Market Under Pressure as the Clouds Build

Mailchimp Issues this morning.  Sorry for the delay. 
 

Good morning…. It is Monday June 18…….
 
So, investors/traders toyed with 2800 all last week -  as last week was a busy one…. US, European and Japanese central banks all met and then detailed what the future looks like plus the announcement of tit-for-tat tariffs between the US and China only created that end of week drama….The S&P kissed it and then backed off - only to try and kiss it and pierce it again – 3 times last week as the sellers remained steadfast in their attempt to prevent the mkt from moving higher....I mean you could just feel the resistance every time the S&P approached it....Now the fact that the indexes remained relatively flat (S&P traded in the 2760/2780 range all week) and traded in a tight range doesn’t mean that nothing was going on in individual sectors at all...Quite the contrary....global growth fears, slowing corp earnings, rising rates and the ‘non-trade war’  are all beginning to take a toll on investor psyche…..
 
All week-long investors/traders/strategists etc all waited with baited breath as the reality of the ‘non-trade war’ took shape and while they (the gov’t) continue to tell us that there is nothing to worry about -the mkt is assuming something different.  Trump ignited the fuse on Friday - by imposing $50 bil of tariffs on Chinese goods effective July 6th....China - not to be outdone - responded immediately saying that they would impose their own tariffs on a range of US goods and so it begins.... The ‘war’ that wasn’t……So how will this play out and will there be a winner and a loser? 
 
Now the interesting part of all of this is that China can afford to push and push and push - partly because they don’t care....they don’t have mid-term elections, in fact they don’t even have elections so Xi Xi (Gigi) doesn’t have to worry about his base or how voters will react to a long drawn out trade war with the US.....Donny on the other hand  - has to worry about mid-term elections - now only 4 months away and then he has to worry about his own re-election which starts in earnest in January 2019.....Or maybe not....but my gut tells me that Donny doesn’t want to go out like Jimmy Carter did....and so something has to give - because even the Republicans are getting concerned about all of the drama lately.....
 
On Friday – global industrial and steel names took it on the chin…..CAT -2%, DE – 1%, BA – 1.3%, X – 4.2%, ATI – 1.3%, USAP -1.3%, AKS – 2%, Metsho (Finland) – 1%, Hitachi Construction (Japan) – 2%, Doosan Infracore (Korea) down 3.7%, Atlas Copco (Sweden) – 2% and this was more about global growth concerns than it was about a US/Sino Trade war….Concerns created by what appears to be a slowing global economy are creating a  ‘shoot first ask questions later’ mentality….….
 
Agriculture names and the Invesco Agriculture ETF (PAGG) also feeling the pain of a possible trade war….as sellers took to the airwaves in some of those names as well…. News out over the weekend about farmers in the Midwest (big Trump supporters) getting hit in the pocketbook because of a possible trade war – question how long it will be before they turn on him…. China is betting not to long….as they impose tariffs on meat, pork, soybeans etc….
 
Energy was also under pressure - two reasons really cited – 1. A stronger dollar (inverse relationship) and 2. Increased production expected by some of the major producers…so we saw Exxon, Chevron, Suncor, Cenovus all down 1.5% - 2% and the energy construction names followed suit…. Halliburton, Schlumberger and Weatherford all down nearly 2%...
 
Tech also came under a bit of pressure as investors took some money off the table. 
 
Now the macro data all week points to a strong US economy but the global macro data told a different story about what is going on in Europe and parts of Asia…. thus, the confusion…. this week does not have nearly the headline risk that last week had so investors will need to focus on the bigger picture and more of the data that drives inflation and interest rates.
 
The mkt appears to be pricing in the fact that inflation is under control and that we will remain near or at 2% for the foreseeable future – and this is keeping treasury yields in line even as the FED unwinds its massive balance sheet.  And it is these low yields that continue to support higher valuations and higher valuations support or tend to support the US consumer and consumer spending…note the very strong retails sales number last week….
 
Expectations for 2% inflation can be found in the 5, 10 & 30 yr TIPS (Treasury Inflation Protected Securities) ……TIPS are securities that provide protection against inflation….  
 
The 5 Yr break-even is running between 1.6% and 2.1%, the 10 yr expected rate is now 2.1% and the 30 yr expectation is running at 2.2%...The bottom line is that  while expectations may rise a bit more from current levels – the mkt is not expecting a surge in inflation anytime in the near future…..and so the announcement by the FED on Wednesday to raise rates a possible 4th time in 2018 is raising some concerns about what the FED is really looking at…...and that is causing some of the angst and resistance for investors.  Never mind the possible inversion of the yield curve that has always signaled a recession ahead….
 
