Did The Bell Just Ring On The Bear Market Rally?

It would be a mistake to read too much into one (or, in this case two) days, especially considering Friday was a holiday in many locales, and the sheer scope of the bounce off the March lows likely enticed those lucky enough to have participated to consider taking some profits before the next shoe drops.

That said, US equities closed the week (and started the new month) in decidedly inauspicious fashion. The fact that losses were in no small part attributable to what could be another severe macro shock in the making (i.e., a rekindling of Sino-US economic tensions) and sour sentiment around tech (Amazon plunged), is not good news at all.

The worst Friday since March for the S&P brought the gauge’s weekly losing streak to two, and Amazon’s one-day decline was among the largest in years.

Somewhat amusingly, the two-day swoon for equities suggests Jerome Powell may have rang the bell at the top on this bear market bounce with Wednesday’s dovish press conference, following what amounted to a status report from the April FOMC meeting.

That, despite his having pretty clearly indicated that the Fed has everyone’s back for the foreseeable future (e.g., “We’re not going to be in any hurry to move rates up”, emergency lending powers will be deployed “forcefully, proactively, and aggressively”, etc.).

“I had already shifted slightly less bullish due to the price rise, but it’s hard to stay firm when stocks rip higher in your face”, Kevin Muir, formerly head of equity derivatives at RBC Dominion said Friday, in his daily note. “When the VWAP orders are running, it often seems like the buying will continue forever, and nothing can stop it”, he added. “On the day of Powell’s rate decision, the buyers overwhelmed the market and the sky seemed the limit”.

Fast forward 48 hours and the sky seems like it might be falling – again.

The bottom line is that with just five stocks accounting for 20% of market cap, breadth is poor on at least one measure, and now, everyone has to be concerned about the next China tweet from the president.

In addition to the push to block the Thrift Savings Plan from executing a planned reshuffle that would entail having a $50 billion fund mirror the MSCI All-Country World index (and thereby invest in Chinese equities), Rabobank’s Michael Every reminds you that “other reports have it that Peter Navarro is pushing hard to onshore US manufacturing of key health goods as soon as possible by executive order”.

The Fed said Friday it will trim Treasury purchases again, this time to $8 billion per day from $10 billion. The balance sheet is now at $6.65 trillion. They bought “just” $82 billion in securities over the last week, a far cry from the torrid pace seen in late March, when the world was ending.

Powell’s schedule for March, unveiled on Friday, shows Jay was on the phone pretty much from dawn to dusk on March 2, chatting with everyone from the PBoC’s Yi Gang to Christine Lagarde.

Two months on, and things have calmed down considerably, but the next speed bump (or maybe “pothole” is better) is pretty clearly going to involve a boiling over of tensions between the White House and Beijing.

At this juncture, Trump (and his surrogates) have made too many promises with regard to “holding China accountable” not to act, and this is a case where economic penalties are pretty much the only available option. And yet, the imposition of any such penalties will almost by definition nix the trade agreement. Hence the market’s palpable consternation.

One silver lining this week was oil, which managed a gain for the first time in a month. The fundamental backdrop is obviously still terrible (and will remain so for the foreseeable future) but there are some tentative signs of normalization as the production cuts begin to kick in.

Exxon reported a $610 million loss on Friday, its first in more than three decades. The company will close hundreds of thousands of barrels of output going forward. Chevron said it will cut spending further and shut up to 400,000 barrels per day of production. When you think about these results, don’t forget that Q1 ended on March 31. Things got considerably worse for oil after that, so one shudders to think what Q2 is going to look like.

Oil rigs in the US declined for a seventh week to 325, Baker Hughes said Friday.

Looking ahead, there’s little question that the Trump administration will start turning the screws on China again. That will leave the market vulnerable to foreign-policy-by-tweet, something investors haven’t had to worry about since early January, when the president was assassinating legendary generals and using his Twitter account to warn Tehran against retaliating lest the US military should be “forced” to take further offensive action.

Commenting on Larry Kudlow’s attempts to reassure the market that Trump doesn’t intend to actually move forward with some manner of ill-conceived scheme to repudiate US debt, Rabobank’s Every says “That’s like being in a dispute with your neighbor over the line of a fence and them calmly telling you ‘I can assure you that we don’t plan to burn your house down over this'”.

“Is one reassured by that kind of thing or not?”, Every went on to wonder, in a Friday note, adding that “the hows and whys and ifs and maybes of what was once a crackpot leftfield are now out there actually being discussed on trading floors”.

So, that’s where we are as May begins.

On the bright side, Trump told reporters Friday afternoon that Gilead has received emergency use authorization for remdesivir. This was expected after Wednesday’s news flow, but confirmation ahead of the weekend was welcome all the same.