Stocks fall on increased risk of faster rate hikes
Potential bidding war prompts Disney and 21st Century Fox sell off
China’s official manufacturing index drops the most in 5 years
IEA warnings on US shale production extend WTI decline to a second day
Dollar holds steady ahead of Q4 GDP release
Bill Gates hurts Bitcoin
Key Events
Yesterday, investors switched to risk-off mode after new Federal Reserve Chairman Jerome Powell described a strengthening economy, in which inflation is likely to accelerate. The market raised its bets on the probability that the Fed would add a fourth interest rate hike this year, pushing up expectations for a hike in the fourth quarter to about 50 percent following Powell’s remarks. Odds of rate increases in the second and third quarters ticked up to about 80 percent and 70 percent respectively, while the chances of a boost when the Fed next meets in March remained near 100 percent.
US stocks across the S&P 500, the Dow Jones Industrial Average, the NASDAQ Composite and the Russell 2000 sold off, ending a two-day rally. Treasurys dropped, causing 10-year yields to once again spike above 2.9 percent. However, both the MACD and RSI provided sell signals, with the MACD’s shorter MA falling below the longer MA and the RSI providing a negative divergence, falling in February, against rising yields—as investors sell off current bonds for those with an expected higher yield. The outlook for a higher interest rate increased the value of the dollar.
The S&P 500 declined 1.27 percent, with all sectors deep in the red. The two biggest drags on the index were Real Estate (-2.14 percent) and Consumer Discretionary (2.12 percent). Media firms weighed on the underlying benchmark after Comcast (NASDAQ:CMCSA) joined in a growing trend among US media giants to make a move into the European market. The cable company put forward a $31bn bid for Sky (LON:SKYB), heightening the risk of a bidding war with Disney (NYSE:DIS) and Twenty-First Century Fox (NASDAQ:FOX) and pushing investors to sell shares of both companies.
Technically, the decline is part of a return move toward the flag.
Disney plunged 4.5 percent yesterday, wiping out three days of gains and falling below an uptrend line since February 9, confirmed by the momentum slipping below its uptrend line of the same period. Shares also fell below the 50 dma and 100 dma and found support above the 200 dma.
21st Century Fox dropped 3.27 percent, erasing almost two days of gain upon nearing the resistance of the former price peak of $38.52, posted January 29, potentially forming a double top, to be completed with a decline below the February 9, $33.75 trough.
The sectors posting the smallest losses were Technology and Financials, both falling 1.01 percent. The latter's outperformance comes as banks are expected to see their profits increase on higher rates.
Global Financial Affairs
This morning, the risk-off sentiment continued, as global stocks extended yesterday’s selloff.
It certainly didn’t help that China’s official Manufacturing PMI dropped to 50.3 in February, from 51.3 in January, significantly missing the 51.2 estimate. While any reading above 50 means economic growth is still up, yesterday's data marked the worst plunge in 5 years, bringing the indicator to a 19-month low.
The Shanghai Composite dropped 1 percent, extending its selloff to a second day for an accumulated loss of 2.15 percent. The Hang Seng declined 1.3 percent, bringing its two-day selloff to 2.1 percent.
The Hang Seng China Enterprise Index, which tracks Chinese stocks traded in Hong Kong, is the worst performing major benchmark worldwide this month, down almost 9 percent. This second-day decline is eyeing the February 9 low, when the index was down almost at 14 percent.
Japanese equities on the TOPIX fell 1.2 percent, potentially forming a bearish Rising Flag, whose bottom is being tested for a downside breakout.
European stocks mirrored Asian counterparts, which in turn took their cues from yesterday's US market performance. The STOXX Europe 600 opened 0.3 percent lower and regained less than 0.1 percent in a struggle to climb back up. Miners led the decline, dragging down most other industries.
After Powell's speech, followed by China’s manufacturing data, investors are now bracing for fourth-quarter US GDP data, due at 8:30 EST, which is expected to drop to 2.5 percent from 2.6 percent in the previous quarter. The significance of this particular GDP reading was amplified by Powell's hints of a potential fourth rate hike in 2018, after he said his personal economic outlook has improved since December.
