The Rebound Erodes with Corporate Profits | Morning Express 05/18/22
Posted: May 18, 2022, 9:01 a.m.
E-mini S&P (June) / NQ (June)
S&P, yesterday’s close: Settled at 4084.75, up 80.00
NQ, yesterday’s close: Settled at 12,560.25, up 315.50
Fundamentals: U.S. equity benchmarks are slipping from yesterday’s exuberant closing levels. There was a sense of negativity ahead of Fed Chair Powell’s afternoon comments, that he would squash the rally. He certainly did not set out to be supportive with comments such as, “right now, it feels like the natural (neutral) rate is well above 3.6%” and that “a soft landing will be challenging”. The neutral rate is becoming a hot topic among Fed committee members. Simply, it is the rate in which policy is neither accommodative nor restrictive. Minneapolis Fed President Kashkari pointed to a neutral rate of 2.5%, and this arguably brought supportive tailwinds. Although Powell’s 3.6% was inferred as hawkish, equity benchmarks rallied into the close because none of his comments were seen as a true surprise. Given market participants’ negativity ahead of his comments, this paved the way for a relief rally of sorts. The Chair confirmed he is eyeing 50-basis hikes in both June and July; the probability of such for June rose from 86.2% to 91.3%. However, the yield of the 10-year Note could not ignore the overall hawkishness and finished up 10-basis points on the session to 2.995%.
This morning’s soft tape comes after price action stalled to regain 4100. Many are watching this critical level as a battleground given it being established as a hard low in February and as a monumental gamma balancing point ahead of Friday’s Week 3 Option Expiration. Despite these positioning dynamics, the leader to the downside was Target. The company’s stock has plunged by more than 20% after missing earnings by about 50% at $2.16 versus $3.06 expected. The company cited supply chain problems, higher fuel costs and less discretionary spending. Revenues did beat, however, this exudes inflation and the higher cost of doing business in this environment. This comes a day after Walmart missed and fell by 11.4% in its worst trading day since 1987. Lowe’s is also down about 3% after beating earnings this morning but missing on revenues. Lowe’s leans on the spring gardening season to maximize the end of the first quarter revenues and cooler weather certainly played a role in slowing the company. Home Depot beat yesterday, showing a strong quarter, but was whipsawed by Walmart and broader market angst to muscle out a gain of only 1.68%. Upon Target’s miss the S&P fell from a high of 4077, just before the report, and along with Walmart, the two have certainly set a tone.
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NQ (June)
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Crude Oil (July)
Yesterday’s close: Settled at 109.63, down 2.19
Fundamentals: Options on the June contract expired yesterday. Also, Open Interest and Volume have decisively moved to July. The private API survey, released after the bell yesterday, showed massive surprise draws and brought very bullish tailwinds overnight. They printed -2.445 mb Crude, -5.102 mb Gasoline, and +1.075 mb Distillates, while inventories at Cushing drew 3.071 mb. Analysts’ expectations for today’s official report are for +1.383 mb Crude, -1.333 mb Gasoline, and -0.80 mb Distillates. If such inventories at Cushing are confirmed than half the rebound from March’s low would disappear. Inventories for the prior week, released last Wednesday, surged by 8.487 mb because of the SPR release and a lack of Exports. If last night’s API data is confirmed, it would truly show how tight the market is and we find this very bullish.
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Gold (June) / Silver (July)
Gold, yesterday’s close: Settled at 1818.9, up 4.9
Silver, yesterday’s close: Settled at 21.75, up 0.199
Fundamentals: The rebound in Gold and Silver is dissipating just as quick as it started. The retest to 3.0% in the U.S. 10-year Note has clearly weighed on the precious metals complex along with U.S. Dollar strength against the Chinese Yuan. At the end of the day, not much has changed, but we can clearly see what can jumpstart the complex and it is exactly what we have been pointing to. Much of the damage in Gold in recent weeks is due to Chinese Yuan weakness while rates elevated. The complex does not seem to care about eroding corporate growth and fear of inflation, as seen through Walmart and Target, but in due time we believe Gold will. Now, it is up to the technical landscape to hold and provide a constructive path to recovery.
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