Fed Presidents Making The Rounds Could Heighten Investor Nervousness

(Tuesday Market Open) Investors appear confident after the Juneteenth holiday as equity index futures pointed to a higher open.

Potential Market Movers

However, last week’s concerns still loom over the market with Goldman Sachs GS raising its probability of a recession over the next year to 30% from 15%. Also, Tesla (NASDAQ: TSLA) CEO Elon Musk said that a recession is “more likely than not” in the near term adding that a recession would likely end a 10% cut of Tesla employees.

The Cboe Market Volatility Index (VIX) was 2% lower in premarket action but was still above 30, indicating a level of concern for many traders. The 10-year Treasury yield (TNX) was up ahead of the opening bell rising from 3.239% on Friday to 3.292%. Increasing 10-year yields have pressured stocks this year and so has the rising U.S. dollar. The move in the 10-year appeared to boost the U.S. Dollar Index ($DXY) causing it to trim some of its overnight losses.

A couple of Federal Reserve members will be speaking today, which could ruffle a few investor feathers. Stocks plunged last week after the Fed revealed more aggressive rate hikes to combat inflation. This afternoon, Cleveland Fed president Loretta Mester and Richmond Fed President Tom Barkin will speak. However, St. Louis Fed President James Bullard spoke yesterday, stressing that he felt the economy would continue to grow despite higher inflation—and that didn’t appear to negatively affect the markets before the opening of this shortened trading week.

Despite a day that is light on news, a few stocks are making headlines. Kellogg K announced plans to split into three different companies, sparking a 6.5% jump in premarket trading. K plans to spin off its U.S., Canadian, and Caribbean cereal and plant-based foods businesses. While the new company names have yet to be determined, one of the spinoffs will focus on global snacking products like Pringles, Cheez-it, and Nutri-Grain. The North America cereal company will focus on breakfast cereals like Raisin Bran and Corn Flakes. The third company will be built around the plant-based foods like MorningStar Farms.

DocuSign DOCU announced this morning that CEO Dan Springer would step down, turning a 2% loss in premarket action to a 1% gain in premarket action. DOCU was a pandemic darling but has struggled to maintain its market share during the reopening.

Housing stocks were one of the big losers last week as the S&P Homebuilders Select Industry Index fell more than 9%. However, Lennar LEN reported better-than-expected earnings and revenue ahead of the open, prompting the stock to rally 2.71%. Investors will have more housing data to digest after the open with the existing home sales report.

Reviewing the Market Minutes

Most of the market rallied on Friday as stocks appeared to be overbought, but energy stocks sold off with the Energy Select Sector Index plunging 5.42% on the day. Energy stocks appeared to be dragged down by energy-related commodities. WTI crude oil futures fell 6.3% to $108.66 per barrel, more than 11% down from its June high. Natural gas futures fell about 7% while gasoline futures dropped 4.2%.

Energy turned out to be the single worst performer for the week from Monday’s opening bell. Starting with the energy index falling nearly 14% to end the week on Friday, the Utilities Select Sector Index tumbled more than 8% and the Materials Select Sector Index slid almost 6%. All other sector indexes finished lower, losing between 1.5% to 3.25%. Energy, utilities, and materials have been among the strongest sectors in 2022, so it’s likely that this isn’t a change in market direction so much as profit-taking during this week’s volatile trading.

Despite the S&P 500 (SPX) rising 0.66% and the Nasdaq Composite ($COMP) rallying 1.76% on Friday, the stock market had its worst week since March of 2020. Stocks saw some volatility on Friday with high volumes as options expired on a triple witching day and traders closed positions ahead of the three-day weekend. 

The U.S. dollar regained much of its losses from Thursday with the U.S. Dollar Index ($DXY) closing 0.94% higher. The 10-year Treasury yield (TNX) fell almost seven basis points to 3.24% on Friday and was down nearly 20 basis points from its Tuesday peak. This suggests that investors are still favoring the safety of bonds to the volatility of stocks.  

CHART OF THE DAY: GLITCH. The Technology Select Sector Index ($IXT—candlesticks) recently broke below its autumn 2020 highs. The next level of support appears to be around the 1,100 level. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results. 

Three Things to Watch

Frozen Assets: Crashes in cryptocurrencies are causing new problems within that industry. Crypto lender Celsius Network announced Wednesday that it would freeze withdrawals, swaps and transfers from accounts due to crypto market volatility causing liquidity pressures. Investors don’t have access to their funds and the company doesn’t fall under any regulatory arm that could take action. On Friday, another crypto lender, Babel, announced similar actions freezing withdrawals due to liquidity problems.

Celsius and Babel work similarly to banks in that they take deposits and offer a yield. In fact, both companies have offered a very high yield of as much as 18%. The last few days have played like a “run” on these institutions, but no George Bailey has yet come to rescue. For investors, frozen accounts made life less than wonderful last week.

Crypto Chill? Cryptocurrency investors had reason to worry that the industry is having a “Lehman moment,” referring to the start of 2007’s credit crisis when investment firms Lehman Brothers and Bear Stearns had liquidity issues that nearly brought down the U.S. banking system and prompted the 2008 housing and stock market crashes.  Bitcoin, the largest cryptocurrency, has fallen 30% in the last week and is down 70% from its peak. The second largest cryptocurrency is ether, which by Friday was down 77% from its all-time high.

It’s unlikely that any the current crypto crisis will affect institutions outside of the industry. For now, crypto markets are highly decentralized, and the currencies still haven’t broken into mainstream use. So, at least for now, the winds from June’s “crypto winter” are likely to remain contained.

Stopped Cold: While crypto lenders are freezing assets, some crypto companies are leaving employees out in the proverbial cold. Crypto exchange company Coinbase (COIN) announced that it has rescinded job offers, frozen hiring, and plans to lay off 18% of its workforce. Gemini is planning on laying off 10% of its staff, BlockFi is cutting payroll by 20%, and Crypto.com said it’s cutting 5% of its employees.  

These layoffs join other cuts in the technology space. In recent weeks, layoffs have been announced by Redfin RDFNPeloton PTONPayPal PYPLTesla TSLA, and Carvana CVNA to name a few. Meta Platforms METAIntel INTCMicrosoft MSFTUber UBER, and Lyft LYFT have announced hiring slowdowns or freezes.

Despite the layoffs in the technology sector, the overall employment picture in the United States remains strong. But a virus in tech does have the potential to spread.

Notable Calendar Items

June 22: Earnings from KB Home KBH and H.B. Fuller FUL

June 23: Initial jobless claims, U.S. manufacturing PMI, and earnings from FedEx FDX, Accenture ACN, and Darden Restaurants DRI

June 24: Michigan Consumer Sentiment, New home sales, and earnings from CarMax KMX

June 27: Durable Goods Orders and earnings from Nike NKE

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Unsplash

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