Tuesday Morning Reads
Stocks are going into September on a high, fueled by easy monetary policy from the Federal Reserve and a market still flush with cash. While the major averages fell back slightly on Tuesday, Dow and S&P 500 futures climbed another 0.4% overnight, and contracts linked to the Nasdaq were ahead by 0.2%. Investors are still on the lookout for a correction this month, given that stocks haven't had a significant pullback since October 2020, which was the last time the S&P 500 fell by more than 5%.
Summer has come and passed: "Although this bull market has laughed at nearly all the worry signs in 2021, let's not forget that September is historically the worst month of the year for stocks," said Ryan Detrick, chief market strategist at LPL Financial. "Even last year, in the face of a huge rally off the March 2020 lows, we saw a nearly 10% correction in the middle of September."
Just to note, many hedge fund managers, traders and analysts have been flagging a correction or a sizable retreat for months. However, any weakness could be short-term, according to Detrick, who feels it could be contained in the 5-8% range. "This bull market is alive and well and we would view any potential weakness as an opportunity."
Portfolio protection: Demand for protective options rose across the market ahead of historically volatile September, according to the latest data from Bloomberg. The publication cited an elevated options skew, showing outsized demand for protective put contracts relative to bullish calls, as well as rising open interest in puts. If that is the case, "the market is in fact better hedged going into September. That should ultimately mean less market drama than might otherwise be the case," wrote Michael Purves, CEO of Tallbacken Capital.
Social Security benefits are likely to run out earlier than expected, according to newly released estimates that take into account the effects of COVID-19. The annual Social Security trustees report now forecasts retirees and the disabled will only be able to receive full benefits on a timely basis until 2034, one year earlier than predicted last year. After that, the program would have enough income to pay only about 78% of scheduled benefits unless Congress steps in to shore up the program.
Quote: "The pandemic and its economic impact have had an effect on Social Security's Trust Funds, and the future course of the pandemic is still uncertain," said the Social Security Administration's acting commissioner, Kilolo Kijakazi. "Yet, Social Security will continue to play a critical role in the lives of 65M beneficiaries and 176M workers and their families during 2021."
The bumped-up timeline was triggered by the U.S. economic recession caused by COVID-19, which led to a drop in employment and a decrease in payroll tax revenue. Those developments accelerated the depletion of Social Security's reserves and trustees even expect the pandemic to have lowered worker productivity and economic output permanently. A silver lining may be higher inflation that could significantly boost benefits in 2021, with Social Security beneficiaries expected to see a 6% cost-of-living increase.
Outlook: While the new report points to the need to fix the program, it is unlikely to spur lawmakers in Washington to act immediately. Many are opposed to increased taxes, reduced benefits or a combination of both, while Congress could step in when the threat becomes more immediate. Over the long term, it's also possible that COVID mortality rates could limit the number of benefits being paid out via Social Security, or alternatively boost costs of potential beneficiaries that live longer or those who survived with long-term health effects. (14 comments)
OPEC+ will meet today for the first time since July, when the group reached a deal to raise crude production in response to "oil demand showing clear signs of improvement and OECD stocks falling." Delegates are likely to stick to their guns, pumping an extra 400K barrels a day over the next several months to restore all the cuts they made at the start of the COVID-19 pandemic. "It would hurt OPEC+'s credibility to change the terms after only one month," said Bob Yawger, director of energy futures at Mizuho.
U.S. pressure: In recent weeks, the Biden administration has urged OPEC and its allies to boost oil output, in order to combat rising gasoline prices that could threaten the global economic recovery. Some see the request as hypocritical, as the country discourages drilling at home in its fight against climate change, while others see it as a stopgap measure until the U.S. transitions away from fossil fuels toward cleaner energy sources. Biden has set a goal to decarbonize the economy by 2050 and has paused new drilling lease auctions on federal lands pending a review of environmental and climate impacts.
"At a critical moment in the global recovery, [OPEC production] is simply not enough," National Security Advisor Jake Sullivan declared. "We are engaging with relevant OPEC+ members on the importance of competitive markets in setting prices." The national average for a gallon of gas stood at $3.174 on Wednesday, according to AAA, up roughly $1 over the past year.
Oil movement: U.S. crude oil closed August with its first monthly loss since March and its biggest drop since last October, as investors weighed the prospect of more OPEC+ production and the restoration of output after Hurricane Ida. October WTI crude (CL1:COM) settled down 1% at $68.50/bbl, capping a 7.4% drubbing this month for the front-month contract. August's oil price drop is a "correction, since the market had gotten ahead of itself," according to Velandera Energy Partners CFO Manish Raj. (24 comments)
The takeover of Afghanistan by the Taliban following the chaotic withdrawal by the U.S. and allied forces has many countries on alert for a potentially large number of refugees fleeing the Islamist militant group. Many EU capitals are now warning that the bloc must act to prevent a repeat of the European migrant crisis of 2015, which saw more than a million migrants enter Europe due to the war in Syria. That period sparked fractious internal disputes between member states and challenged Brussels' legal mechanisms for placing people seeking asylum.
Snapshot: EU officials are drafting a proposal to offer about €600M to neighboring Afghan countries to help refugees escape the Taliban. The money could land up in Pakistan, Uzbekistan and Tajikistan, and even Iran, which is under international sanctions. The plan mirrors a financial support package paid to Turkey in exchange for the country absorbing Syrian refugees, which ultimately broke down over Ankara's response to the 2016 Turkish coup attempt and suspension of EU accession talks.
"We are at the beginning of the budgetary cycle, we're not scraping the barrel as we were in 2015,'" European Commission Vice President Margaritis Schinas told the FT. "I don't think money will be the problem."
Go deeper: The EU has already earmarked €300M in direct humanitarian assistance to deal with the Afghan crisis, most of which is allocated for women, girls and other vulnerable groups in the country. The funds, along with the new €600M for settling refugees, would be part of a broader Afghanistan assistance package worth roughly €1B. The U.N. refugee agency estimates up to half a million Afghans could flee their homeland by year's end.
In Asia, Japan +1.3%. Hong Kong +0.6%. China +0.7%. India -0.4%.
In Europe, at midday, London +0.7%. Paris +1%. Frankfurt +0.2%.
Futures at 6:20, Dow +0.4%. S&P +0.4%. Nasdaq +0.2%. Crude +0.4% at $68.76. Gold -0.1% at $1815.70. Bitcoin +0.9% at $47689.
Ten-year Treasury Yield +1 bps to 1.31%
Today's Economic Calendar