U.S. Equity Markets got slammed yesterday, suffering one of the largest Key Day Reversals (points terms) in history, led by the 5.54% fall in the NASDAQ 100. This move higher saw the VIX close higher by a further 12%. Markets fell Tuesday as investors reacted to the hotter than anticipated August Consumer Price Index (“CPI”) reading. August’s CPI release showed headline inflation rising 0.1% month over month against expectations for a slight monthly pullback. The energy component was notably lower for the month, but food prices rose sharply – offsetting any easing. Additionally, falling earnings estimates for the Third Quarter sparked the largest sell-off in markets since 2020. August’s CPI all but cements that the Federal Reserve will raise rates by 75 basis points at the policy meeting on September 20 and 21. Despite the rise in CPI yesterday, I am still expecting inflation to fall. It is not just gas prices that are indicating inflation growth is slowing. We are seeing similar readings in manufacturing surveys from regional Fed banks. And a sustained change tells the central bank that it does not have to increase interest rates as rapidly going forward. That will support a steady long-term rally in the S&P 500 Index. The manufacturing surveys are gauges of business activity within the regional central banks’ districts. The research teams send questionnaires out to manufacturing executives in their areas, asking them about the state of current business in addition to what they think the state of activity will be six months down the road. So, I combined the data from the surveys of the Dallas, Kansas City, New York, and Philadelphia Feds. All of their numbers go back to at least June of 2004. I left out the figures from the Richmond Fed because the data set was less complete. These figures are important when we consider the scope of each of those regions as it relates to the national economy. According to the U.S. Bureau of Economic Analysis, Texas accounts for 9.4% of domestic economic output, New York makes up 7.7%, Pennsylvania is 3.7%, and Kansas is 0.8%. In other words, they make up just under 22% of Gross Domestic Product. That means trends in those Fed districts will have a large effect on what is taking place nationally. Prices paid is important because it tells us what manufacturers are paying to produce goods. Prices received is an equally important reading. This measure tells us what companies are collecting for their finished goods, or basically what it’s costing individuals to buy something. We can think of it relative to the CPI. The August reading points toward further weakness. The readings for prices paid and received have a tendency to peak before or right around the same time as the PPI and CPI. They are returning back toward pre-pandemic levels as activity subsides. The current data would lean toward inflation growth cooling when the numbers are released. Anything below the current expectation would signal to the Fed that its rate hikes are successfully dampening inflation. A drop in price growth would also support slowing the pace of interest-rate increases going forward. And a steady decline in inflation growth along with a change in Fed policy direction would act as a long-term tailwind for the S&P 500. Within the S&P 500, all 11 sectors finished lower. European Markets reversed morning gains before closing lower. Markets reacted to the hot U.S. inflation data as concerns of a persistently aggressive Federal Reserve rose. Commentary surrounding equity markets remained quite negative with the energy crisis and aggressive rate hike outlook by the European Central Bank posing significant hurdles for an economic recovery. The Bank of England rate hike expectations became firmer following U.S. inflation data. And the German ZEW Indicator of Economic Sentiment continues to deteriorate with the third consecutive drop. In Asia, Investors spurred a cautious day of trading as they waited for U.S. inflation data to give guidance moving forward. China’s sluggish economic growth and persistent COVID-19 lockdowns remain a hinderance. A new Japanese survey showed that most private firms planned to pass on higher costs to consumers. The Bank of Japan is expected to let pandemic stimulus expire and signal no imminent rate hike plans. Meanwhile, Australian consumer confidence edges slightly higher. Elsewhere, Oil fell 0.25% while Gold got hit hard, closing lower by 1.62%
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Equities
The S&P 500 closed 4.32% lower at a price of 3932.
The Dow Jones Industrial Average closed 1276 points lower for a 3.94% loss at a price of 31,104.
The NASDAQ 100 closed 5.54% lower at a price of 12,033.
The Stoxx Europe 600 Index closed 1.55% lower.
This morning, the MSCI Asia Pacific Index fell 1.5%.
This morning, the Nikkei closed 2.64% lower at a price of 27,858.
Currencies
The Bloomberg Dollar Spot Index closed 1.2% higher.
The Euro closed 1.3% lower at $0.9990.
The British Pound closed 1.6% lower at 1.1508.
The Japanese Yen fell 1.5% closing at $144.58.
Bonds
Germany’s 10-year yield closed 8 basis points higher at 1.72%.
Britain’s 10-year yield closed 7 basis points higher at 3.15%.
US 10 Year Treasury closed 10 basis points higher at 3.42%.
