Debt Ceiling Games, Saudi Oil Warning, Covid Vaccine Stocks, Pressured Equities

How many days... are left in May? "Not enough" might be the answer. For those not schooled by nuns who maybe never had to memorize these things, there are 31 days in May. June 1st is next Thursday, which is a week from tomorrow. The first of the month is not a hard date, but instead a soft estimate for when the United States Treasury will run out of enough cash and or flexibility to meet the federal government's financial obligations.

That is the point where Treasury Secretary Janet Yellen becomes unsure. I have seen other estimates that push this "date of default" out another week or even two. Do we really want to play that game? Are we really willing to risk testing the waters of potential US default?

I guess that depends on who you are and how well you play poker. Apparently, for for leadership on the right, reducing federal spending without raising taxes is worth the risk of coming this >< close. Apparently, for leadership on the left, maintaining federal non-defense spending at pandemic levels is worth that risk.

Negotiations between the two sides seemed to hit a bump in the road on Tuesday. At a meeting of House Republicans, Speaker Kevin McCarthy told his colleagues that he and President Biden are nowhere near a deal and that members will likely have to be ready to work during what is usually a 10 day recess around the Memorial Day holiday.

White House press secretary Karine Jean-Pierre tried to put a pretty bow on these negotiations, saying, "While areas of disagreement remain, the president, the speaker and their teams will continue to discuss the path forward." The fact is that after meeting or at least talking for several days consecutively, there is no next meeting scheduled between the sides. Global equity markets and US equity index futures have reacted negatively to this news overnight.

Bear in Mind...

The White House's Council of Economic Advisers has projected that default could trigger a 45% stock market crash, and potentially generate a deep economic recession that could rival the "Great Financial Crisis" of 2008 in terms of severity.

While I have been one of those economists that had called for a 2023 recession and so far have been incorrect, I think the severity of any default-induced recession would really have more to do with the length of the government shutdown.

Can the economy handle a day or two, or even a week? Probably. Once we start talking about weeks, then we'll have an issue.

Warning !!

Crude oil prices popped on Tuesday, and are higher still at zero dark-thirty Wednesday morning. What gives? OPEC Plus (23 nations in all) will meet over June 3rd and 4th in Vienna to discuss H2 2023 production policy. Saudi Energy Minister Prince Abdulaziz bin Salman spoke at the Qatar Economic Forum in Doha on Tuesday. The Prince did not mince words: "I keep advising them (short-sellers) that they will be ouching - they did ouch in April." The Prince added, "I would just tell them: Watch out !"

Another production cut would obviously impact global and US inflation. Headline level inflation surprised to the upside (8.7% y/y) this morning in the UK, as the US looks ahead to April PCE data this Friday with Fed officials apparently quite split on what to do with the target range for the Fed Funds Rate at their next policy meeting on June 14th. 

Of Course...

The global economic recovery to include demand for crude, as well as supply chain resilience, remains more reliant upon China's continued rebound from the pandemic than we would like. Any hiccup here too would have an impact upon global inflation.

On that note, new Covid infections appear to be surging in China due to the rise of the XBB sub-lineage of the Omicron variant. Chinese health regulators are talking about 40M new cases per week by the end of May and potentially as much as 65M new cases at some point in June. This is why the vaccine makers... Pfizer (PFE) , BioNTech (BNTX) and Moderna (MRNA) all popped on Tuesday. Moderna, at +8.66%, was the top performing stock in the S&P 500 for the regular session.

Markets

The major US equity indexes finally backed off of recent highs on Tuesday, with the Nasdaq Composite giving back 1.26% and the S&P 500 once again failing at the 4,200 level and falling back (-1.12%) to its 21 day EMA (exponential moving average) in search of support...

The pressure was fairly broad, with pockets of strength in smaller caps, in regional banks, and of course across the oil patch. Energy (XLE) was the lone S&P sector SPDR among the 11 that shaded green for the day (+1.07%), while seven of the 11 surrendered at least 1% on Tuesday. Materials (XLB) and Technology (XLK) led to the downside. The semis were mixed with Broadcom (AVGO) up on Apple (AAPL) news and some profit-taking ahead of Nvidia's (NVDA) expected Wednesday afternoon earnings release.

Interestingly, with equities under pressure, some trading volume did finally return as investors appeared to react simultaneously to the stalled debt ceiling negotiations, potentially higher crude prices, the spread of Covid in China and uncertainty ahead of Nvidia this evening.

Losers beat winners by a rough 3 to 2 at the NYSE and by about 5 to 4 at the Nasdaq. Advancing volume took a 43.7% share of composite NYSE-listed trade and just a 38.7% share of that metric for Nasdaq-listings. Aggregate trading volume increased 11.4% and 1.6% across NYSE and Nasdaq-listings respectively.

Trading volume across the Nasdaq Composite has not touched the trading volume 50 day SMA (simple moving average) for that index since May 3rd. It's been since May 4th for the S&P 500, but trading volume did come close to reaching that level on Tuesday. I see this as at least the start of some nervousness among portfolio managers. There is no significant move underway. Yet.

On a trading note... I have taken a small portion of my NVDA long off ahead of this evening's numbers. I'm still long and I am still rooting hard for Jensen. Risk management 101. Nothing more. Nothing less.

Onshoring Supply Chains

News broke on Tuesday that Apple and Broadcom had entered into a "multi-billion dollar" agreement for Broadcom to supply 5G "high-performance" (5G) radio frequency and wireless components to Apple. This is being seen as part of Apple's campaign to source more parts and components from American or at least more geographically diversified facilities.

Apple has come under scrutiny for the firm's reliance upon Chinese manufacturers. The firm has made overt moves to spread production into Vietnam and India. These 5G components will be manufactured in Colorado as well as other parts of the US.

Economics (All Times Eastern)

07:00 - MBA 30 Year Mortgage Rate (Weekly):Last 6.57%.

07:00 - MBA Mortgage Applications (Weekly):Last -5.7% w/w.

10:30 - Oil Inventories (Weekly):Last +5.04M.

10:30 - Gasoline Stocks (Weekly):Last -1.281M.

The Fed (All Times Eastern)

14:00 - FOMC Minutes.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (ADI) (2.76), (KSS) (-.44)

After the Close: (ELF) (.20), (NVDA) (.91), (SNOW) (.05), (SPLK) (-.12)

(XLE and AAPL are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)

At the time of publication, Stephen Guilfoyle was Long APPL, NVDA equity.