Finally! A little relief. Equities are trading higher this morning, as markets try to recover from steep losses. Rising rates have recently put pressure on stocks amid fears that the central banks could keep monetary policy tighter for longer than expected. All major North American indexes were down sharply yesterday, with the Dow posting its biggest one-day loss since March at –1.1% to close below its 200-day moving average for the first time since May. The stock market rally in the first half of 2023, particularly in technology stocks, has faced headwinds as central banks signal their intentions to keep rates elevated well into the next year. The S&P 500 Information Technology Index has dropped more than 10% from its July high, entering correction territory. Falling consumer confidence has contributed to the tech stock sell-off, raising concerns that a hawkish Fed and nervous consumers could leave the market vulnerable to a reversal.
Hedge funds are reducing their stock leverage at the fastest rate since the 2020 crash as a cross-asset selloff engulfs the market. Last week, hedge funds increased their bearish wagers on stocks, driving down their net leverage by 4.2% to 50.1%, the biggest week-on-week decline in portfolio leverage since the pandemic began. The recent pessimism is partly due to the Fed's commitment to keep interest rates higher for longer, creating pressure on stretched market valuations. However, this more cautious stance could potentially set the stage for a market bounce, although timing such a recovery is uncertain. Short selling has also increased as investors turn bearish on specific sectors.
Consumer confidence in the U.S. slipped in September, particularly regarding future expectations, as people anticipate that interest rates will stay elevated. The Conference Board's consumer confidence index fell to 103 in September from 108.7 in August, with a significant decline in future expectations, which tumbled from 83.3 in August to 73.7 in September. This drop in future expectations could be seen as a sign of recession. Consumers are reacting to the possibility of more challenging conditions, including rising interest rates, narrowing job openings, and higher costs for big-ticket items. Retailers are starting to feel the effects of decreased spending, with some reporting declining sales and profits. Consumer confidence is closely monitored because consumer spending makes up a significant portion of the U.S. economy.
The OSFI, Canada's banking regulator, has expressed concern about the prevalence of ultra-long mortgages with amortization periods of 35 years or longer. OSFI is working with banks to address this issue and is planning to introduce more regulatory oversight to make these extended-term mortgages less common. Homeowners with variable-rate mortgages that have fixed monthly payments are facing increased interest costs as rates rise. These homeowners may be making interest-only payments, and when their mortgages come up for refinancing, they could face substantially higher payments if interest rates remain elevated. The regulator sees this issue as "manageable" but believes it's essential to take steps to reduce the prevalence of such mortgages.
Canada's Finance Minister Chrystia Freeland announced an expansion of the Canada Mortgage Bonds program, unlocking an additional $20 billion for rental housing construction across the country. The program's annual limit has been increased from $40 billion to $60 billion, with the extra funds aimed at boosting rental construction, including apartments, student housing, and senior residences. This expansion is part of the government's efforts to address the national housing shortage, allowing developers to access loans at lower interest rates. The government aims to increase rental construction by 30,000 units annually in response to the housing affordability challenge.
The most recent Fed survey of household finances in the U.S. found that Americans outside the wealthiest 20% of the country have run out of extra savings and now have less cash on hand than they did when the pandemic began. Adjusted for inflation, bank deposits and other liquid assets were lower in June of this year than they were in March 2020, for the bottom 80% of households by income. Despite all income groups seeing their balances decline in real terms from a peak in 2021, cash savings are still about 8% higher compared to Feb 2020 for the wealthiest one fifth. By contrast, the poorest two-fifths of Americans have seen an 8% drop in that period while the next 40% (the middle class) also saw their cash savings drop below pre-pandemic levels in the last quarter, although by slightly less. Economists are noting that the figures point to dwindling firepower available for U.S. consumers, whose resilience has kept the economy growing at a rapid clip this year and staved off the recession that many expected.
