Incomprehensible Tragedy Stultifies Biden In His Finest Hour And Sours The Mood Across Markets: The Action For October 18, 2023
Objectivity makes its mark in the Times this morning as they attempt to show all sides of many issues and carefully eschew apportioning blame for the terrible geopolitical and domestic situation. But markets react rather than watch from the sidelines and conflicting beliefs mirror conflicting data across the global economy, leading to a sour mood on Global Wall Street. The S&P 500 likely falls over the near term, as a wolf’s basket of negative trends give the bears ammunition to try retesting the lows from earlier in the month. Unless earnings guidance turns very positive soon they will get their chance by Halloween, after which a ferocious bull run likes emerges.
The bears have control for the moment as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
Inflation Expectations: Investors expect rising inflation over the coming years, implying higher interest rates to come, potentially bearish for equities.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, potentially bearish for equities.
BTP-Bund Spread Of Italian & German Bonds: Italian default risk and corresponding crisis for the Euro are heightened, which can destabilize Europe and is bad for global growth.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and falling prices signal weak global demand, which is usually bad for equities.
Gold Prices: Rising gold prices reflect higher potential inflation but less restrictive interest rates, and concerns about geopolitical risks, which is on net bad for equities.
Geopolitical Issues: Developments around Israel and the broader Middle East are a clear negative for equities.
Based on the action yesterday and overnight there are several factors that will eventually flip the markets around, including:
Volatility Risk Premium: The VRP signals moderate upside as the VIX is muted relative to likely moves in actual volatility.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps 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.