U.S. Equity Markets finished yesterday’s volatile session lower, led by the 1% fall in the Dow. Markets were lower as investors turned defensive as rising bond yields and lower earnings are taking hold ahead of the Federal Reserve policy decision. It is expected that the Fed will raise interest rates by 75-basis points. Additionally, Chairman Jerome Powell will state the Fed’s new economic projections. And Housing Starts in August beat the consensus, but Building Permits slowed more than expected. The Dollar is at its strongest in decades. A central bank’s primary tool to try and bring prices back down is raising interest rates. The idea is that when the Dollar is falling in value, it takes more of it tomorrow to buy the same amount of goods as it did today. Conversely, when the Dollar rises in value, it should take less tomorrow to buy the same amount of goods as it did today. With inflation hitting the highest level in four decades, the Fed is raising interest rates to increase the underlying currency’s buying power. The process makes the greenback increasingly scarce. As more individuals and asset managers clamour for the same resource, its value goes up. That is important from an inflation standpoint. A more valuable Dollar means it should take less tomorrow to buy the same amount of a particular item – say, a gallon of gasoline – as it did today. A stronger Dollar weighs on inflation. The Fed is expected to raise interest rates by another 0.75% this evening, taking the Federal-Funds target to a range between 3% and 3.25%. Policymakers have been guiding for interest rates to finish this year around the 4% level. Brokerage firm Goldman Sachs, which has been calling for aggressive rate hikes, recently said it anticipates the central bank to reach a terminal policy rate of around 4.25% to 4.50% by early next year. It then anticipates the Fed will hold at that level before it starts to implement rate hikes in early 2024. The change will improve the return outlook for competing currencies, like the Euro, which have been hurt by the Dollar’s strength. And a falling Dollar will support a steady long-term rally in the S&P 500. You see, the American greenback is pushing rival currencies to devalue at a pace we have not seen in quite a while. Year to date, the Euro is down 12%, the British pound has dropped 15%, and the Yen has tumbled 24%. So, the Fed’s rate-hike policies are increasing the cost of imported goods for these foreign nations. That is putting tremendous pressure on their economies and worsening global inflation. This has placed greater pressure on other global central banks to raise rates at a time when Europe is dealing with an energy crisis and record inflation. Meanwhile, Asia is dealing with a rise in borrowing costs, forcing housing markets and lenders to require government intervention to avoid default. With greater uncertainty building overseas and the Fed’s first-mover advantage, investors and money managers are pouring into the Dollar as a safe-haven asset with a fair return. The problem, though, is that other central banks were just too late to match the Fed’s rate hikes. And now, economic conditions have worsened in these countries, reinforcing investors’ intentions to stick with the Dollar. For those Americans planning a trip abroad, you may be in luck. The Dollar now has more buying power than it has had in decades. And while that is a nice caveat, the focus should be brought to the effects this will have on domestic equity markets. Keep in mind that 30% of S&P 500 companies’ earnings are generated abroad. This means that a stronger Dollar serves as a headwind for profits. This results in downward earnings revisions – and a likely decline in markets in the near term. And while it’s highly likely that companies will be forced to update earnings guidance for this scenario during the upcoming quarter, it is what happens over the next 12 months that we care about. After all, the Dollar has not been this strong in 20 years. It’s up more than 14.5% this year and around 22% over the last two years. And typically, when we see this type of strength, it’s a sign of an asset that’s growing expensive. Within the S&P 500, all 11 sectors finished lower. European Markets closed lower. Investors’ worries of global rate hikes from central banks weighed on equities. Bond yields continued to rise as the German two-year yield hit its highest level in 11 years. Economists project that the Bank of England is likely to raise rates by 75-basis points. Germany’s Producer Price Index (“PPI”) rose well above expectations to a record high with energy prices the primary catalyst. And the Swiss government revised its inflation outlook higher and economic growth lower. In Asia, Equities rode late momentum from Wall Street on Monday. Gains were limited as investors await multiple central bank interest-rate decisions later this week. Hong Kong reaches a consensus on reopening plans which boosted Chinese markets. Japan core Consumer Price Index (“CPI”) rose slightly higher than expected. And Australia’s central bank Minutes showed multiple members debated an immediate slowing of rate hikes. Elsewhere, Oil closed 1.80% lower, while Gold fell 0.29% after a quiet session.
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Equities
The S&P 500 closed 1.13% lower at a price of 3855.
The Dow Jones Industrial Average closed 313 points lower for a 1.01% loss at a price of 30,706.
The NASDAQ 100 closed 0.85% lower at a price of 11,855.
