Stocks and Bullion Rebound, Banks Take a Hit as Brent Crashes Prior to Presidential Debate
As the presidential debate and CPI prints loom, traders took a cautious approach. After a volatile few days of trading, with stocks first plummeting 1.7% on Friday and then bouncing back 1.2% on Monday, Tuesday witnessed a small rollercoaster ride. Emini futures initially dropped, then gained, only to slide to session lows after Europe closed. However, they recovered all losses and closed near session highs, just around the key psychological resistance level of 5,500.
The market's movements were so subdued that not even the 0DTE crew attempted to significantly influence stocks in either direction.
Oracle's Solid Results Provide Much-Needed Boost
The market received a much-needed boost from Oracle, which soared to an all-time high after reporting solid results. This buoyed the AI trade just as it was on the verge of breaking the most crucial long-term support levels.
Mega Cap Tech's strength, which increased by 1.3%, helped counterbalance the cyclical weakness. AI Winners rose by 70bp, while Defensives increased by 35bp, with the bid led by Wireless, Utilities, and Real Estate.
Bank Stocks Suffer Amid Warnings of Disappointing Revenues
However, not all sectors fared well. Banks suffered after Goldman and JPMorgan warned that Q3 revenues and the full-year Net Interest Income outlook would likely disappoint, causing their stocks to plummet. The largest US bank at one point experienced its sharpest drop since the covid crash.
An even more worrying plunge occurred at Ally Financial. As one of the largest US auto loan lenders, it finally acknowledged what everyone else already knew: both delinquencies and charge-offs are on the rise, resulting in one of the biggest drops in ALLY stock on record.
Energy Sector Struggles, Brent Crashes
The rest of the market generally performed well and closed in the green, with the exception of the energy sector. Ahead of the presidential debate, where inflation and the price of various goods will be key topics, it was crucial that oil prices were suppressed. As expected, Brent plunged 3.3%, one of its largest one-day drops of 2024, sending the price back to 2021 levels.
Possibility of Historic Short Squeeze in Oil Market
The last time oil prices were at this level, they doubled in the following three months. While another war doesn't seem imminent, the fact that hedge funds are the most bearish they've ever been on oil suggests a historic short squeeze could be on the horizon. This is especially true since Goldman warned that while financial demand may be low (boosted by historic shorting), physical demand remains quite resilient.
Saudi Arabia and OPEC+ wouldn't have to do much to trigger a massive squeeze, similar to a reversal of April 2020, as those who are short on oil struggle to find deliverables to cover.
Market Remains Resilient Amid Increased Activity
Despite the turbulence in the oil and banking sectors, the overall market remained resilient at the index level, even as micro headlines increased. UBS notes that the market is surprisingly resilient despite increased activity in equity capital markets and high yield issuance, election uncertainty, and growth concerns with crude oil down 4%.
UBS warns that a lack of liquidity is contributing to the choppiness, with many investors attending various conferences and uncertainty around the Fed cut pace and the election keeping investors on the sidelines.
Defensive Moves and Flight to Safety
Investors are already set up very defensively, as evidenced by recent action in defensive sectors like Staples and Wireless. There is also plenty of cash on the sidelines, as shown by last week’s healthy equity capital markets activity and performance.
This defensive approach is further illustrated by the record takedown by foreign (Indirect) buyers in today's 3Y auction. This led to continued buying on the short-end and pushed the 2s10s curve to its steepest point since the summer of 2022.
Bonds were not the only "flight to safety" asset; bullion also extended its rebound from Friday's drop to trade just shy of its record high. Even bitcoin appears to be attracting a more solid bid.
Upcoming Presidential Debate
Now, all eyes are on the upcoming Kamala-Trump debate.
Bottom Line
The market's resilience in the face of increased activity, election uncertainty, and growth concerns is noteworthy. However, the defensive moves by investors and the flight to safety in bonds and bullion suggest a cautious approach. The upcoming presidential debate is likely to have a significant impact on market movements. What are your thoughts on this? Share this article with your friends and let us know your opinion. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
