U.S. Equity Markets surged for the second consecutive trading session, led by the 4% gain in the Small Cap Russell 2000. Markets rallied once more as bond yields fell again. The Reserve Bank of Australia (“RBA”) said it would raise the benchmark cash rate by 25 basis points (or 0.25%) to 2.6%, compared with the consensus expectation for a 50-basis-point increase (or 0.50%). This caught investors off guard. The RBA said it still intends to increase rates further, but the change in strategy is significant. Behind the Federal Reserve, Australia’s central bank has been the most aggressive with policy tightening. So, this adjustment could signal that we are getting closer to peak interest rates for this rate-hike cycle. The U.S. Bureau of Labour Statistics’ August Job Openings and Labour Turnover Survey showed 10.05 million job openings compared with the expectation for 11.1 million. When compared with the number of unemployed people, the data indicates the labour market is loosening. The reports boosted the outlook for risk assets like stocks. Investors hate uncertainty. Money managers hesitate to invest in unpredictable environments. After all, if they can’t model what interest rates or global economic growth will look like, how can they determine the earnings outlook for a specific company, sector, or index? Instead, they are simply be guessing. So, they tend to sell first and ask questions later. That way those big money investors have funds to reinvest when they feel the environment has become more predictable. Otherwise, they have to watch investments drop and then be unable to take advantage when they think the stock market has bottomed. Last Monday, the U.K. government announced it would rethink its recent tax-cut plans. Prime Minister Liz Truss said the government would reassess its strategy of lowering the 45% top tax rate to spur economic growth. The statement alleviated concerns about even worse inflation and more interest rate hikes. Easing sovereign-bond yields will boost the outlook for risk assets like stocks and point to a steady long-term rally in the S&P 500 Index. In early September, Truss became the British prime minister, replacing Boris Johnson. And like every other country, the U.K. has been dogged by rising inflation over the last two years. Following the global economic collapse brought on by COVID-19 lockdowns, governments everywhere spent freely to support growth. At the same time, central banks cut interest rates to zero to encourage lending. Initially, those policies had the desired effect as Households and businesses wound up cash rich. In addition, people stuck working from home had nowhere to travel, meaning they had even more money in their pockets. All of that led to increased demand for goods. During the 2020 downturn, the global economy contracted by 3.1%. Then, after all of those fiscal and monetary spending policies had been introduced, output skyrocketed by 13.1% a year later. Not only that, but the 2021 number was 9.6% higher than the 2019 (pre-pandemic) number. To put it into perspective, those numbers compare with the 4% average growth experienced since 2010. In other words, output was more than triple the recent trend because businesses and individuals were flush with cash. But, in the process of spending all of that money, supply could not keep up with demand. Inventories of cars, houses, and electronic goods were wiped out. As costs to produce those goods shot up, so did the price to buy them. And that brings us back to the current predicament. U.K. Chancellor of the Exchequer Kwasi Kwarteng had announced plans to lower taxes about 10 days ago. Money managers were worried the new government did not comprehend how the country and globe wound up in the inflation situation we are dealing with now. Handing out more money would only lead to increased spending and demand, compounding the price growth issue. Investors reacted by positioning their portfolios for the potential outcome. They sold U.K. bonds and ran for the safety of the U.S. Dollar. More stimuli would weaken the British Pound, and rising inflation meant a higher yield on the U.K.’s sovereign bonds down the road. Why invest in those assets now if you think you can receive a better return in the future? Kwarteng’s announcement roiled global bond and currency markets last week on fears it would worsen inflation and cause interest rates to rise even faster. And if the U.K. government took such action and there was a muted market response, other countries would take it as a sign of approval and take similar action. Members of Britain’s ruling Tory Party said they would not support the plan. The Bank of England was forced to say it would intervene in the bond markets to stabilise yields on the long end. This created a problem for the new Prime Minister – who was less than a month on the job. As a result, she was forced to cave. Monday’s news caused the British Pound to rally and yields on global 10-year sovereign debt to drop in most