Complacency gets whacked as strong data and Oil spike send yields, VIX, and stocks reeling

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 its 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 also much stronger than expected as well. 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 mid-terms 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 – American’s are angry now…what was supposed to be a 6-week middle east conflict is now on month 9 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 across the globe. 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 thru near-term support at 7,720 like a hot knife thru butta! 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.

Penne with sweet sausage in a pumpkin cream sauce

This is a great fall dish and so easy to make.

Prep time: 15m

Cook time: 30m

Total time: 45m

Serves: 4-6

Ingredients

1 lb Penne

4 Sweet Italian Sausages out of the casing.

1 large chopped onion

3 Garlic Cloves - sliced, Olive Oil, s&p

1/2 c White Wine

1 Bay leaf

1 c chicken Broth

3/4 c Canned Pumpkin (not pie filling)

1/4 c fresh sage, Cinnamon and nutmeg

1/4 c Heavy Cream. Fresh Grated Parmegiana

Preparation

Step 1

Bring a pot of salted water to a boil.

Step 2

Brown the sausage in a large frying pan.  Remove.

Step 3

Add the onion and garlic and a splash of olive oil.  - Saute for 5 - 8 mins.

Step 4

Add wine and bay leaf. Bring to boil. Cook until liquid is reduced by half.

Step 5

Now add the chicken stock.

Step 6

Stir in the pumpkin, half the sage, dust with cinnamon and nutmeg.  Cook a little longer about 2 minutes. 

Step 7

Next - add the cream and sausage.  Heat through. Remove the bay leaf. lower heat to simmer.

Step 8

Add the pasta to the water and cook for 8 mins.

Step 9

Using a slotted spoon – add the pasta to the sauté pan with the pumpkin & sausage.   Toss to coat.  Add a ladle of the pasta water – mix. Sprinkle the parmegiana on top and serve in warmed bowls immediately.