When Does The Carnage End? | Morning Express 05/10/22

Posted: May 10, 2022, 8:55 a.m.

E-mini S&P (June) / NQ (June)

S&P, yesterday’s close: Settled at 3987.50, down 132.00

NQ, yesterday’s close: Settled at 12,193.75, down 502.00

Fundamentals: The carnage across risk assets resumed Monday. The S&P covered the gap associated with its April 1, 2021 breakout, settling with “3” handle, and the NQ traded to an 18-month low. The selling has now left no stone unturned. High-multiple growth has been bludgeoned for months, but the indiscriminate selling in recent days speaks to a broader dynamic. Growth names that previously held construction or clung to a floor were not immune. Energy has outperformed since November 2020. Yesterday, the sector had its worst day since June 11, 2020; the XLE lost 8.3% versus 9.4% then. Also, such carnage is to be expected across the high beta crypto space amid risk-off volatility, and it may have only been a matter of time before a stablecoin became unhinged. That day came yesterday when Terra (UST) fell to a low of 0.616 on the Dollar (Coinbase). For those of you who are unfamiliar with a stablecoin, it is supposed to be pegged to $1.00 and act as a reduced risk asset. This type of stress across markets speaks volumes to not only tightening financial conditions and the end of easy money policy, but of forced selling. After being a market participant for two decades, you gain a sense of market dynamics. The liquidation over the last three trading sessions may have started with some institutions taking down exposure, but it only ends when there is blood in the streets. Yesterday may have been that day.

With the S&P trading nearly 20% from its high and down 7% in three days, we find it hard to believe anyone would willingly sell today, ahead of tomorrow’s CPI. This paves the way for a consolidation higher.

We find it encouraging that Treasuries responded to yesterday’s risk-off tone. In fact, both the U.S. 5-and 10-year futures had outside bullish technical days. The yield on the 10-year has come off its high of 3.203% yesterday and is below 3% this morning. Simply, the fact the Treasury market is getting bid signals the market’s plumbing is being restored. Additionally, Bill Baruch noted in yesterday’s Midday Market Minute that Copper gave us a signal last Thursday morning. It pulled off its overnight high by 10 cents within 2 hours of Europe being open and never looked back. Yesterday, it rebounded off a seven-month low by 8 cents into the afternoon and has held ground well into this morning.

With all of this said, it will be Federal Reserve speakers who can either confirm or deny today’s improvements with their tone. New York Fed President Williams said he expects PCE inflation to fall to nearly 4% this year and to around 2.5% next year. Atlanta Fed President Bostic’s comments should be hitting the tape before the opening bell. We then look to Minneapolis Fed President Kashkari and the pivotal Fed Governor Waller at noon CT, before Cleveland Fed President Mester at 2:00 pm CT. For the Fed’s June meeting, the odds have flipped to a 50-basis point hike with a 90% probability, the other 10% being 75-bps.

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