2016/09/09 Quick Update: Creature of Expectations
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COMMENTARY (Non-Video): Friday, September 9, 2016
Creature of Expectations
The anonymous old adage “the market is a creature of expectations” seems to be at work again out of Thursday into this morning. After the ‘Goldilocks’ equities psychology was reinstated on weaker US economic data since the Jackson Hole Policy Symposium two weeks ago, there was an expectation of more extensive QE from Mario Draghi at the ECB on Thursday. It didn’t happen.
After that the markets knew they were going to need to endure a return of communication from those hawkish Fed minions. Messrs. Rosengren and Kaplan were both supporting a potential September FOMC rate hike. Rosengren went so far as to say that NOT hiking might cut the recovery short(???) How the central bank not hiking rates would shorten a recovery is beyond us in the current circumstance. Of course, as usual this was related to the Fed’s ‘normalcy bias’ insofar as it is only a risk if you believe the lack of a hike now will require a very aggressive hike cycle later, due to major acceleration of economic growth.
Also of course, this is still part of the Federal Reserve fantasy that everything is back to normal waiting to explode soon. For all manner of reasons (see our Wednesday Goldie’s Back!! post) this is just another manifestation of that Fed ‘normalcy bias’. In fact, just now (not much more than 2 hours after Rosengren’s speech) in an interview with CNBC’s Steve Liesman, Fed Governor Daniel Tarullo said that in spite of some temporary asset and commodities price gains at times we are not in that kind of economy. This is more of the Fed speaking out of both sides of its mouth, further reinforcing our long-held view that central bankers have gone from ‘inscrutable’ (in the good old days) to ‘insufferable’.
And along the way it is no surprise that the US equities are moving down into the lower supports we suspected might be retested after they failed to remain out above important recent interim congestion Thursday morning prior to the ECB press conference. It also doesn’t help equities that North Korea held another nuclear test early this morning.
“Goldilocks” may still be back. But that seems more so to underpin the equity markets at support than drive a surge to new highs for now. And that is not so much different than what they did on the Fed’s more hawkish views into and after the Jackson Hole Policy Symposium. Of course, it doesn’t make conditions any better that the just released US Wholesale Sales figures missed badly to the downside after other very weak data.
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NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? In that instance the economic factors built up, but the actual crash was deferred into 2008. It is starting to feel this one may be deferred as well.
▪ After reviewing all of the key fundamental factors in Wednesday morning’s Commentary Goldie’s Back! post, we are going to move right into a brief update of the Evolutionary Trend View. The more extensive Market Observations in the lower half of that post remain the same, with all of the key technical trend levels articulated there as well.
EQUITIES
▪ September S&P 500 future resistance is the interim 2,185.00 congestion from mid-late August that was mildly exceeded Thursday morning before the big ECB disappointment. Yet it remains important due to the more major level still being up at the next major weekly Oscillator threshold (MA-41 plus 160) in the 2,210 area. With the market below the lower weekly Oscillator threshold that is up to 2,175-80 this week, all of the lower areas such as 2,155 already vigorously tested this morning remain important.
Should that be violated, next supports are not until the early August 2,141.50 trading low (also weekly MA-13 now) that never quite reached the more prominent 2,120 and 2,105-00 congestion areas. And the US equities will likely set the tone for the other equities.
GOVVIES
▪ The September T-note future had been swinging around the same sort of technical levels as the June contract of late. That alone is very interesting, because the appetite for locked in yields even at these low levels indicates an overall flight to safety. In the case of the June expiration the typical half-point to full-point discount in the second month September future near expiration didn’t exist. In fact, the September contract was trading at a slight premium to the June contract prior to the latter’s expiration.
That is the sort very atypical of ‘flight to safety’ premium that continues to keep yields low in spite of the current more typical discounts in the second months.
After a brief setback it had stalled into the top of the 133-16/134-00 area again in the wake of the Brexit vote, with the 135-16/136-00 area as next historic resistance. While it has stalled a bit on rallies since the selloff into mid-July, it has also continued to hold the 132-00 area with only modest slippage. The further interim support is 131-00 that it has not even managed to test on the current dip, with more major support into 130-00.
While the premium priced European govvies have slipped more aggressively, September Gilt future stalling into next weekly Oscillator resistance in the 132.00 area has only left it back toward the 129.50-130.00 range that it held through all of July into early August.
And the December Bund future discount that has seen it significantly below the premium 167.50-168.50 (tested by the September contract prior to its expiration on Thursday) is still only now slipping below the 164.50 weekly continuation congestion support. The more prominent weekly continuation congestion is down into the 163.50-.00 range the market is now approaching.
The weaker the economic data and the weaker the equities, the more likely it is that the govvies are still at least alright on the selloff. And we also point out the historic tendency we have revisited on many occasions: As long as the second month taking over as front month holds key lower trend support, the overall trend can remain up.
FOREIGN EXCHANGE
▪ The same sort of anomalies between the equities and govvies also goes for the foreign exchange, where the US Dollar Index is only back up near the top of the interim over-under .9500-50 congestion after being temporarily below the .9460 UP Break once again. After being the more active area after Jackson Hole, this looks a bit more subdued compared to the equities and govvies over the past couple of days. We suspect this is also a response to the Fed’s normalcy bias in the face of serial weak economic data in the US this week. As such, we refer back to the Market Observations in the lower section of Wednesday morning’s Commentary Goldie’s Back! post. In spite of the recent modest recovery of the US dollar, not much has changed in this area since Wednesday.
Thanks for your interest.
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