Stocks ran into a wall following an initial positive reaction to yesterday’s Fed statement, says Bill Baruch President of BlueLineFutures.com.
E-mini S&P (ESM)
Yesterday’s close: Settled at 2923, down 25.50
Fundamentals: Equity markets took a swift shot to the gut at the conclusion of Fed Chair Powell’s press conference. The S&P 500 lost 1% into the electronic close and both it and the NQ finished at major three-star supports. Did the Fed take a hawkish turn and reinvigorate odds of a rate hike this year or more disturbingly, say they will unwind their balance sheet past September? Certainly not. We noted here yesterday morning, expectations were overly dovish and in their own words they reminded anyone who wanted to listen that the economy avoided a recession and is at the onset of a seasonally bullish time of year. A slow first quarter is nothing new, but bloated inventories or not, 3.2% is far from slow. U.S. benchmarks held ground and ticked up immediately after the statement gave an upbeat synopsis on growth and pointed to inflation below their target. It was Fed Chair Powell who was the catalyst, in reference to that seasonally bullish time of year, he called the slow inflation transitory. If this is the case, and they expect inflation to pick up, the heavy odds favoring a rate cut in 2019 need to dissipate. This is what we called for in our FX Rundown video last night and this is exactly what we are seeing this morning. The CME’s FedWatch Tool now shows a 47.7% probability the Fed leaves rates unchanged this year, up about 10% from yesterday, with the rest of that pie favoring a cut.
Considering the volatility prior to Apple’s (AAPL) earnings Tuesday, Treasury prices slipping hard on Powell’s comments and the sharp reversal in the dollar, it was clear at 1:45 pm CT yesterday that equity prices were a lagging indicator and were due to come in. We noted how this type of action would be likely upon such a scenario here and in our Midday Market Minute and that is exactly how we positioned with clients ahead of the last hour. If the Fed rakes in the odds of a rate cut, funds were highly likely to trim their unfettered long risk. So, what happens next? We find that answer much more technical in nature.
Nonfarm Productivity beat this morning, but Unit Labor Costs missed. ISM NY Business Conditions are due at 8:45 am CT and Factory Orders are out at 9:00 am CT. Remember, Nonfarm Payroll is tomorrow along with ISM Non-Manufacturing.
Technicals: It is important to note that yesterday’s weakness was not immediate; the NQ struggled at a lower high through the session and the S&P 500 failed to retest a new record that was set overnight. The market profile at these levels clearly became exhausted through the entire session. Once first layers of support, 2944.75-2947 in the S&P and 7823.25-7833.75 in the NQ, gave way late the door was open for the bears.
Crude Oil (CLM)
Yesterday’s close: $63.62
Fundamentals: Crude oil is under immense pressure this morning after failing to hold Tuesday’s bounce. EIA data yesterday showed a bearish picture with a build of 9.9 million barrels of crude and an estimated production increase of 100,000 bpd to a new record. Making the tape heavier at the onset of the U.S removing waivers on importing Iranian oil are first doubts that Iranian oil will be off the market and a Wall Street Journal report that the U.S is pressuring Saudi Arabia to restart production in a field shared by the two and Kuwait. This could add 500,000 bpd. All in all, the broader risk environment is coming in after the Fed meeting yesterday, but this was something that could be seen from Copper losing 10¢ ahead of the Fed. All things considered; we must go outright Neutral until the landscape shows further clarity.
Gold (GCM)
Yesterday’s close: Settled at $1,284.2, down 1.5
Fundamentals: Gold is down sharply today but nearly half of it came post-settlement yesterday on the heels of less-dovish comments from Fed Chair Powell. He pointed to inflation being transitory, which is working to slightly price-out rate cut odds this year. The dollar has strengthened and Treasury prices along with gold have taken a shot to the gut. Tomorrow brings a crucial Nonfarm Payroll number for gold, one that could save or break the metal. But first, we look Factory Orders due at 9:00 am CT today.
Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com