A 6% fall in Apple shares hit U.S. Equity Markets hard yesterday. The NASDAQ 100 led the declines closing lower by a hefty 2.86%. Markets gave up much of the returns from Wednesday as Equities continued their sell-off. Most of the bearish sentiment was driven by the news of record-high German inflation and the U.K. government’s defense of its tax cut plan. Initial Jobless Claims came in under consensus and printed at the lowest level since April. This sent Bond Yields higher as the Fed’s actions are doing little if any to slow down the labour market, while multiple Federal Reserve Officials continue to support the narrative of hiking rates and holding for longer. The Federal Reserve is exporting inflation across the globe. The U.S. Dollar is killing economies everywhere. The Fed is trying to combat rising prices, and the only way to carry out such a task is by raising interest rates. The reason the Fed wants to raise rates is to increase the buying power of the Dollar. So, as the Federal-Funds target range increases, so do yields on sovereign bonds. As that happens, investors at home and abroad clamour to buy those securities. However, as rates go up, so does the cost of borrowing funds. That is going to weigh on the spending outlook for households and businesses. And right now, the Fed is telling us it has another 1.25% in rate hikes to go before the end of this year. Until the Fed stops raising rates, its policies are going to weigh on the perceived outlook for global growth. That means momentum investors will continue to short risk assets like stocks, anticipating earnings estimates must be revised lower. So, the Dollar’s movement will continue to be a barometer for the near-term direction of the S&P 500 Index. The 10-year U.S. Treasury is considered to be one of the safest investments in the world. After all, the U.S. have never defaulted on their debt. When the payout for owning that investment increases, so does its appeal. Bear in mind, the coupon payment amount may not have changed but as underlying bond prices drop, the return size increases. Since the start of this year, the 10-year yield has risen from 1.5% to the current 3.9%. Two-year Treasuries have risen from roughly 0.75% at the start of this year to around 4.1% currently. The change tells you that investors are increasingly uncertain about the current economic environment. Those are massive moves. In other words, if you are an individual or business that needs to borrow money, the amount you must pay to service that debt has more than doubled. Thus, the payout for investors who are willing to lend money has jumped. It is no different for the U.S. government. As interest rates have risen, it costs more for them to borrow. And as I said from the start, because 10-year Treasuries are viewed as one of the safest investments in the world, a yield that has more than doubled over the past nine months makes the purchase more appealing. But if you are a foreign investor, or a domestic one who owns foreign bonds, you must convert to Dollars if you want to buy U.S. Treasurys. Thus, you must unload Euros, Japanese Yen, or British Pounds in order to buy the Dollar. But as you get out of, say, the Pound, you are increasing the available supply. And as you buy U.S. Dollars, you are diminishing the available supply. As an item becomes scarce, like the Dollar, its value tends to increase. Conversely, when supply increases, like the Pound, that same item loses value. When the Fed started raising interest rates in March, the Dollar exploded higher. As the Fed has grown even more aggressive on its policy path, the move higher in the Dollar has accelerated. Now, the Bank of England (“BOE”) has tried to keep pace with the Fed, but it’s still lagging. Since the start of this year, the Federal-Funds rate has risen from a range of 0% to 0.25% to a current range of 3% to 3.25%. Over that same period, the BOE’s official bank rate has increased from 0.2% to 2.25%. That’s a notable jump, but still behind the Fed. As the Fed stepped up the pace this past summer, the gap has widened, meaning the British Pound has lost value compared with the Dollar. This is despite the BOE having been one of the most aggressive of the major global central banks behind the Fed. Yet, a Pound with diminished buying power only stokes inflation. After all, it costs more to buy everything. As the British Pound’s value has begun to diminish, the inflation picture in the U.K. has worsened. So as the Fed is trying to tame inflation here, it is exporting the problem to other shores. The dynamic forces every major global central bank to pursue the same action. They are