Breaking Out
Macro Perspectives
Stocks in the US closed lower on Tuesday, as investors scaled back their expectations that the Federal Reserve would ease monetary policy in June, after fresh data continued to show that the US economy remains strong.
The S&P 500 fell 0.7%, the Dow dropped 396 points, and the Nasdaq slid 0.9%.
Additionally, factory orders exceeded expectations, echoing the prior day's ISM manufacturing report indicating growth after 18 months of decline.
The healthcare sector lagged following a 3.7% year over year increase in government payments for Medicare Advantage, matching previous proposals.
This led to declines in stocks like UnitedHealth (-6.3%), Elevance Health (-3.2%), and CVS Health (-7.2%).
We've started the second quarter of the year with a move up in global government bond yields, up in commodity prices, and down in stocks.
This start of the second quarter coincides with the beginning of the new fiscal year in Japan, where the Bank of Japan recently "began the end" of its role as the global liquidity backstop/support to Western world economies:
They raised rates, ending negative interest rates in Japan.Â
They ended ETF purchases (exchange traded funds). This was the Japanese central banks explicit involvement in, not just Japanese equity markets, but global equity markets - via ETFs.
They ended yield curve control - by the design of that policy, in order to defend the upper limit of the 10-year Japanese government bond yield, they had the license to buy Japanese bonds in unlimited amounts (which pushed bond yields down). Those bonds were bought with freshly printed yen, which finds its way into foreign asset markets (like Western world government bond and stock markets).
With the above in mind, as we've also discussed in recent weeks, this move by the Bank of Japan may afford global central banks (led by the Fed) less leeway to hold rates too high, for too long - with the risk of global liquidity swinging in the direction of too tight (i.e. a liquidity shock). That (risk) includes the potential for rising government bond yields, which we are getting - the 10-year yield has jumped as much as 20 basis points to open the quarter …
The pop in rates is putting pressure on stocks. S&P futures are testing this trendline, after a 29% run-up from the late October lows (when Jerome Powell signalled the end of the tightening cycle) ...
Add to the trendline test, yesterday the S&P futures put in a technical reversal signal (an outside day). So did the Russell 2000. So did the Dow. And the German stock market (DAX futures) did the same.
This looks like a set up for some more weakness in stocks, as we head into this Friday's big jobs report. Remember, the Fed is watching the job market "carefully" for "cracks" as a condition to start the easing cycle.
Meanwhile, commodities are breaking out. Is it demand driven, given the outlook on the technology revolution? Or are commodities (finally) repricing against fiat currencies, now that the BOJ has signalled the final exit from the global central bank money printing era, which has delivered record (and unsustainable) global government debt.
Maybe a bit of both.
The chart below shows silver, copper and crude - all of which are firmly in an uptrend with upward momentum.
Gold is making new record highs by the day.