This post was originally published on this site
It’s fair to say that some froth has come out of the market in fear of a tighter Fed. The Nasdaq Composite
COMP,
has retreated 5% from its record highs, bitcoin
BTCUSD,
has slumped 29% since November, and the Ark Innovation ETF
ARKK,
is down 41% from its February peak.
As the Federal Reserve decision looms, there are two big questions facing markets, according to Brent Donnelly, the president of Spectra Markets and a veteran trader. The first, he says, is whether the U.S. economy can survive more than three interest-rate hikes. Right now the market is saying no, judging by how flat the Eurodollar curve is, but the question won’t be answered until data from the first quarter of 2022 arrive.
(Former Treasury Secretary Larry Summers is asking a similar question, as he frets the Fed won’t be able to engineer a soft landing.)
The other big question, which also won’t be answered today, is whether stocks can survive the start of Fed tightening, Donnelly says.
Donnelly says the conventional wisdom is that the early stages of the Fed cycle are bullish for stocks, and there are buying opportunities when markets get too anxious. He says the reality is there are normally two waves of equity fears, “and unless you have a 2+ year time horizon you can’t ignore the first one.” The second leg is when the Fed moves into restrictive territory and a bear market ensues. “We are in wave one,” he said.
The current economic cycle, he says, is on “hyperspeed,” and the current state of macro is reminiscent of 1999 and 2018 — the “massive retail bubble and hype cycle” like 1999, with inversions like 1999 and 2018.
He crunched data on forward S&P 500 returns depending on the starting point of the 2-year/4-year spread in Eurodollars
ED00,
Right now it is on the worst part of that chart as the spread is 0.05.
| Forward S&P 500 returns based on spread between 2- and 4-year Eurodollar futures | |||
| +3 months | +6 months | +1 year | |
| All data | 2.4% | 4.8% | 9.8% |
| 1.9% | 4.1% | 9.6% | |
| . 9 | 2% | 4.3% | 9.9% |
| . 8 | 2.2% | 4.7% | 10.6% |
| . 7 | 2.5% | 5.2% | 11.4% |
| . 6 | 2.7% | 5.8% | 12.1% |
| . 5 | 3% | 6.2% | 12.4% |
| . 4 | 3% | 5.9% | 11.5% |
| . 3 | 2.4% | 5% | 10% |
| . 2 | 1.1% | 2.7% | 8% |
| . 1 | 1.5% | 2.5% | 5.8% |
| – | -1.6% | 3.3% | 10.5% |
| Source: Spectra Markets | |||
As of Tuesday, he was short S&P 500 futures
ES00,
at 4684, and recommending taking profits at 4545, and short Ethereum
ETHUSD,
at $4,210, and taking profits at $3,010.
The buzz
The Fed decision is due at 2 p.m., followed by the press conference at 2:30 p.m. with Fed Chair Jerome Powell. Markets are expecting the announcement of a faster taper of bond purchases so the central bank is in a position next year to make multiple hikes.
Economists at Nomura say the dot plot may show eight rate increases over the next three years, up from six previously, with two in 2022 versus half a hike previously. “Powell will likely use the press conference to clearly outline the steps the Committee is taking to ensure high inflation does not become ‘entrenched,’ including potentially preparing markets for earlier rate hikes in 2022, relative to our current expectation for liftoff in September, if monthly inflation does not moderate,” said economists led by Aichi Amemiya.
There are also retail sales data due for release.
A study finds China’s Sinovac vaccine is ineffective against the omicron variant of coronavirus. GlaxoSmithKline
GSK,
and Sanofi
SNY,
said their vaccine candidate was effective as a booster in a preliminary trial. Europe’s drug regulator said it is recommending Johnson & Johnson’s
JNJ,
vaccine as a booster, including for people who received different vaccines initially.
Errant quotes made cryptocurrency traders ‘quadrillionaires’ — on screens if not in reality.
The market
U.S. stock futures
ES00,
NQ00,
were slightly weaker after the second straight losing session.
The yield on the 10-year Treasury
TMUBMUSD10Y,
was 1.44%.
Top tickers
Here are the top tickers on MarketWatch, as of 6 a.m. Eastern.
| Ticker | Security name |
|
TSLA, |
Tesla |
|
GME, |
GameStop |
|
AMC, |
AMC Entertainment |
|
DXY, |
U.S. dollar index |
|
TMUBMUSD10Y, |
U.S. 10-year Treasury note |
|
NIO, |
NIO |
|
DJIA, |
Dow Jones Industrial Average |
|
ES00, |
E-mini S&P 500 futures |
|
AAPL, |
Apple |
|
NVDA, |
Nvidia |
Random reads
Time’s Person of the Year is back to insulting senators.
A four-year-old got on his dad’s phone, and ordered more than $1,000 worth of gelato.
This room is hotter than the Sun.
Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.
Want more for the day ahead? Sign up for The Barron’s Daily, a morning briefing for investors, including exclusive commentary from Barron’s and MarketWatch writers.