developed nations. The yield is back below 3.7% compared with the recent intraday high of 4.01% set last week on September 28. That’s important because it’s a benchmark for domestic loans to businesses and households. A rising rate means it will cost more to borrow – and eats into disposable income. Conversely, a falling rate means less is spent on interest payments. At this point in the Federal Reserve’s rate-tightening cycle, investors are anticipating a further increase in borrowing costs. After all, the Fed, the most aggressive of all central banks worldwide in terms of tackling inflation, recently told us it anticipates interest rates to end the year between 4.25% and 4.5% compared to the current level of 3% to 3.25%. The change is going to suppress economic demand even more. That should also weigh on inflation growth. As a result, Wall Street’s peak interest-rate-hike expectations have accelerated. Money managers are now anticipating a March 2023 peak in rate hikes around 4.5% (compared with the belief just a week ago that the top of the cycle would come in May of 2023 at 4.7%). And they are anticipating the first-rate cut could come as soon as the end of next year. So, what does this tell us about the stock market? As, I stated above, investors are increasingly worried about the economic growth outlook. Economies were overstimulated everywhere in late 2020 and throughout 2021. If the economy were to continue to run at that pace, the inflation we are experiencing now would look like a gift. So, demand needs to slow in order for inventories to rebuild and for the price of everything to stabilise. That way, households and businesses can readjust, allowing them to better budget ahead, making output more predictable. Then, as that happens, portfolio managers and analysts can better model what demand and growth will look like going forward. That way, they can more accurately estimate the earnings-growth potential of individual stocks and indexes. That process will allow them to arrive at fair-value price-to-earnings multiples, increasing conviction for investing in risk assets like stocks. Longer term, the change will support a steady rally in the S&P 500. Within the S&P 500 Index, all 11 sectors finished higher. European Markets closed higher. As I stated above, investors were encouraged by the RBA’s interest-rate announcement. In addition, members of U.K. Prime Minister Liz Truss’ government said her plans to lower tax rates were all but dead, further easing concerns about increasingly higher interest rates. In Asia, Equity markets in mainland China and Hong Kong were closed for holidays. China’s markets will remain shut through Friday for the Golden Week holiday. Markets that were open rallied across the board on follow-through from a rebound in the U.S. The Institute for Supply Management’s manufacturing metrics for September showed prices paid by companies for raw materials continued to drop – and were back to pre-pandemic levels – while employment eased. Both numbers signalled Federal Reserve interest-rate hikes were felt by the economy, boosting optimism the central bank could slow its pace of rate hikes. Elsewhere, Oil closed 3.46% higher while Gold rose a further 1.52% on a weaker Dollar.
To mark my 2625th issue of TraderNoble Daily Commentary I am offering a special 2-Year Rate of Euro 2750 for my Platinum Service which includes 1 to 4 updated emails throughout the trading day to demonstrate this value, a monthly subscription over the same period would cost 4440 euro in total This offer represents a 38% discount and is open to both new and existing members. If anyone is interested in this offer can you please email me on bryan@tradernoble.com for details
For anyone following my Platinum Service it made 370 points yesterday and is now ahead by 1150 points for October, after finishing September with an incredible gain of 6660 points, after closing August with a gain of 2228 points, having made 2660 points in July, following a gain of 3371 points in June. The Service made 3651 points in May, after making 762 points in April, following a gain of 5883 points in March. The Platinum Service made an impressive 5324 points in February, after ending January with a gain of 3878 points, more than making up for December’s 932 points loss. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points. I have a YouTube Channel which contains recent interviews I have given This can be viewed by clicking HERE Please subscribe to this for new interview notification
Equities
The S&P 500 closed 3.06% higher at a price of 3790.
The Dow Jones Industrial Average closed 825 points higher for a 2.80% gain at a price of 30,316.
The NASDAQ 100 closed 3.14% higher at a price of 11,582.
The Stoxx Europe 600 Index closed 3.12% higher.
This morning, the MSCI Asia Pacific Index rose 0.6%.
This morning, the Nikkei closed 0.53% higher at a price of 27,134.
Currencies
The Bloomberg Dollar Spot Index closed 1.2% lower.
The Euro closed 1.5% higher at $0.9973.
