Pace Of Fed Rate Hikes Diminish As Europe Unravels

Index Futures Net Changes and Settlements:

Foreign Markets, Fair Value and Volume:

• In Asia 7 out of 11 markets closed lower: Shanghai Comp -0.65%, Hang Seng +0.08%, Nikkei -0.14%
• In Europe 13 out of 13 markets are trading higher: CAC +1.35%, DAX +1.04%, FTSE +0.66%
• Fair Value: S&P -0.24, NASDAQ +2.27, Dow +1.18
• Total Volume: 1.64mil ESM & 1,506 SPM traded in the pit

Today’s Economic Calendar:

Today’s economic calendar includes Motor Vehicle Sales, Employment Situation 8:30 AM ET, Neel Kashkari Speaks 8:55 AM ET, PMI Manufacturing Index 9:45 AM ET, ISM Mfg Index 10:00 AM ET, Construction Spending 10:00 AM ET, and the Baker-Hughes Rig Count 1:00 PM ET.

S&P 500 Futures: U.S. Tariffs Push Allies To Retaliate

The quickened pace of the decision to place tariffs on China and U.S. allies rang through the markets yesterday. After a big bounce on Wednesday things seemed to improve, but as the news continued to blast out, the tariff headlines algos did a number on the S&P and Dow.

Yesterday started with the Asian markets closing mostly higher and the European Stoxx 600 up 0.10% midday. The S&P 500 futures Globex trading range was 2728.25 to 2715.50, with 184,000 contracts traded. The first print off the 8:30 CT open was 2718.00. After several small drops and lower highs, the ES sold off down to 2707.00 at 9:50 am, and then shot up to 2722.50 at 10:45 am.

From there, the high was in, and the futures began to drag lower throughout the late morning and into midday. The first leg down was a move to 2710.00 at 11:40, followed by a bounce up to 2714.25. After that, a wave of sell programs came in at the end of the noon hour, pulling the ES to its daily low of 2699.75.

After the 1:00 pm low the futures mounted a rally pushing through the 2:00 hour making a late afternoon high of 2711.50. The futures then chopped up as a MOC imbalance of $1.5 billion accumulated to the sell side. The ES sold down to 2704.25, and printed 2705.00 on the 3:00 pm cash close, before settling the day at 2705.50, down -19.00 handles, or -0.70%.

Rate Hikes In Question

The Wall Street Journal:

The Federal Reserve’s plan for tightening monetary policy might be running into some trouble.

Investors have unwound bets the Fed will pick up the pace of interest-rate increases over the past few days as political and financial turmoil rattles countries such as Italy, Turkey and Argentina.

The Fed has penciled in three rate increases for 2018, and investors still see a more than 70% chance of that happening. But they have grown increasingly skeptical the Fed will deliver a fourth increase this year. That is something investors and Fed officials had been warming up to recently amid evidence of stronger U.S. growth and inflation.

Markets are now pricing in just a 24% chance the Fed raises rates four or more times this year, according to CME Group data. That is down from over 50% last week.

Political turmoil unfolding in Italy–which is now facing the prospect of snap elections that could strengthen the position of anti-euro parties–and volatility across emerging markets are the main culprit behind the markets’ dimmer outlook. Some investors also worry U.S. trade policy could hurt global growth as the Trump administration puts tariffs in place on Chinese and European goods.

There would be precedent for a go-slower approach by the Fed. The central bank has strayed from its interest-rate plans in the past during periods of market volatility. It delayed plans for raising rates in 2015 after a slowdown in Chinese growth spooked companies and financial markets around the world. In 2016, the Fed only raised rates once–instead of the four times it had projected–as investors fretted over the impact of tighter U.S. policy on emerging markets and the U.K.’s Brexit vote.

Paul Ashworth, chief U.S. economist at Capital Economics, says it’s too early to expect the Fed to change course. He expects the Fed to deliver four rate-increases this year as long as “the Italian situation doesn’t descend into a full-blown crisis and…President Trump’s protectionist bark once again proves to be worse than his bite.”

But the retrenchment in bets on higher rates–and a rebound for stocks and other risky assets on Wednesday–shows investors are already banking on a more accommodative stance from the Fed.

How will the Fed respond to global uncertainty? Let the author know your thoughts at ch elsey.dulaney@wsj.com

June Outlook: Best 8 Months End, Midterm Machinations Suggest Cruel Summer for Stocks

Stock Traders Almanac

To all the market seasonality naysayers and “Sell in May” or Best Six Months/Worst Six Months critics, we say thank you for your skepticism. Despite your disbelief (and perhaps because of it) the recurring seasonal market patterns highlighted in the Stock Trader’s Almanac continue to persist. Of course they are not perfect and do not work 100% of the time, and some have fallen by the wayside and some have shifted – we’ve tracked and updated those.

However, supported by a host of academic studies and papers (just Google them yourself) and now years of evidence-based results, our Tactical Seasonal Best & Worst Six Months Switching Strategy, a slightly more sophisticated version of “Sell in May and Go Away,” continues to outperform over the long and short term, 2017 notwithstanding. Yes the Worst Six Months (or “Sell in May”) was quite positive in 2017 and better than the Best Six.

This has happened before as it did in 2009 (Post Financial Crisis) and 2003 (Iraq war) and it will again. But that has not changed or tainted the seasonality, strategy or results. Just think back to how well the market and the Switching Strategy did following those years. And remember we are not talking about the plain vanilla “Sell in May” on May first (see page 52 of the Stock Trader’s Almanac 2018 for the results of our Best Six Months Switching Strategy using MACD Timing. Here are the results since 2009 to give you an idea.

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