Nasdaq rallies on lower bond yields in see-saw markets

Markets rallied after sell-offs this week, led by Nasdaq. Bond markets steadied, with yields backing off highs. This reversed prior moves this week. After focusing on the Fed and interest rates this week, traders are starting to think about the impact of a Government shutdown next week and an escalating Auto workers strike. Commodities saw buying in oil, as did precious metals and the ag complex.

Bottom-line: risk-on.

TODAY’S MAJOR NEWS

Government shutdown, will markets care?

The White House is expected to tell federal agencies today to prepare for a government shutdown next week. The House of Representatives has not yet been able to reach an agreement to fund the government beyond September 30, let alone agree to a bill that would pass the Senate. We’ve seen a partial shutdown of the government a dozen times since 1976, with the longest of them lasting 34 days in late 2018 extending into early 2019. Typically, markets dip in advance of a feared shutdown and bounce back when its real impact is seen to be modest.

A group of representatives in the House threaten to hold up a spending bill to fund the government as leverage to force cuts in spending to start addressing our nation’s debt problem. The market assumes that we’ll get through this, with little significant harm to the economy, and that may be true. However, this will come to a head after 2024 elections. Congress’ choices at that time will be higher taxes, spending cuts, or monetizing the debt by creating money to buy its own debt certificates. We’ll likely see a combination of the three, and that will be a more serious issue.

Ford negotiations signal how auto workers strike might be settled

The United Auto Workers union (UAW) is expanding its "stand up" strikes at 38 locations across 20 states, but only against GM and Stellantis, after the union said it made progress in negotiations with Ford. Instead of striking at all plants at the same time, UAW chapters will walk out at targeted facilities, giving the UAW "maximum leverage and maximum flexibility". The UAW have reached a number of concessions with Ford: reinstating of a COLA (cost-of-living adjustment formula), the right to strike over plant closures, enhanced profit sharing formula, and immediate conversion of temporary employees. This indicates what GM and Stellantis need to provide to end their strikes.

Mexico hikes tariffs on Chinese imports

Mexico hiked import tariffs by five points to 25% on almost four hundred products effective August 16, impacting nearly 90% of Chinese exports to Mexico. Mexico has also become an important destination for Chinese product, often to re-export them to the US. This comes as trade restrictions escalate between China and the European Union, with the latest development including the EU’s anti-subsidy investigation into Chinese exports of Electric Vehicles. Germany is also reportedly considering restricting the use of Chinese telecom equipment made by ZTE and Huawei in its mobile networks. That could provide another blow to China’s struggling economy.

TODAY’S MAJOR MARKETS

Nasdaq leads equities rally

• Equity markets saw buying on weakness this morning after recent sell-offs. Nasdaq, the S&P 500 and Russell 2000 were up 0.9%, 0.5% and 0.2% respectively
• Foreign markets also fell overnight, as they digested the Fed’s negative messaging, with the Nikkei 225 and Dax off 0.5% and 0.1% respectively, while the FTSE 100 was up 0.1%
• The VIX, Wall Street’s fear index, fell back to 16.1

Dollar holds technical level

• 2- and 10-year yields fell back marginally to 5.11% and 4.34%, respectively
• The dollar index maintained an important technical level at 105.5, with additional support from a more dovish than expected Bank of Japan policy statement.
• Versus the dollar, the Yen was down 0.5%, Sterling was off 0.3% and the Euro was unchanged

Oil hovers around $90 mark

• Crude oil prices rose 0.2% to 89.7 per barrel
• Spot gold and silver prices rose by 0.3% and 10.6%, respectively, at $1,946 per ounce, and $23.8 per ounce
• Grain and oilseed markets were mixed to mostly higher

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected] 

Market outlook by Paul Walton, Financial Writer: [email protected]