Summer trading is here and so is the Fed’s next policy announcement which will be released on Wednesday. Expectations are that the Fed will anoint the markets with a 0.25% rate cut as “insurance” against a rising risk of slowing growth and trade tensions. However, this move is largely symbolic now as the fear of a GDP slowdown for Q2 was abated with a higher than expected release this week at 2.1%. Slower than Q1 but far from a problematic trend. Some traders are still expecting 0.5% rate cut this week but I think that is wishful thinking at this point as earnings reports don’t warn of a meltdown and economic growth is steady.
The S&P 500 Index chart below shows we are breaking out to new new all-time highs after going nowhere for 18 months. Many have been calling this a multi-year top but it may have just been a larger consolidation period before the next uptrend in this index. The momentum indicators in the bottom of the chart are not running “too hot” or in overbought territory so we may just continue to trend higher after the Fed meeting. I continue to see many in the media express concern of a top in the making but that is a rarity after breaking out from an 18 month consolidation period.
Fortunately, the chart has made it easy to identify where there is a concern of a larger correction. The former triple-top at 2,944 marks the breakout level and is now a critical support area for the S&P 500. The chart below takes the latest correction from early June and projects out the next resistance point at the top of the chart at 3,093 based on a Fibonacci extension of 161.8%. Notable is the trend line where we closed on Friday which may act as resistance into the Fed meeting.
Chart of the Week!
As you can see below, ultra-low interest rates have spurred on massive debt loads across the board. Does this make the Fed nervous? The next debt cycle is sure to be a doozy. Even tech companies that don’t need the cash have taken on large debt loads thanks to the low cost of issuance.
Economic & Central Banking Snippets
- Germany’s manufacturing sector posted its worst performance in seven years. IHS Markit’s purchasing managers index for manufacturing fell to 43.1 in July from 45 at the end of June, well below the 50 level that separates expansion from contraction. The country’s service sector continued to grow, keeping the overall economy afloat for now. “The health of German manufacturing went from bad to worse in July…raising the risk of the euro area’s largest member state entering a mild technical recession,” said Phil Smith, economist at IHS Markit. (WSJ)
- Core durable goods orders in June surprised to the upside with a 1.9% m/o/m gain, well more than the estimate of up 0.2%. Auto’s and machinery orders led the way as auto production jumped 3.1% m/o/m and machinery was higher by 2.4%. Drops in both April and May this year represented the first back-to-back monthly declines in a year which stirred concerns that the US economy may be losing momentum. (Boock/FT)
- The European Central Bank signaled it is preparing to cut short-term interest rates for the first time since early 2016 and possibly restart its giant bond-buying program, a policy shift aimed at insulating the eurozone’s wobbling economy against international headwinds that range from trade tensions to Brexit. The statement sends a strong signal that the ECB is preparing to announce a major stimulus package as soon as its next policy meeting on Sept. 12. (WSJ)
- Switzerland’s entire bond market, including its 50-year Treasury note, has negative interest rates. What was the safe haven of global banking is now making investors pay it to hold their money. (Investopedia)
- Data from the Commerce Dept. showed that the U.S. economy grew at an annualized 2.1% rate in the second quarter, down from 3.1% in the first quarter, but higher than forecast. The Commerce Dept. also revised the fourth quarter of 2018 downward, from 2.8% to 2.5% in its measurement of Real GDP. (Investopedia)
- Gold is hovering near its highest level in six years as the prospect of easier global monetary policy burnishes the allure of owning the metal. Central banks have purchased nearly 250 tons of gold this year through May after hoarding over 650 tons during 2018 in their biggest buying spree in decades, according to data from the World Gold Council and TD Securities. Central banks “may be concerned over massive U.S. budget deficits and believe the Fed could be fairly aggressive in cutting rates,” said Bart Melek, head of commodity strategy at TD Securities. (WSJ)
- Shares soared by as much as 520% on the first day of trading for Shanghai’s new science and technology-focused equities market, as investors scrambled to buy the first 25 companies to list on the so-called Star Market. Star has been billed as China’s answer to Nasdaq and Beijing hopes it will encourage investment in domestic technology innovators. (FT)
- Global debt increased by a hefty $3 trillion in the first quarter of 2019, bringing the total level to $246.5 trillion, Axios reports. That represents 320% of the world’s GDP. In the U.S., debt hit a record $69 trillion. The marked increase in borrowing, which has been powered by low interest rates around the world and growing government spending, comes amid concerns surrounding global economic growth.
- Deutsche Bank has suffered its biggest quarterly loss since the depths of the financial crisis as the German lender digested almost half of its total three-year restructuring bill of €7.4bn in the second quarter. The German lender said it has jettisoned 12% of the risk weighted assets earmarked for sale in the restructuring it outlined recently. (FT)
- BofA and UBS are hoping to join the small cadre of Wall Street giants — led by Goldman Sachs, Morgan Stanley and JPMorgan Chase — setting their sights on young companies that traditionally rely on venture capital firms for early backing. “The volume of capital being raised in the private markets is approaching amounts raised in the public markets,” Thomas Sheehan and Jack MacDonald, co-heads of global investment banking at BofA, wrote in a memo to its staff. “We must identify and cover these companies much earlier in their lifecycle.” (FT)
- Boeing slumped to its biggest ever quarterly loss as the company warned that while it expected the 737Max aircraft to start returning to service “early in the fourth quarter”, it might have to further reduce or temporarily shut down production if the timing slipped significantly. (FT)
- Vodafone could list its towers business within 18 months after moving to legally separate the masts into an independent company. The business would be Europe’s largest independent towers company with 61,700 towers across 10 countries. The proceeds would be used to pay down debt, Vodafone said on Friday. (FT)
- Amazon’s move to one-day shipping reinvigorated revenue growth in the second quarter but cost more than the ecommerce company anticipated, causing it to miss Wall Street’s earnings estimates and end a run of record quarterly profits. But the faster deliveries also spurred more shopping as revenue rose 20% year-on-year. By ceding record margins Amazon could deliver longer-term pay-offs. (FT)
That is all for now until next week’s Market Update. Thanks for being a subscriber!
Paul J. McCarthy, III
President – Kisco Capital