(Nick Mastrandrea – Market Tea Leaves)
US Dollar: Sep ’22 USD is Up at 107.380.
Energies: Aug ’22 Crude is Down at 103.56.
Financials: The Sep ’22 30 Year bond is Up 17 ticks and trading at 137.12.
Indices: The Sep ’22 S&P 500 emini ES contract is 85 ticks Lower and trading at 3880.00.
Gold: The Aug’22 Gold contract is trading Down at 1736.80. Gold is 55 ticks Lower than its close.
Initial conclusion
This is not a correlated market. The dollar is Up, and Crude is Down which is normal, and the 30-year Bond is trading Higher. The Financials should always correlate with the US dollar such that if the dollar is lower, then the bonds should follow and vice-versa. The S&P is Lower, and Crude is trading Lower which is not correlated. Gold is trading Lower which is correlated with the US dollar trading Up. I tend to believe that Gold has an inverse relationship with the US Dollar as when the US Dollar is down, Gold tends to rise in value and vice-versa. Think of it as a seesaw, when one is up the other should be down. I point this out to you to make you aware that when we don’t have a correlated market, it means something is wrong. As traders you need to be aware of this and proceed with your eyes wide open. All of Asia is trading Lower with the exception of the Singapore and Nikkei exchanges. Currently all of Europe is trading Lower.
Possible challenges to traders today
- FOMC Member Williams Speaks at 2 PM EST. Major.
- Lack of major economic news
Treasuries
Traders, please note that we’ve changed the Bond instrument from the 30 year (ZB) to the 10 year (ZN). They work exactly the same.
We’ve elected to switch gears a bit and show correlation between the 10-year bond (ZN) and the S&P futures contract. The S&P contract is the Standard and Poor’s, and the purpose is to show reverse correlation between the two instruments. Remember it’s likened to a seesaw, when up goes up the other should go down and vice versa.
On Friday the ZN made its move at around 9:45 AM EST. The ZN hit a Low at around that time and the S&P moved Lower shortly thereafter. If you look at the charts below ZN gave a signal at around 9:45 AM EST and the S&P moved Lower at around the same time. Look at the charts below and you’ll see a pattern for both assets. ZN hit a Low at around 9:45 AM EST and the S&P was moving Lower shortly thereafter. These charts represent the newest version of MultiCharts and I’ve changed the timeframe to a 15-minute chart to display better. This represented a Long opportunity on the 10-year note, as a trader you could have netted about 20 ticks per contract on this trade. Each tick is worth $15.625. Please note: the front month for the ZN is now Sep ’22. The S&P contract is also Sep’ 22 as well. The front months are now Sep’ 22. I’ve changed the format to Heikin-Ashi such that it may be more apparent and visible.
Charts courtesy of MultiCharts built on an AMP platform
Bias
On Friday we gave the markets a Neutral or Mixed bias as is our custom on Jobs Friday. The markets didn’t disappoint as the Dow traded 46 points Lower, the S&P 3 points Lower but the Nasdaq gained 14 points. All in all, a Neutral or Mixed day. Today we aren’t dealing with a correlated market and our bias is to the Downside.
Could this change? Of Course. Remember anything can happen in a volatile market.
Commentary
Each and every month around Non-Farm Payrolls or as we call it Jobs Friday, we always maintain a Neutral bias. Why? Because historically speaking the markets have never shown any sense of normalcy on that day. Case in point, yesterday the US economy created 372,000 net new jobs last month handily beating the 260,000 estimates. Good news by any measure yet what happened? The markets acted erratically as the Dow was all over the map yesterday. Down, then Up, then Down, then up and finally Down. So why did this happen yesterday? Everyone is convinced that a recession is coming, the good news from doesn’t coincide with that. A recession is coming but it’s not going to happen now, eventually it will. How and why? The Federal Reserve will continue to raise interest rates as that is their way to combat inflation. The idea is to slow down demand and when demand subsides companies start to lower prices thereby curbing inflation. However, when that happens businesses begin to realize that they need as many people as they’ve hired so guess what happens next. Layoffs: and usually that is big time layoffs. The Federal Resrve made a mistake last year thinking that prices going up was temporary. It wasn’t as businesses lost money during the pandemic and were eager to make up for lost ground. The Fed should have taken that into consideration and start to engineer a soft landing. Unfortunately, they did not so we are stuck with usual business cycle that says sooner or later a slowdown is coming. I truly hope we are wrong in this regard but as in all things only time will tell.
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