Europe Provides the Market With a New ‘Excuse’
The technical damage came first. Now the news is doing the rest.
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September opens under pressure with the indexes indicated lower on higher oil, weaker bonds, and higher interest rates. The technical action on Friday and Monday has been a warning sign that pressure is building and now we have a new excuse to drive the market lower.
There have been two consecutive sessions where the rotation that had been holding this market together stopped working, and early indications are that the broad selling will continue on Tuesday.
Price Action Drives How News Gets Treated
An important concept to understand about the stock market is that price action often determines how news is treated rather than the other way around. The same headline will generate a totally different response depending on what the market has been doing.
In a strong market bad news gets explained away as temporary or already priced in. In a weak market, the same news becomes confirmation of what everyone already fears. Nothing about the information changed but emotions have shifted and that determines the response.
We saw a version of this last week when the market absorbed sanctions on Iran that extend to any country doing business with it, a breakdown in the Canada trade talks with new tariffs, and a report that Treasury might tap a trillion-dollar account to buy bonds. The indexes finished virtually unchanged as investors shrugged off the headlines. Big news but no reaction, because everyone was waiting for Nvidia (NVDA) and Jackson Hole.
Which Is Why Europe Matters More Today
The primary news driving a response Tuesday morning is that European inflation jumped to 3.3% in August, which is the highest in almost three years. The core reading that strips out food and energy edged down to 2.4% and services fell to 3%, so the underlying numbers are not as bad but the headline is generating a negative response. Investors are now fully pricing another quarter-point hike from the European Central Bank on September 10, following the initial increase in June.
Two weeks ago that story would have just been a European problem with a decent core number attached, and U.S. markets would have had little response. Today it hits differently because technical conditions have shifted. We are now in the first week of the weakest month of the year, with Fed Chair Warsh having leaned hawkish on Friday.
That same news about inflation in Europe is causing more technical damage because of the price action over the last couple of days. Inflation in Europe is not trivial either. We have two major central banks leaning hawkish, and long-dated bond yields are under pressure in France, Italy, the United Kingdom, and Japan as well as here. That is not a healthy environment for equities.
What to Watch
The 2-year Treasury yield jumped 12 basis points Friday to 4.35% on Warsh’s remarks, with the 10-year now around 4.75%. When shorter term rates move that much on a speech it means the market is repricing Fed policy rather than inflation expectations. Oil is the other issue and it is going the wrong way, with Brent near $90 on the renewed conflict.
August labor data starts to come out Tuesday with JOLTS and runs through the monthly jobs report Friday. July payrolls declined 23,000 with another 103,000 of downward revisions to the prior two months, so Friday carries more weight than usual.
Weak employment could help ease some concerns about inflation or it could ramp up concerns about possible stagflation. That will be the key issue later in the week.
Game Plan
My positioning has not changed. I’m playing defense with heavy cash holdings and staying very selective with any buying. I’m still making some trades but they are shorter term or very small longer term buys.
What is important to understand is that the technical damage came first and now the news flow is hitting a market predisposed to sell it. That can persist for a while, and it usually does until enough people have repositioned that the same headlines stop working.
My shopping list is a key priority right now. Not because I’m in a hurry to buy but because I want to be well prepared when the conditions are right.
At the time of publication, Rev Shark had no positions in any securities mentioned.
