Why the Market Is Dropping Today

Wall Street is deeply underwater with the major indices all suffering losses in the -1.2% to -1.4% neighborhood, though after recent all-time highs.

The driver of today’s stock sell-off appears to be mostly growing angst over the economic recovery, as Delta variant covid infections continue to rise globally.

We read last week that Covid D was not any more dangerous than the original Chinese Covid, but now we see lockdowns again.

The Dow is -460 points lower just over 34,200, while the S&P 500 is down -60 points to 4,298. The NASDAQ has shed -197 points to 14,468. Broad risk-off conditions have weighed on the markets, with safe-haven flows into Treasuries taking yields to multi-month lows.

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A couple of weeks ago, the equity market would have cheered lower yields, though it appears the market has shifted to a more traditional outlook, of risk-off equated to lower yields and lower stocks.

I expect the market to bounce back once the Fed steps in. (We are not below the 20MA yet) Speaking of the Fed……..

Fed announced it will gradually begin selling its corporate bond holdings beginning July 12. This action was previously suggested with the June 2 announcement of portfolio sales, but the Fed is giving more details. The Fed began liquidating some of its ETFs from the SMCCF (Secondary Market Corporate Credit Facility), one of the many emergency credit facilities it created. The SMCCF held about $13 bln in corporates and ETFs. The Fed stressed in its prior announcement that these operations have no policy implications. (expect this to be delayed if the market takes a serious dip)

Treasury Action: curve flattening trades have not only been the order of the day, but have been generally in effect since mid May, though in essence since the end of March when longer yields hit cycle peaks. The 2s-10s gap narrowed to 104 bps overnight and is at 108 bps currently, but was as wide at 157.6 bps on March 31 versus 89.5 bps on January 27. So, about 3/4th of the 70 bps in steepening from January 27 through March 31 has been unwound. As to the 5s-30s, the gap has come in to 114 bps from 122 just after the June FOMC and was as wide at 163 bps on February 24. The current spread is testing narrows from late November.

Treasury Action: yields remain richer but are off their overnight lows as some of the buying eases. A slightly better than expected jobless claims report has had little impact. Equities are still near their cheapest overnight levels though. The 10-year rate is 3 bps richer at 1.286% versus 1.2479% earlier. The 30-year is down 4 bps at 1.898% versus 1.855%. Those are the lowest yields since early/mid February. And the 2-year is fractionally lower at 0.206%. The 2s-10s spread has narrowed to 104 bps earlier, versus 120 bps at the start of the month. Reduced worries over inflation and removal of accommodation by the FOMC and ECB, along with fresh signs that the PBoC may ease again have wrong-footed bonds with a resulting short covering scramble.

The 2k initial claims uptick to a tighter than expected 373k in the first week of July trimmed declines of -45k last week to a 371k (was 364k) cycle-low, and of -2k to 416k (was 415k). Continuing claims fell -145k to a tighter than expected 3,339k, after last week’s 72k rise to 3,484k (was 3,469k). The insured jobless rate fell to a 2.4% new cycle-low from a 2.5% prior low over the last four weeks. The lean initial claims trajectory, and resumed continuing claims downtrend, leaves an encouraging path for the claims data over the last four weeks. Initial claims are entering July below prior averages of 393k in June, 428k in May, and 582k in April. The July BLS survey week reading will likely undershoot recent survey week readings of 418k in June, 444k in May, and 566k in April. Continuing claims are poised to fall about -150k between the June and July BLS survey weeks, after drops of -199k in June, -42k in May, -188k in April, and -628k in March. Our July nonfarm payroll estimate sits at 600k.

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Oil Action: WTI crude traded to three-week lows of $70.78 in London morning trade, after closing at $71.77 on Wednesday. Growth worries have risen again globally, as the Delta variant of the Covid virus continues to surge, putting pressure on oil demand. In addition, uncertainty from OPEC+ after it canceled a production cap meeting on Monday has kept the market second-guessing, with the cartel largely in radio-silence mode. Speculation is that some OPEC producers could go rogue, and disregard current output quotas, and open the oil spigots. The only good news for oil bulls was the API weekly inventory report, which revealed the 7th straight week of stock drawdowns, this time, an 8 mln bbl draw. From here, the psych $70 level will be key.

Global stock markets are selling off sharply and across the board, against the background of mounting concerns that the recovery will be derailed. China’s announcement that it will offer more support seems to have been taken as a signal that the global rebound is at risk and the Hang Seng closed with a loss of -2.8%, the Shanghai Comp was down -0.8% at the close and the Nikkei fell -0.9%.

Supply Chain & Shipping.  An executive order tasking the Federal Maritime Commission and the Surface Transportation Board to address shipping prices is expected this week. The order is expected to cite the small number of ocean and rail shipping companies as engaging in anti-competitive pricing practices. The Federal Trade Commission is also expected to adopt rules limiting non-compete clauses and banning unnecessary occupational licensing requirements, affecting more than 30% of the workforce.  This is suppose to help the supply chain issues.

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