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Market News Posted by John Doherty February 26, 2023

Whale Trader Alert!


Top things to watch this week

The Economic Calendar:

MONDAY: Durable Goods Orders, Pending Home Sales Index, Dallas Fed Manufacturing Survey, 3-Month Bill Auction, 6-Month Bill Auction

TUESDAY: International Trade in Goods, Retail Inventories, Wholesale Inventories, Case-Shiller Home Price Index, FHFA House Price Index, Chicago PMI, Consumer Confidence, Richmond Fed Manufacturing Index, Money Supply, Farm Prices

WEDNESDAY: MBA Mortgage Applications, PMI Manufacturing, ISM Manufacturing Index, Construction Spending, EIA Petroleum Status Report, Survey of Business Uncertainty, 4-Month Bill Auction

THURSDAY: Motor Vehicle Sales, Jobless Claims, Productivity and Costs, EIA Natural Gas Report, 4-Week Bill Auction, 8-Week Bill Auction, Fed Balance Sheet

FRIDAY: PMI Composite Final, ISM Services Index, Raphael Bostic Speaks, Baker Hughes Rig Count, Thomas Barkin Speaks

Futures Expiration and Rolls This Week:

MONDAY: Last trading day for March (H) Natural Gas futures

TUESDAY: First notice day for March (H) Metals, Agriculture, and Interest Rate futures

Key Events:

  • Stock traders settle for higher for longer interest rates.
  • China’s attempt at a truce between Russia and Ukraine.
  • Eurozone CPI inflation report.
  • ECB meeting. Expect another 50bp rate move in March.
  • Fed speakers Jefferson, Waller, Bostic, Bowman, Barkin.
  • Economic reports on home sales, ISM, and durable goods.
  • Tesla hosts a highly-anticipated investor day.
  • Target and Lowe’s earnings report to highlight consumer spending.
  • Looking forward to the Jobs report position squaring before March 10.

Stock Index Futures

Stocks took a sharp nosedive last Friday to wrap up their worst week of the year. The S&P 500 and Nasdaq dropped significantly, having their worst week since early December, -2.67% and -3.09%, respectively.

The Federal Reserve’s favorite inflation measure (PCE) unexpectedly jumped in January to 0.6% and 4.7% from a year ago, well above economist estimates.

Traders worry that this could push the Fed to continue to raise interest rates.

A few key short-term levels for the S&P 500:
Upside: 41030,4070,4105,4135
Downside: 3920, 3880,3845, 3785

Interest Rate Futures

Inflation sure has been giving the Federal Reserve a headache lately!

The Fed’s favorite inflation indicator core PCE price index rose 0.6% in January and was up 4.7% from a year earlier (vs. upwardly revised 4.6% in December).

The overall PCE index rose 0.6% in January, up 5.4% from a year earlier (vs. 5.3% in December).

In an op-ed last week, Mohamed El-Erian warned that there’s a 75% chance of inflation rebounding and the Fed grappling with soaring prices. He suggested that the prices could jump to a 41-year-high, forcing the Fed to hike interest rates again and again in 2022 to cool off the economy.

El-Erian also said that the most likely scenario was inflation staying in the 3-4% range, meaning that the Fed would need to keep interest rates high.

In short, the Fed is in a tricky situation, and it will be interesting to see how they navigate this inflationary wave. This would force the Fed to choose between crushing the economy to get inflation down to its 2% or maybe moving the inflation goalpost to a 3-4% inflation target,

Here’s to hoping they find a suitable solution!

U.S. Treasury yields current yield compared to the last newsletter:
30-Year yield  3.93% vs. 3.87%
10-Year yield  3.94% vs. 3.82%
5-Year yield  4.21% vs. 4.03%
2-Year yield  4.82% vs. 4.62%
2-10 Yield spread  –0.87 vs. -0.80%

Target Rate Probabilities 02-27-2023Source: CME Fedwatch

Natural Gas Futures

There’s been a lot of downside pressure on U.S. natural gas futures this winter. From an unseasonably warm winter to high production to increasing storage, prices have dropped 70% since August 2022. NatGas futures for March trade at $2.45/MMBtu.

Freeport LNG went offline from a fire on June 8, 2022. It’s set to restart exporting LNG in the coming days. Is all that about to change as there is massive demand from Europe and China?

Traders say there were meager natural gas exports during those 250 days offline, and prices crashed. There is a substantial underlying bid for LNG from Europe and China. Watch for key-level price breakouts to confirm demand.

Freeport LNG Comeback 02-27-2023

Source: S&P Global Commodity Insights

Whale Trader Alert

Last Thursday was a “boring” trading day after all of the macro events, and then, a block trade in S&P 500 options and futures tumbled from 4030 to session lows just below 3980.

  • The block trade 26,000 S&P 500 e-mini 4000 strike Put options traded around (10:40 am).
  • This was well after all the data releases and macro events for the day, and SPX was trading comfortably above 4,000.
  • The option price notional value was $5.2 Billion, and the premium paid was $5.5M.
  • There was $2B worth of delta selling as a result of the hedge, a 40% delta.
  • The price of the put moved  5x from $5 to $25 in two hours as ES futures tumbled from 4030 to session lows just below 3980.

The Takeaway: Initial analysis confirms that the put buyer didn’t unwind the trade when it was 5x in price but rather let it bleed out. The trader spent $5.5 Million on the most highly levered, liquid, and volatile short-dated option structure to manipulate trillions in market cap. This leads many to speculate that the purpose of the trade was not to make money on the options structure in the 0DTE but manipulate the entire market first lower and then higher.

State of the Consumer

Oh boy, the online retail market sure had a wild ride last week! It started with a bumpy landing as eBay, Wayfair, and Etsy had disappointing earnings reports.

Understandably, investors were a bit wary since the pandemic-era surge in demand for online retailers had taken their stocks to such lofty heights.

But alas, the ProShares Online Retail Index has dropped around -32% from its peak, and even Amazon and Shopify had some weak moments. However, the bright spot was Etsy, which rallied after reporting substantial revenue in the holiday quarter, although the gross merchandise sales forecast was still slightly lower than expected.

Overall, it’s been a rollercoaster for online retailers, but here’s to hoping things will start looking up soon!

Macro Watch

The top things we are watching this week:

1) Yield Curve
2) Earnings
3) Fed Speak
4) China pushing for Russia/Ukraine Truce
5) U.S. Dollar
6) VIX
7) Key downside levels in ES futures

Asset Class Performance Summary

This performance chart tracks the daily, weekly, monthly, and yearly changes of various asset classes, including some of the most popular and liquid markets available to traders.

Asset Class Performance Sheet 02-27-2023

Thought of the Week

We are working hard on risk management, following our risk rules, and thinking in probabilities this year.

How Much You Dont Lose

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