Things you need to know.
– JJ keeps the heat on – promises to continue to raise rates
– BoE surprised markets and raised rates by 50 bps
– The Dollar index surges – kissing resistance sending oil and gold lower.
– Try the Sweet and Sour Chicken – Italian Style.
And stocks continued to meander around…. not sure whether to continue to go lower or start looking for bargains…. JJ was on Capitol Hill discussing the state of the economy with both the House Financials Services Committee and the Senate Banking Committee over the past two days and we learned nothing new – other than a full commitment to continue to push rates higher – suggesting that JJ remains worried about ‘sticky’ inflation – which by the way – should have surprised NO ONE.
In fact – JJ said it this way….
“The Fed fights inflation by slowing the economy through raising rates, which causes tighter financial conditions such as higher borrowing costs, lower stock prices and a stronger dollar.”
And that about says it all…. note the ‘lower stock prices’ reference.
Now – given that the economy remains strong and inflation is moving in the right direction – it is likely that we are closer to the top of the rate rising cycle than not…..and while traders are pricing in one more hike – JJ has made it clear that there will be at least two more hikes and maybe three.
Yesterday though, while stocks remained weaker all morning…. We did see investors dip their toes back into some of the popular ‘tech’ names – that have sold off 3-4% earlier in the week – thinking they got a ‘bargain’! Since when is 3-4% considered a bargain? I mean it’s ridiculous – a bargain is 10%, 30%…. but my sense is that investors that missed the tech move higher are looking for any opportunity to ‘get in’ and if they can say they weren’t chasing the name – then it makes them feel better……. But guess what? if we are all expecting the FED to push rates up 2 or even 3 more times before this is over – then I can almost guarantee you that those highflying ‘tech’ superstars will surely back off…. Why? Well first of all – they are already up double and triple digits – some trading at very stretched multiples….……they are priced for perfection…. They are not priced for a market that could see rates approach 6%.
The S&P is trading at 19.5 x’s forward earnings…. which is a bit ‘rich’ for 6% rates. But it is also just a handful of stocks that are causing that multiple to be what it is…. If you remove the top 10 names – then the S&P is trading at a more reasonable 15 X’s forward earnings……which suggests that those top 10 names are causing the problem. So, if investors get more anxious those 10 names will come under pressure first…and that is exactly what we saw this week, right? For example – on Wednesday when the markets closed lower – the Nasdaq lost 1.2% while the S&P only gave up 0.5%…..We saw anything TECH lower while we saw those underperforming sectors that we have been talking about go higher….Think Healthcare, Energy, Staples, Utilities….And why? Because investors don’t WANT out of the market – they are just taking profits from the highflyers and reallocating to the underperformers. Now, if that money went to cash and did not get reinvested, we would have seen the S&P move more…. but we did not and that then suggests that investors are ok with where we are going….
Remember – it is qtr. end….and asset managers are preparing to ‘window dress’ their portfolios in preparation for the 2nd qtr. marking period and the start of the 3rd qtr. By the end of the day – The Dow lost 5 pts or 0.01%, the S&P gained 16 pts or 0.4%, the Nasdaq rose by 128 pts or 1%, the Russell lost 14 pts or 0.8% and the Transports gained 59 pts or 0.4%.
Now look while investors remain unsure of what’s next…and while the FED has made it clear they are not done, it is clear that other global central banks are not done yet either, and are still actually fully committed to their inflation fight and are prepared to sacrifice economic growth if they need to – Yesterday we saw the BoE raise rates by 50 bps….this after their inflation figures came in hotter than expected – leaving BoE President Andy Bailey with little choice. Recall last week – we saw the ECB raise rates by 25 bps and ECB President Christine Lagarde make it clear that she is not done raising rates either. And remember – Norway and Switzerland also raised rates last week. So – the move higher for banks around the world remains in place and that will – in my opinion – hold a significant move higher in stocks at bay.
Eco data today includes US Manufacturing and Services PMI’s…. Manufacturing is expected to be 48.5 (contractionary) while Services is expected to come in at 54 (expansionary).
