Earnings Calendar Quiet Today, But Big Names Including FedEx, Nike Ahead Later In Week

Talk about snapping right back. 

Major indices rose just a bit in pre-market trading this morning, nothing too spectacular, but Monday’s surge was the best day in three months after a four-day losing stretch. Basically, stocks are back to where they were before Friday’s plunge as the SPX broke its losing streak in a big way. 

Wall Street’s in whiplash territory, veering from one thing to another as investors try to make sense out of the latest Fed speeches and economic data. Yesterday was a 180 from Friday, with the “reflation” trade once again lifting “cyclical” sectors like Energy and Industrials. Tech took a breather as the chip sector came under pressure. 

What does today have in store for us? There’s really no chance for investors to relax, because Fed Chairman Powell is back in town. More on that in a moment. 

Overnight, Japanese stocks bounced back in a big way. If you’ll recall, weakness in that market helped push U.S. indices lower early in pre-market trading Monday before the rebound. Gold is down a little this morning, and if it continues tracking lower that would be three days out of four.

There was also some good news from Delta DAL this morning. Media reports say they’ll hire 1,000 new pilots next year, and it’s really positive that they’re seeing that kind of demand. Hopefully, we’ll see other airlines and hotels go on a hiring spree.

No Break From Fed Chatter As Powell Tops Today’s Bill

Powell is today’s catalyst. His news will overshadow just about anything else, barring some major development. 

Less than a week after his last appearance, Powell takes the stage again this afternoon to chat with Congress about the Covid economic recovery. Even if that’s the official subject matter, it’s certainly possible some of the questions he gets asked could relate to rates and possible balance-sheet tapering, so consider staying on your toes. We’ve seen the last two days just how ticklish the market can get about any Fed talk. 

Questions are always the interesting part on Capitol Hill when the Fed chair makes an appearance there, because with that audience you never know what you’ll get. Powell might get asked specifically about St. Louis Fed President Jim Bullard’s remarks last Friday that made rate hikes seem a bit more imminent. 

On that topic, it’s likely Powell will keep his comments closely guarded, but he might be asked to get more granular about just when and by how much the Fed plans to cut back on bond buying. A lot of talk in the analyst community centers on the late-August Jackson Hole Fed meeting, but some say more information could come as soon as the Fed’s next meeting in late July. 

Powell’s statement released ahead of his testimony today didn’t say anything he hasn’t said before. Basically, he says inflation is transitory. It looked pretty vanilla and didn’t appear to move the market. The 10-year Treasury yield sits just a basis point below 1.5% early Tuesday. Crude overnight gave back a bit of its sharp Monday gains that helped power the Energy sector to a huge day. 

As investors digested last week’s Fed statement and Powell comments, the market seemed a bit reassured by the Fed simultaneously raising its inflation forecast for the year but also sticking with its message that a spike in prices is only transitory. Despite everything going on in the market, there hasn’t been a general sense of disorder. 

In fact, volatility eased gently on Monday, with the Cboe Volatility Index (VIX) falling double-digits to back below 18 from above 20 on Friday. The 10-year Treasury yield climbed, but didn’t bump its head against 1.5%. It remains way below this year’s highs of above 1.75% despite the Fed’s more hawkish recent tone. VIX looks pretty tame again this morning, staying well below 18. 

Also, commodities revived a bit Monday even though tighter Fed policy traditionally boosts the U.S. dollar, often putting pressure on this part of the market. The only major commodity suffering losses Monday was corn. The metals and energy complex all gained, with crude rising above $73 a barrel for the first time since 2018. 

Meanwhile, bitcoin (/BTC) is having a rough start to the week after China began cracking down on cryptocurrency mining and payments. After yesterday’s drubbing, /BTC starts the morning down another 9% to fall below $30,000. Bitcoin’s quick fall from highs above $65,000 might be part of an overall cooling of some of the market’s risk appetite, but considering how volatile it’s been these past few months, we’ll have to wait and see. 

On The Road To $100 Crude? One Bank Thinks So

In fact, it was interesting yesterday to see Bank of America BAC come out with a projection for $100 a barrel crude by next year as travel demand rebounds. As we pointed out yesterday, crude production both in the U.S. and overseas just hasn’t come back as quickly as demand. That’s not too rare when the economy emerges from a recession, and it’s fair to say the post-Covid reopening is unprecedented for everyone. That means this travel recovery might be like none we’ve ever seen in terms of pent-up demand. 

Whether crude can actually get back to $100 for the first time since 2014 is an open question, obviously. Previous rallies since then have flamed out above $75 a barrel, which incidentally is around the area where many transport stocks like airlines start to suffer from margin pressure.

Where crude goes could have a lot to say about inflation overall. Because even if it isn’t directly responsible for inflation, crude goes into so many products and transporting them that it ultimately has an impact. The cost of energy plays into the cost of most things we use every day. Copper is similar, but a product like lumber, maybe a little less the case. 

