Government spending issues warn
Key points to remember:
- The debate continues
- El Salvador bitcoin ad ended in sale
- Intermarket analysis sheds light on interest rates
Futures markets point to a lower opening on Wednesday, weighed down by European markets. The uncertainty surrounding infrastructure, stimulus and other government spending seems to be on the minds of investors.
Goldman Sachs (GS
However, St. Louis Federal Reserve Chairman James Bullard told the Financial Times that there is a high demand for workers and worries about the job market may be overblown. Bullard pushed the Fed to start cutting monetary stimulus earlier.
Meanwhile, Morgan Stanley
What does the yield tell us?
The recent rise in the yield on 10-year Treasuries has helped some bond investors see the economy strong enough for the Fed to start cutting its monetary stimulus by buying fewer Treasuries. However, as we have said before, it seems more likely that the 10-year yield will be in a limited range, with the Fed kicking the box. In fact, recent resistance at 1.38% has already pushed the yield lower this morning. If a rise in yields occurs, it could potentially push bond prices and the US dollar higher. Stronger dollar could push crude oil (/ CL) lower price.
In addition to a stronger dollar, lower oil demand in the United States and Asia could make the price decline worse. Problems with oil demand may be more important than problems with supply. US oil production is still below normal as the southeast is still reeling from Hurricane Ida. Saudi Arabia cut oil production on Sunday over fears of falling demand in Asia.
Friday’s producer price index (PPI) and next Tuesday’s consumer price index (CPI) announcements could confirm or reverse recent changes in bond and commodity sentiment. Another high inflation figure – if we get it – could eventually force the Fed to cut sooner than President Jerome Powell would like, which could lead to higher yields, a higher dollar, and higher prices. raw materials lower.
Salvadoran Bitcoin liquidation
Many Bitcoin investors were surprised by Monday’s sale of the cryptocurrency after El Salvador became the first country in the world to adopt it as legal tender. The currency can now be used to pay for everyday goods and services in this country. Despite the announcement, Bitcoin fell around 10% on the day.
A movement among cryptocurrency advocates has encouraged investors to buy $ 30 worth of Bitcoin in honor of El Salvador’s move. Other Latin American countries like Paraguay, Panama, Brazil, Mexico and Argentina are also considering switching to Bitcoin to help consolidate their respective economies with a more secure currency. Widespread adoption of Bitcoin by these governments could increase the currency’s legitimacy. It would also potentially provide an easier way to transfer money from migrant workers in the United States to families.
However, many groups have warned against adopting Bitcoin, including the International Monetary Fund (IMF) and several central banks. According to the Wall Street Journal, the idea of adopting Bitcoin is not well received by the citizens of El Salvador and many have expressed little to no confidence in it.
Slick and Stick: Oil is the biggest traded commodity in the world and it’s not even close, so it can be a precursor to inflation. Since oil is traded in US dollars, cross-market analysts often start by looking at the dollar. If the dollar appreciates, oil prices will tend to fall and vice versa. One of the main drivers of dollar strength is interest rates (bond yields). Rising rates generally attract investors looking for higher yields, which in turn strengthens the dollar.
This complex relationship can be upset by government actions. For example, many countries like China often buy US Treasuries to strengthen their currencies. Demand for Treasuries could lower interest rates and make the correlation between yields and oil less sticky.
Traders who commonly use these relationships to help determine potential buy and sell signals may be frustrated with unexpected changes. If and when the Fed starts to decline, other correlations could decouple as well.
M&A takes over: So far in 2021, U.S. companies have announced $ 1.8 trillion in mergers and acquisitions (M&A) and $ 3.6 trillion globally according to the Wall Street Journal. This puts 2021 on track for the biggest M&A year of all time.
August saw nine announcements with the largest being VICI Properties (VICI) buying MGM Growth Properties
It is likely that more announcements are in the works. Mergers and acquisitions are a strange indicator for investors, as they could suggest that the ability to grow a business organically is too difficult and that economic growth could slow. So, some see the increase in mergers and acquisitions as a bearish sign.
However, mergers and acquisitions generally take certain companies and their shares out of circulation. This results in a greater amount of investment dollars that could be reinvested elsewhere. Thus, some investors view mergers and acquisitions as bullish.
Is technology the safe harbor? Recently, investors have migrated to utility and healthcare stocks. These are generally seen as defensive actions that are often popular when an economy goes from expanding to contracting. Basic consumer products
Can tech stocks maintain their dominance as many investors take a more defensive stance? It’s hard to say. Apple
TD Ameritrade® commentary for educational purposes only. SIPC member.