Manchin’s Move Could Waylay Biden And The Bond Market: The Action For November 10, 2023
Should Joe Manchin follow thru on his threat to run on a 3rd Party ticket not only would the Democrats likely lose the Senate but possibly the Presidency, setting us up for GOP tax cuts that pile onto Biden’s runaway spending. The very thought of that would spook the bond market and send stocks cratering as long rates surged to 6%. For once political decisions are desperately important to investors and the bulls now need Biden to muddle through with no mistakes to keep the status quo going. Uncertainty over the political dynamic is one more reason the market is now in zigzag mode, with this week’s upmoves wiped out and more to come before the bulls can regain control. The S&P 500 likely rises today before falling next week and then rising again as Thanksgiving approaches.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
MOVE Index Of Bond Volatility: Fixed income volatility is steady and implies modest inflation expectations and stable interest rates to come, potentially bullish for equities and the global economy.
Inflation Expectations: Investors expect lower inflation over the coming years, implying lower interest rates to come, potentially bullish for equities.
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
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.
Gold Prices: Falling gold prices reflect positive developments in inflation but also restrictive interest rates, and less fear about geopolitical risks, which is on net good for equities.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
Based on the action yesterday and overnight there are some risks the bulls need to climb over, setting up a for a downmove next week:
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
Volatility of Volatility & Put/Call SKEW Metrics: Derivatives trading in volatility is heightened and signals that active investors are concerned equities are going lower.
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 $.
Geopolitical Issues: Developments around the Middle East are a clear negative 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.