Precipitous and Indiscriminate Selling | Morning Express 05/19/22

Posted: May 19, 2022, 9:11 a.m.

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

S&P, yesterday’s close: Settled at 3922.75, down 162.00

NQ, yesterday’s close: Settled at 11,935.50, down 624.75

Fundamentals

Precipitous and indiscriminate selling returned yesterday, and the S&P gave back its entire three-day rebound. Of course, the failure came right at a critical technical impasse, but the one-two punch of Target-Walmart earnings and Fed Chair Powell’s 3.6% neutral rate comments were too much for markets to withstand. Selling overnight has retested Thursday’s low in both the S&P and NQ. Remember, these levels align with a 20% correction for the S&P and a 50% retracement of the whole pandemic move in the NQ. Whereas the S&P and NQ have not yet made a new swing low, the Dow has, now correcting 16%. The more concentrated, blue chip index has faced steep selling in companies that may have been hideouts to avoid higher beta names. The Dow is a price-weighted index, so the larger the share price, the larger the weighting. Three of the four top for holdings, UNH, HD, and MSFT, were down at least 4% yesterday. What this tells us is the selling has been just that, precipitous and indiscriminate.

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We are also watching credit spreads. In yesterday’s Midday Market Minute, we noted the Treasury complex is responding to weakness and yields are coming in. While this is happening, yields on corporate debt are diverging. Two closely watched ETFs are HYG and JNK. Each did not enjoy Tuesday’s strength in stocks and yesterday they fell sharply to new lows. The lower the price, the higher the yields. This means credit spreads are beginning to blow out. This is one very larger corner of the market that will catch the Federal Reserve’s attention. If they were ever to pivot policy at any point, this could be a leading indicator.

Philly Fed Manufacturing, fresh for May, missed expectations this morning at 2.6 versus 16.0 expected and down from 17.6 in April. However, it did not fall into contraction like the NY Empire State read did on Monday. Initial Jobless Claims came in higher than the new benchmark 200k at 218k, but Continuing Claims trended lower for the sixth straight week.

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NQ (June)

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Crude Oil (July)

Yesterday’s close: Settled at 107.04, down 2.59

FundamentalsCrude Oil slipped sharply this morning on news that China is buying Russian Oil for its strategic reserves. Remember, markets are pricing in less Russian Oil in the market and this theoretically adds some back. The news had more weight given the broader risk-off dynamics and recessionary fears with $4.00 front month Gasoline trading yesterday. Russian Oil is grabbing more headlines this morning as their Energy Minister Novak said production is set to rebound in May. Furthermore, there is belief circulating that EU sanctions will leave the door open for some Russian Oil to be exported. Traders want to keep a pulse on that broader risk-off dynamic and if things improve it is likely to help lift Crude, and vice versa.

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Gold (June) / Silver (July)

Gold, yesterday’s close: Settled at 1815.9, down 3.0

Silver, yesterday’s close: Settled at 21.544, down 0.206

Fundamentals: Gold and Silver are responding to U.S. Dollar weakness and broad Treasury strength. This is the moment in which they must respond, a failure to do so would signal they are acting no more than a simple risk-asset. The Chinese Yuan has rebounded by 0.55% against the U.S. Dollar today and this has encouraged a broader move across the metals complex with Copper and Platinum both rebounding nicely. The last leg this morning came after Philly Fed Manufacturing and Initial Jobless Claims both missed, but surprisingly enough, Copper and Platinum rallied alongside Gold and Silver.

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Silver (July)

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