Stocks retraced to test support on concerns over an escalation of hostilities between Israel and Iran and its potential threat to the flow of crude oil from the Middle East.
Stocks
The S&P 500 retraced to test support at 5670/5700, but rising Trend Index troughs signal buying pressure. Respect of support will likely confirm another advance, with a target of 6000.
The equal-weighted index ($IQX) shows that large caps experienced a similar retracement.
Financial Markets
Bitcoin is consolidating in a narrow “descending flag” channel. Marginally lower troughs are typically a bullish sign, reflecting support. Upward breakout from the channel would signal a fresh advance, confirming strong liquidity in financial markets.
Treasury Markets
Increased demand for safety drove 10-year Treasury yields lower, again testing support at 3.7%.
Dollar & Gold
The Dollar strengthened, benefiting from the same flight to safety.
Gold retraced to test support, but the flight to safety will likely fuel another rally, breaking resistance at $2,700 per ounce.
Silver found short-term support at $31 per ounce and will likely re-test long-term resistance at $32.
ISM Manufacturing
The ISM Manufacturing PMI continues to signal contraction, holding steady at 47.2%.
The New Orders sub-index at 46.1% warns of further slowing ahead.
So does the Employment sub-index at 43.9%.
The Prices sub-index surprised, dropping below 50% for the first time since the beginning of the year, reflecting declining inflationary pressures.
Labor Market
Job Openings also surprised, increasing to 8.04 million in August. The gap above unemployment indicates continued labor market tightness.
Crude Oil
Brent crude is rallying on fears of an interruption to oil supplies from the Middle East.
Conclusion
Escalation of hostilities between Israel and Iran is likely to fuel a flight to safety, increasing demand for Treasuries, gold, and silver.
We expect the S&P 500 to retrace to test support at 5670. Crude oil is likely to rally but remain in a bear market unless Iran attempts to interdict shipping in the Straits of Hormuz and the Red Sea through its Houthi proxies in Yemen.
The ISM PMI warns of a slowing manufacturing sector, but there has been no significant decline in cyclical sector employment so far. Job openings also maintain a healthy gap above unemployment, indicating a still-tight labor market. The economy is expected to remain reasonably robust until the new year, when liquidity may tighten as the US Treasury likely reduces T-bill issuance, replacing them with longer-term coupons.
Acknowledgments
- CoinDesk: Bitcoin Prices
- Institute for Supply Management: ISM Report on Business