How 'Transitory' Is 'Transitory' & Can Stocks Fall Further?

Very good morning to you. It's Thursday, 13th of May. Gonna run you through what's been going on from the biggest slump in the S&P 500 yesterday since February. Gonna talk a little bit about the rationale there. The theme definitely in markets right now is how transitory is transitory. We're also going to talk about Bitcoin, down over 15% overnight. Tweet from none other than the man himself, Elon Musk. And then our outlook for the day ahead, we've got US jobless claims, uh, we've got PPI numbers coming out the States this afternoon with a couple of key Fed speakers as well coming in the context of the big push in inflation that we saw materialize yesterday. So starting with that, this of course was the heat map on the S&P, so pretty much red across the board. Again, one of the biggest declines that we've seen now in a couple of months. For US equities. Technology once again leading the decline, as you can see on the board there. Some of the mega-cap tech names— Microsoft, Apple, Google, Amazon— down around 2.25% to 3%. Tesla as well down 4.4%. Another bad day, bad week, uh, for them overall. And certainly Musk back in the headlines after his tweet on Bitcoin last night. A couple of things that I wanted to talk about on here, and then we'll have a run through some of the charts from a technical perspective. So a couple of key levels to have a look out for. And one of the things here then is this idea of who's right at the moment. Are the markets right or is the Fed right in terms of its belief about how temporary of nature or not this inflation shock is going to be? And can the Fed afford to sit on the sidelines, hold the line with the belief that after this kind of phase of reopening in the months ahead, the inflationary pressures then start to decline as the world economy starts to function back to a degree of normality. Couple of things to be aware of then on this front. First of all, just how bad was the inflation reading yesterday? Well, yeah, definitely a shocker on the upside, definitely breached the upper bound of even the most kind of hawkish reading on the street or optimistic as far as how high inflation was going to be. And as you can see here now, inflation on a year-on-year basis tracking the US, the highest it's been since 2008. So getting over that peak and hump in, in around 2011. Again, the argument is, you know, transitory US inflation pressure seen lasting for more months. We have seen money markets now bring forward the expectations on the timing of the first Fed rate hike to the end of 2022. And remember, The Fed's kind of overall outlook is way different to that, in a much more dovish timeline through 2023. So definitely I think the Fed are going to be updating this in June, of course. But the question is, will there be any, you know, how aggressive are they going to be? Is there any commentary that they could make at the moment that could reflect from what we've seen here with this, how quickly inflation is picking up? As I said though, a couple of things to be aware of before we start jumping the gun. Uh, one is that, um, Federal Reserve Atlanta Fed President Bostic said yesterday that he expects bouts of volatility around inflation through to September. So one of the things here, and the reason why these timings are quite key, is the Fed have adopted this average inflation targeting, AIT, strategy, which gives them flexibility then for this impending increased volatility through this unprecedented pandemic reopening period that we're going through. And so rather than be restrained by a 2% target, they've said, but unqualified then the kind of parameters around it, that we can let inflation run hot for a period of time. We just don't know what that period of time is. So hence these, these timings are quite key to give us a bit of a roadmap. And so Atlanta Fed President Bostic said yesterday expects bouts of volatility around inflation through to September. So perhaps then many more months here that the Fed are going to have to keep their composure on the belief then that it's going to be noisy up until that point, until we actually get to be able to see if there's any underlying true consistent price pressures that would warrant more faster tightening. Uh, inside the White House, which is what this article talks about, is aides see the transitory period of inflation lasting potentially through the end of the year. That was according to an anonymous source at the White House yesterday as well. So quite interesting to hit— to see this then, that definitely the timings of the transitory nature— and the Fed and Brainard was saying this early in the week— is they have to see more consistency beyond this initial, uh, kind of phase that we're in at the moment. But it could be then that they've— that we've got to hold that view through some pretty tricky months as we go through this, this inflation surge at the moment. And how far are they willing to let it go up before then having to change course or not? In addition, I saw an interesting note out of Deutsche Bank analysts last night. They said, quote, in general, the Fed won't be able to get a sense of what the new normal looks like until at least the fall. So in line with kind of Bostic, because of the need to assess school openings. Add