Disunity Never Looked So Confusing To So Many: The Action For October 3, 2023
Ructions within the GOP and the airing of grievance from its putative leader dominate the Times this morning but the confusion in financial markets may take over the news by the evening. Uncoordinated policies across East-West and disunity in Washington make nasty bedfellows that together push the dollar and interest rates higher and valuations lower. The S&P 500 likely falls over the near term, but I expect a violent reversal coming in the next week as investors shift attention from interest rates toward corporate earnings.
The bears have control for the moment as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, potentially bearish for equities.
Long-Term Treasury Rates: Long rates are rising and that will reduce the attraction of equities while cooling the housing and auto industries to the detriment of economic growth.
High Yield Credit Spreads: The cost of borrowing is rising for lower-rated firms compared to their AAA siblings, a portent of potential defaults to come.
Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global growth.
Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting weaker against the dollar, and that’s bad for global growth since many key imports are priced in $.
Gold Prices: Falling gold prices reflect higher potential rates and a stronger dollar, which is on net bad for equities.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and falling prices signal growth may be worse than expected.
Tin Prices: Tin is broadly used across goods and industry and falling prices typically signal worsening growth prospects.
Based on the action yesterday and overnight there are several factors that will flip the markets around as we enter earnings season, including:
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
Zinc Prices: Few commodities are as broadly important as zinc, and rising prices for zinc signal better than expected global demand, which is usually good for equities.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and rising prices signal better than expected global demand, which is usually good for equities.
My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.