Market Overview – Morning Express
Market Overview – Morning Express
E-mini S&P (June) / NQ (June)
S&P, yesterday’s close: Settled at 3983.00, up 36.00
NQ, yesterday’s close: Settled at 12,688.50, up 43.75
Fundamentals: The Federal Reserve begins its two-day policy meeting today and concludes tomorrow at 1:00 pm CT with a rate decision. Will they raise interest rates in the face of recent bank turmoil? The CME’s FedWatch Tool says yes to a 25bps hike with an 83.4% probability, whereas only 16.6% points to no move at all. The Fed took interest rates from zero to 4.25% last year, including an unprecedented four consecutive hikes of 75bps, before tacking on another 25bps on February 1st. Additionally, its balance sheet fell by from $9 trillion to $8.3 trillion from April 2022 through the first week of March. The steadfast policy tightening inverted the U.S. Treasury curve, with the 2s10s spread hitting a record low of -1.08% on Wednesday, March 8th, the day before SIVB began its two-day death spiral, setting off a banking crisis, and the day after Fed Chair Powell surprised markets. On that Tuesday, Fed Chair Powell flip-flopped from an unwarranted victory lap on disinflation a month earlier to injecting fear and channeling his Jackson Hole hawkishness. Ultimately, he shocked markets, extrapolating rate hikes, underpinning a rise in the 2-year above 5%, the highest since June 2007, and set forth this chain of events within the banking sector. The Fed and Powell have been intent on breaking something in order to tame inflation, and he broke something that day.
SIVB’s demise did not happen overnight, it was poorly managed with misfocused values, and neither did this crisis. The move in rates and the curve created insurmountable stress on banks’ balance sheets due to ill-managed bond holdings that were now losing value due to the rise in rates. Furthermore, sophisticated depositors began moving balances into interest-yielding assets, something banks were not providing in the typical checking account. Also, the Fed’s tightening slowed the venture capital market. For SIVB and some regional banks with close ties to banking venture capital-backed companies, this meant a loss of corporate deposits, which were now needed to meet day-to-day business obligations. Although this mismanagement was within a niche type of banking, it cannot be ignored as a canary in the coal mine. Credit Suisse was the latest domino to fall, but the writing was its wall for years. If rates were to continue moving higher and the curve deeper into inversion, there is no telling how widespread the turmoil could reach.
Do not miss our daily Midday Market Minute, from yesterday.
Over these last two weeks, the U.S. 2-year yield fell from 5.08% to 3.64%. The moves across rate markets now discount a 25bps rate cut from the current 4.50% by yearend. Lower rates mean higher bond prices, and this has eased pressures on banks’ balance sheets. Although the landscape seems to have stabilized a bit, that canary in a coal mine could be an object in motion that has been set in motion and one that will remain in motion until derailed. Fed Chair Powell lost some credibility with his February-March flip-flop, and we believe inflation is showing signs of slowing. Additionally, the banking stress is expected to weigh on the economy as credit conditions and lending tighten. By some considerations, the Federal Reserve finds itself in a more favorable spot now than feared two weeks ago. However, its next steps must be chosen wisely, and we see a 25bps rate hike as highly likely because the words they choose can also dictate policy, and we expect a very thoughtful (dovish) communication.
Technicals: We have held a cautiously Bullish Bias for about a week now, expecting the E-mini NQ to outperform, which it has. Today, we are seeing some catchup from the other indices, underpinned by banks and cyclicals that have recently been bludgeoned. As the E-mini S&P moves to a fresh 12-day high, and we remain upbeat, it is essential to note that it has not repaired the damage from the March 9th reversal and the March 7th selling from Powell’s testimony, whereas the E-mini NQ has cleared those marks and broke out above a downtrend from the February high. If the overall landscape remains constructive, which we expect it will, there is likely to be a continued consolidation of the NQ’s outperformance, and this is healthy as other sectors catch up. What matters going forward is the path of rates, which we will learn more in the coming days. Now, we must not ignore overall headwinds, nor those technically. The E-mini S&P and E-mini NQ each face major three-star resistance, denoted in our levels below. However, yesterday did help define a line in the sand to keep the risk environment vibrant, and this is major three-star support at … Click here to get our (FULL) daily reports emailed to you!
Crude Oil (May)
Yesterday’s close: Settled at 67.82, up 0.89
Fundamentals: Crude Oil is in rebound mode, gaining nearly $5 or 7.5% from yesterday’s early low. Economic worries began impacting Crude Oil when the banking crisis elevated into Europe, with its largest drop happening on the 15th, when Credit Suisse’s inevitable and last spiral took hold. It would be fitting that Crude Oil bottoms, at least in the near-term, once a resolution had been reached. The focus now shifts to U.S. inventory data amid an early risk-on move at the onset of U.S. hours. In recent weeks, rising inventories have been a headwind from price action, but this week could be a turning point with early expectations for -1.448 mb Crude, -1.441 mb Gasoline, -1.525 mb Distillates, and -1.558 mb at Cushing. Furthermore, this turning point for inventories could happen right at the onset of a seasonally bullish time of year.
Technicals: Price action raced through yesterday’s intraday high upon the European open this morning, just as it bottomed into the European open last night. We now look to this area as first key support, defined in our levels, with major three-star support coming in below there at 66.92-67.17. Although we do have resistance overhead, this could be the early stage of a move targeting major three-star resistance at … Click here to get our (FULL) daily reports emailed to you!
Gold (April) / Silver (May)
Gold, yesterday’s close: Settled at 1982.8, up 9.3
Silver, yesterday’s close: Settled at 22.646, up 0.184
Fundamentals: Gold and Silver have u-turned from Friday’s melt-up into Sunday evening trading, a day after we advised it would be prudent to capitalize on the rally in Gold and Silver. The weakness is happening despite a lower U.S. Dollar Index due to Euro strength. However, the U.S. Dollar is broadly stronger against many currencies, such as the Yen and Aussie. Furthermore, rates are on the mend ahead of tomorrow’s Fed meeting, and some of the later 2023 rate cuts are priced-out. The takeaway here is there are fewer uncertainties as we head into that Fed decision after UBS acquired Credit Suisse, and markets are consolidating back of the Fed decision.
Technicals: Price action is slipping, and Gold surrendered its February high. Although we advised capitalizing on the recent strength, we remain longer-term upbeat in an evolving year that should be supportive to the precious metals complex. For now, Gold and Silver must remain constructive against major three-star supports at … Click here to get our (FULL) daily reports emailed to you!
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