Both US and European bond investors have been selling off in recent months on the increased outlook for a faster pace of rate hikes. This pushed US 10-year yields to a four-year high and turned them into the catalyst for the worst equity selloff in years. But the current market environment is a test for equity investors too. After having become cozy with the most accommodative monetary policy on record, will they be able to sustain the shift to investing in the “real world” without added liquidity?
On Sunday we pointed out a contradiction in market structure and narrative. First, equities sold off severely on rising yields, suggesting a faster pace of policy tightening. Then, equities rebounded on the outlook of a strengthening economy, which supports higher rates more quickly—the very fear that caused the selloff in the first place.
Sure enough, equities rebounded with a fury, despite yields at a four-year high. We suggested that perhaps investors have shifted their focus from fear regarding the impact of higher rates to a conviction that economic environment is supportive for company profits and stock prices. Finally, we warned that we are likely to see seesawing market narratives, which could result in violent price swings...and here we are.
Elsewhere, crude oil extended its slide as the International Energy Agency warned about seemingly unstoppable US shale production. Technically, the price found resistance at the January-February consolidation.
Forex remains flat, as the dollar steadied, while USD traders await US GDP results beneath the neckline of a double-bottom.
Bill Gates, founder of Microsoft (NASDAQ:MSFT) and the second wealthiest man in the world, joined the recent crypto debate yesterday by saying that governments' ability to track money laundering or terrorist funding “is a good thing.” Participating in a Reddit “Ask Me Anything” session, he also said:
“Right now cryptocurrencies are used for buying fentanyl and other drugs, so it is a rare technology that has caused deaths in a fairly direct way. I think the speculative wave around ICOs and cryptocurrencies is super risky for those who go long."
Technically, BTC price fell back toward $10,500, from above $11,000, forming a shooting star, suggesting it would retreat into its falling channel.
Up Ahead
Fed Chairman Powell testifies before the Senate Banking Committee on Thursday. Other Fed speakers this week are Neel Kashkari and Bill Dudley.
U.S. GDP and personal consumption data on Wednesday may provide more clues about the state of the world’s biggest economy.
In the euro region, investors will be watching consumer price data on Wednesday, followed by manufacturing and jobs numbers on Thursday.
The European Union will publish a draft Brexit treaty on Wednesday and U.K. Prime Minister Theresa May delivers a speech Friday on Britain’s relationship with the European Union.
Japan capital spending is out on Thursday.
Market Moves
Stocks
The STOXX Europe 600 Index dipped 0.2 percent as of 9:11 a.m. London time 4:11 EST.
The UK’s FTSE 100 Index fell 0.3 percent.
Germany’s DAX Index fell 0.3 percent.
S&P 500 Futures gained 0.2 percent.
The MSCI AC Asia Pacific Index fell 1.1 percent.
Japan’s TOPIX fell 1.2 percent, Hong Kong’s Hang Seng dropped 1.6 percent, South Korea’s KOSPI declined 1.2 percent.
Australia’s S&P/ASX 200 Index declined 0.7 percent.
Currencies
The dollar index increased 0.1 percent to the highest in almost three weeks.
The euro decreased 0.2 percent to $1.2203, the weakest in six weeks.
The British pound fell 0.2 percent to $1.3886, the weakest in more than two weeks.
The Japanese yen gained 0.1 percent to 107.22 per dollar.
Bonds
The yield on 10-year Treasuries rose one basis point to 2.90 percent.
Germany’s 10-year yield dipped one basis point to 0.68 percent.
Britain’s 10-year yield decreased one basis point to 1.561 percent.
Japan’s 10-year yield rose one basis point to 0.05 percent.
Commodities
WTI crude fell 0.2 percent to $62.88 a barrel.
Gold dipped 0.1 percent to $1,317.51 an ounce, the lowest in almost three weeks.