U.S. Indices were choppy but ultimately closed in the red on Tuesday, with the majority of sectors lower while defensives outperformed. With a lack of US data yesterday, the focus was on US President Trump’s tax bill talks. The President attempted to get Republicans on side with his tax bill, although it appears there is still some work to do. The House Freedom Caucus Chair suggested they would eventually get there, but maybe not by today. T-notes were choppy, with morning strength fading before rising back into settlement to see the 10-year settle little changed, although the curve was steeper, with attention turning to the 20-year bond auction on Wednesday, after the very weak 20 Year JGB auction overnight. Fed speak saw Musalem express concern about a slowdown of businesses and consumers amid uncertainty, while Hammack provided three tariff scenarios, and suggested the most likely one is a case of stagflation. Crude prices were choppy but also settled little changed, as the upside in the morning, sparked by the Iranian Supreme Leader casting doubt over a US nuclear deal, later pared, but was off lows amid the UK and EU announcing fresh sanctions on Russia. Regarding the US, Secretary of State Rubio said the US will impose new sanctions on Russia if no progress on the peace deal is made. In FX, the Swiss Franc, Euro and Japanese Yen outperformed, while the Canadian Dollar saw brief upside on a hotter-than-expected inflation report, which dialled back rate cut pricing for the next Bank of Canada Meeting. The Australian Dollar as the clear laggard after the dovish RBA yesterday morning, which cut rates by 25bps as expected but also discussed a 50bps rate cut. Fed Member Musalem said Monetary Policy is currently well-positioned. A balanced response to higher inflation, and unemployment is feasible if inflation expectations stay anchored. However, if inflation expectations become de-anchored, Fed policy should prioritise price stability. Musalem noted how the US economy has underlying strength, the labour market is stable, and inflation has eased but it still remains above the 2% goal. The St Louis Fed President said that economic policy uncertainty is unusually high, noting that even after the May 12th de-escalation, tariffs are likely to lead to labour market softening and higher prices. He did suggest that tariffs are just as likely to have a temporary effect on inflation as a persistent effect on inflation. He added that if trade tensions are durably de-escalated, inflation could head back to target, the labour market will remain resilient, and current monetary policy would remain appropriate. Nonetheless, Musalem noted how he is hearing that businesses and households are holding back from decisions amid uncertainty. Suggesting that if decisions have been somewhat paused, he would expect it to affect the economic outlook. Musalem also warned the impact of uncertainty on economic activity tends to be pretty meaningful. The Cleveland Fed President (Hammack) warned the traditional approach to economic projections with a baseline scenario may not be the best way to think about the outlook right now. Instead, she provided three tariff scenarios. Scenario 1): Tariffs have a one-off price effect, but economic growth takes a hit from policy uncertainty. This might come alongside a “tremendous amount of uncertainty that weighs on economic activity,” with growth declining and the labour market falling off. In that situation, the Fed would want to be attentive to the employment side of the mandate and potentially ease policy, and potentially very quickly. Scenario 2): The labour market holds up, but tariffs are inflationary. She warns that price pressures from tariffs become sticky, because of the way the tariffs have been rolled out. Scenario 3): The most likely case, is a stagflationary outcome where the economy slows alongside higher inflation. “We’re going to have to have good insights and a good understanding of how much we’re missing each side of the mandate and how long those misses persist — and then we can decide what the right course of action is.” Finally, Bostic said the current US tariff level is still high enough that it is difficult to assess what will happen and adding even more uncertainty would cause further delays in policy changes as the Fed seeks more clarity. The Atlanta Fed President noted consumer balance sheets are not as strong as they were three or four years ago, and some are back to pre-pandemic levels or maybe even weaker. Bostic noted that there is a lot that is unknown about how consumers will respond to another round of inflation; households may be more price-sensitive now. He hears from an increasing number of businesses that they can no longer delay responding to tariffs through changes in either prices or employment. Ahead, Bostic said the US economy is going to see a slowdown in activity, but how it plays out by sector and nationally is hard to say. For the Fed, it needs to be more certain about the outlook to be comfortable about how monetary policy should shift. Elsewhere, Oil closed flat while Gold surged ending Tuesday with a 2% gain.
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Equities
The S&P 500 closed 0.39% lower at a price of 5940.
The Dow Jones Industrial Average closed 114 points lower for a 0.27% loss at a price of 42,677.
The NASDAQ 100 closed 0.37% lower at a price of 21,367.
The Stoxx Europe 600 Index closed 0.73% higher.
This Morning, the MSCI Asia Pacific closed 0.4% lower.
This Morning, the Nikkei closed 0.50% lower at a price of 37,343.
Currencies
The Bloomberg Dollar Spot Index closed 0.31% lower.
The Euro closed 0.33% higher at $1.1274.
The British Pound closed 0.15% higher at 1.3380.
The Japanese Yen rose 0.22% closing at $144.64.
Bonds
Germany’s 10-year yield closed 2 basis points higher at 2.60%.
Britain’s 10-year yield closed 4 basis points higher at 4.71%.
U.S.10 Year Treasury closed 1 basis points higher at 4.48%.
Commodities
West Texas Intermediate crude closed 0.11% lower at $62.62 a barrel.
