Market Brief – Thursday 9/5/19

U.S. equity futures catapulted higher in overnight trading which sent S&P 500 futures over their 50-day moving average on a report from the Chinese state media that a meeting will be held in Washington in October to take action to create good conditions for trade consultations. Notably, the market reaction to this meeting is stronger than the initial announcement of the now-canceled September meeting. Treasury yields were slightly higher on the news.

ADP reported +195k jobs created in August above expectations for a +148k print. The goods-producing sector created a scant +11k jobs while the services sector created +184k jobs. It is odd that companies are reducing Capex spending while adding employees. The strength in the services sector was validated by the ISM Services PMI which came in at 56.4, above expectations. It is not unusual for the services sector to expand as an economy slips into a recession.

The financial media is reporting a surge in stock prices and Treasury yields on the back of today’s ADP report and the ISM Services PMI. This couldn’t be further from the truth. The markets make the news, not the other way around.

For those who don’t believe in technical analysis, last night the computer algorithms drove S&P 500, Nasdaq-100 and DJIA futures over their 50-day moving averages and their overhead resistance level which has been a level of resistance for several weeks. When a strong level of resistance is broken, the weak hands that were short stocks at that price level get flushed out, since their stop losses get triggered. When a stop loss is triggered from a short position when stocks are rallying, it turns the seller into a buyer.

Those same short sellers were also likely long Treasury bonds, which would make sense. At the same point, they were stopped out of their short equity positions, they likely sold their long Treasury bonds to cover their shorts. Hence how stocks can rally and bonds can sell off when resistance is broken.

Crude oil Bulls got their wish as the EIA reported crude oil inventories as Crude: -4.77mm (-2.0mm expected), Cushing: -230k (-2.4mm expected), Gasoline: -2.396mm (-1.5mm expected) and Distillates: -2.538mm (+500k expected). Crude oil exports doubled from this time last year. Crude oil traded higher after the report.

Treasury yields also rose due to $53.4 billion corporate bond issuance this week. Even cash-rich Apple issued $7 billion of new debt to presumably buy more of its stock back. BofA reported that most of this borrowing is being done to refinance existing debts. This rise in Treasury yields may provide a nice entry point for those looking to add Treasury bonds to their portfolios.

Physical gold along with the mining stocks are selling off today. Experts in this sector state that institutional money managers and private investors didn’t chase this rally, suggesting that the much larger move in gold is yet to come. This is especially true as the “Smart Money” is record short gold while the Speculators, or Hedge Funds, are record long.

Stocks and crude oil gave back some of their gains and Treasury bonds some of their losses. Gold was sold aggressively along with soybeans. Markets were mostly quiet after this morning’s ramp ahead of tomorrow’s Nonfarm payroll report.