Place Your Bets

Place your bets.  Equity markets barreled higher yesterday as investors decided that trade issues and tariffs were not so bad, after all.  What we have talked about for so long finally became a reality yesterday as the Dow Jones Industrial Average made a new high close after watching the summer equities rally from the sidelines.  The new high is the first since early January reflecting not only optimism for economic growth but also the fact that investors have finally digested all of the trade issues and believe that their potential effects will not be enough to slow down the train. When it comes to equity markets, it is important to remember that surprises from the unknown are what really cause markets to panic – known facts, good and bad usually have a rather different effect.  Investors’ fear of the unknown regarding trade really held back the Dow Jones for most of the year and once tariffs became a fact, even though they are a drag on the economy, traders came back in for a go.  The S&P 500 powered to new highs yesterday as well and was helped along by Financial stocks.  Investors tend to favor banks when rates are on the rise because high interest implies that banks can earn more in lending and recent moves in the overall market combined with the recent upward shift of the yield curve provided the necessary fuel for financials.  To be fair though, yesterday’s rally in large caps was relatively broad based, with energy being the only lagger as crude oil traded off yesterday following a day in which it rallied into a positive technical position above its 69.99 Fibonacci line.  Both the NASDAQ and the Russell 2000 small caps rallied yesterday as well but are still recovering from the last two weeks of soft trade.  All of the equity indices remain constructive. The Dollar has been weakening as trade fears have ebbed in recent sessions passing through 2 supports levels and ultimately trading down to its 93.54 Fibonacci support line.  The weaker dollar should be good news to the Administration who recognizes that the weak dollar will offset trade-related economic drag as well as provide a better environment for economic growth.  At a certain point however, higher yields on US Treasuries will begin to attract foreign money thus ultimately putting upward pressure on the currency. Remember that foreign sovereign funds must first convert their local currencies to US dollars in order to buy US Treasuries.  And rates they are a risin’.  At least for now.  Ten year rates held their ground yesterday and are sitting around 3.07% just below their 3.12% high and 2 year yields were up to around 2.82%.  The 2/10 yield curve has steepened a bit as the recent rate rally was led by the longer maturities and the swap is at 25.5 basis points as we start today’s session.

Today we get Manufacturing PMI which is expected to come in at 55.0 up from last month’s 54.7.  After a relatively quiet week of releases, next week is a biggie (yes that is actually a word, I looked it up just to make sure) with releases that range from more housing data to consumer confidence to GDP.  The two show stoppers will be the Fed’s Open Market Committee meeting and the Personal Income and Spending numbers (which include the PCE deflator that the Fed loves to watch).  The FOMC is largely expected to raise its fund target by 25 basis points (93% chance of raise) but traders will be looking beyond the rate decision and into the text around it for clues of future raises.  After a lower volume week with little in the way of numbers and some new highs, traders have surely placed their bets on what the next leg of the journey will be and next week will surely test their wills… and egos.  Have a great weekend.

daily chartbook 2018-09-21

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