Debt ceiling and growing list of Chinese woes continue to weigh on investors

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Key points to remember:

  • Watch the new month and the new quarter
  • More bad news for China after lower than expected manufacturing report
  • Asian central banks buy treasury bills, complicate portfolio diversification

The new quarter seems to start on a slightly higher note as futures point to a positive opening. The shares are helped by the pharmaceutical company Merck

MRK
(MRK) and Ridgeback Biotherapeutics teaming up on an experimental COVID-19 pill that has new data showing success in helping prevent people at high risk from avoiding serious illness and death. Merck rose nearly 8.5% in pre-market trading. The news appeared to shift the futures markets from a negative opening to a positive opening.

Sign that life could be back to normal, JP Morgan analysts have shown Southwest Airlines

LCV
(LUV) love by making them overweight. This seems to indicate that these analysts are seeing the light at the end of the delta variant tunnel. In addition, Disney

SAY
(DIS) has announced its deal with actress Scarlett Johansson for her movie Black Widow.

The personal income report arrived as expected, while personal expenses were slightly higher than expected. The Core PCE price index showed that inflation rose as expected. The 10-year Treasury note (TNX) had already traded lower before the announcement and remained relatively unchanged thereafter. The ISM Manufacturing number comes out after the market opens.

The question is whether Friday’s higher pre-market surge can hold up? Thursday’s bullish start ended on a bearish note as the Dow Jones Industrial Average closed down 1.59% and around 5% from its all-time high. Higher than expected weekly jobless claims and disappointing earnings from Bed Bath & Beyond

BBBY
(BBBY) and CarMax

KMX
(KMX), along with McCormick’s Lower Boards (MKC) helped pull stocks to lower levels.

The S&P 500 ended the previous quarter down 5.8% after breaking through significant technical levels on the 50-day moving average mid-month. Then break below the 100 day moving average yesterday. Many technical analysts may choose to target the 200-day moving average as their next short-term decline. The 200 is currently hovering around the 4134 level.

Apart from the seasonal crisis in September, the other dark cloud in the markets is the lingering problem of the debt ceiling. Debate was delayed by a spending bill that created a wedge between moderate and liberal Democrats. To get around the problem, the Senate passed an ongoing resolution that could fund the government until December 3. Briefing.com reported that the resolution is expected to pass the House. House Speaker Nancy Pelosi plans to put the resolution to a vote on Friday. The resolution allows Congress to table the spending bill for a few months and focus on the debt ceiling.

Break China

The Chinese manufacturing purchasing managers index fell in September, breaking an 18-month expansion. The report surprised analysts who had expected no changes. The Wall Street Journal reported that China recovered quickly from the pandemic but continues to be hampered by regional COVID outbreaks, supply chain disruptions, port closures, rising material prices. raw materials, semiconductor shortages and increasing economic regulation.

China’s manufacturing sector is now facing a growing energy crisis that could further hurt its production. Morgan stanley

MRS
economists predict a potential loss of 1% of China’s gross domestic product in the fourth quarter if these problems persist. The lower target adds to a growing list of scaled-down projections from other analysts, including Nomura, China International Capital, Goldman Sachs

SG
, S&P Global and Citigroup

VS
.

October is scary

While the growing list of problems in China may be cause for concern, there is still little indication that the recent slowdown was anything more than a regular September crisis. However, as we enter a new month and quarter, investors should be aware that October has a reputation for being downright scary at times. October hosted The Bank Panic of 1907, The Crash or 1929 that started the Great Depression and Black Monday of 1987. However, Stock Trader’s Almanac reports October as a relatively positive month on average.

After fund managers spend September shifting their portfolio allocations for year-end, markets often bottom out in October and then enter the fourth quarter. The almanac shows that the fourth quarter tends to be the strongest seasonal cycle for stocks.

It is important to remember that the almanac is about historical averages, not future price predictions. There are of course lingering risks such as the debt ceiling, rising yields, energy shortages and the weakening Chinese economy that could make this October a little scary. Only time will tell.

Have a plan: Technical analysts use the support and resistance levels to identify where other investors can buy or sell a security. If Crude Oil breaks its $ 76 level, many technicians would use previous resistance levels to set their next price target.

However, while the support and resistance lines may look quite concrete when looking at history, the market does not look for the lines on your chart and change direction. Breakouts often fail, rallies weaken and don’t always hit targets, and daily volatility can make the picture cloudy.

That’s why many techs have a set plan that tells them when to place a trade, how much to trade, and when to exit. Exit plans usually include when to go out if things go wrong, if things are going right, or if things are going right. In fact, many of them will use scaling methods to help control risks and take benefits.

As good as gold: Speaking of support and resistance, the dollar, gold and silver are trading at interesting levels. Precious metals have have lost some of their luster as the US dollar (DXY) has rallied over the past four months. Silver (/ SI) is testing its support level of $ 22. Gold (/ GC) is testing August low. The dollar index is trading at 94.25, just 0.75 from its 2020 resistance level.

The confluence of support and resistance levels between these stocks is no accident. Before cryptocurrencies, precious metals were considered one of the few alternatives to fiat currencies. If the resistance level of the dollar holds, the support levels of gold and silver may also hold. If the dollar breaks resistance, then these precious metals could collapse.

As the debt ceiling debate rages on, confidence in the dollar may wane and investors may choose precious metals as a hedge against uncertainty. This could be an interesting area to watch over the next few days, if not weeks, depending on how long it takes Congress to determine the debt ceiling.

Equities & Bonds decoupling: Another interesting relationship change is between stocks and bonds. You can’t invest for too long without understanding the importance of diversifying a portfolio between stocks and bonds. Generally speaking, when stocks go up, bonds go down, when stocks go down, bonds go up. These actions complement each other by offsetting some of the losses and gains of the other asset, albeit to varying degrees. Historically, both assets have grown over time and have contributed to the growth of portfolios. Of course, asset allocation and diversification does not eliminate the risk of incurring investment losses.

Sometimes the inverse relationship between stocks and bonds has decoupled where they generally move in the same direction. There are three extended periods where this happened: 1997-1998, 2004-2006 and 2010-2011. In his book Intermarket analysisJohn Murphy found out that this happened in 1997-1998 because the Japanese central bank was buying treasury bills to help support the yen’s deflation. A 2010 study by Citibank found similar results for 2004-2006 compared to what was observed during the 2010-2011 period when Asian central banks were buying treasury bills to support currency deflation.

Since March 2021, the S&P 500 (SPX) and the S&P US Treasury Bond Index have moved in similar directions. As both assets move higher, this has been positive for many investors. If both assets were to fall, this would obviously be of concern to investors. In the rare moments when stocks and bonds have decoupled, this has not been a problem. But, it is definitely something to watch out for.

So who buys treasury bills? The Financial Times reported on September 20 that China and Japan were buyers again. If demand for Treasuries continues, investors could benefit from the rise in both assets. Additionally, purchases from Asian central banks could help ease tapering for the Fed.

In case you haven’t noticed, relationships can be complicated.

TD Ameritrade® commentary for educational purposes only. SIPC member.


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