The Dow gave up 300 pts overnight to close at 27272 while the S&500 lost 0.78% to 3207 held up by Apple, Microsoft and Amazon stocks hitting all time highs - conveniently the FAANG stocks went up on the day most other stocks fared badly. Market participants who bought travel stocks the night before , capitulated sending airline and cruise shares sinking, Norwegian Cruise down 10%, United Airlines 8% and Boeing 6%. Bank stocks also lost ground with the XLF down 2.1% while gold GDX and GDXJ were flat +0.85% and -0.84% respectively. ASX200 futures pointing to a 50 pt drop at this stage.
And this is what Graham Summers had to say overnight.
Is the Fed Money Printing/ Stimulus Going to Blow Up the Bond Bubble? The #1 thing investors need to be thinking about today are “unintended consequences.”
Everyone knows that the Fed has flooded the financial system with liquidity. This liquidity, combines with what appears to be a “V” shaped recovery in the economy, is what propelled stocks to go straight up from the March lows.
As I write this Tuesday morning, the S&P 500 has broken out of a rising wedge formation (blue lines in the chart below) to the upside. It is now slamming into overhead resistance (red line in the chart below).
It is unlikely we break this on the first try. And a drop to retest the breakout would be perfectly normal. I’ve drawn what this would look like with a red arrow in the chart above.
So… stocks rally on liquidity as the Fed reflates the system. That’s the obvious consequence of the Fed printed $1 trillion a month. But what is the unintended consequence of this money printing?
The market is suggesting it could be a crash in bonds.
The US was already on schedule to run a $3-$4 trillion deficit this year based on the March-May economic shutdown. However, it is growing clearer that the real number is going to be even higher than that.
Multiple states (NY, CA, IL) are on the brink of insolvency and will need bailouts soon. And the President has suggested he’d like a massive infrastructure bill ($1+ trillion) passed this year as well.
Either of those could mean the US needing to issue $5-$6 trillion in NEW debt this year on top of rolling over old debts. The bond market is signaling this might be too much for it to absorb at current levels.
The long-term Treasury has rolled over badly. We are now at support (green line in the chart below) and STILL a long ways from a mean-reversion drop to test the bull market trendline (blue line in the chart below).
A bond crash would mean the bond market revolting against the US’s fiscal stimulus. And it would have a profound impact on ALL risk assets, including stocks.
So while it’s nice to see stocks rallying so much, we need to consider what might be coming down the pike in the near-future. Bonds suggest it’s nothing pretty.
Buy all The Things! That's the message from the markets today... Bankrupt (with equity worth ZERO), buy it! Source: Bloomberg
Big Tech (at record valuations amid plunging EPS expectations), buy it! Source: Bloomberg Biotechs (a 10-bagger on the day on reports that company has approached the FDA over treatments for e-coli infections)... Source: Bloomberg
Bonds (but but but last week everyone said inflation was imminent and yields were going to the moon because "v-shaped" recovery), buy 'em! Source: Bloomberg Bullion (but but but who needs safe havens when The Fed has yr back), buy it! Source: Bloomberg
It's all an utter farce and Jay Powell's malarkey (and the rest of his liquidity-spewing pals around the world) is at the heart of it... Source: Bloomberg
There's one way this ends...
Nasdaq (blue) was panic-bid as soon as the cash market opened and while the other indices opened lower they were immediately bought also...Small Caps (red) lagged on the day - this is the first down day for S&P 500 in June! do not panic!
Nasdaq 100 (and Composite) topped 10k for first time but couldn't hold it...
AMZN and AAPL hit record highs sending FANGs ever higher... Source: Bloomberg There is one thing that is being sold...
The USDollar was dumped for the 9th straight day (11 of last 12 days down)... Source: Bloomberg
Momentum and Value factors reversed their recent quant-quake trend today... Source: Bloomberg
Railroad stocks are soaring as rail traffic collapses... Source: Bloomberg
VIX and stocks have decoupled this week... Source: Bloomberg
And the VIX decoupling is being driven by Call-buying (levered longs), not hedges... Source: Bloomberg
Treasury yields tumbled for the second day... Source: Bloomberg
With the yield curve seeing its biggest 2-day flattening since mid-April...
Source: Bloomberg
Wondering why bonds are suddenly bid? Well, they are once again at a positive currency-hedge yield for foreign investors... Source: Bloomberg
While the dollar dropped and gold gained, silver ended the day red... Source: Bloomberg
Bitcoin ended the day very slightly higher after a crazy move overnight... Source: Bloomberg
Oil prices were higher with WTI back up to $39 ahead of tonight's API inventory data... And finally, stocks ain't cheap!! So buy 'em...on margin!! Source: Bloomberg
