We're at the Mercy of Hot Prints and Yield Spikes: Taking Stock

(Bloomberg) -- S&P futures are flattish and the 10-year yield is holding ~3.20% ahead of the jobs data, where it seems like everyone is expecting a much higher print than the survey.

The current figure on the WHIS terminal screen is 209k versus the estimate 185k and a forecast range of 125k to 245k (see our preview). And now that yield-watching is a favorite pastime of equities traders, it might be the hourly wage figures that could get all the attention if they come in hot again; the consensus for today’s number is 0.3% M/m, whereas the prior month was 0.4% versus an estimated 0.2%.

If rates react positively to the data, or even if they don’t budge, I’d have to think chances are good that the banks will continue to be propped up by traders (BKX is up 2.3% in the past two days). Tech is probably the bigger question mark after Thursday’s brutality that spilled over into the global markets -- Chinese computer maker Lenovo sank as much as 23% at one point, the MSCI Asia Pacific Info Tech index fell to its lowest since July 2017, while European semiconductor stocks fell in unison.

It also looks like we’re going to get a Senate procedural vote on the Kavanaugh confirmation at 10:30am today ahead of a final vote Saturday. The Kavanaugh circus, while not the market mover that some had expected, remains a very hot topic that should keep the newsreels spinning this weekend depending on the outcome. Kavanaugh, who wrote an op-ed in the WSJ last night admitting he "might have been too emotional at times" last Thursday, is inching closer to the confirmation, if you go by what the betting sites are projecting: PredictIt has 79c yes vs 74c yesterday and 66c earlier in the week.

About Yesterday’s Sell-Off

Every sell-off that we’ve seen this week hasn’t been able to be pinned on one single concrete reason. The difference with the action on Thursday was that the pressure in the tape started immediately at the open and lasted for most of the session, while the other three days seemingly had a big sell program that kicked in with around an hour left prior to the closing bell.

Traders had a mix of reasons for yesterday’s risk-off move, which saw the VIX spike the most since the February meltdown and the bull market winners (FAANGs, the semiconductors, consumer discretionary) pull back in droves:

  • "Rates" --> The selloff in bonds that sparked a violent upswing in the 10-year yield on Wednesday didn’t dissipate in the slightest on Thursday, making market participants assume that 3.20% or higher could be the new normal; the corresponding strength in the banks stocks corroborates the market’s focus on the bond selloff
  • "Trade" --> The U.S.-China trade situation appeared to deteriorate in sharp fashion almost overnight, between Pence (who usually keeps a low profile) accusing the Chinese of meddling in the election process and our Businessweek scoop about how China used a tiny chip in a hack that infiltrated several top U.S. companies
  • "Emerging Markets" --> Long a concern for the macro investors, but one cannot ignore the persistent selling in the EEM, down 2.5% for its worst day in over a month, and the Turkey ETF TUR, which plunged 5.8% for its biggest shellacking since the mid-August crisis
  • "Technicals" --> Support levels acted as magnets for the S&P 500, which slipped below the 2,900 mark only to recover and close two points above it, and the QQQs, which ended the day smack dab at the 50-day moving average (see chart below)
We're at the Mercy of Hot Prints and Yield Spikes: Taking Stock

On Tap for Next Week

Next week is the calm before the storm, and by storm I mean third-quarter earnings season, which kicks off with the banks next Friday -- and just in time for Wall Street to warm up to that sector with 10-year yields surging to their highest level in more than seven years, or potentially get burned again (see Thursday’s Taking Stock) waiting for the big BKX breakout.

The calm begins with the Columbus Day holiday on Monday, which, alas, is not a holiday for the equities folks, but ’tis for fixed income traders (except for those chained to their desks to monitor bond futures, that is). Corporate catalysts are virtually non-existent, but it will be interesting to see what China’s stock market does in its first day of trading in a week.

The following three days is a mix of eco data (PPI/CPI), earnings (Fastenal, Delta, Walgreens, and European luxury goods giant LVMH), analyst meetings (JM Smucker, Sanderson Farms, and cybersecurity name Okta) and some hedge-fund speak at Jim Grant’s conference, where Ackman is scheduled to present a new idea and Druckenmiller may expound on his theory about the next financial crisis.

And then there’s Friday, where comments from Jamie Dimon, Mike Corbat, and Tim Sloan may set the tone for the market for the near term -- unless yields do first.

Notes From the Sell Side

It’s very quiet in the research departments today, so quiet that even the Tesla analysts haven’t opined on what Musk’s latest tweet escapades mean going forward -- my guess is everyone is just too exhausted by his antics, and a negative stock reaction of ~2.5% is child’s play versus the roller coaster that the stock has been through since the "funding secured" tweet.

Some of the bigger calls are BMO upgrading Eli Lilly to an outperform with a Street-high price target of $130 ("LY’176 has the potential to significantly improve Lilly’s growth prospects after 2022"), Piper calling for a buying opportunity in the restaurants space as investors shift perspective to the eventual expansion cycle (upgrades Fiesta Restaurant and BJ’s Restaurants), and JPMorgan removing its overweight ratings on both HP Inc. (limited catalyst now with the analyst meeting out of the way) and Eastman Chemical (raw material trends to pressure year-ahead results).

Tick-by-Tick Guide to Today’s Actionable Events

  • 8:00am -- BDSI investor day
  • 8:00am -- CALA R&D day
  • 8:10am -- PAYX CEO Marty Mucci on Bloomberg TV
  • 8:30am -- Nonfarm Payrolls, Unemployment Rate, Hourly Earnings, Trade Balance
  • 9:35am -- Kudlow on Bloomberg TV
  • 10:15am -- Fed’s Williams on Bloomberg TV
  • 10:30am -- Kavanaugh procedural vote in the Senate
  • 11:00am -- Bill Gross on Bloomberg TV
  • 12:40pm -- Fed’s Bostic speaks at financial literacy conference
  • 2:00pm -- FIZZ annual meeting
  • 3:00pm -- Consumer Credit

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