- Stricter COVID restrictions in China have investors nervous
- Treasuries are rising with the dollar, deepening yield inversion in bearish signs
- Euro touches parity
Stocks extended yesterday's selloff, fearing inflation and interest rates will keep pushing markets lower. The dollar climbed together with Treasuries as investors sought hideouts in havens, positioning themselves for another hot inflation reading and the start of a critical earnings season that may confirm or alleviate concerns of a coming recession.
US futures were red, keeping the same pattern since Friday, in which the Nasdaq 100 and the Russell 2000 underperform. These two indexes have been leading stock market moves, up and down, as they are in the hot core center of the most critical theme: interest rates. In a word, investors are shifting from greed to fear.
The STOXX Europe 600 extended a decline to its second day after a pocket of supply outweighed demand.
The European benchmark has been ranging between the resistance set by late-June highs and the support of the March lows. Given that the trend is falling, I expect the 400 levels to give way too. Like US futures, technology led the selloff, followed by healthcare and luxury.
Oil-related stocks managed to gain slightly on a correction within the continent's energy shortage. Miners lost another 1.2%, extending losses as Chinese cities increased restrictions, sparking concerns that the world's top metal consumer and the second-largest economy will take a significant hit, impacting the global economy.
Treasuries extended gains, pushing the yields down for the second day, pushing toward a top.
If 10-year yields fall below 2.7, it will have completed an H&S top.
However, worse than the implication of investors buying more bonds is that they're buying more bonds even though their payout is falling. Moreover, the rates are falling, in contrast to expectations for further rate hikes, rendering current yields even more unattractive. The fact that investors are willing to buy bonds at this point suggests they are much more afraid of keeping their money elsewhere, which is a bearish sign. So is the following chart.
The 10-year fell harder than the 2-year yield, meaning that people bought more ten-year yield bonds than the two-year yield bond. This behavior is widening the inverted yield spread—a situation in which the shorter-dated bond pays out more than the longer-dated bond, which is economically illogical and is a leading indicator of a recession.
Investors rushed to safety, pushing the U.S. dollar to its highest level since Oct 18, 2002.
I expect the dollar to extend its rally to at least 110, based on the height of the H&S Continuation pattern. Here is our last post on the dollar. The dollar's rise pushed the Euro to its lowest since Dec 4, 2002, and parity.
Although the H&S Continuation pattern targets 0.99, I expect that parity's headlines will support it with all the interest and psychological implications.
Gold is now up after having swung between gains and losses. It's impressive that gold is up despite a stronger dollar and rising yields, underscoring how scared investors are. Technically, gold is unclear right now.
I would feel more comfortable guessing a direction after reaching its Falling Channel's extremes.
Bitcoin fell for the fifth-straight day as it tests potentially cataclysmic support.
The cryptocurrency fell to the bottom of a potential Rising Flag. If the price closes below $1,900, I expect another leg down on the scale of the previous legs, respectively $13K and $14K. These moves will jive along with my long-term bearish call, which I have been repeating since at least January.
Oil fell for the second day, confirming the preceding Rising Flag within the Falling Channel, increasing the odds of completing a much larger bearish triangle (as explained here).
Up Ahead
- Earnings due from JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC)
- BOE Governor Andrew Bailey discusses the economic landscape, Tuesday
- Amazon.com (NASDAQ:AMZN) kicks off its Prime Day event, Tuesday
Disclaimer: The author currently does not own any of the securities mentioned in this article.