based dollar strength as well.
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