The Stoxx Europe 600 Index closed 1.1% lower.
Yesterday, the MSCI Asia Pacific Index rose 0.4%.
Yesterday, the Nikkei closed 0.44% higher at a price of 27,688.
Currencies
The Bloomberg Dollar Spot Index closed 0.3% higher.
The Euro closed 0.4% lower at $0.9976.
The British Pound closed 0.4% lower at 1.1384.
The Japanese Yen fell 0.3% closing at $143.65.
Bonds
Germany’s 10-year yield closed 13 basis points higher at 1.93%.
Britain’s 10-year yield closed 15 basis points higher at 3.29%.
US 10 Year Treasury closed 7 basis points higher at 3.56%.
Commodities
West Texas Intermediate crude closed 1.80% lower at $82.48 a barrel.
Gold closed 0.29% lower at $1666.10 an ounce.
This morning on the Economic Front we have a speech from ECB Member De Guindos at 8.00 am, followed by U.S. MBA Mortgage Applications at 12.00 pm. Next, we have Existing Home Sales at 3.00 pm. Finally, at 7.00 pm we have the FOMC Statement where a 75 basis points rate hike is expected, ahead of Fed Chair Powell’s press conference at 7.30 pm.
Cash S&P 500
The news just keeps getting worse with German Monthly PPI rising an astonishing 7.9%, yet the Equity Markets cannot make new lows. Even Sweden’s surprisingly large 1% rate increase could not break the market. This rate hike saw 10-Year Treasuries hit a new high after rising for eight weeks while the Bund is now approaching 2%. Concerns are mounting that the Fed, late to the game and now slamming the foot on the break, risk causing a major crisis. If they do hike by 0.75% this evening, they need at the same time to say they are pausing for a few months to given the lower inflation to be reflected in the headline numbers. This would weaken both the Dollar and Bond Yields leading to a melt up in the S&P in my opinion as sentiment is that few investors are left long. Yesterday the S&P saw wide spread selling as the S&P made a marginal low right into my support area before having a nice 35 Handle rally into the close. Both the Russell and NDX did not make a new low, implying more positive divergence. Nothing is easy about this and the risk remains lower if the Fed goes full ‘’Volcker’’. But you know what? Everybody is so singularly focused on the Fed that it is easy to lose sight of what the charts are saying. And, they are telling me in no uncertain terms for a big fat buy. Now we make new lows but this will result in charts becoming even more oversold. I am now long the S&P at an average rate of 3874 with a now lower 3889 T/P level. I will continue to be an aggressive buyer in front of 3820 with no stop. My stop on yesterday’s long remains at 3849 ‘’Closing Price’’ and if any of the above levels are hit I will be back with a new update for my Platinum Members.
EUR/USD
No Change. I am still long from last Monday at an average rate of 1.0060. I have no stop while lowering my T/P level to 1.0100.
March Dollar Index
No Change. I am still short at 107.50 with the same 107.10 T/P level. I will add to this position at 110.30 and if this level is triggered, I will come back with a new update for my Platinum Members
Cash DAX
The DAX got hit hard yesterday morning, trading to a new low for this move at 12540 before rallying over 100 points into the close. I am now long at an average price of 12735 with the same 12595 ‘’Closing Stop’’. I will now lower my T/P level to 12800
Cash FTSE
The FTSE sold off to my buy level and I am now long at 7200 with a now lower 7240 T/P level. I will add to this trade at 7130 while leaving my 7085 tight stop unchanged.
Dow Rolling Contract
My Dow plan worked well. The Dow traded the whole of my buy range for a 30670 average buy level before rallying post the cash close, hitting my 30760 revised T/P level and I am now flat. Today, I will again be a buyer on any dip lower to 30240/30480 with a lower 29995 ‘’Closing Stop’’.
Cash NASDAQ 100
Although the NDX was the strongest of the American Indexes, the market still sold off to my 11840 buy level. I will add to this position at 11680 with a now lower 11595 ‘’Closing Stop’’/ I will now lower my T/P level to 11920 and if any of the above levels are hit I will be back with a new update for my Platinum Members.
December BUND
The awful PPI number saw the Bund again trade the whole of my buy range for a now 141.40 average long position. I will leave my 140.55 ‘’Closing Stop’’ unchanged, while lowering my T/P level to 141.80.
Gold Rolling Contract
No Change. I am still a buyer on any dip lower to 1640/1655 with the same 1629 ‘’Closing Stop’’.
Silver Rolling Contract
No Change. I am still long at 19.25. I will continue to look to add to this position on any further move lower to 18.55 while lowering my T/P level to 19.80.
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