all staring at runaway costs and trying to figure out a solution to the problem. And as I said earlier, the primary tool is raising interest rates to kill economic growth. By doing that, policymakers everywhere are estimating that it will cost more to borrow. That will eat away at discretionary income to be spent on wants compared with needs. That money will have to be directed toward things like mortgage payments, car loans, and credit-card debt. So, inventories of goods like iPhones and sneakers can rebuild, ultimately weighing on prices, or at the least keep prices from rising. Then, in 12 months’ time, when prices have not gone up compared with the year prior, the Fed, BOE, and European Central Bank will declare victory against inflation. Mind you, that does not mean prices have dropped. But there is a broader global economic growth concern at hand. As long as the Fed stays intent on its current rate-hike path, that is creating a problem for every other central bank. As I stated earlier, a stronger Dollar is creating inflation everywhere else. And as other countries fall further behind, they are going to have to play catch-up, and fast. The changes are going to weigh on global growth. In nine months, households and businesses are having to adjust from historically low borrowing costs to those they haven’t seen in over a decade. That is going to be a problem for the consumption of everything. If the Dollar keeps rallying, there will be two main outcomes: either the Fed cools its heels to spare global economic turmoil, or other central banks are forced to rapidly raise interest rates, killing growth, and sparking a larger global sell-off. Yesterday’s 1.5% fall in the Dollar is a start in the right direction. Within the S&P 500 Index, all 11 sectors finished lower. European Markets closed lower. Markets saw further deterioration yesterday following a modest reprieve a day earlier. German inflation soared to double-digit levels for the first time in over 70 years, portraying the dire state of the region’s largest economy. Elsewhere, U.K. Prime Minister Liz Truss doubled down on her plans to fund government stimulus in the form of tax breaks and other spending. This spurred multiple Euro-Zone Bond Yields to rise in the prospect of inflation risks. And the European Systemic Risk Board issued a warning of further deterioration in the macroeconomic outlook for the region. In Asia, Markets ended the day with a mixed reaction as the positive news from Wednesday mostly tapered off. Central banks and governments continue to give varied indications of market intervention to support equities and currencies. Among banks making moves, the People’s Bank of China issued a strong statement warning against speculation after the Yuan fell to its lowest level versus Dollar since 2008. South Korea’s central bank announced its plan to buy back government bonds to support the struggling won and bolster markets. And Nikkei Asia reported that Japanese Prime Minister Fumio Kishida is set to announced measures to provide private sector relief for high energy costs. Elsewhere, Oil fell 1.12% while a weaker Dollar saw Gold close higher by just 0.1%.
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The S&P 500 closed 2.11% lower at a price of 3640.
The Dow Jones Industrial Average closed 458 points lower for a 1.54% loss at a price of 29,683.
The NASDAQ 100 closed 2.86% lower at a price of 11,164
The Stoxx Europe 600 Index closed 1.67% lower.
This morning, the MSCI Asia Pacific Index rose 0.5%.
This morning, the Nikkei closed 0.95% higher at a price of 26,422.
The Bloomberg Dollar Spot Index closed 1.1% lower.
The Euro closed 0.9% higher at $0.9805.
The British Pound closed 2.1% higher at 1.1121.
The Japanese Yen fell 0.1% closing at $144.43.
Germany’s 10-year yield closed 6 basis points higher at 2.18%.
Britain’s 10-year yield closed 13 basis points higher at 4.14%.
US 10 Year Treasury closed 7 basis points higher at 3.78%.
West Texas Intermediate crude closed 1.12% lower at $80.78 a barrel.
Gold closed 0.1% higher at $1660.10 an ounce.
This morning on the Economic Front we already had the release of U.K Q2 Final GDP which rose 0.2% versus -0.1% expected. At 8.55 am we have German Unemployment, followed at 9.30 am by U.K. Consumer Credit and Money Supply. This is followed by Euro-Zone PPI and Unemployment at 10.00 am. Next, we have U.S. Personal Income/Spending and all-important PCE. Finally, we have the Chicago Fed National Activity Index at 2.45 pm and the University of Michigan Consumer Sentiment at 3.00 pm. Meanwhile, Fed Members Brainard and Bowman are speaking at 2.00 pm and 4.00 pm respectively.
