The Week Ahead: June 17-21

by | Jun 17, 2019 | Daily Weather Report, Market Thoughts, Public Blog

Market Thoughts

Last week I wrote about  my Best Fed guesses and week before that how Treasury yields are on the MOVE.  But all that seems to matter is that markets are heavily betting stocks will continue to rally despite an economic slowdown (in U.S., China, pretty much everywhere) while company EPS estimates are falling.

  • Per the IBES data, Q2 ’19 expected SP 500 earnings growth is just +0.3% and could slip under 0 before earnings start July 10th. H/T @TrinityAssetMan
And yet, the S&P500 is up 5% after falling 6.6% in May – putting it less then 2% from April highs (despite a very tight $1 range last week). During that time, however, trade wars and tariff threats have escalated, tankers have been torpedoed, and safe-haven plays of Treasuries, Gold and US Dollar have been strongly bid. So why are equities seemingly not afraid?
Big Picture: Market participants want to believe this is 1995 – when the Fed cut rates the same day as new record highs in July 1995. Those cuts kept the whole shebang going in the 1990s until it went BANG!

In Jan 2001, “the Fed announced a surprise cut that sent the Nasdaq up 14% in a single day, which remains the index’s largest move since its creation in 1971. .. Folllowing that day, the Nasdaq would fall 57% before hitting bottom..” @WSJheard

Another consideration, for the short-term: Markets had an emotional reaction to Powell’s Pause and are now a tad ahead of themselves.
Odds of a rate cut on Wednesday are 31% now – and seemingly on the rise every day. In years past, the market knew pretty well what the Fed was going to announce. But times are different for sure: The mystery behind announcements by this Fed, the about-faces by this Fed, the political drama from the White House against this Fed ,and (let’s not forget) the likelihood of sell-offs post press conferences as a result of ‘stepping in it’ by this Fed… creates a lot of Volatility!

While everyone is expecting rate cuts as early as next week, UBS says ‘not so fast’.

UBS: no FED cuts

  1. We do not think that the Fed is set to cut the federal funds rate any time soon.
  2. If escalation of tariffs with China is avoided, the underlying economy is slowing, but not by as much as the Fed deems necessary to sustain the expansion.
  3. With tariffs, the economy would slow further, but the second half of 2019 would still be above their estimate of sustainable growth.
  4. If we are wrong, and the economy is weaker, or escalation of the trade war causes a faster slowing in the economy, the Fed will still take a few months of data before they conclude the economy has slowed more than they desire.
  5. Either way, we see a cut by September as plausible but unlikely and a cut in December as possible, but only with a consistent deterioration in the real-side data.
Of course in a world of TINA and FOMO, in a world where corporate share buybacks have supported stocks, and private equity funds have reduced the outstanding shares available to a growing pool of global investment funds looking for a home, the promise of more cuts by the globes central banks – absent the Bank of England at the moment –  is still seen as supportive of stocks. Greg McKenna
Agree, but supportive of stocks in light of global economic slowdown and accelerated trade wars and tariffs? That is The Multi-Trillion Dollar Question
Either way, I contend, traders may be sadly disappointed once they realize that even WHEN the Fed cuts, this will only embolden Trump to ratchet up his trade war and tariffs. I’m not sure which dangerous childhood game to compare it to: the Cinnamon Challenge, Chubby Bunny or straight on Sack Tapping!
But I am amazed the Fed wants to play. My point: Fed cuts will be negated by Trade Tariffs and that will make the climb higher in asset prices that much harder. As global, domestic and earnings growth slows, while inflation expectations drop at the same time prices paid rise, consumers will start to get squeezed – slowly at first and then all at once.
Consumer consumption aside, the path Trump has put us on to isolationism is not easily navigated in the dark and holds many dangers. And it seems no one – not Congress, not his constituents or party, not Xi or other world leaders – have any sway in convincing him that trade wars are not easy to win and will do significant damage to our economy, even potentially pulling forward a global recession. No one, except maybe the Fed.

Economic Calendar

We actually have three central bank meetings on the agenda: the Fed, the Bank of Japan and the Bank of England. The European Central Bank gathers for a forum in Sintra, Portugal. U.S. Bank stress tests are also due but not expected to say much, since the failures aren’t released…

Monday June 17
We start slow and ramp up: New York Fed’s Empire manufacturing index comes out with the NAHB housing market index.
Tuesday June 18
We get the RBA minutes which may allude to their next moves (always helpful) and then we get German PPI, EU trade, CPI and ZEW sentiment. In the US – housing starts and building permits as well as Redbook sales. API crude data is after the bell.
Wednesday June 19
Japanese trade will be closely watched. Euro current account comes out with UK and Canadian inflation data. EIA energy stocks released at 10:30 ET then the Fed 2:00 ET minutes followed by the infamous (with Powell, it is) 2:30 ET press conference. Again, the futures market is only expecting a cut at 25% at this meeting and an 87.5% chance by the July meeting.
Thursday June 20
A BoJ policy meeting is not expected to produce any changes but you never know in the current environment. US releases Jobless claims and the Philly Fed.
Friday June 21
We get some flash PMI prints, Japanese CPI, UK CBI trends and a BoE bulletin along with existing home sales in the US. Most notable: quadruple witching day arrives on June 21

Earnings Calendar

Home Stretch: Of particular interest will be reports from companies like Oracle (ORCL) this week and then FedEx (FDX) and Micron (MU) next week.

See Seeking Alpha’s Earnings Calendar for the complete list of earnings reporters.

 

Macro Matters

Data from Morgan Stanley showed U.S. business conditions deteriorating this month by the most on record, reaching their lowest point since 2008, adding to recent signs that the U.S. economy is slowing.

Personal Note:

I will be presenting at the Benzinga Trading Summit this Thursday June 20th – traveling Wednesday (FED DAY) through Sunday – so my live trading room will be closed W/Th/Fri. Would be lovely if any clients or loyal followers popped in to say hello!!
Samantha

 

About Your Captain

Samantha LaDuc is the Founder of LaDucTrading.com and the CIO at LaDuc Capital LLC. As a professional options trader, Samantha has focused on timing volatility and leveraging her market calls with defined risk against a backdrop of Macro, Intermarket, Fundamental, Sentiment and Technical Analysis. Her practice is dedicated to identifying reversal and continuation patterns using intermarket relationships across global equities, currencies, commodities and interest rates.

Retail and Institutional (RIA/HF/PM) clients can expect her to provide tactical trading plans for stocks, options and futures that cover multiple time-frames in addition to thesis, trigger, and entry/stop/profit targets. You gain access to not only a unique perspective but unparalleled transparency; Samantha also makes available her brokerage account as real-time open trades with realized/unrealized performance.

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