it all up, Deutsche said that it would— it would say that it will be at least 6 months for the Fed to get a sense of whether inflation pressures are transitory, and more likely 12 months— 12— to make a firm conclusion in that respect. My final exhibit, if you like, to kind of round off this discussion is this. This was kind of, you know, under, under the bonnet, so to speak, is the fact that the unprecedented surge in prices for used cars— this was the thing that came out after the report when you can't drill down into the numbers— and the surge in prices for used cars was the biggest contributing factor to the surprise jump in US inflation last month. And of course, if you think about it, this comes as manufacturers have really struggled. We're going through a supply shortage of chips, which is also as well impeding some of that manufacturing process. And that figure on used cars accounted for more than a third of the 0.8% increase in Consumer Price Index yesterday. And most analysts, as you would imagine then, say the increase in car prices like the spike in inflation as a whole, will be transitory because undoubtedly manufacturing facilities who produce cars— production will start to ramp up and demand subsequently will start to subside on people who have been reticent to kind of get on public transport through the pandemic and buying used cars. So that pressure in that particular area will start to fade over time. So when you put all of this together Certainly, you know, we look at the markets yesterday and this week as a whole, and sure, the market is reacting to this idea about inflation might be a little bit more sticky than perhaps the Fed have led us to believe. I still hold the view that the Fed will not react to the situation that is happening at the moment. You would have to see in the months ahead really persistent and significant increases in a lot of these inflation data points, not inflation forward-looking expectation gauges. So when we start looking at the 5-year, 5-year and breakevens and things like that, that's markets' expectations of what they think about future inflation. I think that that's not really a fair assessment, and it's not applying necessary context to this situation. Now, spouting out a statistic saying that, you know, inflation expectations haven't been this high in 10 years— well, guess what? We just had a pandemic, and inflation expectations are going to ramp to levels never seen before. I think that's, I think that's completely understandable. So I do think, and, and, you know, from a behavioral point of view, this is something we see in markets all of the time. You know, you give the market a crumb and it starts thinking about the cake, so to speak. And then the market's nearly always inherently overextend, whether in a positive or a negative way. It's just the nature of human beings who at the end are the decision makers that are making this market move. So I do think the Fed have the right strategy at the moment. I don't feel particularly, um, unnerved by yesterday's figure. And so could we go lower in equities? I'm going to show you some charts. I think in NASDAQ perhaps we can, um, but is that cause for concern? No. I mean, take a step back, zoom out, look in the higher time frame where we are in this equity market, uh, and I just think that we're coming off the top of what has been a push recently to record high. And, and the other thing that kind of gives me a little bit reassurance here is that it's, it's still very much equity sensitivity at the moment. Sure, yields moved lower yesterday, but I think it's been a fairly controlled move, and that tells me that people in the rates market are definitely not as jumpy as people in the equity space. And that makes a lot of sense, you know, these kind of short-term traders, retail traders in particular, they're not trading fixed income products. These are institutional views playing out in those asset classes compared to a little bit more nuanced in the equity space. Um, so, you know, a couple of levels then to have a look at here as we go through the charts. Talked about the 10-year, certainly yields did move higher. You can see here this US CPI print did bump the 10-year down, but it moved it down 12 ticks, and it's not a particularly large move. And actually, if you look in the context of where we have been and where we are I mean, we're pretty much square where we were prior to the original FOMC meeting back at the end of, end of April. So don't particularly see anything too shocking here when I look in other assets outside of the equity space. Today's— in terms of levels I'm looking at for the 10-year, this colored area I think is quite key. Was a key area yesterday actually on the decrease on the back of the data. There was a nice classic opportunity around the prior days S1, and then the kind of continuation on the push down— excuse me, S2. As far as today's concerned, I think on the upside, as we come back up, you've got that previous high that was seen yesterday evening, and that's around exactly the same price point pretty much as where the daily pivot is sat today. And so any push back up to there into that zone, I think you could see a bit of resistance, and perhaps we see a bit of consolidation through this area of around 0.5 to 25, 26 on the low, barring anything