Small-Caps Scream Higher, Canada Smokes & Hikes, Dour Druckenmiller, Trading AMD

Can you imagine the air filled with smoke?

It was. The city was vanishing before noon

or was it earlier than that? I can't say because

the light came from nowhere and went nowhere.

-- "Smoke" (excerpt)  Philip Levine (2000)

We're Number One!

We finally won something. According to the website IQAir, New York City became the most polluted major city in the world on Tuesday evening. The cause? Smoke from wildfires in Quebec and Nova Scotia wafted over the border from Canada and caught the air currents just right so that the dirtiest air in the northeastern U.S. (or anywhere else on Planet Earth) crossed over northern New Jersey, through New York City and over Long Island.

The U.S. Air Quality index moved well into the 200s by Wednesday morning on a 0 to 500 scale, and, according to New York City Mayor Eric Adams, peaked at 484 by 5 p.m. late yesterday afternoon. Air Quality levels above 300 are considered to be hazardous and citizens were cautioned to do what they can to avoid outdoor activities or physical exertion.

I did feel that one could sense the air becoming less thick overnight as the smell of those far-away fires seemed to dissipate. I just checked that IQAir website. At 3 a.m. Thursday morning, we were still number one among major cities glabally, but with an air-quality reading of just 176, so the air has indeed improved overnight. That puts NYC just barely ahead of Dhaka, Bangladesh with a reading of 173 and Detroit, Michigan at 163, which is also suffering due to the fires in Canada.

Also in New York

The "catch-up" trade continued. Smaller caps screamed higher. The Russell 2000 gained 1.78% on the session as the S&P SmallCap 600 gained 2.4% and the S&P MidCap 400 picked up 1.52%.

The iShares Russell 2000 ETF, whose breakout we discussed here 24 hours ago, extended that move:

Now, we'll find out if that trendline, or that volume shelf can provide support.

The Dow Transports soared as well, running 2.45% above Tuesday's closing level, as not one single member of that index closed the Wednesday session in the red. Conversely, the Nasdaq Composite shed 1.29% (the worst day since April 25 for that index) on Wednesday as it's more refined, more tech-focused large-cap cousin, the Nasdaq 100, lost 1.75%.

The broader S&P 500 gave up 0.38%, as the blue-chip Dow Industrials gained 0.27%, falsely extending to the public a false perception of a quiet marketplace.

What Happened?

Was it big news at the time? I thought the news had passed under the radar when I saw it. I guess not.

On Wednesday morning, more smoke from Canada, or rather a surprise increase of 25 basis points was made by the Bank of Canada to the "Overnight Rate," after a two-meeting pause, bringing that rate up to 4.75% due to an uptick in Canadian inflation in April and despite a GDP that looks to have stopped growing.

This came one day after the Reserve Bank of Australia had delivered a second straight increase to their "Cash Rate" after a one meeting "skip," bringing that rate up to 4.1%. Australia also saw inflation reheat itself in April as growth in GDP slowed.

U.S. investors, while fully expecting a "skip" by the FOMC next week are starting to understand that a skip or even a pause does not necessarily mean an end to the policy tightening cycle or a change in trajectory. Central banks are willing to continue acting in their fight against inflation even if economic activity slows ahead of the timing for these decisions.

Can the Fed be any different? Of course they can. With unemployment and underemployment on the rise, but still far lower than levels once considered to be where the U.S. economy would be "fully employed," there is less pressure to defend the people, and more pressure to pursue the mandate.

Besides...

The Atlanta Fed, in response to the BEA's trade balance print for April, which came in better than expected, revised their Q2 GDPNow model upward to 2.2% (q/q, SAAR) from 2.0%. Atlanta upped their inputs for real net exports, private domestic investment, and real government spending, while reducing their input for real personal consumption expenditures.

Futures markets trading in Chicago are still pricing in a 70% probability for no rate hike next week, but a 68% probability for a 25 basis point rate hike at the following meeting on July 26.

