Oil Trading Higher On Hurricane Supply Woes, Stronger Demand

There’s a mixed tone early after an overnight rally flagged amid political turmoil in Washington, D.C., and concerns about more supply chain challenges.

The coming decisions around the budget, debt ceiling, and other issues on Capitol Hill really appear to be the focus this week in a big way. Arguably, the sooner things get done there, the better for the market. Uncertainty around all this could be part of the reason stock index futures lost ground as the overnight session moved along after initially being higher.

Lawmakers might have a government shutdown on their hands unless they can agree to fund the government after its fiscal year ends on Thursday. The discussions on the debt ceiling have been woven into a $1 trillion infrastructure deal and a $3.5 trillion budget reconciliation package.

Turning to the supply chain issues, we heard last week that Nike NKE may not have enough sneakers to meet upcoming holiday demand. Costco COST just announced it will start rationing paper towel purchases again. 

The culprit: ships loaded with goods at ports in the US can’t unload their cargo from overseas due to scheduling woes, long lines, and worker shortages across shipping, trucking, and railways, according to the Wall Street Journal.  As a result, retailers can’t get enough goods to satisfy demand.

Meanwhile, Evergrande, the Chinese real estate developer giant that caused one of the most volatile weeks in market history, is still in jeopardy of defaulting on its debt obligations. This is one of those issues to keep in mind, because it isn’t necessarily going away.

Oil is approaching a three-year high, with U.S. crude trading  above $75 a barrel on lingering supply issues caused by Hurricane Ida and increased demand in parts of Asia, where the impacts of the pandemic appear to be fading. Goldman Sachs GS raised its year-end Brent crude forecast to $90 a barrel from $80, and increased its  U.S. crude price forecast to $87 from $77.

You could argue the crude rally is a bright spot for at least one sector: Energy. That’s a sector that’s been trading in fits and starts over the last few months. Now crude is at levels where technical resistance stopped the upward march earlier this year and back in 2018, so we’ll see if there’s enough buying interest to push through the 2021 high above $76.

Yields March To Near Three-Month High

If the stock market bored you on Friday, hopefully you turned your attention to what’s been going on around the corner in fixed income.

U.S. Treasury yields finished the week on a roll as the benchmark 10-year yield wound up at 1.45%. That represented a pretty amazing rally of more than 15 basis points in just two days from a low near 1.3% on Wednesday when the Fed meeting ended. The yield moved up again early today to 1.48%.

A more hawkish tone from both the Fed and the Bank of England might have contributed to the selling in fixed income assets, which move the opposite way of yields. Generally, a drop in Treasuries can tell you good things about the economy because it generally signals less cautious trading. In fact, the best sector performers Friday were the ones you often see do well when the economy is on the move higher, including Energy, Financials. This week we’ll see if that continues. 

The 10-year yield is now at levels last seen at the beginning of July, though it remains historically low. The yield regularly traded above 1.5% between March and June before economic growth began slowing due in part to the Delta variant.

When Treasury yields rise and more hawkish monetary policy appears to be ahead, that’s often bad news for growth stocks like ones in Tech and Communication Services. That seemed to be the case a bit last week, with some selling of “growth” and buying of “value,” but what we saw looked more like a little portfolio adjusting and nothing severe. Investors may want to be on their toes however, because earlier this year when the 10-year yield climbed to 1.75%, Tech took a beating. No guarantee it will happen again, but it’s something to be cognizant of.

A Look At The Week Ahead

It’s the last week of the quarter, so there isn’t a whole lot of earnings on investors’ plates this week. However, Fed Chairman Jerome Powell speaks on Wednesday, which will of course attract the attention of investors in hopes of gaining clarity on the timing of the stimulus tapering he alluded to last week. 

And if you’re approaching the economic landscape from an even bigger picture, ECB President Christine Lagarde will be speaking Wednesday as well, giving you a double dose of central bank tidings to digest. 

On Friday, keep an eye on the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) Report. Earlier in the year, several monthly numbers came in below what analysts had forecasted. A higher than expected reading could be seen as bullish for the US dollar, but that means goods are more expensive for foreign buyers. The consensus forecast for September is 59.6, according to research firm Briefing.com. 

Friday also brings a look at inflation with the government’s personal consumption expenditure (PCE) prices for August. 

