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U.S. equities struggle for direction; Dow weakest, down
0.4%
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Real estate is weakest S&P 500 sector; comms services up
most
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Dollar flat; gold rises, crude up >2%; bitcoin falls ~4%
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U.S. 10-Year Treasury yield rises to ~3.50%
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MARKET RISKS FROM THE DEBT CEILING SHOWDOWN (1412 ET/1812 GMT) Many strategists have been finding some comfort in the idea that the U.S. government will eventually raise the debt ceiling because that's what it always ends up doing.
While Adam Turnquist, chief technical strategist for LPL Financial sees a default as a "very low probability event," he's still warning of some bumps ahead given what happened in 2011, as if 2023's rising recession risk and anxiety over banks isn't enough to deal with already.
Treasury Secretary Janet Yellen warned recently that the U.S. may not be able to service its debt by June 1, giving lawmakers a few weeks to agree to raise the ceiling.
In the meantime, Turnquist worries that headline risks will likely weigh on market sentiment. In 2011, the government hit its debt limit on May 16. While the Treasury "pulled off some accounting maneuvers to narrowly avert a crisis and fund the government until Aug. 2," this was how long Congress took to come to an agreement to raise the debt ceiling, Turnquist notes.
But it still resulted in a "a sizable sell-off across equity markets" with lower yields underpinning a flight to safety, and a credit downgrade of U.S. debt to AA+ from AAA by Standard & Poor’s.
While there many differences between now and then, "the 2011 analog at least provides a potential roadmap for stocks if the debt ceiling drama continues," the strategist said. "In the event of a prolonged debt ceiling battle similar to 2011, watch for large caps to outperform small caps, growth to outperform value and defensive sectors to outperform more cyclical sectors."
Here is LPL's illustration of what happened on Wall Street:
(Sinéad Carew)
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RATE CUTS? CAREFUL WHAT YOU WISH FOR (1201 EST/1601 GMT) The Federal Reserve and its Chair Jerome Powell last Wednesday, finally delivered what investors had been waiting for - language indicating that it may pause interest rate hikes and that it might be possible to avoid a recession even if history doesn't support that hope.
But Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management pointed to a lot of potential potholes the market should keep in its line of vision. For example, she cautions that a 'soft landing' policy is "rare and requires a precise alignment of the stars." On the one hand items such as strong balance sheets, a tight job market, a recovering housing sector, improving demographics and post-Covid capex drivers could mitigate a downturn.
But Shalett eyed "extreme complications" including "post-pandemic demand dynamics; crosscurrents around corporate pricing power following decades of industry concentration" and of course the regional bank crisis, which she sees as "far from over, especially if commercial real estate becomes stressed." On top of this are "debt ceiling implications for financial conditions and liquidity." So if the Fed gets the timing and duration of the pause wrong, she sees a growing list of long-run implications. Traders are pricing in rate cuts so if those cuts don't happen that would cause disappointment.
But Shalett is concerned that if the cuts do happen it will be either from a recession or "a crisis that stems from the debt ceiling, regional banks or some other black swan."
"Rather, we are in the danger zone, where bad news is likely to be bad," the CIO said. "We doubt megacap valuations will expand further, as the drivers of rate cuts come with consequences."
(Sinéad Carew)
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BANKING CRISIS: IT'S THE PUNCH YOU DON'T SEE THAT HURTS MOST (1101 EDT/1501 GMT) The banking crisis has been weighing on investor sentiment for more than a month now, but as Philip Palumbo, founder, CEO, and chief investment officer at Palumbo Wealth Management, sees it, the real crisis is ahead of us, not behind us. The ‘disappearing deposits’ problem, that has brought down a number of banks recently, could be nothing more than a prelim to the main event. Palumbo notes that when deposits flee a bank, as they have done for many regional banks since March, reserves must be increased to stay in compliance. That means there is less money available for lending. "If that happens to one bank, it doesn’t matter much, but when it happens to a large number of banks, it is a big problem. Credit is generally less available and what credit is available is more expensive. Less credit availability and a higher rate on the credit that is available, can suck the life out of an economy," writes Palumbo in a note. One important metric for a bank is its loan to value ratio as it is effectively their safety net. Palumbo is concerned that the margin of safety is completely disappearing for some commercial property, particularly, office buildings. Given a high percentage of vacant office space, these properties are taking a major valuation hit, which has the potential to spread across major cities all around the country. Thus, while deposit runs have been the primary worry to date, Palumbo is concerned about growing loan loss fears.
"That is a very bad combination for banks and one that leads not only to increasing credit costs, but also a crimp on credit availability. That could be a knockout blow to the broader economy," said Palumbo.
"At the moment, it’s hard to tell exactly where the next blow will come from, so we need to keep our eyes open. It’s the punch you don’t see coming that knocks you out."
(Terence Gabriel)
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WALL STREET'S MAJOR AVERAGES TURN RED (1010 EST/1410 GMT) Wall Street's major averages are now slightly red early on Monday, taking a breather after Friday's strong rally following the more solid than expected April jobs report.
Of note, the beleaguered bank sector's initial efforts at a comeback are faltering with the S&P 500 banks index last up less than 0.5%, while the KBW regional bank index is falling more than 1%. Offering some encouragement was a ~17% gain in shares of PacWest Bancorp after the lender sharply cut its quarterly dividend to shore up its finances. Still the stock is down more than 70% from its early March levels. Still, even after Friday's rally, a report by BTIG's chief market technician Jonathan Krinsky pointed to market breadth concerns and "some of the most extreme breadth divergences we have seen in some time." He notes that the S&P 500, on Friday, closed above its 200-DMA for the 34th consecutive day.
It is unusual to have <50% of SPX names above the 200-DMA after the index has been above its long-term moving average for this long. Since 1990, Krinsky notes 29 times the SPX went above its 200-DMA at least 34 days with the average percentage of components above the 200-DMA at 69%. This compares with the current 47% level, which is the third weakest reading.
Here is your snapshot from just after 1000 EDT:
(Sinéad Carew)
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S&P 500 INDEX: RESPECTING ITS LEVELS (0900 EDT/1300 GMT) The S&P 500 index ended a four-day losing streak on Friday. The benchmark index snapped higher on Friday after having tested its late-April trough and a trend line from its record high:
Indeed, the SPX hit a low on Thursday of 4,048.28, which was only a little more than one point below its 4,049.35 April 26 low, and less than one point under the broken resistance line from its record high, which was around 4,049 at the time. With a near-2% rally on Friday the S&P 500 ended at 4,136.25. On Monday, with e-mini S&P 500 futures up around 5 points in premarket trade, the SPX is poised to push high higher in early trade.
Weekly cloud resistance resides at 4,155. Additional hurdles
come in at the April 18 and May 1 highs at 4,169.48 and
4,186.92.
The 4,195.44-4,203.04 area remains a major barrier. This
zone includes the February 2 peak, the 23.6% Fibonacci
retracement of the March 2020-January 2022 advance at 4,198.70,
the 100-week moving average, which ended Friday at 4,202, and
the August 26, 2022 Fed-chair Powell Jackson Hole speech high.
Since reversing to the downside with Powell's speech that
day, the SPX has been unable to reclaim this level.
In the event of weakness, besides the late-April-early-May
lows, the broken resistance line which is now acting as support,
comes in at around 4,045 on Monday. The 50-day moving average
ended Friday just shy of 4,042.
(Terence Gabriel)
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FOR MONDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE
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SPX05082023 Wall St dips slightly LPL's Debt ceiling sell-off graphic: April-Oct 2011 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
