Volatility kicked up last week but there will be more weeks like this as interest rates “normalize” from historically low levels. I have several charts this week as sometimes it is easier just to show a picture. Before throwing in the towel on equities, keep in mind that the VIX volatility index closed the week below 15 where 18 is the historical average and large one-day moves don’t happen until this index breaks well above 25. Let’s look at how this index looks for 2018:
The 10YR Treasury yield is on the rise and will continue to move higher for the foreseeable future. The market only cares about how quickly this happens as spikes in interest rates can cause dislocations in the debt markets which translate into stocks going lower. Below is a long-term chart of 10YR yields where you can see the direction is clearly higher:
The change in interest rates has affected each index disproportionally. Unlike January, where all the indices rolled over in the same manner, the major indices have all behaved differently which may mean support levels will be found in the coming sessions. Here is the DOW ETF ($DIA) that barely budged:
The S&P 500’s pullback has also been modest but may be at a support level:
The NASDAQ Index has been more volatile and may have a bit more to go on the downside:
Finally, the small caps have been the most volatile but have found a support zone that should hold:
The lack of synchronization to the downside tells me we should find some positive price action this week – perhaps after testing Friday’s low but that is not a requirement given some of the support zones found from Friday’s price action.
Chart of the Week!
Economic & Central Banking Snippets
- The September ISM manufacturing index was 59.8, a hair below the estimate of 60 and down from 61.3 in August. This level is about the same as the average year to date of 59.4.
- The September ISM services index jumped to 61.6 from 58.5. The last time it was higher was August of 1997. The employment part of the report was a bright spot as it jumped to 62.4 from 56.7, the best print on record, dating back to 1997.
- The US unemployment rate fell in September to its lowest level since 1969, the latest sign of the tightening of America’s labor market. Non-farm payrolls rose by 134,000 last month, short of the 185,000 addition that economists in a Thomson Reuters survey had expected. The unemployment rate slid to 3.7%.
- Factory orders rose 2.3% in August from the previous month to $510.5B — its biggest monthly gain since September 2017 — the Commerce Department said. Demand for non-defence aircraft and parts climbed 69.1%, while orders for defence aircraft and parts rose 17%.
Macro Snippets
- Honda is investing $2.75B in General Motors’s self-driving car unit, a move that comes as auto makers and technology giants scramble to plant stakes in a transportation landscape that is swiftly being reshaped by technology. Honda will make a $750 investment in GM Cruise LLC immediately, and will invest an additional $2 billion over the next 12 years, the companies said Wednesday. The investment will give Honda a 5.7% stake in Cruise.
- Several major auto makers reported steep declines in U.S. sales for September, a slowdown that comes amid shifts in North American trade policy and the looming threat of tariffs on European and Japanese imports.
- General Electric’s credit rating has been cut by S&P Global to BBB+ from A, following the company’s warning about deepening problems in its power equipment division and the replacement of its chief executive. Moody’s and Fitch have also put the company under review for a possible downgrade. S&P said its assessment was that GE’s aggregate competitive position “no longer supports a rating in the ‘A’ category,” unless its debts were cut far more sharply than the agency expected. The downgrade is a notable move for a company that lost its triple-A rating less than a decade ago, during the financial crisis in 2009. It is another indication of the pressures facing the company, which has lost about 60% of its market capitalization since the start of 2017.
- Tech giants are responding to a Bloomberg Businessweek report that China initiated a supply chain attack using small chips to infiltrate businesses with Super Micro as primary conduit. Sources said chips were traced back to factories run by Chinese manufacturing subcontractors and eventually affected nearly 30 companies, including Apple and Amazon, although they have denied the reports.
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
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Regards,
Paul J. McCarthy, III
President – Kisco Capital
(347) 709-9539