Gold closed 2.01% higher at $3294.10 an ounce.
This morning on the Economic Front we already had the release of U.K. April CPI which printed +3.5% versus +3.3% Y/Y expected. Next, we have U.S. MBA Mortgage Applications at 12.00 pm, followed by a speech from Fed Member Barkin at 5.00 pm. Finally, we have a 20-Year Treasury Auction at 6.00 pm.
Cash S&P 500
Tuesday was a quiet session for most of Tuesday before springing to life in the last two hours of trading, hitting a low at 5910 before rallying to close with a 0.4% loss at a price of 5940. It looked like the market did its best to keep the VIX from going below 18 yesterday. This afternoon we have the VIX OPEX, and that will be that, and the pin at 18 will be no more. The VIX has been mean-reverting to 18 every day since getting there last Monday. In the meantime, the 30-year Treasury rose by six basis points to 4.97%. The big question is whether we are going to finally crack 5% and really make a meaningful move higher. Technically speaking, I could make a strong argument for a 30-year Treasury between 5.25% and 5.5%. Fundamentally, I could make a strong argument for rates being much higher than that. The 30-year minus the 3-month rose to 60 basis points yesterday, and if we break through the level of resistance, the 30-year rate could go much higher because there is not much resistance. The question ultimately is how wide this spread gets. If the economy does not head to recession, and the 3-month settles around 3%, the 30-year rate could be much higher over time. Since 1988, the 30-year typically tops out around 4.5% higher than the 3-month rate. You can do the math. It will be interesting to see how and if the BOJ responds to the rapid rise in long-end rates in Japan, with the 30-year JGB rising by 12 bps yesterday to 3.09%. Finally, we have the 10-day EMA, the 200-day SMA, technical support at 5,900, the 78.6 retracement level, along with an uptrend in the S&P 500 futures, all in play here. I would imagine that if this 5,900 level break were to occur, we could see that gap fill on the S&P at 5,685 within a few days. The late sell-off saw the S&P hit me 5932 T/P level on my 5943 average short position and I am now flat. Internally the market has been weak as shown by the McClellan Oscillator which has weakened from +187, closing at +53 last night while the Fear & Greed Index is now close to a reading of ‘’Extreme Greed’’ as shown by Tuesday’s 70 close. The Dollar weakening is not help matters and there is in my opinion no reason to be a buyer of the S&P currently without a meaningful pullback. This morning, the S&P is trading lower at 5915. We have short-term resistance from 5935/5955 where I will again be a seller with the same 5971 ‘Closing Stop’.
EUR/USD
I am still flat the Euro. This morning, the Euro is trading higher at 1.1345 – 200 points higher from where we were trading early Monday morning. The Euro has short-term resistance from 1.1410/1.1490 where I will be a small seller with a 1.1555 ‘Closing Stop’. If I am taken short, I will have a T/P level at 1.1340. I will now raise my buy level to 1.1190/1.1270 with a higher 1.1125 ‘Closing Stop’. If I am taken long, I will have a T/P level at 1.1340.
Dollar Index
The Dollar has fallen 2% since Monday and I am still flat. Today, I will lower my buy level to 98.40/99.20 with a 97.75 ‘Closing Stop’.
Russell 2000
I am still flat. The Russell is trading lower at 2092 this morning. I will continue to be a buyer on any dip lower to 1960/2040 with the same 1895 ‘Closing Stop’. If I am taken long, I will have a T/P level at 2080. I still do not want to be short the market at this time.
FTSE 100
I am still flat as the FTSE continues to trade close to all-time highs. I will now raise my FTSE buy level to 8580/8660 with a higher 8515 ‘Closing Stop’. If I am taken long, I will have a T/P level at 8710. I still do not want to be short the FTSE at this time.
Dow Rolling Contract
Frustrating! The Dow hit a low of 42480 just above my 42450-buy level before rallying over 200 points into the close. The 200-Day Moving Average is edging higher at 42305 this morning. Today, I will now lower my buy level to 42080/42330 with a lower 41895 ‘Closing Stop’. If I am taken long, I will have a T/P level at 42540. I still do not want to be short the Dow at this time.
Cash NASDAQ 100
The NDX never came close to Tuesday’s sell range and I am still flat. Given how severely overbought the NDX is at this time I will now lower my sell level to 21400/21600 with a lower 21755 ‘Closing Stop’.
December BUND
Higher Treasury Yields overnight sees the Bund trading lower at 130.10 this morning. I will now lower my Bund buy level to 128.50/129.30 with a lower 127.75 ‘Closing Stop’. I still do not want to be short the Bund at this time. If I am taken long, I will have a T/P level at price of 129.90
Gold Rolling Contract
Gold surged a further 2% on Tuesday, trading at 3318 this morning, and I am still flat. I will now raise my buy level to 3220/3245 with a higher 3199 ‘Closing Stop’.
Silver Rolling Contract
Silver rallied to my 32.50 T/P level on my latest 32.20 long position and I am now flat. This morning, Silver is trading higher at a price of 33.16. We have short-term support from 31.50/32.50 where I will again be a buyer with the same 29.95 wider ‘Closing Stop’. If I am taken long, I will have a T/P level at 33.20.
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