unexpected. Not a great deal coming out of the US today. US retail sales Friday could act as that next catalyst. So until that point, perhaps a bit of consolidation. Let's look at the equity space then. And having a look at the NASDAQ 100, I've got this on a daily chart. This is something we've been watching all week, of course, the blue line being the 100 DMA. We've had a flirt with it, failed to break it earlier in the week. Yesterday, definitely snapping through it. We've had a bit of a bounce this morning. The Nasdaq futures trading up about 53 points, but as you can see here technically on the chart, I don't really see a great deal of real significant support here until we get lower down. And as far as where we're trading at the moment, uh, at 13,050 down to 12,730, you're talking about 2.25% move. Um, so, so is that achievable intraday for the week? It certainly is. Um, so I, I don't, I don't feel comfortable with the, the notion of dip buying here. It's a bit of a no man's land if you're looking out on the daily chart. I think that won't materialize until we get lower down, which does leave for me, with the firm close below the 100 DMA in that kind of resistance support zone broken strongly yesterday, susceptible to potentially further downside there, particularly the way tech's been performing as a, as a sector reaction effect to higher rate expectations. From an S&P point of view, again, probably prudent to just jump out onto a higher time frame. Quite an interesting area now, I'd say, that I'm— that the market has broken is if you go back to, um, so you can kind of ignore that colored rectangle. I mean, that was a really strong level through April, May as support, but we We broke through that quite aggressively yesterday on the data, but this area on resistance at the start of April before the, the push-up to record territory, just finding a little bit of a challenge here on the recovery, on the pullback from these lows from yesterday at around that level at 4076 on the daily. As if that acts as resistance here on any type of recovery and we continue to descend then I'd be keeping an eye kind of down here on this trend line. And also you can draw kind of the horizontal here from the area of support on the 5th at the time of April. So that could be quite interesting. Further down you've got then the 4,000 level, 39,9150. So 21, the handle, 4, 39,9150, we'll be looking at downside levels. Again, probably this trend line and horizontal level at 4021 would line up fairly nicely with the NASDAQ on that aforementioned level. And at that point, I think then you start to see a bit of a, bit of a pullback to reverse some of the declines, if that were so to materialize. A quick look at the currency markets, then I'll run you through a couple of headlines. Um, I can see here euro is having a bit of a bounce this morning as Europe comes into the market. Let me just squeeze this chart a little bit so you can make the most of what I'm looking at. I've got this colored rectangle on that. It was pretty rough, but it has been a relative marker of price activity over the last few weeks. And we've had— I drew a Fib retracement from the low on the 5th of May to the high we printed just 2 days ago, and market had a nice response on the 618 retracement on that move in the late afternoon session staging them, or kind of marking the low point of that dollar push that we had that weighed on the currency pair. So putting in a bit of recovery here at the moment for, for the euro. Um, sterling though is probably one I do want to talk about because there is some COVID restrictions related news that could well be of interest. And this is looking at cable. So we've had obviously the breakout of the range that was, was holding up really nicely through the best part of this week. Uh, the prevailing dollar strength though, then seeing the breakdown in price yesterday. And as you can see, Cable's having a little look on the downside here. Some, some key area of near-term support seen at 1.4050. You can see here from, from back earlier at the beginning of the week and also in yesterday's low during the US session. It's held during Asia-Pac trade. You can see a few stops getting run here at this latest move. Again, what will be dictating this largely will be still the aftermath of digestion in the dollar on this, this CPI print. Any further downside move, probably be looking down here at 140.19, and then down here you've got the S1 or S2 on the daily pivots, and then 3973. Reason why I'm talking of downside levels is not only have you got, um, a bit of obviously the dollar movement, and again the question mark is how sustainable given the pump that we saw in the greenback yesterday will it be, but there is also some UK-related news in the form of, uh, of COVID and Here it is. So in short, a SAGE member has said it's possible the final lifting of lockdown in the UK could be delayed beyond the 21st of June due to a threat of a highly transmissible variant. This is the variant in India, of course, that's, uh, still, um, seeing really high case rates and death numbers in that country specifically. And apparently that variant has been found in the UK. My understanding is these are still very low numbers, but it's tripled in a week. And an update is due to come out on those numbers later on today, and