August is usually volatile for the market, but the Fed is a wild card and could agitate things further

on Aug20
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A trader works at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., August 19, 2021.

Andrew Kelly | Reuters

The markets: It’s August, but it’s also Covid. Normal August trading flows are being greatly complicated by the delta variant.

A third but still important complication — increasingly authoritarian action in China is causing some to reprice China’s demand for commodities, and the valuation of its entire market.

A normal August

Not a normal August

On another level, this is not at all a normal August.

The primary mover of the market (the reopening story) is getting rerated. The market is being forced to reprice the growth outlook due to the delta variant.

As a result, cyclicals sectors that are sensitive to the reopening story (energy, materials, industrials, travel/leisure) are getting hit this week:

Energy this week:
Chevron: -8%
EOG Resources: -6%
Hess -10%
Cabot Oil -8%

Industrials/materials this week:
Deere: -6%
United Rentals: -6%
Caterpillar -6.5%
Freeport-McMoRan: -15%
Cleveland-Cliffs: -10%

Airlines this week:
United: down 6%
American: down 6%
Delta: down 5%

The broader market is holding up due to the continuing rotation into defensives (health care, consumer staples, utilities) and technology, where several megacap names are hitting new highs.

Consumer staples this week:
Costco: up 1.4%
Pepsi: up 1.7%
Kimberly-Clark up 1.8%
Procter & Gamble: up 0.8%

Health care this week:
Abbott: up 2%
HCA: up 1.5%
United Health up 1%
Bristol-Meyers: up 1.7%

Technology new highs:
Juniper Networks

Is the Fed now the marginal mover of the market?

Delta variant remains the big unknown

Which is the bigger issue? Both are in play, but most feel delta is the bigger of the two risks, because the delta variant impact is far less predictable than the Fed’s likely path.

Bulls insist that once everyone gets boosters, full steam ahead economic activity will resume.

But there’s going to be several months where the outcome is uncertain. Until then, it’s like death from a thousand cuts.

“The worse delta gets, the more likely tapering will start later rather than sooner,” Alec Young from Tactical Alpha told me.

“You’re either going to have delta ease up and the Fed start tapering, or delta will get out of control and the Fed timeline could change,” he added. “Investors would much rather deal with well-telegraphed tapering than they would with delta spreading out of control and tanking the global economy.”

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