What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities weakened after the close yesterday on a weak earnings report from Amazon, whose revenue estimates for next quarter missed estimates (more below). This cam after the cash session saw the Nasdaq 100 index managing to sustain above 15,000 into the close and the S&P 500 likewise closed in the green after touching all-time highs intraday before weakening after the close. The question is whether the blow to confidence from Amazon will compound with other factors to drive a more significant consolidation. The first pivotal level of note is perhaps the 21-dat moving average which recently supported the Nasdaq 100 and now sits at 14,833, actually above overnight lows. The 21-day moving average for the S&P 500 is at 4,355.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Bitcoin just can’t seem to do the deed and sustain the price action above the 40k level over the last couple of sessions, the key for a more significant attack on the higher range to 50k and above. Ethereum is similarly hesitant near key resistance above 2,400. In the US yesterday, a framework to regulate cryptocurrencies and stablecoins was introduced in the House of Representatives. In other news, Germany will allow some institutional funds to invest in crypto.
Amazon (AMZN:xnas) – Amazon missed Q3 revenue estimates, guiding for revenue in the quarter of $106-112 billion versus nearly $119 billion consensus expectations and seeing operating income in the $2.5-$6.0 billion range versus $8 billion estimated. The end of Covid lockdowns and changing consumption patterns that accompany them are seen as driving the lower estimates and drove Amazon shares sharply lower after hours despite strong growth in advertising and the AWS cloud unit.
Nikkei 225 Index (JP225.I) – The main large cap Japanese equity bears watching as it trades at new lows since the very first trading days of the year on a very weak session overnight – with a risk of an aggravated sell-off if the Japanese JPY rallies broadly – see below comment on USDJPY for levels.
USDJPY and JPY crosses– watching USDJPY and other JPY crosses closely here if the price action edges back toward the key recent 109.00+ lows as US treasury yields remain in the lower part of the recent range and we got a dose of weaker risk sentiment, which crumbled broadly in the wake of Amazon earnings after the close yesterday in the US and as the rally in Chinese equities has so far been a one-day affair.
GBPUSD – sterling has achieved a significant comeback from notable lows versus the US dollar last week, rising back above the key 1.3670, which was the low since February and from a briefly melt-down through the 200-day moving average. That episode seemed to show a strong correlation with a brief rout and then recovery in risk sentiment in global equities, so as the US market has weakened again sharply overnight, it will be interesting to see if that correlation holds. As well, the highs yesterday in GBPUSD poked back near the critical 1.4000 hurdle, which is coincidentally also the 61.8% retracement of the sell-off from the top in early June to recent lows.
US Treasuries (SHY:xnas, TLT:xnas, IEF:xnas) US Treasury yields rose amid ugly 7-year auction. Yesterday’s 7-year auction was the weakest since February. It stopped at 1.05%, tailing 1 basis point compared to When Issued (WI). Demand was also weak with the bid-to-cover at 2.23x, the lowest since March. The weak auction follows quite a substantial GDP miss which saw it expanding by 6.5% during the second quarter of the year, below an estimated 8.4%. At the same time, 10-year TIPS yield fell to 1.175% indicating that the market is beginning to fret about possible stagflationary pressures.
What’s going on?
Germany Jul flash CPI much hotter than expected with the headline CPI number coming in at +0.9% month-on-month and +3.8% year-on-year versus +0.6%/+3.2% expected, respectively. That 3.8% print is the highest in the German inflation data series since 1993.
US GDP comes in weaker than expected with highest inflation in nearly 40 years. The first estimate of US Q2 GDP came in weaker than expected at an annualized rate of 6.5% versus 8.4% expected, in part as inventories were drawn down heavily as companies struggled with supply chains, particularly in the residential construction industry. The Q2 GDP Price Index registered a stunning 6.0%, the highest level since 1982.
Robinhood (HOOD:xnas) IPO met with weak first day. The IPO of the at times controversial US based retail brokerage was priced at $38 per share, but ended the day below $35 in a weak first day of trading.
What are we watching next?
US June PCE Inflation later today – This is the inflation data series favoured by the Fed. The headline “PCE deflator” expected to show a month-on-month rise of 0.6% and year-on-year rise of 4.0% and the core readings expected at +0.6%/+3.7%, respectively. If the year-on-year core readings come in as expected, they will represent the highest numbers in 30 years.
St. Louis Fed’s Bullard out speaking today. During Fed Chair Powell’s press conference, it was implicitly clear that the Committee is divided on Fed messaging on inflation as Powell deferred to “the committee” rather than expressing his opinion on inflation on a couple of occasions. One of the leading voices in expressing a more hawkish view on the need for the Fed to taper asset purchases due to rising inflation pressures has been St. Louis Fed president Bullard, who, although not a voter may be seen as representing a concerned faction among key Fed profiles. He has already been out saying that the time is right for the Fed to begin tapering purchases and will speak on Friday.
Earnings for the rest of this week. Besides the Amazon report noted above, Mastercard was out yesterday reporting a better than expected bump in US card spending to +36% year-on-year vs. +31% expected as the economy reopened. The focus in today’s reports from the US is in a very different place as we have a look at construction and mining equipment maker Caterpillar, which reports before the open and is expected to report strong results, in part from pricing power, but the market will be very sensitive to guidance and any indications of supply chain difficulties. The two largest US oil companies are also out reporting before the open today.
- Friday: ExxonMobil, Chevron, Caterpillar, BBVA, BNP Paribas
Economic Calendar Highlights for today (times are GMT)
- 0800 – Germany Q2 GDP estimate
- 0800 – Norway Jul. Unemployment Rate
- 0800 – Italy Q2 GDP estimate
- 0900 – Euro Zone Jul. Flash CPI
- 1230 – Canada May GDP
- 1230 – US Jun. PCE Inflation
- 1300 – US Fed’s Bullard to Speak on the US economy
- 1400 – US Jul. Final University of Michigan Sentiment
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