Here is what you need to know on Friday, June 17:
Finally, the end of yet another exhausting week for investors and traders alike. Direction remains lower, but those swings are wild and hard to fathom for many portfolio managers, traders and investors. The market surged on Wednesday in a so-called relief rally as the Fed raised rates by 75 basis points. This was the highest such raise since the 1990s. That should really have been the clue for what transpired on Thursday. We are now back in peak doom, the end is nigh mode, and that feels about right for the foreseeable future.
The macro economic picture is deteriorating sharply with housing data now the latest to turn south. This is not surprising where mortgage rates have been lately and are heading. The average price of a home has surged due to a lack of supply and building costs as well. The wealth effect that encourages consumers to go out and spend, spend, spend is largely due to rising housing and stock prices. Now when both turn lower, so spending will also turn lower.
The last cog in the wheel to go will be corporate earnings. We touched on this in our S&P 500 (SPY) note on Thursday. The SPX has retraced to trade at 15 times forward earnings, and this is more or less the historical average. A 10% reduction in EPS from $250 to $225 times 15 gives us 3,375, but in times of recession, the P/E can slip lower to nearer 10, or EPS can easily fall more than 10%. Current earnings forecasts are pie in the sky from the Wall Street analyst community. They have not meaningfully changed for 2022. In fact, they have been revised up despite the rapidly increasing geopolitical and macro economic environment we have witnessed this year. EPS outlook has also failed to grasp the CEO gloom and doom, and usually those are the ones with their finger on the pulse of their particular industry. The next quarter should see reality hit those EPS estimates with downgrades all around. The S&P dividend futures contract is already pricing in lower dividends, which would be a logical assumption of lower earnings.
Back to current events now. This morning sees a revival of sorts with markets in Europe moving higher. Bond yields are still moving higher but the acceleration and volatility have slowed. Next week could once again prove challenging with long term investors continuing to reposition. But then we enter the quarter end period when traditionally the quarter ends with a reversal of the dominant trend. Also of note is the relative underweight positioning into quarter end which should add to the strong potential for a bear market bounce.
The Bank of Japan held the line overnight as the only dove in a sea of hawks, and the dollar regained its strength as a result. The Dollar Index is up to 104.40, and dollar/yen is back to 134.50. Gold trades at $1,850, and Bitcoin is holding at $20,800. Oil is lower at $116, and yields are steady across the board.
See forex today
European markets are higher: Eurostoxx +1.6%, Dax +1.4% and FTSE +1.1%.
US futures are also higher: S&P +0.8%, Dow +0.7% and Nasdaq +1.1%.
Wall Street top news (SPY) (QQQ)
EU recommends Ukraine for candidacy status.
Germany getting 60% less gas than ordered.
Russia says EU may face serious gas issues this fall and winter.
Tesla (TSLA): Elon Musk sued for alleged Dogecoin pyramid scheme.
Twitter (TWTR): Elon Musk addressed Twitter employees on Thursday in a Q&A.
Adobe (ADBE) falls on guidance profit.
US Steel (X) soars on strong earnings.
ROKU announces partnership with Walmart (WMT).
Alibaba (BABA) up on news that China central bank approves ANT Group application to form a financial company.
SNAP testing a paid subscription model.
Centene (CNC) up on earnings and share buyback.
Redbox (RDBX): latest meme squeeze continues as it closes up 6.6%.
Rivian (RIVN) to use wind turbines to give EVs first charge.
Vita Coco (COCO): CFO to leave company.
Upgrades and downgrades
Source: WSJ.com and Briefing.com
The author is short Twitter and Tesla, as well as long OTM puts and short OTM calls on Redbox.