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Good morning.
U.S. futures are taking a tumble this morning, following Europe lower. Even tech stocks, yesterday’s outperformer, are lower.
But the real action is in crypto. Bitcoin, Ethereum, Dogecoin and just about every alt-coin of significance was down heavily over the past 24 hours following El Salvador’s rocky addition yesterday of Bitcoin as legal tender. Nearly $400 billion in market value was wiped out at one point yesterday. Crypto prices remain extremely volatile this morning, testing three-week lows.
In today’s essay, I cover a new bearish call—this time on the U.S. economy, and on stocks.
Let’s see what else is moving the markets today.
Markets update
Asia
- Asia is mixed with the Nikkei up nearly 0.9% in afternoon trading.
- Billionaire financier George Soros called out BlackRock for raising $1 billion to start a China mutual fund, a first for the firm’s wealthy clients. The fuss didn’t end there. Hedge fund king Ray Dalio defended the move, saying China and Singapore are don’t-miss-out investment opportunities.
Europe
- The European bourses slipped at the open, with the Stoxx Europe 600 down 1.1% in the first hour. At the start, construction, energy and utilities led the way lower.
- Investors are on hold ahead of tomorrow’s big ECB meeting. The big question is whether president Christine Lagarde and her colleagues will signal a pullback in stimulus-spending amid runaway inflation.
- Salvatore Ferragamo delivered a big first-half beat yesterday, no doubt helped by Bull Sheeters filling their closets with $1,300 Italian-leather mocassins (with tassels) and $1,800 handbags. The share price was up nearly 4.5% in early trading.
U.S.
- U.S. futures point to a rocky start. The Dow[hotlink] fell 260 points on Tuesday, but the [hotlink]Nasdaq eked out a tiny gain to close in record territory.
- Apple shares outperformed on Tuesday, jumping 1.6%, after the tech giant sent out a save-the-date notice: Sept. 14. Apple fans expect the company will unveil something called iPhone 13, which my kids tell me is the next must-have device (and which I will ignore).
- The big regional news was the volatility in El Salvador. Bitcoin tumbled by as much as 17% yesterday after the country made the virtual currency legal tender in a glitch-filled debut. In El Salvador, you can now pay your taxes in Bitcoin, but don’t be surprised if the ATM machines are a bit wonky.
Elsewhere
- Gold is flat, but the shiny yellow metal is once again trading below $1,800/ounce.
- The dollar is gaining.
- Crude is up with Brent trading below $72/barrel.
- The crypto slide continues this morning, with Bitcoin sinking below $45,000 at one point.
***
Long overdue?
The yield on the 10-year Treasury this morning sits at 1.356%, up 18 basis points in the past five weeks. Whenever the topic turns to rising interest rates you should brace for some uncomfortable news. There, you’ve been warned.
More on that in a moment.
Yesterday, Lisa Shalett of Morgan Stanley posted her closely watched weekly take on the markets. The upshot: Shalett and her global investment committee team see reason for concern. As you’ll recall, Goldman Sachs, too, is getting increasingly bearish on the American economy. Unlike Goldman, however, Morgan Stanley thinks this Delta-fueled headwind we’re seeing will very likely impact your portfolio.
They argue the markets haven’t adequately—if at all—priced in the risk from “a resurgence of COVID-19 hospitalizations, plummeting consumer confidence, increased talk of tapering the Federal Reserve’s bond purchases, higher interest rates and significant geopolitical shifts—the U.S. departure from Afghanistan and China’s regulatory crackdown on tech, education and consumer companies listed in the U.S.”
One of the things they find galling about these markets is something I’ve mentioned here a few times: that we haven’t had a single pull-back of a least 10% since the March 2020 lows. That’s not just rare, it’s borderline nutty. Shalett and her team think one is coming.
“The GIC continues to warn investors about the potential for a 10% to 15% pullback in the S&P 500 index before the end of the year,” they write. “While we see the economic cycle and the bull market remaining intact, we think a correction is necessary to restore risk premiums and preserve forward returns for selective and active stockpickers. The broad index needs to pause, consolidate its historic run and position for lower liquidity, higher real interest rates and higher inflation.”
Judging by the emails I’ve received from Bull Sheet readers lately, Shalett isn’t the only one who thinks we’re due for a correction.
Her advice: keep an eye on that 10-year Treasury rate, and any other longterm indicator on rates. If they go up and earnings revisions go down, that could be a sign of storm clouds ahead.
Lastly, she advises, “consider taking profits in index funds and rebalancing portfolios toward high-quality cyclicals, especially financials. Also seek consistent dividend-payers in consumer services, consumer staples and health care.”
***
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.
Today's read
The real reason everyone is quitting their jobs right now—Fortune
Homebuyers just got more good news—Fortune
What El Salvador's Bitcoin Experiment Looks Like—Wall Street Journal
Market candy
How Fed officials trade the markets
2020 was a busy year for Robert Kaplan. The Dallas Fed Chief "made multiple million-dollar-plus stock trades" last year, the Wall Street Journal reports, citing the latest financial disclosure forms. Kaplan, a former Goldman Sachs investment banker and Harvard Business School professor, went all-in on FANG stocks, and Marathon Petroleum, too.
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