The British Pound closed 1.1% higher at 1.1445.
The Japanese Yen rose 0.2% closing at $144.28.
Bonds
Germany’s 10-year yield closed 6 basis points lower at 1.87%.
Britain’s 10-year yield closed 8 basis points lower at 3.87%.
US 10 Year Treasury closed 2 basis points lower at 3.61%.
Commodities
West Texas Intermediate crude closed 3.46% higher at $86.44 a barrel.
Gold closed 1.52% higher at $1725.10 an ounce.
This morning on the Economic Front we have German, Euro-Zone and U.K. Global Services PMI at 8.55 am, 9.00 am and 9.30 am respectively. This is followed by U.S. ADP Employment Report at 1.15 pm and the Trade Balance at 1.30 pm. Next, we have Global Services PMI at 2.45 pm. Finally, we have ISM Services PMI at 3.00 pm.
Cash S&P 500
Last week’s technical signals were telling us to position long or hold onto existing long positions. While it was a frustrating exercise given all the chop, it was the right decision with the S&P now trading over 6% higher since Friday. This move higher saw the Weekly 5 EMA tagged helped by the falling Dollar and Bond Yields. It is looking more and more likely that last Sunday’s overnight low at 3560 maybe it for the year given the seasonality. Yesterday’s aggressive move higher saw no two-way price action, meaning there was no dip for investors to buy, forcing short positions to cover as the market surged. One caution is the massive ‘’Open Gaps’ left after Monday and yesterday’s rally. The low for the S&P was 3740 against Monday’s 3678 Chicago close. This is huge and a back-test followed by renewed buying would be healthier for the S&P going forward. The S&P rallied to my 3770 T/P level on my long held 3733 position and I am now flat. Today, I will be a buyer on any further dip lower to 3730/3750 with a tight 3715 ‘’Closing Stop’’. We have resistance from 3800/380 where I will be a small seller with a 3831 tight ‘’Closing Stop’’.
EUR/USD
The Euro never gave shorts a chance to buy yesterday. The Euro is now trading 5% higher from last week’s low. Today, I will raise my buy level to .9820/.9890 with a higher .9745 stop. I still do not want to be short the Euro at this time.
March Dollar Index
The sell-off in the Dollar is finally accelerating with the Dollar trading at 110.00 this morning. I am still short at an average rate of 108.90. I will now raise my exit level on this position to 109.60 and if this level is triggered I will be back with a new update for my Platinum Members.
Cash DAX
The DAX surged yesterday, trading a massive 800 points higher than where we closed last Friday night in New York. The DAX has short-term support from 12350/12450. I will move my buy level to this range with a higher 12275 tight stop. I still do not want to be short the DAX at this time.
Cash FTSE
The FTSE traded the whole of yesterday’s sell range for a now 7040 average short position I will leave my 7125 tight stop unchanged while raising my T/P level to 7010.
Dow Rolling Contract
The Dow surged a further 800 points yesterday as the market believes we are closer to a Fed Pivot. The ISM and Job Openings this week showed drastic rollovers with many investors believing that the Fed has to pivot. Next week’s CPI data will be key to any pivot. I am still flat the Dow as the market never came close to yesterday’s buy range. I will now raise my buy level to 29700/29900 with a higher 29495 ‘’Closing Stop’’. I still do not want to be short the Dow at this time.
Cash NASDAQ 100
I am still flat the NDX as the market never came close to yesterday’s buy level. The NDX has short-term support from 11250/11450 where I will be a small buyer with a wider 10995 stop.
December BUND
No Change. I am still a buyer on any further dip lower to 139.60/140.40 with the same 138.95 ‘’Closing Stop’’. If I am taken long I will have a T/P level at 141.05.
Gold Rolling Contract
Gold continued to rally, trading a huge $120 higher from last Wednesday’s 1610 low print. I am reluctant to chase the price of Gold higher. Therefore, I will only raise my buy level to 1680/1695 with a 1669 ‘’Closing Stop’’.
Silver Rolling Contract
No Change. I am still a buyer from 19.80/20.50 with the same no stop strategy if triggered.
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