Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
Summary: Market sentiment is out of synch globally, as the US trades near all-time highs, while the Chinese market remains on edge near key support on the recent regulatory crackdown on a number of online companies and industries. The next few days bring earnings reports from most of the very largest US companies, which have led the recent, somewhat narrow rally to new all-time highs in the indices. Elsewhere, the USD is firm ahead of one of the least anticipated FOMC meetings in a while as US real yields hit a new low.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – a big sentiment test for the remainder of the week here for the Nasdaq 100 in particular as an FOMC meeting is up tomorrow and as the largest of US companies report earnings today and in the coming couple of days after these companies have provided the leadership in the recent rally. The local focus for the Nasdaq is on perhaps the 15,000 area as support as this was the recent cycle high. The technical setup for the S&P 500 index is similar with tactical focus on whether 4,400 holds.
Tesla – (TSLA:xnas) – reported strong results and managed to avoid supply chain impacts that were more significant on many competitors as the company’s Q2 saw stronger revenue than expected at just short of $12 billion and reported better than expected profit margins, with the gross profit margin at 28.4%, almost 2% clear of the previous quarter. Shares were up over 2% prior to the report and another percent or so after hours.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – a volatile session yesterday for cryptocurrencies as Amazon was out denying that it was looking to accept Bitcoin payments this year, a story that was credited with sparking the wild rally to above 40k at one point yesterday. The price action has pulled back toward 37k this morning, still well above the range of last week, with the critical ongoing focus on the 40-42k resistance. In Ethereum, yesterday’s peak briefly took the price above the early July high if 2,408 but has retreated in sympathy with Bitcoin back toward 2,200 this morning.
EURUSD – still no resolution here as it appears the bears lifted positions yesterday in anticipation of the FOMC meeting tomorrow, where it is hard to anticipate strong new guidance signals from the Fed. The overheard resistance is heavy for the pair all the way through 1.2000 and higher, making any rally difficult to gauge for its chances to point to a new uptrend potential, while the downside breakpoint near 1.1750 is far more clearly etched on the chart and would point to a test of 1.1600 or lower if the price action breaks down post-FOMC.
EURNOK – while the US dollar situation remains difficult to sort out and we await the outcome of the FOMC, the ongoing strength in crude oil prices and stable risk sentiment has helped EURNOK stick back lower after a brief rally yesterday, underlining the strength of the 10.50 area resistance and pointing toward a test lower, potentially all the way back to 10.00 and lower if the commodity complex, and energy in particular, march to new highs.
Crude Oil – oil prices continued to dribble higher yesterday, effectively taking out the last major Fibonacci retracement levels in theory, though with prices still contending with the round 75 dollars/bbl resistance in Brent, which was a sticky price area from mid-June until almost mid-July before the recent swoon and recovery. A similar area for WTI is at 72.50 as the market gauges the forward demand outlook on Covid variant resurgences.
US Treasuries (SHY:xnas, TLT:xnas, IEF:xnas) Lower US Treasury real and nominal yields add to monetary stimulus, raising the risk of a “hawkish” Fed surprise. The bond market is convinced that an economic recovery will fade in the near term. The problem is that despite concerns for the growth outlook; inflationary pressures continue to be supported. It raises red flags concerning stagflation, which now is becoming an increasingly possible scenario. Today we will be monitoring the US Treasury 5-year and Thursday’s 7-year UST before the FOMC meeting as they could provide important information about investors’ appetite. Although this week’s Fed meeting will be a non-event, it could reveal considerable detail to long-term traders.
European sovereigns (VGEA, IFRB, IS0L). The rally may be overdone here. The symmetrical inflation target adopted by the European Central Bank earlier this month has helped European Government bond yields lower. Yet, the honeymoon might be short lived, especially for German Bunds. Although the ECB continues with its dovish monetary policy, European sovereigns remain correlated to move in US Treasury yields and vulnerable to the upcoming German election. Moreover, Goldman Sachs’ strategists recommend selling 30-year Bunds highlighting the fact that duration will be detrimental as the economy recovers and inflation picks up. We agree with this view and remain bearish Bunds from 10-year onwards, as well as French OATs.
What’s going on?
Ark Innovation ETF (ARKK) exiting Chinese stocks. As the fund now only holds some 0.32% of its $23 billion in assets in Chinese companies. This includes the winding down of stakes in the Tencent Holdings Ltd., as Chinese authorities crackdown on a number of sectors cloud the outlook for many Chinese tech companies.
UK looks to ease travel restrictions from the EU and the US – an ongoing move toward opening up despite the recent surge of Covid cases in the UK, though the case count looks to have peaked there more than a week ago.
Intel (INTC:xnas) – the company’s shares were sharply lower in after-hours trading during the company’s “Intel Accelerated” event, in which it outlines plans to re-establish itself as a leader in manufacturing.
More disruption for logistics in China on weather – as a typhoon slammed the Shanghai area, closing the mega-port of Yangshan until at least today.
New low in US real yields as inflation expectations remain relatively elevated while nominal yields remain low – this saw the 10-year real yield slide to its lowest level ever at below -110 basis points.
What are we watching next?
FOMC meeting on Wednesday. The FOMC meeting this week is one without economic and policy projections, so any clues on changes in the Fed thinking will have to be gleaned from the statement, which usually sees minor alterations, and in Powell’s press conference, here anticipation of a change of stance is low, given his recent dovish performance in semi-annual testimony before Congress, in which he bemoaned the need for substantial further progress in the labor market and insisted that the Fed sees the recent inflation spike as transitory.
Hungary’s Central Bank to raise rates today – the central bank is expected to raise the rate 20 bps to 1.1%. The appreciation in HUF that came in the wake of the central bank’s tilt toward a new tightening regime back in May has since evaporated, as investors are concerned with low real interest rates in the wake of recent high inflation prints. Interesting to watch whether the central bank turns up the pressure to turn the HUF back higher.
US Jul. Consumer Confidence will be an interesting release to watch today after the preliminary July University of Michigan sentiment reading showed a significant dip and registered a five-month low. This has been somewhat out of synch with the Consumer Confidence data series, which has risen every month since January and is back in the pre-pandemic range. A soft survey here could suggest something is souring in the consumer outlook, whether in the jobs market or due to concerns of rising costs.
Australia Q2 CPI – is up tonight and expected to show the highest reading since 2008 on the headline (anything above 3.5% year-on-year will do the trick) but with considerable focus likely on the core CPI measures like the “trimmed mean” which is only expected in at 1.6% year-on-year. A hotter than expected print, particularly at the core, will be an interesting test of the RBA’s policy guidance, as the central bank will have to mimic the US Fed in a high stakes prediction that inflation will prove transitory.
Earnings for the rest of this week. Today, the earnings focus shifts to three of the largest US companies, which all report after the close today – Apple, Alphabet, and Microsoft. Alphabet has surged recently on hopes that Twitter and Snap’s strong gains in advertising will see a similar development for Alphabet, which is very dependent on ad sales. For the largest company in the world, Apple, the focus is on a tough year-on-year comparison for iPhones and the degree of continued services growth after two strong recent quarters of growth in that category.
Economic Calendar Highlights for today (times are GMT)
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