Commodities
West Texas Intermediate crude closed 0.25% lower at $85.22 a barrel.
Gold closed 1.62% lower at $1703.10 an ounce.
This morning on the Economic Front we already had the release of U.K. CPI which rose 9.9% versus +10.2% expected. Next, we have Euro-Zone Industrial Production at 10.00 am and U.S. MBA Mortgage Applications at 12.00 pm. Finally, we have PPI at 1.30 pm.
Cash S&P 500
One Word: WOW. The S&P had its worst trading day since June 2020 while the reversal off the pre-CPI release high at 4154 to the late 3918 low print is one of the largest falls in the S&P in points terms ever. This sell-off was enhanced by the fact that everyone was wrong on the higher CPI print including me. I had expected food prices to be higher but still the public talk was so strong about a negative read including many banks that most expected a decline and it was the exact opposite. The reaction was intense with no two-way trading as the S&P got slammed from the off. Risk is clearly lower but so far the Weekly Trendline is holding. The S&P is now severely oversold. We may sell-off further to the Head & Shoulders target of 3820. If this happens today on a higher PPI print, I will be an aggressive buyer with no stop. Despite the aggressiveness of yesterday’s sell-off the McClellan Oscillator only closed slightly negative with a -66 print. I would have expected the MO to post a -200 print at least. Frustratingly, the S&P missed my 4155 initial sell level by one handle before trading the whole of my buy range for a 4085 average long position. I stopped myself out of this trade at 4019 and I still flat. The $NYSI was max oversold before yesterday’s sell-off and this is one of the main reasons why I cannot be short the S&P despite the seasonally weak time of the year. Today, I will again be a buyer of the S&P from 3900/3920 with a 3883 stop which is just below last Wednesday’s low print. If I am taken long I will have a T/P level at 3955.
EUR/USD
The Euro reversed all of Monday’s gains, closing lower by 1.5%. This move lower has me long at an average rate of 1.0060. I have no stop while I will lower my T/P level to 1.0120.
March Dollar Index
Having hit a morning low at 107.40, The Dollar reversed, ending Tuesday with a gain of 1.3%, trading at 109.30 this morning. I am still short at 107.50 and I will now add to this position at 109.80. In my opinion, the world needs a weaker Dollar and it is only a matter of time before the Bank of Japan intervenes to buy the Yen.
Cash DAX
The DAX got hit hard yesterday, trading the whole of my buy range for a now 13240 average long position. I will now lower my T/P level to 13260 while leaving my 13085 stop unchanged.
Cash FTSE
The FTSE rallied to my second sell level at 7510 for a 7480 average short position. Subsequently, the FTSE followed the S&P lower, hitting my 7410 T/P level and I am now flat. This morning, the FTSE is trading at 7340. We have support from 7210/7290 where I will be an aggressive buyer with a 7155 stop.
Dow Rolling Contract
The Dow had one of its biggest intra-day falls in points terms ever, falling an incredible 1600. This move did not suit me at all as after I bought the market at 32000, I was stopped out at 31695 and I am still flat. The 50-Day Moving Average (32238) did not provide any support and you got to feel that any retest of this key level will be met by strong selling. The Dow is oversold, has support at last week’s low. Therefore, I will be a small buyer from 30800/31000 with a tight 30645 stop. If I am taken long I will have a T/P level at 31300.
Cash NASDAQ 100
As I had so many long equity positions, I waited to buy the NDX which I did at the bottom of yesterday’s range at 12500 before getting stopped at 12395 and I am still flat. The NDX fell a massive 850 points from its pre-CPI print to hit a low of 12004. Just like the Dow above I cannot remember a day when the NDX lost so may points in one session. The NDX has short-term support from 11830/11980 where I will again be a seller with a 11695 stop. If I am taken long I will have a T/P level at 12130.
December BUND
The Bund traded lower to my 143.20 buy level yesterday afternoon. We have rallied this morning and as I want to reduce some of my losses, I have now exited this position here at 143.70. Today, I will again be a buyer from 142.50/143.20 with the same 141.95 ‘’Closing Stop’’.
Gold Rolling Contract
Gold got hit hard yesterday, trading the whole of my buy range for a now 1702 average long position. I will now raise my stop to 1683 while at the same time lowering my T/P level to 1712.
Silver Rolling Contract
Silver reversed some of this week’s gains closing lower by 2.5%. Overnight, Silver hit my buy level at 19.25. I will add to this position at 18.55 while lowering my T/P level to 19.80.
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