So, futures markets are betting that the Fed follows the Australian/Canadian playbook should inflation stay hot, even if the economy slows? Exactly, but as readers can see, at least in Atlanta, they do not see the economy slowing... they see growth accelerating from the first quarter (1.3% q/q, SAAR).

All Clear?

Not exactly.

Stanley Druckenmiller, the chair and CEO of his Duquesne Family Office, appeared at the Bloomberg Invest Conference on Wednesday. In full disclosure, I have a very high opinion of Druckenmiller and consider his opinions to be among the sharpest available to us living and working in the U.S. economics/financial markets space. Druckenmiller still sees the U.S. economy going not only into recession, but does not see a reduced likelihood for a hard landing kind of recession just because growth has outlasted many negative projections (including my own).

Druckenmiller said on Wednesday: "I would actually argue (that) since it's taken so long, the Fed has actually ended up with a higher terminal rate, and in fact, inflation gets stickier the longer it stays in the system; that it increases, not decreases, the probability of a hard landing."

Druckenmiller went on: "I could see corporate profits down 20% - 30%." This echoes his thoughts from a month ago, when at the Sohn Conference, Druckenmiller said that a hard landing for the U.S. economy could involve a 20% minimum decline in corporate profits and an unemployment rate greater than 5%. He also suggested that while he was not "predicting something worse than 2008" that it would be "naive" not to at least be open minded to the possibility of something along the lines of a global financial crisis.

Back to Wednesday's Bloomberg event, Druckenmiller said, "I think the probabilities would suggest that Silicon Valley Bank, Bed Bath & Beyond, they're probably the tip of the iceberg." He sees "more shoes to drop" as the lag effects of higher short-term interest rates are yet to be felt across parts of the economy.

On the bright side, Duckenmiller did say "AI could be as innovative as the internet. If I'm right on AI, I could own Nvidia (NVDA) for two or three years or more." That said, Druckenmiller also said that he does "not see any fat pitches" right now.

Druckenmiller has legendarily never had a losing year managing money. Just an FYI. I don't know anyone else who can say that this deep into a career.

Later On

On Wednesday afternoon, Ray Dalio, founder of Bridgewater Associates, who also has a large following, said simply... "We are at the beginning of a late, big-cycle debt crisis when you are producing too much debt and have a shortage of buyers." Dalio does not necessarily see interest rates going much higher than they are now, but he does see the economy worsening and that this could beget internal strife should the political fragmentation within the U.S. continue to deepen.

Oh, that reminds me. The U.S. Treasury Department had shelved some $850B in borrowings while the debt-ceiling bill was being negotiated. That means simply that Treasury will have to beef up the issuances of coming short-term (T-Bills) offerings by an aggregate of $1T into the end of this fiscal year (end of September).

While most bond traders are not expecting to see market disruption as this is expected, this could impact the banks that are required to bid for Treasury securities at auction as the federal government refills its coffers. All as U.S. regulators consider requiring large banks to increase their cash reserves in order to stabilize the industry. What could possibly go wrong?

Islands in the Stream

Well, Advanced Micro Devices (AMD) gave back on Wednesday almost everything it gained on Tuesday. As mentioned 24 hours ago, the key level here is $116. A move below that level, will likely lead to a filling that gap down to $109, which would also pierce the 21-day exponential moving average (EMA).

No, I am not changing my pivot ($130), target ($150) or panic (200-day simple moving average) prices. Clearly, the stock needs to retake the upper trendline of the price channel this morning to put the bulls at ease.

Economics (All Times Eastern)

08:30 - Initial Jobless Claims (Weekly):Expecting 239K, Last 232K.

08:30 - Continuing Claims (Weekly):Last 1.795M.

10:00 - Wholesale Inventories (Apr-rev):Flashed -0.2% m/m.

10:30 - Natural Gas Inventories (Weekly):Last +110B cf.

The Fed (All Times Eastern)

Fed Blackout Period.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (SIG) (1.45), (TTC) (1.52)

After the Close: (DOCU) (0.56), (MTN) (8.77)

At the time of publication, Guilfoyle was long NVDA and AMD equity.