This morning – futures are lower…. Dow futures down 110, the S&P’s down 20, the Nasdaq down 105 and the Russell is off 12….as investors mull over the week’s data and JJ’s commentary. Recall that he once again reiterated that he sees NO rate cuts this year…. Next week – is the end of the quarter…. I expect to see more pressure on tech as asset managers re-allocate capital going into the second half of the year. In fact – we see short bets getting bigger and bigger – currently better than $1 tril of short bets…which suggests that there is an expectation of lower prices and pressure on the mkts…by next week.
Stocks in Europe are weaker………as weaker Eurozone data points send investors into the safety trade – think bonds – as the expectation is for the recent moves by the ECB and BoE to tip those economies into recession. German economic activity fell more than expected driven by a slowdown in services and manufacturing while the French economy is also expected to show a bigger slowdown than anticipated. At 6:30 markets across the zone are down anywhere between 0.3% and 0.8%.
The dollar index surged higher over the past couple of days – moving right up to trendline resistance at 103.06 and that is putting pressure on the commodity complex.
Oil is a bit lower – trading at $68.60…. on the stronger dollar as well as on the idea that the global economy is on the edge of a recession this even as US crude stockpiles fell…. (Suggesting demand is fine). In any event – oil is once again testing the lows of the year…. expect to hear from the Saudis over the weekend.
And on the back of that stronger dollar – we also saw Gold come under pressure……Overnight – gold traded as low as $1920/oz and is likely to test trendline support at $1,895 next week. Gold is now down 7.5% since May…. Think of the stronger dollar and if the dollar breaks above trendline resistance at 103.06, then we could see it test the May high at 104.70 which will put a bit more pressure on gold.
2 yr. treasuries are yielding 4.77%, the 10 yr. 3.75% and the shorter duration 3 month and 6-month bills are yielding 5.3% and 5.4% respectively.
The S&P closed at 4381 – up 16 pts…. This morning the tone suggests more weakness….and this should not be a surprise at all…It is the end of the week, there is a big Russell Rebalancing today and so expect lots of activity. Next week is the final week of the qtr., so expect more action as large asset managers reallocate money for the second half of the year.
We will hear from 3 FED heads today…. St Louis’s Jimmy Bullard, Atlanta’s Raffi Bostic, and Cleveland’s Loretta Mester…of the three? I would be paying the most attention to Loretta…. followed by Jimmy and then Raffi. Just a reminder – Both Loretta and Jimmy are pushing for higher rates, Raffi is ok to take a break…. In the end – get ready for a pullback – The S&P is well above the trendline….and a reversal to that trendline would not be a surprise at all. It would only represent a 4% move lower…and that is nothing to get all worked up about…. but it will shake the branches a bit as investors then places bets on whether or not it holds.
Stick to the plan. Build out the defensive part of your portfolio….do not keep chasing tech names that are way overdone… If you put money into short term treasuries – get ready to roll them over again if you remain skeptical about the summer months.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace
Capital Advisors.”
Pollo Agrodolce (Italian Style Sweet and Sour Chicken)
You need: Chicken pieces – legs, thighs and breasts, olive oil, s&p, diced onion, chopped carrots, chopped celery, plenty of sliced garlic cloves – 6+, ¼ c sugar, 1 c Chianti, ½ c red wine vinegar, ½ c orange juice with pulp, *sliced almonds – optional.
Season the chicken pieces with s&p – set aside. In a heavy frying pan – heat up some olive oil, – now brown the chicken on all sides. Remove and place on a platter.
Now add the garlic, carrots, celery, and onion – sauté for 10 mins on med heat…. Now add the sugar, wine, vinegar, orange juice, and almonds…. bring to a boil – add back the chicken – skin side up. Place a lid off center and turn heat to simmer. Cook for about 30 mins.
Now remove chicken and place on a platter, – turn heat up to high and stir until it is nice and thick…not long…maybe like 4 mins max…. taste – adjust seasoning with s&p. Spoon the sauce over the chicken pieces and serve.
This dish works well with a green veggie – like French cut green beans or broccoli. Make a large mixed green salad with tomatoes, red onion, and cucumbers. Dress in a balsamic Vinegar and Olive oil dressing. Keep it simple – as the chicken and marinade carry the dish.
Buon Appetito
