The Daily Trading News: The Trader: UK growth cools and is there still more downside to this market pullback?

UK growth seems to be slowing – can it pick up again after Freedom Day?
First signs of a slowdown in inflation
US bond yields rally

The reopening can’t come soon enough: UK GDP rose a meager 0.8 percent in May, led by indoor hospitality, but slowed down by a global chip shortage that is affecting car production. The monthly growth rate was below the forecast of 1.5 percent, leaving the economy 3.1 percent below its size prior to the February 2020 pandemic.

The shares were sold out on Thursday. The kind of worries that narrowed the breadth and overbought conditions on major indices broke across the broader market. Concerns about regulatory pressure in China on big tech and concerns about antitrust law in the US have gnawed on the margins. Concerns about the global rise of the Delta variant also play a role – Tokyo’s decision to ban viewers was taken as a warning that the Covid pandemic is far from over. In this sense, the biggest concern seems to be that we have hit peak growth – and hit peak expectations a few months ago, as the top of the commodities market shows. For the past month or two, mega-cap growth has been doing all of the boost as reflation trading eased, but even with lower rates yesterday we saw the market pull away from the S&P 500 for the last 14 days during the month Treasury market doesn’t make much sense at all and the recent drop in yields is apparently without justification and is explained away as a technical matter. This is true, but it is not the full story, and we now face the risk that the year-end 10 years will be 1 percent, not 2 percent. Or at least that’s what the market seems to be saying – in fact, I would expect normal service to resume after this (painful) washout of the market and the Fed to start signaling the rejuvenation in August / Sep.

The yield on 10-year US notes rebounded from a low of 1.25 percent to hit 1.33 percent this morning. The US stock indices closed on Thursday in the red, but far from their lows. The S&P 500 fell 0.86 percent to 4,320 after hitting a session low of 4,289. The Dow Jones lost 260 points, but ended up being about that far from the day’s low. The S&P 500 could fall another 100 points to the 4215 area to tap the 50-day SMA that was a feature of the recent pullbacks. After rising 5 percent in just two weeks, it was ripe for a break, if not a deeper retreat – the 50-day line looks appealing. The current trailing P / E ratio of 30 for the S&P 500 indicates that it is heavily overbought – the earnings season starts next week and with high expectations and a broad market of +15 percent YTD this could be a best seller.

Still a bull market: corrections like these are seen as “healthy”, rotation means positioning yourself for growth and not for cover. Bank of America’s closely watched Flow Show notes that “poor returns and the Wall St-dependent Fed remain the main reasons stock and credit investors still believe in TINA.” Futures this morning suggest a higher open on Wall Street.

The Dow Transportation Index slipped 3 percent, with Biden targeting rail and ocean shipping with an executive order targeting competition in the U.S. economy. The pain for meme stocks continued with AMC, GME fell sharply in early trading before the day ended higher in an impressive turnaround. Meanwhile, the US is expected to blacklist other Chinese companies. San Francisco Fed President Mary Daly warned against declaring victory over the pandemic ahead of schedule.

Signs of a slowdown in inflation? China’s factory gate price growth slowed in June as rollover in the commodities market eased cost pressures after peaking in May. China’s producer price index rose 8.8 percent in June, but was below the 9 percent growth in May.

The FTSE 100 is higher in early Friday trading to recover some of the ground lost Thursday as it declined 1.7 percent. Keep entering a 3 month range as the 78.6 percent fib level at 7.155 continues to be a tough nut to crack.