U.S. stocks continued their technical rebound off of support at the 200-day moving average on Wednesday thanks to an overnight rise in Chinese stocks as well as a rise in crude oil. The latter was driven by inventory drawdown reports.
Also boosting sentiment toward energy was a better-than-expected report from Hess Corp. (NYSE:HES) ahead of reports from Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) on Friday.
In the end, the Dow Jones Industrial Average gained 0.7%, the S&P 500 gained 0.7%, the Nasdaq Composite gained 0.4%, and the Russell 2000 gained 0.4%. Crude oil gained 1.8% to close at $48.85 a barrel while gold was largely unchanged. Treasury bonds were largely unchanged.
Technically, breadth remains challenging with just 51% of the stocks in the S&P 500 in uptrends vs. more than 75% back in April. Jason Goepfert at SentimenTrader warns that the obvious defense of the S&P 500’s 200-day moving average on Monday and Tuesday could prove troublesome: A similarly vigorous rebound off of this level preceded the last three major pullbacks in the stock market in 2000, 2007, and 2011.
The Shanghai Composite gained 3.4%, breaking a three-day losing streak during which it fell 11%. There was no single catalyst behind the bounce, which came late in the session. There were reports the People’s Bank of China was looking to actively support markets by encouraging foreign investors — including global central banks and sovereign wealth funds — to invest in its interbank market.
At the sector level, energy led the way with a 1.3% gain, followed by industrials. Technology was a laggard on post-earnings weakness in Yelp Inc (NYSE:YELP) and Twitter Inc (NYSE:TWTR), which lost 25.2% and 14.2%, respectively.
After the bell, Facebook Inc (NASDAQ:FB) was trading down 1.9% after reporting better-than-expected earnings. User metrics were a little soft, with average daily active users growing just 3.4% quarter-over-quarter to 968 million.
Turning to the Fed: The July policy statement confused more than clarified but was considered hawkish as just “some further improvement” in the job market is needed before rate hikes will start. The U.S. dollar surged higher in response, with the PowerShares DB US Dollar Index Fund (NYSEARCA:UUP) breaking a three-week downtrend.
Policymakers remain frustrated by tepid wage growth and still-low inflation. The latter is driven both by energy price declines and the demand-side drag from a slowdown in China and Europe.
Once again, the fate of the free world seemingly rests on a decision out of the Marriner Eccles building in Washington D.C. where, on Sept. 17, Janet Yellen and her cohorts at the Federal Reserve will decide whether to raise interest rates for the first time since 2006.
If they do, the fear is, they will undo layers upon layers of credit leverage that have supported stocks, the global financial system, and the recovery over the last seven years.
A quicker-than-expected rate liftoff could throw stocks into their first 10%-plus correction since Bernanke started QE3 in 2012 as a higher cost of capital cascades through the bond market, corporate junk debts and eventually into equities as the flow of debt-funded buybacks is threatened.
Now that the stakes are set, Wall Street is doing its best to read the tea leaves Yellen is leaving behind.
In September 2013, Bernanke surprised with a dovish “no taper” decision. Alberto Gallo, head of macro credit research at RBS, believes traders are bracing for something similar as the market is already pricing in a 25% change of no rate hike until 2016 vs. 12% at the start of the year. “A rate hike could be delayed by slowing global growth, fears of a stronger USD and Chinese financial volatility spreading to global capital markets,” Gallo said.
With futures only pricing in a one-in-three chance of a September rate hike, assets most at risk of a surprise rate hike — another “taper tantrum” of the kind seen in early 2013 when Bernanke first teases the tapering of QE3 in front of Congress — would hit U.S. high-yield and emerging market corporate credits the hardest according to Gallo.
Capital Economics U.S. economist Steve Murphy is more hawkish, believing the Fed’s July policy statement was fairly hawkish and sticking with a forecast of two rate hikes this year in September and December taking short-term interest rates from near 0% now to a range between 0.5% and 0.75%.
After that, he sees “stronger wage growth and core inflation resulting in a much more aggressive pace of tightening than is currently anticipated by the markets and Fed officials, leaving the fed funds rate at 2.25% to 2.50% by end-2016.”
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