Other than the central bank speakers and a smattering of data, another thing to look out for the last week of any quarter is a phenomenon called “window dressing” where fund managers often buy some of the quarter’s better-performing stocks so their clients can see them in the quarterly results mails soon going out.

Whatever happens today, how the week starts isn’t necessarily how it will play out. A week ago saw a huge selloff Monday followed by a major turnaround that led to Wall Street enjoying overall gains by Friday.

CHART OF THE DAY: HERE THEY COME, SPINNING AROUND THE TURN. With just four sessions left in Q3, the Nasdaq 100 (NDX—candlestick) and the S&P 500 Index (SPX—purple line) are neck and neck in year-to-date performance, trailed by the Russell 2000 Index (RUT—blue line) of small-cap stocks. Earlier this year, small-caps were well ahead of the others.  Data Sources: FTSE Russell, Nasdaq, S&P Dow Jones Indices.  Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Working With A Net: So far, you could argue September has been the “tale of two months” for Wall Street. Obviously it’s only a single month, but the market had a pretty clear demarcation last week when stocks turned around Wednesday and rallied back following so much malaise the first few weeks of September. You could give the Fed credit , or call it “buying the dip,” but whatever the case, the prolonged selloff some people had forecast doesn’t appear to be happening. At least for the moment. September is the worst month of the year historically on Wall Street, and there’s still four days left. 

Technically, however, last week’s turnaround might have left things easier for the bulls to defend. The SPX fell below its 50-day moving average (now near 4340) a week ago, but then buyers surfaced and sent it back above that level. As we’ve been noting, the 50-day has held pretty tightly most of the year, and it appears to be coming to the rescue again. As analysts note, however, support at the 50-day doesn’t mean investors should go “all in” when the index falls to the moving average. You still have to be smart about what you buy, and know why you’re getting in and what your exit strategy is going to be. You never want to go in blind simply because of a technical support level. Those levels got crushed during March 2020, as you might remember.

The “Uncertainty Principle”: How many times have you read that the market hates uncertainty? Enough to be sick of it, probably. Even so, we got more proof of the value of certainty last week when Fed Chairman Jerome Powell made clear the Fed is on the verge of lifting the gas pedal it’s kept to the floor since March 2020. In past years, news of the Fed getting hawkish might have upset markets, but this time stocks responded with a major rally late Wednesday into Thursday after Powell’s words. And that rally included most sectors, not just the “cyclical” ones you’d typically see rise in hawkish times.  

How do you explain this irony? Call it the “uncertainty principle.” Volatility had been heading up and stocks had been faltering most of September for a bunch of reasons. A major one, arguably,  was lack of “clarity” from the Fed on when it would begin pulling back stimulus. The market’s positive response last week to Powell’s clarity offers more evidence that even “bearish” news can be bullish if it provides more certainty. It also didn’t hurt that many investors and analysts had been calling for the Fed to get more hawkish as inflation worries persist and now the Fed seems almost ready to act. Keep last week’s moves in mind as we go into October, because it’s likely any further clarification from the Fed on future policy could have a similar impact on markets. Or will it? That’s the “uncertainty principle” at work. 

Claim Jumping: In 2020, the weekly initial jobless claims data from the Labor Department each Thursday took on new importance after flying under the radar for a long time. When Covid hit, claims (a proxy for layoffs) soared to unheard of levels, and provided a strong weekly pulse of just how bad things were getting in the jobs market. A bad claims number sometimes helped sink stocks on a given day. 

Last week, claims spiked to 351,000—about 30,000 above analysts’ average estimate—but the market didn’t really blink at the news. That’s partly because claims are still near their lowest level since  the pandemic started last year. Initial claims rose by 16,000 to a seasonally adjusted 351,000 last week from a revised 335,000 the prior  week, the Labor Department said. Keep in mind that recent figures could have been affected by disruptions from storms such as Hurricane Ida, which might temporarily increase the  unemployment claims if places of business are closed due to storm damage or no electricity. 

Though weekly claims totals remain more than 100,000 higher than they generally were before the pandemic, in general economists seem to think that the labor market has been improving and, despite last week’s increase, will continue to improve. Of course, a lot depends on the course of the Delta variant, which has kept some potential workers on the sidelines. Other factors that will continue to be monitored include child-care responsibilities, continued fears of contracting Covid-19, extended unemployment benefits, and early retirement.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image by MotionStudios from Pixabay