US equities in Correction territory. Where does the Fed stand in this?

Its officially correction territory in the US equity markets, while the rest of the world experiences a downtrend of their own. S&P 500 entered the red zone for the year this past week and is continuing to show signs of weakness while the VIX pressed above 25 and gold is surging higher. Volume on moves higher was weak and buying was absorbed in equities this past week.

Earnings came out this week on several highly anticipated stocks, most of which missed Q3 expectations to some degree or another, mainly 2019 targets.

Midterm elections are in about a week and a half’s time (November 6th 2018) which has some investors concerned especially with the drop experienced in this gloomy Red October. Causing 10-year yields to go back to fill the gap created by Fed Chair Powell’s “far from neutral” rate statement.

On another note it seems that crude oil has found some support, and is trying to make a move higher as it hovers around its 200-day moving average.

A number of Fed speakers hit the wire this week, with some rather interesting news, despite weak housing numbers out of the US it seems that a lot of the Doveish members of the Fed are singing a Hawkish song. A lot of the Fed projects steady increases in rates.

Mario Draghi from the ECB left rates unchanged, meeting expectations. He does not plan to alter the ECB forecast just yet, while the Italian 2019 remained the focal point in Europe. Next to Italy’s budget was Brexit negotiations which remained unresolved, bringing about further market uncertainty.

China and the US continue to butt heads over trade talks, as the Trump administration made it clear that there were no intentions on restarting their talks with China. That is until China makes a promise to address economic concerns along with technological data breaching. This saw the Yuan get hit into lows that haven’t been seen since 2017. Despite Chinese officials claiming they are not actively devaluing the currency.

Tesla rose this week as the company moved up its earnings report. The 12% jump in the stock was lead by its first quarterly profit, and forecast of further growth. Google and Amazon beat on earnings but missed on revenue which saw both giants tumble. Microsoft was bid up on strong earnings and a strong future forecast.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks down 6.79%
  • Technology down 3.54%
  • Financial down 5.43%
  • Retail down 0.84%
  • Utilities down 1.86%

Overview of key markets last week (bottom chart):

  • Crude oil down 2.31%
  • S&P500 down 3.46%
  • Silver was up 0.38%
  • Gold was up 0.49%
  • US dollar up 0.66%

Red October.

What an October 2018 we’ve had, giving back all of the gains the S&P 500 made in 2018 on October 24th. A slight rebound came in to close out the week, but whats behind this sell off? US equities down around 10% on average, but they’re not alone. The rest of the world is having difficulties as well. Where will the downside end, will the Fed save the markets?

This could be just a retracement or it could be the effects of rate hikes, slower growth around the world, and trade wars attacking the economy. But wait, things seemed so rosy, unemployment numbers are at record lows, economic growth is strong (3.4% expected in the Q3) and fear is at lows. Albeit, this seems great, but talks of recession still muddy the waters.

The numbers that support a strong economy are estimates based on current data, which could be revised in the future, whether its over the next year, or even more. In the past, real economic growth jumped higher immediately before a recession hit. So there were no real signs of a recession in the eyes of analysts right before they happened because the economy was “growing”.  For example during the 2008-09 crash, there were no signs of recession by anyone in 2007, as the economy looked healthy and alive. But it wasn’t until the revised data that came out a year after the spill happened that the signs were prominently shown. In 2007 the stock market and yield curve data showed signs of a recession 14-months prior to the matter but they were not acknowledged. This time around there have been warnings from both the stock market and yield curves. Not to say the recession is around the corner, prepare yourselves for the worst, but there are some warnings signs of “economic stress” rather than “recession”.

Image result for US gdp growth before recession

Spike in GDP before a recession.

These warning signs are, increase in rate, with a less accommodating policy view, while rates of consumption weaken. (The Fed is hiking rates, while reducing liquidity). The yield spreads are falling apart, debts levels on both the consumer level and the government level are rising fast. Housing numbers and automobile numbers are slumping. Finally, tariffs and oil price volatility are causing additional tax on consumption and production.

As there are signs of turmoil, this is a “when” type of scenario and less of an “if” type. Meaning it is unclear when the “Everything” bubble will unravel but it is a very high possibility. Stay tuned for an upcoming blog post on the overvaluation of the stock market, set to come out in the coming weeks.


Weekly Economic Calendar

A lot of high impact events are set to come out this coming week. The events are from all over the world, not concentrated out of the US which will bring a lot of opportunity to Forex traders who love trading news.

Monday-No news

Tuesday- News out of the US kicks off the trading day, Consumer Confidence numbers. Governor Poloz from the BOC comes on in the afternoon. The day ends in news out of Australia (CPI, Trimmed mean CPI) and Japan. Japan has Monetary Policy news, and BOJ outlook report which should be watched closely.

Wednesday- Tentative news out of the BOJ, GDP numbers out of Canada, SNB Chairman Jordan out of Switzerland and BOC’s Poloz speaks again. Watch the Canadian dollar, and the Swiss Franc.

Thursday-The day kicks off with a lot of news out of the UK. This should be watched closely, and so should the Pound. Manufacturing PMI, BOE inflation report, MPC Official Bank Rate Votes, Monetary Policy, Bank rate and BOE Governor Carney speaks. All out of the UK. ISM numbers out of the US. ANZ business confidence out of New Zealand and Retail numbers out of Australia to wrap up the day.

Friday-Employment numbers out of Canada and the United States, just what we’ve been waiting for.



That’s all for this week, good luck and good trading. Manage your risk and trade like a TRADEPRO.


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