the PM is going to pass comment, is what I've been led to believe. So I think it's worth keeping an eye on. The roadmap strategy has been executed to the, to the tee so far, and obviously we've just gone, or we're going to go through the next form of relaxation very shortly. And what that means then is that slight delay to the 21st of June, it really depends how violently this Indian variant is spreading. And as per that guidance that the government's always given us, it's the data, not dates, that will be important. So obviously an extension of that final easing could well just put a bit of a headwind for sterling, which has been obviously a significant outperformer. When you start looking here on the daily chart, we had that breakout through 140, big push-up. And so any pullback here on, on the daily— we're trading at 140.50 at the moment— I'd be eyeing up firm support though for the pair at the 140 handle, which is this colored rectangle, which is still the, the kind of March-April top before the breakout that we saw at the end of last week. All right, a few other final headlines and calendar to have a look at, and I guess we've got to talk briefly about Elon Musk. I'm sure you would have seen it by now, but he did a tweet last night and he effectively said that they're suspending purchases of Bitcoin. Let's actually just quickly get it up. Here we go. So this is the tweet 8 hours ago at the time I'm, I'm doing this. The main reason why he's suspending vehicle purchasing using Bitcoin is they're concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions. Then he's talked about, you know, cryptocurrency is a good idea, XYZ. They're looking at other cryptocurrencies that use less than 1% of Bitcoin's energy, uh, transactions. So here, just to give you a visual cue of what that looks like on the price of Bitcoin futures, uh, this was the type of movement that we saw, roughly around a 15% decline. You can see here a bit of a breakout of a technical level of support in terms of recent price activity here through the, uh, the lows that we had had back in late April and early May. Um, price did actually snap through that, came back up to the level before then the push down. But we've seen a pretty decent bounce already from that overnight low which was printed around just after midnight London time. So trading back above 50K for the time being in Bitcoin. Okay, quick look at the calendar. What is on the agenda for the rest of the session? And as far as this morning is concerned in UK and Europe, there's absolutely nothing going on. So really looking to the US session as a guide for, for direction. And again, yes, there's initial jobless coming out, suspected at 490, which would be a good number, continuing to decrease there from previous 498. I've also got the PPI numbers. I don't really see too much reaction to that. I still think it's really The market's got to decide where it stands, really. Um, did the market just follow through from what we had yesterday, or do we start to get this understanding that the transitory effect is still what's, what's going to play out in the end? At the moment, most of the stuff I'm reading, as far as what the Fed is saying, what economists and analysts are saying, is on balance transitory. But since when have economists and analysts been right? So I'd say for the moment, um, I'd just be marking up, respecting your technical levels. As I said, I think those US indices do have a technical setup at the moment which could result in them being susceptible to more downside because of that lack of technical near-term support. But again, I do feel that then lower down we get some buying. I think it could be quite aggressive at that point given the scope and size of the pullback that we've had. And plus as well, the fact that I don't think yesterday's inflation data ultimately shifts the Fed. On that point about the Fed, and you've got Fed's Barkin and Fed's Waller speaking 3 o'clock and 6 o'clock London time. Interestingly, both these guys are voters and both are speaking about the economy. The latter, Waller, is also speaking about monetary policy as well. So just given the context of timing, it'll be quite interesting to see what they have to say on this situation. But as I said, Bostic has already kind of shown his hand because he spoke yesterday and he said that bouts of volatility around inflation would be lasting through September. So kind of in a way talking it down. And that would be my base case expectation, that these Federal Reserve officials will be out in force. They'll all be trying to talk down, provide reassurance to the market that they're in control and that they— the market shouldn't panic at this point over the inflation issue. Um, supply-wise, Italian supply this morning. You've got a 20-year bond, 10-year TIPS announced out of the US at $4 and $27 billion for 30-year bond auction later on tonight. All right guys, Gonna leave it at that, let you guys get on with the day. Don't forget as well, if you're watching this on YouTube, if you're not part of the community, check out AmplifyLive.com. We actually have a free area there where you can access a couple of resources like technical analysis charts, a private chat room, and get this morning briefing early as well. So hopefully see you online. Take care, see you tomorrow.