The Weakening Pulse of the Markets: Why I See No Room for Further Rise

The week starts off with the market showing a lack of momentum. The S&P 500 is barely edging higher while the yield on the ten-year UST briefly surpassed 3.74% per annum before declining to 3.68%. The DXY peaked above 104.3 before retracing to 104. While I still wouldn’t discount the possibility of an attempt to breach the 4300 point mark this week, I suspect this uptick lacks the momentum to sustain itself. We might see a continuation of the upward trend, but I doubt it will surpass 2-3%.

So, what's my plan of action for the time being?

• Concerning gold, I feel the current levels are favorable for amassing a position.
• In terms of indices, I'm maintaining a short position, as I see more downside potential than upside.
• Regarding TLT/TMF, I expect that despite the potential for slight near-term yield increases, in the span of 5-6 months we'll see yields for ten-year periods in the range of 2.9-3.1%. Consequently, both TLT and TMF should rise significantly.

My slightly bearish outlook is bolstered by an insightful perspective from Morgan Stanley analysts. Their renowned Wall Street pessimist Mike Wilson anticipates a significant plunge in this year's earnings. He predicts a year-over-year drop of 16%, a scenario not yet priced in by the markets.

Wilson's base case envisions a dip to 3900 points for the S&P 500 - the lower end of Wall Street analysts' expectations. Yet his expectation of a more profound market drop lacks a solid rationale. Factors such as the excitement surrounding artificial intelligence and other major tech companies, coupled with the Fed's interventions and the ongoing drama surrounding the US national debt ceiling, continue to buoy the market.

On Friday, the market demonstrated optimism, reacting positively to unemployment data and non-farm payroll figures. With such a robust job market, a US recession seems to be on hold. Additionally, this serves as yet another incentive for the Fed to delay interest rate hikes. Despite the inflation surge, there's no urgency.

So what lies ahead? President Biden has indeed signed a bill suspending the national debt ceiling until January 1, 2025. However, I find myself aligned with Wilson's view that this could cause a significant liquidity crunch, and given the prevailing high rates, this could weigh on the markets in the latter half of the year.

By signing the bill to raise the debt ceiling, the White House has effectively unleashed a 'Kraken' on the market in the form of the US Treasury.

Preliminary estimates indicate that the regulator will issue over $1 trillion in government bonds from June to December. Meanwhile, the monthly $95 billion quantitative tightening (QT) remains in effect.