The inversion will happen when the 10 yr rate exceeds the 2 yr rate and current 2/10 spreads are now 35 bps away…. recall that we started the year at a 54-bps spread and one year ago (July 2017) the spread was 100 bps….so unlike the saying ‘the trend is your friend’ In this case – yield spread – ‘THIS TREND IS NOT YOUR FRIEND’ – Capisce?
 
This morning the mkts are under pressure – US futures are down 15 pts, Dow futures are down 180 pts and Nasdaq futures are lower by 15 pts… as concern grew over the escalating rhetoric between China and the U.S., and rising political risks in Europe.  And uncertainty creates lack of conviction…..and while the buyers are still alive and well – it feels like today they are just not going to be as aggressive – nor do they have to be because the sellers appear to be the ones that are more anxious…..And you know that while nothing is ever certain – the mkts back off when that uncertainty becomes even more pronounced – the think we do know today is that RISK is higher than it was last week – and so traders are responding in kind by hitting the SELL button but remember that long term investors have a different viewpoint….and unless the tone changes dramatically – I do not expect the bottom to fall out at all…but a move to the 2745 level wouldn’t be a surprise – in fact a move to trendline support at 2710 would not be a surprise either and while there were not any new developments over the weekend -  general consensus is that as long as we don’t see any additional tariffs or increased rhetoric then Friday’s actions shouldn’t be a major headwind. But the focus for this week will be those trade talks….so stay awake. 
 
Nothing on the eco calendar today will be a mkt moving catalyst nor will the appearances of the 2 FED speakers - Atlanta’s Bostc at 1 pm or San Fran’s Williams at 4 pm. 
 
My gut tells me that a test of 2745 ish is next in line….so the question is will the bulls defend it or allow it to fail to create angst amongst the bears?  If so – then the trendline support at 2710 is in sight.  On the Upside – It is still 2785/2800 that is proving to be resistance.    
 
Now European mkts are under a bit of pressure as morning turns to afternoon.  UK data shows that the UK economy is set to grow at the slowest pace since 2009…. (not good) …...  FTSE -0.36%, CAC 40 – 1.28%, DAX – 1.40%, EUROSTOXX – 1.18%, SPAIN – 1.03% and ITALY -0.81%. 
 
Oil is down 0.21 cts at $64.85.   China is talking about imposing tariffs on US oil as the heat gets turned up….in addition – OPEC and Russia are considering raising production a bit.  As I have been saying for 2 weeks now…we remain in the $64.68/$67.62 range BUT todays selling has taken us below intermediate trendline support at $64.99 – leaving this commodity vulnerable to a pullback into the $61.50 range if we do not hold right here….   
 
Gold is up $3 at $1,284…. On haven buying after the beating it took on Friday……on the back of a stronger dollar.  We broke support at $1299 – leaving us vulnerable to some thrashing around…. Heightened tensions will provide some haven support – but if those tensions subside – we could test $1,251 on the downside.  $1,299 now become resistance.    
 

Take Good Care

KP

Mussels Posillipo 

This is an easy recipe that you can use for both clams or mussels -  is great on its own or over linguine.
 
You need:  Mussels....2 doz... thoroughly washed of any sand.  White wine, Clam juice, garlic, onions, olive oil, s&p, 1- 28 oz can of imported Italian Plum tomatoes - (Not in Puree), Fresh Basil
 
In a pot - heat the olive oil and sauté the garlic - until lightly browned - do not burn.  Add in the sliced onion and sauté until translucent.
 
Add 1 1/2 c of dry white wine - nothing fruity - stir and let come to a boil - after about 2 mins...rough crush the tomatoes and add to pot with the juice.
 
(When you rough crush - you literally crush them in your hand - over a bowl to catch the juice. - you can also use the blender - but do it quick - do not puree) Add enough of the tomatoes to give it some substance and color - you do not need to add the whole can if you are not serving it over linguine.
 
Add the small bottle of clam juice and fresh basil leaves.  Season with s&p. Turn heat down to simmer and cook for about 15 mins or so.  Now add the mussels to the pot and cover tightly.  Cook until the shells open - should be maybe 8 to 10 mins more.... Discard any mussel that refuses to open.
 
Present this dish in a large bowl with the mussels bathing in the Posillipo sauce.  This dish demands toasted garlic bread to dip in the sauce while you enjoy the mussels...
 

  
Buon Appetito.