Even though Energy led all sectors yesterday thanks in part to crude’s booming rally and analyst upgrades and price target hikes for stocks like Marathon MRO and Devon Energy DVN, there wasn’t a single losing sector in the S&P 500. Still, Technology and Communication Services brought up the rear, with Tech maybe getting some pressure from China cracking down on cryptocurrency mining, according to media reports.

Cryptomining is big business in China, accounting for more than half of global bitcoin production, Reuters reported. But the State Council, China’s cabinet, last month vowed to clamp down on bitcoin mining and trading as part of a series of measures to control financial risks. 

Another interesting development seen Monday that might be worth monitoring today is a drop in the “meme” stocks like GameStop GME and AMC Entertainment AMC. We may be seeing an “unwinding” of meme trades, but a couple of days isn’t enough proof. The drop in bitcoin yesterday and the fact that it remains off nearly 50% from its 2021 highs could provide more evidence that investors are starting to shy away a bit from some of this year’s more untraditional types of trades. 

One contributing factor to yesterday’s comeback could be technical, as the SPX once again bounced after a test of its 50-day moving average, now down near 4182. That level has consistently been one where buyers have jumped back into the market over the last few months, research firm Briefing.com noted. Failure to trigger more selling on a test below that level Friday appeared to put a charge back into things Monday. 

There’s still a bunch of earnings to wade through later this week, including KB Home KBH, Darden Restaurants DRI, Rite Aid RAD, FedEx FDX, Carnival CCL, Blackberry BB, and Nike NKE. Thursday looks like a crowded earnings day.

CHART OF THE DAY:  HAVING IT BOTH WAYS? Further evidence of the market’s basic confusion over the path of interest rates is arguably seen in this year-to-date chart of the 10-year Treasury yield (TNX—candlestick) vs. gold (/GC—purple line). Yields popped briefly last week after the Fed sounded a more hawkish note, but then fell. Pressure on yields often implies expectations of a dovish Fed. Gold, meanwhile, took a big dive, something it often does when there’s concern that the Fed might tighten. So who’s right? That remains to be seen. Data Sources: Cboe Global Markets, CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Finals Season For Banks: Fed Chairman Powell’s testimony today and various other Fed speakers aren’t the only Fed-related events going on. The Fed’s “stress tests” for major banks are due Thursday after the market closes. Only banks with $100 billion or more in total consolidated assets are participating this year. On its website, the Fed says, “For the 2021 stress tests, the resilience of large banks is being tested against a hypothetical recession featuring a severe global downturn with substantial stress in commercial real estate and corporate debt markets.” Results of the tests can help determine how much latitude various banks will have from the Fed to use their money on things like buybacks and dividends. 

The Fed said it will lift its temporary cap on dividend payments and stock buybacks for banks that pass this year’s stress tests. A recent Barron’s analysis suggests that banks most likely to be in position to lift their dividends this year are Bank of America BAC, Citigroup C, Fifth Third FITB, JP Morgan Chase JPM, M&T Bank MTB, and Zions Bancorporation ZIONS. Banks’ stress test performance can also play into stock prices, as investors often reward big bank stocks for passing with flying colors and punish any that end up wearing a dunce cap. Financial stocks had a really nice run after last December’s strong stress test performances, though you’ve got to be careful about equating correlation and causation. 

Home Ec: Yesterday’s existing home sales for May became the latest housing report to fall short of analysts’ expectations, totaling a seasonally-adjusted annual rate of 5.65 million, down 2.7% from April. The consensus on Wall Street heading in was for 5.85 million. That followed weaker than expected housing starts and building permits for May reported last week. Maybe, just maybe, the high prices are starting to have an impact on demand.

The next calendar item on housing comes this morning when investors get a look at new home sales for May. In fact, the data may be out by the time you read this. Analysts expect 873,000 seasonally adjusted, according to Briefing.com, down from 975,000 a month earlier. The data can give you a quantitative picture of how the housing market’s doing, but to get closer up it helps to hear from a homebuilder. Investors have that chance tomorrow afternoon when KB Home KBH is expected to report. Consensus is for a blowout on the quarterly earnings number, but what will KBH executives say about where they see things headed? With a possibility of higher interest rates driving up the cost of mortgages, we’ll see if KBH thinks that might be a headwind.

Go Find The Menthol: Anyone whose neck feels sore might want to consult their doctor about whiplash. Market whiplash, that is. Last Friday, growth stocks like the Tech sector seemed like they were getting some respect again while cyclicals like Industrials and Materials dived. Monday saw the reverse, with Tech shares bringing up the rear and cyclicals finding buyers again. As noted here yesterday, it’s hard to find a pattern in these markets, and it might reflect confusion and position shifting following last week’s Fed meeting and the approaching end of the quarter. 

Remember, we only have a few days of Q2 trading left, which means we might see some “window dressing” in coming sessions where some fund managers stock up on stocks that performed well in the quarter and shed some of their losing positions. Anyone venturing into the Wall Street froth this week should be prepared for some quick moves and maybe buy some menthol rub.

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

Image by grailify from Pixabay