Equites were again nervous yesterday as the mega tech dragged down the indices. The market is concerned that many of these tech issues are priced to perfection, the Federal Reserve may not be as aggressive as once believed and an economy that at one moment may be too hot and the next to cold.
Swap markets now reflect less than a 100% certainty that the central bank reduces rates at each of its two remaining policy meetings. Moreover, the degree of next year’s Fed reductions is also being questioned.
Until yesterday, volatility had been absent in the markets for the last 23 sessions as the markets have not moved more than 1% in either direction, the longest streak since 2021.
Is this period of stability about to be shattered?
Will the outcome of the election be a catalyst? If one uses campaign contributions as a measure of opinion, Wall Street massively favors the Democrats, perhaps the result of the huge amount of monies spent on green energy and the like. Moreover, it is widely believed the Democrats would support yesterday’s global trading structure as the Republicans are more tariff orientated.
There are massive sunk costs in offshore production facilities that could be jeopardized if the tariffs proposed are instituted.
Moreover, the odds favor the countries that house these production facilities might close their markets to American products in retaliation.
It could be a double whammy for Wall Street’s earnings growth expectations for the S & P 500. 500. Losing low-cost production facilities as well as vital markets.
Considerable attention has been focused on China. China is an export driven economy. The country requires vibrant and free trade for economic growth. According to recent data, trade with the US has been down by double digits over the last 12 months.
The world has changed dramatically over the past four years. The West has weaponized the flow of capital and the East has weaponized the flow of goods. Availability and reliability have replaced price as the primary determinate of a purchasing decision.
An argument can be made a possible Republican victory/sweep is beginning to be priced into the bond market. Yields bottomed out around the same time Harris’s approval ratings peaked and are now about 60 to 75 bps higher depending upon the maturity. As noted above, the global trading structure has radically changed over the last four years, a change that may be now the new normal.
What will happen today? After the close, TSLA reported profits that exceeded expectations sending shares higher by10%.
Last night the foreign markets were mixed. London was up 0.65%, Paris up 0.72% and Frankfurt up 0.60%. China was down 0.68%, Japan up 0.10% and Hang Seng down 1.30%.
Futures are bifurcated as Dow futures are flat and NASDAQ up 0.75%. The 10-year is up 14/32 to yield 4.19%. Oil is up about 2% awaiting an Israeli retaliatory strike on Iran.
