U.S. markets showed continued weakness on Wednesday and gained downside momentum into the closing bell, leading to the market’s worst trading day since June.
Trade concerns and rising interest rates have been a headwind for the market over the past two weeks and finally reached a boiling point.
Fueling the selloff late was news that the U.S. Justice Department charged a Chinese intelligence officer of economic espionage for theft of trade secrets from leading U.S. aerospace companies.
The news is hardly likely to tamp down rising Sino-U.S. trade/tariff animosity as volatility soared past a key level of resistance.
The Nasdaq plummeted 4.1% after tapping a low of 7,420.
Fresh and upper June support at 7,400-7,350 held on the close below the 200-day moving average with a move below the latter being a continued bearish development.
The S&P 500 slumped 3.3% following the pullback to 2,784.
Upper support at 2,775-2,750 and the 200-day moving average held with a close below the latter being a warning sign for lower lows.
The Russell 2000 sank 2.9% while closing on its session low of 1,575. May support at 1,570-1,560 held with a drop below the latter likely leading to 1,540.
The Dow tumbled 3.2% after testing an intraday low of 25,593.
Fresh and upper support at 25,600-25,400 was stretched by a couple of points into the close with a move below the latter being a continued bearish signal.
There was no sector strength. Technology and Communications Services were slammed for losses of 4.9% and 4%, respectively.
Utilities fell 0.6% and were the least affected.
Global Economy – European markets closed with significant losses.
Germany’s DAX 30 dropped 2.2% while the Belgium20 and France’s CAC 40 sank 2.1%. The Stoxx 600 Europe was punished for 1.6% and UK’s FTSE 100 fell 1.3%.
UK August industrial production rose 0.2% month-over-month and 1.3% year-over-year, topping expectations of 0.1% and 1%.
UK August manufacturing production slipped 0.2%, missing forecasts for a rise of 0.1%.
UK August construction output fell 0.7%, missing estimates for a decline of 0.5%.
Asian markets were mixed Wednesday, with Hong Kong’s Hang Seng’s 0.1% advance its first finish in the green so far in October.
China’s Shanghai and Japan’s Nikkei added 0.2% while Australia’s S&P/ASX 200 climbed 0.1%. South Korea’s Kospi sank 1.1%.
Japan August core machine orders rose 6.8% month-over-month and 12.6% year-over-year, stronger than expectations of for a decline of 3.9% and a gain of 1.8%, respectively.
MBA Mortgage Applications were down 1.7%, in addition to a 1.1% drop in the purchase index and a 2.6% decline in the refinancing index for the week ending October 5th.
The average 30-year mortgage rate cleared the 5% mark, soaring 9 basis points to 5.05%, and represents the highest level since February 2011.
September PPI rebounded 0.2%, with the core rate up 0.2%, both matching forecasts. There were no revisions to August’s 0.1% declines for both.
The 12-month pace cooled to 2.6% year-over-year for the headline, compared to 2.8%, while the core rate accelerated to a 2.5% clip from 2.3% previously.
Goods prices fell 0.1% following the prior flat reading, with the energy component dropping 0.8% versus 0.4%, and food prices down another 0.6% following the prior 0.6% decline.
Services prices rose 0.3% from -0.1%.
October Atlantic Fed Business Inflation Expectations was up 2.3%.
Meanwhile, Atlanta Fed’s Q3 GDPNow estimate rose slightly to 4.2% from 4.1%.
August Wholesale Trade Inventories were up 1%, topping forecasts of 0.8%.
Market Sentiment – New York Fed John Williams said that upside risks to the economy are relatively balanced, and added the Fed has positioned such that it’s ready if anything happens.
So far, he has yet to see any tariff impacts on jobs or inflation.
Williams talked about the benefits of U.S. normalization while noting spillover effects cannot be completely eliminated.
He also said low U.S. inflation and unemployment are the best of all worlds, and reiterated inflation will likely rise over the 2% target. He expects more strong growth due to stimulus and financial conditions.
Chicago Fed Charles Evans sees the neutral rate in the 2.75%-3% range and said the U.S. economy is doing quite well.
He added the labor market is extremely vibrant, and wages are increasing, although they are not up as much as one would have expected.
Evans is extremely pleased where inflation is right now and doesn’t think it will be a big problem if inflation is a bit above or a bit below the 2% target. He reiterated the gradual tightening path remains a very good call and gives the FOMC flexibility.
He said inflation expectations are still a little lower than ideal and he is paying close attention to the labor market and above trend growth.
Evans said he could see the Fed reaching neutral and then pausing with rates above 3%, or the Committee could shift to a slightly restrictive stance and then pause.
He stated analysts and inquiring markets want to know what’s neutral, but of course no one knows.
The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 5th time in 6 session following the backtest to $112.79.
Shaky support at $113-$112.50 held with a close below the latter being a continuing bearish development. Resistance remains at $114-$114.50.
Market Analysis – The Russell 3000 Index ($RUA) recently broke down out of a trading range between 1,720-1,740 that lasted for two weeks and we highlighted.
We mentioned the prior v-shape pattern was failing with a move above or below these levels leading to the next short-term trend.
Today’s plunge to 1,642 and session low held shaky support at 1,640 and the 200-day moving average.
A close below this level would be a continued bearish development with risk to 1,620-1,600 and May/ June support levels.
Lowered resistance is at 1,660-1,680 and prior July support levels.
The 50-day moving average had been in a solid uptrend but is showing signs of leveling out.
RSI is back in a downtrend following the pullback.
Support is at 20 with a move this level being a bearish signal for lower lows.
At current levels, RSI is way oversold but could remain that way for a few more sessions. Resistance at 25.
The Financial Select Sector Spiders (XLF) had been in a tight trading range over the past 4 sessions following the late September selloff and the early October rebound.
The lower highs and lower lows between the 50/200-day moving averages was a slightly bearish signal.
Today’s plunge to $27.21 and session low held upper July support at $27.20-$27.
A move below the latter would be a continued bearish development for lower lows.
Lowered resistance is at $27.40-$27.60.
RSI had been flatlining near the 50 area before today’s weakness with fresh support at 30 and the June low.
Near-term resistance is 40.
All the best,
Roger Scott.