Market Lab Report - Premarket Pulse 9/15/16
Major averages finished mixed yesterday on lower volume. Leading stocks have managed to weather the storm overall relative to the major indices. While the NASDAQ Composite and S&P 500 have both well undercut their prior August consolidation, supercap leaders such as FB, GOOGL, AMZN, have managed to find shallower floors, at least for now. Likewise, higher RS leading names such as PI, LN, BABA, VEEV, EDU, GRUB, WIX, MOMO, and NTES appear to be forging new highs or setting up for another run higher, provided the general market can find its footing. All of the aforementioned stocks are on our Focus List except for GOOGL because its RS 68 is a bit slow for our liking.
Three major central banks are in focus.
First, longer duration Japanese government bonds (JGBs) recently experienced their worst selloff in about 20 years because the Bank of Japan (BOJ) may start buying shorter-duration bonds and less longer-duration bonds which will cause yields to rise on longer-duration bonds. This could cause a substantial amount of capital to flow back into higher yielding JGBs. Nevertheless, the BOJ remains dovish and in favor of continued negative rates.
Second, the Bank of England (BOE) central bank went all out with easing measures at its August meeting, cutting interest rates to a record low of 0.25%, and restarting its quantitative easing (QE) program. The aggressive stimulus plan came after a string of weak data following the Brexit vote, which had triggered fears the UK economy would fall into a near-term recession. However, recent data, including Wednesday’s unemployment number, have shown the odds of recession remain low. The BOE therefore held its benchmark rate steady on Thursday but telegraphed that it still expects to cut it again later this year if its economy weakens as expected.
Third, bond markets are of course paying close attention to what the US Federal Reserve may do. If markets believe the Fed will hold off any rate hikes, bond yields will drop and prices will rise. But in the meantime, markets are looking to react viciously to any threat of slowing the myriad of central bank quantitative easing programs. It is indeed a bubble ready to burst should central banks make any missteps. Indeed the US Treasury 20-year Index ETF TLT has corrected sharply over the past week primarily on the hawkish words of Fed President Eric Rosengren.
The Fed is aware of this so may now have to jawbone in a more overall dovish direction to calm markets. This manipulative war of words issued periodically by the Fed is designed to keep US markets contained while at the same time, keep up appearances that they are vigilant on the notion of a rate hike. Nevertheless, markets remain hungry for generous helpings of QE. The unpainted part of the corner grows smaller with each passing Fed meeting.
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