Weekly Memorandum 9/27/2021
After a volatile start last week, the Fed came out to save the day, and stocks formed a higher-low. A strong rally followed and equities closed out near the highs of the week. This unfolded almost exactly as we shared in last week's column, which stated, "Stocks are set to start the week on a defensive note, as we already broke last week's lows and are trading below key support levels. A close below these price zones would be bearish and could lead to more selling. It's imperative that we avoid the formation of a lower-low, as it would be the first step in the establishment of a downtrend. Even so, the FOMC is set to speak this week, and fear levels are already high, so further downside could be capped." Now we are witnessing a massive sector-rotation take place. Value and inflation-sensitive segments of the market are bidding strongly this morning, while growth and tech are struggling. This could play out as a major theme for the rest of the year, especially with respect to small caps.
We also saw interest rates rise and bond prices fall last week. This came after the Fed assured markets that they would not begin to tighten monetary policy until later this year, at the least. Their first step would be to taper QE, before raising rates. The Dollar is seeing bids come through as a result, in the form of an arbitrage play on interest rates. Considering that commodity markets saw strong bids last week too, this is creating a scenario whereby the dollar could rise in tandem with commodities.
Cryptocurrencies hit a new low last week, but staged a nice rally by Friday. Precious metals continue to deal with serious technical issues. A new Mercator Letter will be published this weekend, where we will provide a complete analysis of the macroeconomic situation, along with a few actionable trade ideas.