The S&P 500 closed the week up 1.25%, but was masked by subtle rotations under the surface. Nasdaq 100, which has been the absolute horse leading this market, closed down 1.76% for the week. According to Sentiment Trader the last time we saw the dispersion between the Nasdaq and S&P within 5% of both their highs was the week ending March 17, 2000. Over the next 19 months the NDX dropped over 80%.
Could this be the first sign of rotation out of big cap tech? Time will tell. NFLX was the big event for the week dropping over 6% on Friday after posting Q2 Earnings. However, the week’s main event was the earnings reports from the nation’s large cap banks. JP Morgan, Citi, Bank of America, Wells Fargo, Goldman Sachs and Morgan Stanley all reported this week. XLF managed to close the week in the green as most companies were able to beat low expectations. However, Institutional investors were quick to point out the enormous jump in loan loss provisions as bank CEOs prepare for the worst. Image below highlights the jump in credit provision from the first three banks that reported this week.
On the JPM call Jamie Dimon noted, “This is not a normal recession. The recessionary part of this you’re going to see down the road…You will see the effect of this recession. You’re just not going to see it right away because of all the stimulus.”
All that stimulus continues to have an impact. The Federal Reserve Balance Sheet dipped below $7T for the first time since the beginning of the crisis, yet we have still witnessed a 70% increase in the monetary base in a few short months.
Despite the drop in stimulus, the US Dollar Index fell for a fourth straight week with the Euro trading up over 1% this week. As the Purchasing Power of the dollar continues to be devalued, commodities are starting to shown signs of inflation pressures creeping in. Ag commodities like Coffee, Lumber and Beans all had a very strong week of performance with the cost of living on the rise. Precious metals continue to outperform with Silver and Platinum jumping nearly 3%, closing the performance gap with gold.
US government bonds had a relatively quiet week, thanks to a 8 tick sell off in 10s into Friday’s closing bell. The entire curve continues to flirt with breaking down to fresh yield lows. After flirting with inversion in the summer of 2019, the benchmark 2/10s curve continues it’s predictive power of recessions. The curve has widened back out to 48 bps at the end of the week, but the more interesting development is with beta risk near highs, USTs continue to suggest the risk market is wrong. 10s, along with every other maturity, continue to coil in a continuation pattern that looks to make new lows. Measured move for the pattern brings the market to roughly 15 bps on the next move.
