Morning Notes — Weakness Defined/Support Levels Identified

Snapshot: US equities opened lower and extending near worst levels with the S&P 500 down -3.7%. All sectors retreat with cyclical/value groups like Energy, Materials and Financials weakest. Reopening beneficiaries such as airline, cruise ship, hotel, some retail and auto industries are the worst performing. Treasury yields are lower with curve flattening. The dollar is weaker vs risk-sensitive yen, but modestly firmer vs other currencies. Curiously, Gold is down -0.50% despite the apparent ‘risk-off’ trade, while risk-on/cyclical beneficiary Copper is up +2.30%. WTI crude is down -9% to $35.83.

• The sell-off mostly attributed to bearish FOMC/Powell takeaways on the economy, rising Covid numbers and concerns of speculative excess from specific investor groups. Rising coronavirus hospitalizations in some US states suddenly in focus after US case counts reaches 2 million. While this has been the case for two weeks, the headlines halt reopening momentum that fed recent cyclical/value equity outperformance.
• Reports still suggest a fifth US coronavirus relief bill will be timed to fill the fiscal support gap in late July.
• US weekly jobless claims mostly in-line at 1.542M and the US Economic Surprise Index continues to improve, up +9.60 to 74.70.

Why? Yesterday’s Fed meeting and Powell press conference weighed on the SPX yesterday afternoon and getting most of the credit for today’s sell-off probably because: 1) policy action and messaging were extremely dovish but maybe not ‘incrementally dovish’; 2) economic commentary was more gloomy than the present narrative and; 3) Powell said the Fed could switch from balance sheet expansion to a yield curve control (YCC), but it currently has no plans to do so.

Gloom? Powell’s commentary on the labor market were definitely gloomy: “…I don’t want to give you a number because it’s going to be a guess, but well into the millions of people who don’t get to go back to their old job and, in fact, there isn’t a…there may not be a job in that industry for them for some time.” You and I know that sounds completely reasonable, but markets were priced for a performance. Powell also wants to remove any ambiguity about monetary resolve in light of last week’s surprisingly strong May Jobs Report and nudge the fifth fiscal stimulus bill closer to the starting line.

Chartist: Initial technical support for the S&P 500 (SPX) is in the 3015-3000 zone. The SPX VWAP 250-day moving average sits at ~3000, which is a popular CTA trigger but most strategies include a 3% buffer, so CTA flows may not be a factor until 2910. And a cluster of technical support levels sit 2800-2900 zone.