Market Update 4-8 Oct - Market enters into volatile period as tapering looms

The market yet again went through another volatile week with the S&P500 flirting with the 4300 support level and the 100 Moving average, before ending the week slightly higher after being resisted by the downwards trendline on the S&P500.

As mentioned previously, the financials are going to be the primary beneficiary of the tapering of the monetary policies across the globe. The financials gained 2.3% for the week while the strongest gainer is the Energy sector with 5% gain as Crude Oil prices briefly topped $80. As it’s the week for the non-farm payrolls, the market ended on Friday on a mixed notes after the jobs reported a job gain of 194,000 jobs instead of 490,000 jobs as expected. However, the unemployment rate dropped unexpectedly from 5.2% to 4.8%. The job report might be perceived as ‘bad news’ as it is likely to hasten the tapering of the monetary policy in the United States.

The United States once again finds itself caught in the debt ceiling issue again and Congress is debating whether to raise debt ceiling to avoid default of its payments. As history always repeats, the Congress will DEFINITELY raise the debt ceiling given the current spending and with the interest rate rising, United States might find itself to have more bills to pay.

Market Heat Map

Market Internals

Technical Updates

In the weekly charts we can see that the market is still holding up at its moving average support level and is likely to be range bound to the downside for Oct at least while waiting for the Fed's announcement on the tapering decision.

We can see that the S&P500 is holding up at the level of 4300 while forming a descending triangle.

• Yield Check:

  • 2-yr: UNCH at 0.31% (+5 bps for the week)

  • 3-yr: +3 bps to 0.58% (+10 bps for the week)

  • 5-yr: +3 bps to 1.05% (+12 bps for the week)

  • 10-yr: +3 bps to 1.61% (+15 bps for the week)

  • 30-yr: +3 bps to 2.16% (+12 bps for the week)

• News:

  • The Chinese government ordered major coal producers in the country to increase annualized output by over 160 mln tons to alleviate the country's energy crunch.

  • Shanghai Securities News reported that sales of Chinese property developers plunged in September.

  • The Reserve Bank of India left its repurchase rate at 4.00%, as expected.

  • Ireland will reportedly enter the OECD agreement on a global 15.0% corporate tax.

  • An Austrian think tank raised its forecast for 2021 growth in Austria to 4.4% from 3.4% and lowered its forecast for 2022 growth to 4.8% from 5.0%.

  • CDU leader Laschet offered to resign as coalition talks continue in Germany.

  • China's September Caixin Services PMI rose to 53.4 from 46.7.

  • Japan's August Household Spending decreased 3.9% m/m (expected -2.0%; last -0.9%), falling 3.0% yr/yr (expected -1.5%; last 0.7%). August overall wage income was up 0.7% yr/yr (last 0.6%) and August Current Account surplus reached JPY1.666 trln (expected surplus of JPY1.541 trln; last surplus of JPY1.911 trln). September Economy Watchers Current Index improved to 42.1 from 34.7.

  • Germany's August trade surplus reached EUR13.00 bln (expected surplus of EUR15.80 bln; last surplus of EUR17.70 bln) as imports grew 3.5% m/m (expected 1.8%; last -3.6%) and exports decreased 1.2% m/m (expected 0.5%; last 0.6%). August Current Account surplus reached EUR11.80 bln (last EUR17.60 bln).

• Today's Data:

  • September nonfarm payrolls increased by 194,000 (Briefing.com consensus 450,000). The 3-month average for total nonfarm payrolls decreased to 550,000 from 806,000 in August. August nonfarm payrolls revised to 366,000 from 235,000 and July nonfarm payrolls revised to 1,091,000 from 1,053,000.

    • September private sector payrolls increased by 317,000 (Briefing.com consensus 385,000). August private sector payrolls revised to 332,000 from 243,000 and July private sector payrolls revised to 816,000 from 798,000.

    • September unemployment rate was 4.8% (Briefing.com consensus 5.1%), versus 5.2% in August. Persons unemployed for 27 weeks or more accounted for 34.5% of the unemployed versus 37.4% in August. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 8.5%, versus 8.8% in August.

    • September average hourly earnings increased 0.6% (Briefing.com consensus 0.4%) versus a downwardly revised 0.4% increase (from 0.6%) in August. Over the last 12 months, average hourly earnings have risen 4.6%, versus 4.0% for the 12 months ending in August.

    • The average workweek in September was 34.8 hours (Briefing.com consensus 34.7), versus 34.6 hours in August. Manufacturing workweek was unchanged at 40.4 hours. Factory overtime was up 0.1 hour to 3.3 hours.

    • The labor force participation rate was 61.6%, versus 61.7% in August.

    • The employment-population ratio increased to 58.7% from 58.5% in August.

• Wholesale Inventories increased by 1.2% in August (Briefing.com consensus 1.2%) after increasing 0.6% in July.

• Commodities:

  • WTI crude: +1.4% to $79.40/bbl

  • Gold: -0.1% to $1757.40/ozt

  • Copper: +0.8% to $4.276/lb

• Currencies:

  • EUR/USD: +0.2% to 1.1575

  • GBP/USD: +0.1% to 1.3624

  • USD/CNH: -0.1% to 6.4418

  • USD/JPY: +0.5% to 112.21

• The Week Ahead:

  • Monday: Bond market closed for Columbus Day (NYSE open)

  • Tuesday: September NFIB Small Business Optimism (prior 100.1) at 6:00 ET; August job openings (prior 10.934 mln) at 10:00 ET; $58 bln 3-yr Treasury note auction results at 11:30 ET; and $38 bln 10-yr Treasury note reopening results at 13:00 ET

  • Wednesday: Weekly MBA Mortgage Index (prior -6.9%) at 7:00 ET; September CPI (prior 0.3%) and Core CPI (prior 0.1%) at 8:30 ET; weekly crude oil inventories (prior +2.35 mln) at 10:30 ET; and $24 bln 30-yr Treasury bond reopening results at 13:00 ET

  • Thursday: September PPI (prior 0.7%), Core PPI (prior 0.6%), weekly Initial Claims (prior 326,000), and Continuing Claims (prior 2.714 mln) at 8:30 ET; and weekly natural gas inventories (prior +118 bcf) at 10:30 ET

  • Friday: September Retail Sales (prior 0.7%), Retail Sales ex-auto (prior 1.8%), September Import/Export Prices, and October Empire State Manufacturing (prior 34.3) at 8:30 ET; August Business Inventories (prior 0.5%) and preliminary October University of Michigan Consumer Sentiment Survey (prior 72.8) at 10:00 ET

Other Notable News

While in the spotlight, China Evergrande’s former backer, Chinese Estates Holdings 32% as it announced a takeover offer to take the listed co private by offering minority shareholders a 38% premium.

In the Asia Pacific, New Zealand raised its interest rate first time in 7 years, an indication that a slew of rising of interest rates will likely happen across the globe soon enough as Inflation is becoming unstainable.

Summary

As the market prepares itself for the tapering, eventually leading into an increase of interest rates to avoid an overheated economy, the key sectors that will benefit from this will be the financial industry and the US dollar. Energy commodities will remain elevated as the energy crunch across the globe will continue into through winter.