The SPX closed 0.7% lower on Tuesday in a session that was dominated by two main themes: 1) Pelosi visiting Taiwan, and 2) hawkish commentary from several Fed officials.
Markets initially moved higher as Pelosi safely touched down in Taipei, but China is likely playing the long game from here and will slowly dial up the pressure in the coming days, via military drills and other measures.
Main headwind today was provided by several Fed officials, who tried to guide markets away from the notion that a Fed pivot is just around the corner. Some excerpts:
San Francisco Fed President Mary Daly (2024 FOMC voter): The Fed is nowhere near being almost done in fighting inflation. Outlook most likely is raising interest rates and maintaining rates at a higher level for a while.
Cleveland Fed President Mester (2022 FOMC voter): Inflation is not going to come down quickly. Little signs of progress on inflation. Says she must see convincing evidence that inflation is coming down before stopping rate hikes.
Chicago Fed President Evans (retiring in early 2023): A 50 basis points rate hike in September is reasonable, but 75 basis points could be okay.
Minneapolis Fed President Kashkari (2023 FOMC voter): Said over the weekend that the Fed is a long way from backing off as inflation is higher than the Fed expected and spreading out more broadly across the economy. Fed Fund Futures took notice and erased almost all gains that were accumulated since the last FOMC meeting (see chart below), and the open question now is, if markets follow suit, which could bring them back to about 4000 SPX index points.
Fed Fund Futures took notice and erased almost all gains that were accumulated since the last FOMC meeting (see chart below), and the open question now is, if markets follow suit, which could bring them back to about 4000 SPX index points.
Gamma Discussion
From a gamma standpoint the SPX is now back in negative gamma territory and the next support level is now found all the way down at 3900, while resistance can be identified at 4100/4150 and 4200 (chart not included).
Overnight participants will receive a big batch of service PMIs from Asia and Europe and then later from the US, which will shine more light on the direction of the economy/prices.
Also, tensions between the US and China will again be front and center.
Thanks, but Taiwan is not sabre rattling IMHO. Its not going to escalate today or tomorrow, but towards the end of the year we are going to have a explosive situation. Its on.
digital_precision
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@GammaLab Define "explosive situation", please. To me it's a Chinese nutjob leader getting to be best homies with a certain Russian nutjob leader and then having an epic staredown/game of chicken with......well.....the entire rest of the world.
If you wikipedia the Korean War, we are headed towards that, just in Taiwan this time. Same dynamics. Essentially the same players. I don't think there's any way Putin could resist a chance to show how much of a manly-man he is......not to mention a chance to cross swords with the West. And everyone else, I suppose.
GammaLab
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@digital_precision, Russia and China are working in synchrony, yes, but I disagree that they fight against the rest of the world, as the West is getting pretty isolated. Russia will have his new ICBMs operational towards the end of the year, which will act as an umbrella for further chinese provocations. Meanwhile Peking could create a dense fog of pre-war around Taiwan, similar to what Russia did in the months and years leading up to the invasion of the Ukraine.
mjcpaull
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Thnks. No way Fed is going to "pivot"....... great write-up. The Taiwan situation is fragile but likely to be just sabre rattling ......