Far from home. Following Hurricane Idalia’s hit to Florida, migrating flamingos blown off course while traveling from Mexico to Cuba have been spotted in very unsuspecting places. Unusual flamingo sightings have been reported in various states in the U.S., including Ohio and Pennsylvania, following the latest hurricane season. While flamingos can be found in parts of Florida, these sightings reached far beyond their typical range. This phenomenon likely occurred as the birds got caught up in the hurricane's path, with efforts now on the way to get these birds back home.
The US Federal Trade Commission (FTC) is suing Amazon.com Inc. in a long-anticipated antitrust case, accusing the e-commerce giant of monopolizing online marketplace services by degrading quality for shoppers and overcharging sellers. The FTC and 17 states accused Amazon of engaging in a course of conduct to exclude rivals in online marketplace services and stifle competition. The company is also accused of illegally forcing sellers on its platform to use its logistics and delivery services in exchange for prominent placement and of punishing merchants who offer lower prices on competing sites.
A target for crime...Target is closing nine stores in four states to stem losses from rising retail theft. Target says closing is the only option with theft and organized retail crime threatening the safety of our team and guests, and contributing to unsustainable business performance. Target has been fuming on its earnings calls for more than a year about losses from theft by criminal gangs, which are adding pressure on the company’s slender profit margins. In May, CFO Michael Fiddelke said the annual blow from shrink this year would be $500 million worse than the previous year. Target will still have more than 150 locations in the four affected markets. The retailer has a nationwide footprint of almost 2,000 stores.
Cisco Systems' $28 billion acquisition of Splunk is expected to spark more deals in the technology sector as companies seek to acquire software vendors with predictable subscription revenue. Splunk, a cybersecurity and data analytics firm, had been shifting its business model from software licensing to subscriptions when it was acquired by Cisco. Other technology giants, including Microsoft, Adobe, and Oracle, are likely to target subscription-focused companies like Elastic, Datadog, Crowdstrike Holdings, and Dynatrace. The improving outlook for software M&A is expected to boost deal activity in the technology sector, which has seen a decline in 2023.
Oil prices are on moving higher on signs of a tightening market. The premium for near-term barrels of WTI is at the highest level in more than a year, indicating a deficit. Official inventory data due later today may confirm another draw in crude stockpiles at an important US storage site. Yesterday, the industry-funded American Petroleum Institute reported that inventories at the storage hub in Cushing, Oklahoma, declined again last week, although nationwide stockpiles climbed.
Nickel prices are at a 14-month low amid increasing supplies from Indonesia and China and a weaker demand outlook for industrial metals. Prices have slumped 38% this year, the biggest loss among the main metals on the LME. Nickel, which is used in stainless steel and electric vehicle batteries, is in a downward spiral because of rising supplies from new plants in Asia following a historic short squeeze last year.
Fixed income and economics
A potential U.S. government shutdown is raising concerns and uncertainty in the bond market. While historically, government shutdowns have led to short-term rallies in Treasury bonds as investors seek safety, the current situation adds a layer of uncertainty to an already complex economic environment. A government shutdown could disrupt the release of key economic data, slow down economic growth as government workers go unpaid, and underscore the political unpredictability that has recently led rating agencies like Fitch and S&P to strip the U.S. of their top grades. It remains to be seen how this will affect Treasury yields and market sentiment, but investors are closely monitoring the situation. Adding to concerns is the recent selloff in the U.S. bond market and the potential for further increases in Treasury yields. The cost of insurance against rising yields, particularly in the long end of the curve, has reached its highest level since September 2022. Traders are showing a preference for 10-year options that cover the risk of yields exceeding 4.85% by the end of October, up from around 4.55% currently. A recent JPMorgan client survey indicates that short positions on Treasuries have risen to their highest levels in five weeks. The bearish sentiment follows the Fed's signal that it will keep interest rates elevated well into 2024, leading to higher yields as traders adjust their expectations.
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I know that I am intelligent, because I know that I know nothing. Socrates