Cash S&P 500
Wednesday’s shock Bank of England intervention with the U.K. on the cusp of blowing up as pension funds were about to blow up with margin calls laid bare not only the fragility of the global financial construct in the face of the global debt construct but also the sheer ineptitude of political forces that turn the knobs of policy appearing to show a stunning lack of understanding the mechanics of what is going on. The Bank of England had no choice but to intervene and it now up to the other central banks to do co-ordinated intervention to weaken the Dollar by buying European Bonds and drive yields lower. The S&P did well to hold in yesterday despite the 3% fall in the NASDAQ, caused by the 6% fall in Apple shares and 7% fall in Tesla. Not expecting the aggressive sell-off across the board yesterday, one can make the point that it was just an aggressive back test from Wednesday’s huge rally. The McClellan Oscillator closed at -239 last night while the Fear & Greed Index is on the floor, closing with a reading of ‘’Extreme Fear’’ at 16. These are the type of readings needed to get the vicious rally that I am expecting as from next week we are in the seasonally strong time of the year especially ahead of the Mid-Term elections in November. Shortly, after I posted yesterday morning the S&P hit my 3665 buy level before rallying to my 3684 revised T/P level and I am now flat. Subsequently, the S&P made a low at 3608 before having a nice rally into the close. Today, the S&P has support 3620/3640 where I will again be a buyer with a 3599 ‘’Closing Stop’’. I continue to hold my 3733 long position from last Friday with the same 3770 T/P level.
The huge points made over the last two sessions allowed me to cover my 1.0060 long Euro position at my revised .9680 exit level and I am now flat. It is typical that the day you exit that the Euro rallies hard, closing at .9805 last night. The price action for both Cable and the Euro suggest that we have at least put in a temporary top in the Dollar. Today, I will be a buyer of the Euro on any dip lower to .9770.09770 with a wider .9595 ‘’Closing Stop’’.
March Dollar Index
No Change as I need a miracle. I am still short at an average rate of 108.90 with the same 108.10 T/P level. This morning the Dollar is trading at 112, two hundred points lower from where I marked prices yesterday morning.
My DAX plan worked well with the market trading lower to my 11960 buy level before rallying to my revised 12030 T/P level and I am now flat. The DAX had a nice bounce off its 11900 test yesterday. This is now key support on a closing basis. The DAX is severely oversold and is due a large bounce. Today, I will again be a buyer from 11910/11990 with the same 12795 ‘’Closing Stop’’.
My FTSE plan also worked well as the market trading lower to my 6850 buy level before rallying to my 6920 T/P level and I am now flat. Today, I will again be a buyer on any dip lower to 6780/6850 with the same wider 6695 ‘’Closing Stop’’.
Dow Rolling Contract
After the Dow traded lower to my 29280 buy level we rallied to my revised 29460 T/P level as emailed to my Platinum Members. In the same email I suggested buying the Dow again at 29100 before rallying to my 29350 T/P level and I am now flat. With the 14-Day RSI below 30, the Dow in my opinion is setting itself up for an aggressive rally. The Dow has now fallen over 3500 points since the CPI print in mid-September. Today, I will again be a buyer from 28950/29200 with a 28695 wider ‘’Closing Stop’’.
Cash NASDAQ 100
The aggressive sell-off in the NDX saw the market trade the whole of my buy range for a now 11200 average long position. The NDX did make a new low for the year buy significantly did not close at this low as the market had a nice 100 point rally into the close. I will leave my 11420 T/P level unchanged while raising my stop to 11095.
My Bund plan worked well as the market traded lower to my 136.50 buy level before rallying to my 137.30 T/P level and I am now flat. This morning the Bund is trading higher at 138.50. We have support from 136.90/137.80 where I will again be a buyer with a wider 135.95 ‘’Closing Stop’’.
Gold Rolling Contract
Gold has continued to rally off Wednesday’s massive upside ‘’Key Day Reversal’’ I am still flat and I will now raise my buy level to 1635/1650 with a higher 1619 ‘’Closing Stop’’.
Silver Rolling Contract
No Change. I am still long Silver at 18.40 with the same 19.60 T/P level and no stop. If this view changes I will come back with an update for my Platinum Members.