Weekly Indices Analysis
Today’s ADP number came in better than expected and although the reaction in the equities markets was muted at the US session open, the risk-on trade still remains the dominant theme. Especially for the tech heavy Nasdaq 100 index.
Automatic Data Processing Inc. is more commonly known as ADP and their platform has about 17% of the employer services market share. The human resources department of a US company will be the main user and the monthly figure collected from the platform is used as a guide to which way the larger Bureau of Labour Statistics (BLS), Non-Farm Payrolls data due on Friday, will likely go.
ADP reported that private payrolls increased by 692,000 in June for a sixth straight monthly rise. This figure is above the market’s expectations of 600k, with the largest gains were in the leisure and hospitality jobs markets, up by 332k.
Vaccinations are allowing the economy to re-open but fiscal stimulus has been the main driver for increased jobs growth and equity prices since last March, as jobs were guaranteed where possible through direct stimulus to companies. The fiscal flows through the previous administration were already adding $1 trillion per year to the size of the economy and the CARES Act along with the American Rescue Plan and Coronavirus Response and Relief Support Appropriations Act will have added much more into the mix this last 18 months. There is more money in the pipeline too from President Bidens Infrastructure plans.
The above infographic is from the recent report on ‘Bidenomics’ from Goldman Sachs Investment Research and it details where the current proposals will be put to work should they get passed into legislation.
Hindsight is a wonderful thing and looking back at the monthly candles for the Nasdaq, it would be easy to say that the stock markets only ever go up. Even the massive sell off during the spring of 2020 due to the coronavirus looks like a blip in the price action now. At the time, the Nasdaq NQ futures contract was limit down on multiple occasions on a daily basis, making it the most sustained volatile market I had ever attempted to trade. But again, in hindsight a move down to the monthly 50 period exponential moving average would have been a great buying opportunity, especially as the Fed and US Treasury stepped in with a shock and awe stimulus response, which echoes around the global markets and central banks.
The Federal Reserve are going to continue with their asset purchases in their QE programme and although they do not actually buy any shares, this assumed stimulus programme goes a long way to keeping investors bullish and interest rates low. The 10-year Treasury yield hit a year-to-date peak of 1.77% in March but is on track to end the quarter yielding just under 1.5%.
The $120 bln per month of asset purchases will at some point be super bullish for the TLT as that is starting to signal that it has found a bottom as money markets scramble for the highest quality collateral, of which the Fed keep taking out of the system. Higher bond prices are inverse to the bond yields, so inflation worries were reflected in the depreciation of the TLT.
For the Nasdaq and most of the S&P500, the tech companies are again expected to beat earnings in the coming months, but they are also gaining on the back of lower inflation expectations. Recently the largest gainer in the Nasdaq has been NVIDIA on news that the chip maker’s deal to buy UK chip designer Arm for $40 billion should complete on schedule by September 2021. The last few days has seen rivals back the deal. Hock Tan, president and chief executive of Broadcom, said in a statement that his company is backing the deal after receiving the necessary assurances. Rival Qualcomm has said that Nvidia could limit the supply of Arm’s technology to its competitors or raise prices.
Another tech giant in the Nasdaq got a boost as Facebook jumped over 4% when a U.S. judge granted the company’s motion to dismiss a Federal Trade Commission lawsuit. Judge James E. Boasberg concluded that the government failed to establish that the tech platform had a monopoly on social media networks. But he still left open the possibility that the government could revive the case by amending its complaint.
Both NVIDIA and Facebook have been on a rip since March 2021 and the Nasdaq is up 12.86% in the last 3 months.
Consumer confidence data showed that Americans’ increasingly want to spend, with the Conference Board’s consumer confidence index bouncing to the highest level since February 2020. But should there be a new wave of covid-19 variants tare through the states, like it is in other parts of the world, those consumers will hold on to their cash and save even more, just in case.
There is currently a lot of money on the side-lines and only a sustained increase in jobs growth and prosperity will get these consumers to spend in the shadow of possible further restrictions. The amount of money deposited at banks is causing some headaches and the Fed are having to do almost $1trillion in reverse repos with the banks in overnight lending of collateral for that cash.
The price action and momentum on the daily chart for the Nasdaq is currently pointing to higher prices. The next big target will be 15,000 and based on the current appreciation in price, we could be there by the end of next week following the NFP and 4th July holiday period. Buying the all-time high is difficult as who knows if there will be a quick dip down to the daily 20 or 50 ema? Investors have been in for a while so profit taking ahead of month end, could allow other traders to enter the markets at slightly lower levels.
A disappointing data drop for NFP or average wages may spook some traders out of their longs, but it is unlikely under the present conditions of large fiscal expansion that we get a sustained dip. That said a liquidation event which lasts a couple of days does seem more likely the higher we go up, without trading through some key swing lows once more. The gaps in between each US session close to open mean the market structure is unstable and these gaps cold get tested swiftly.