Interest rates once again on the rise
US September jobs figure came in below expectations. Only 194,000 new jobs were created against on average 500,000 anticipated in September. However, the unemployment rate in August was slightly lower than expected at 4.8% compared to 5.2%.
In this weekly trading note from Carlsquare, the following topics, indices and stocks will be discussed:
- US 10-year government yield rising above Fed's threshold
- S&P 500 still caught under MA20
- Nasdaq is wrestling with EMA9
- Value versus growth stocks
- Is Microsoft leading the market?
- Tesla is on fire
- Trading in OMXS30 imply uncertainty
- DAX is struggling to break up
- Is a rebound in the EUR/USD in the cards?
- What about gold and inflation?
- Focus on US banks' Q3 results this week
US September jobs figure came in below expectations. Only 194,000 new jobs were created against on average 500,000 anticipated in September. However, the unemployment rate in August was slightly lower than expected at 4.8% compared to 5.2%. That following a retroactive upward revision of 131,000 jobs to 366,000 jobs in August, but also adjustments for people leaving the workforce.
Job losses in September were mainly attributable to the government sector (minus 123,000 jobs), where education was the primary sub-sector affected. At the same time, 10 out of 14, primarily private payrolls sectors, contributed with a total of 340,000 new jobs. Perhaps most encouragingly, 74,000 new jobs were created in the hotels and leisure sector. That is a clear sign that activity is now recovering after earlier Covid restrictions. So overall, the US jobs statistics were not quite as alarming as they seemed at first glance.
US 10-year government yield rising above Fed's threshold
Last week, the US 10-year Treasury bond rose by 15 basis points from 1.46% to 1.61%. Higher inflation expectations boosted by wage growth trends in Friday's US jobs data contributed. Note that US 10-year yields have now pushed well above the 1.5% level that has been unofficially considered the Fed's pain threshold.
US 10 year yield, March 8th to October 10th, 2021
S&P 500 still caught under MA20
Even though the initial reaction to the job figures was weak and interest rates are on another climb, the S&P 500 index closed last week up. The move was initiated by the US Senate's approval of an increase in the US debt ceiling on Thursday, October 7th, and thus the postponement of the next deadline until December. That indicates that the S&P 500 still has a chance to continue its climb for this time.
As seen in the graph below, S&P 500 attempted to break above MA20 on Thursday. However, the attempt failed. A break above MA20 and MA50 currently trading at 4,397 and 4,438, respectively, would make a bet on the upside more comfortable.
S&P 500 index graph, March 8th to October 10th, 2021
Also, note that MACD is about to generate a weak buy signal in the daily graph. Yet it is also encouraging that MA20 held in the weekly chart below:
S&P 500 index, weekly five-year price graph
Nasdaq is wrestling with EMA9
Tech-heavy Nasdaq 100 also closed the past week up. However, as seen in the graph below, Nasdaq closed Friday's trading below EMA9. Nasdaq is thus lagging partially due to it being more negatively affected by the rising interest rate levels.
Nasdaq 100 index graph, March 5th to October 10th, 2021
In the weekly chart, Nasdaq managed with the smallest margin to hold on to MA20:
Nasdaq 100, weekly five-year price graph
Value versus growth stocks
Value versus growth has been discussed, more or less intensively, lately as the economy is recovering from the Covid pandemic and interest rates are on the rise. Growth companies are categorized by much of their market value being attributed to expected growing cash flow expected to occur several years ahead. That means that a low interest rate level, combined with a positive expectation of future economic growth, becomes important for growth stocks to perform strongly. Value stocks, such as banking and cyclicals, fare better in an environment of positive economic development and naturally a slightly rising interest rate.
As visualized in the chart below, the spread between value and growth has started to widen since late September. That was when the interest rate climbed above 1,45-1,50%. As Nasdaq 100 is more exposed to growth than S&P 500, Nasdaq should lag in case of continued rising interest rates.
Vanguard ETF. Value versus growth stocks and the US 10 year yield
Is Microsoft leading the market?
The Microsoft soft can be considered one in between…as it is neither a pure growth nor pure value case. Microsoft is also a company affecting other stocks as well as indices. As show in the chart below, the Microsoft share has recovered all moving averages. Also, note that MACD has generated a weak buy signal. Will the stock test the previous top? Will the indices follow?
Microsoft share price graph, March 5th to October 10th, 2021
In the weekly chart, Microsoft bounced nicely of MA20 and also managed to retake EMA9, though with little margin:
Microsoft, weekly five-year share price graph
Tesla is on fire
If Microsoft is tilting towards value stocks, Tesla is definitely tilting towards the growth stock group. Despite the rise in the interest rate, the Tesla share is currently trading above all its moving averages:
Tesla share price graph, March 5th to October 10th, 2021
In the weekly chart, one can see how there is a resistance around 785 USD:
Tesla, weekly five-year share price graph
Trading in OMXS30 imply uncertaity
Swedish OMXS30 index is dominated by banking and cyclical engineering stocks. Thus, one may think that OMXS30 should have been outperforming given the rising interest rates and economic recovery phase in the wake of the pandemic. However, the index has also fallen back on what has been happening on the US Stock Exchanges since early September. It seems to be challenging to go against the general market sentiment.
As shown in the chart below, OMXS30 closed last week near unchanged. It did not manage to take back Fibonacci 38.2 nor EMA9. MA200 is acting as a support approaching from underneath:
OMXS30 index graph, March 5th to October 10th, 2021
In the weekly chart, a doji was created, implying uncertainty. Given the past development since Q2 2021, it may also signal that a bounce may be in the cards.
OMXS30, weekly five-year price graph
DAX is struggling to break up
The German DAX is also cyclical heavy but is having difficulties in retaking Fibonacci 38.2 and EMA9:
DAX index graph, March 5th to October 10th, 2021
In the weekly chart, one can see how the index retook the psychologically 15,000-level:
DAX, weekly five-year price graph
Is a rebound in the EUR/USD in the cards?
The USD strengthened against the euro for yet another week. The currency pair is trading close to a falling trendline. In terms of RSI, the currency pair is oversold:
EUR/USD graph, March 5th to October 10th, 2021
In the weekly chart, EUR/USD is trading below MA100. Now it is up to MA200. In case of a break to the downside, Fibonacci 50 meet up around 1.149. Also, note that a doji was created, implying uncertainty. The doji may also be an indication of a rebound being in the cards.
EUR/USD, weekly five-year price graph
What about gold and inflation?
Gold could be a good short term hedge against inflation. However, as seen in the graph below, the gold price lost most of its intraday gains during Friday's 8 October trading. Does that signal that Friday's job data will not contribute to further inflation fears?
Gold price graph, March 5th to October 10th, 2021
Gold, weekly five-year price graph
Focus on US banks' Q3 results this week
This week the focus will be on banking stocks in the US in connection with their Q3/2021 reports. JP Morgan Chase is first out on Wednesday, followed by Bank of America, Wells Fargo, Morgan Stanley, and Citigroup on Thursday and finishing with Goldman Sachs' report on Friday.
Investment banking activity is expected to have been strong as the pace of transactions is at very high levels. What is more unpredictable are individual losses in trading positions or on loans issued. However, the focus will be on whether we can see lending growth again after a period of reduced lending during the Covid pandemic. Increased lending is a sign that economic growth is starting to pick up again.
Full name for abbreviations used in previous text:
EMA 9: 9-day exponential moving average
Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.
MA20: 20-day moving average
MA50: 50-day moving average
MA100: 100-day moving average
MA200: 200-day moving average
MACD: Moving average convergence divergence
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