Summary: US equities managed to post another strong session yesterday, with the major indices closing at their highest levels for the cycle as financial stocks rebounded from the prior day’s sell-off. Today, several major US banks will report earnings ahead of reports from speculative favourites Tesla and Netflix tomorrow. The positive sentiment eluded the Asian session. In FX, the US dollar remains weak, with EURUSD testing new highs.
The S&P 500 and Nasdaq 100 reached new highs for the cycle, with the S&P 500 climbing 0.4% to 4,522 and the Nasdaq 100 rising 1% to 15,713. Among the sectors, information technology and financials emerged as the top performers within the S&P 500. Intel (INTC:xnas) experienced a significant surge of 3.7%, while Nvidia (NVDA:xnas) gained 2.2% as their CEO engaged in discussions with Washington officials to oppose potential new chip bans on China. Prior to the commencement of earnings reports from regional banks, the SPDR S&P Regional Banking ETF (KRE:arcx) bounced by 1.7%. On the other hand, telecom stocks declined as public outcry intensified following a Wall Street Journal investigation that exposed the presence of toxic lead cables left behind throughout the country. AT&T (T:xnys) tumbled 6.7% while Verizon (VZ:xnys) plummeted 7.5%.
The US dollar rolled back over to the weak side late yesterday and overnight, with EURUSD testing new highs for the cycle even as other USD pairs trade within the range. The JPY firmed after USDJPY tested above 139.00, trading 139.41 before rolling over to back below 138.50 coming into early European trading this morning. AUDUSD found support just below 0.6800, but its bounce has proven so far modest, perhaps as sentiment on the Chinese outlook remains subdued and copper prices registered a sharp drop yesterday. NZD traded on the weak side across the board yesterday as traders eyes the Wednesday Q2 CPI release. UK reports June CPI tomorrow morning early at 0600 GMT, a key focus for sterling traders.
Crude oil prices slumped some 1.5% yesterday as China’s activity data mostly came in below expectations and supply issues at the Libyan oil field were also resolved. The focus turns to US retail sales and earnings season from here.
Base metals slumped after weak economic data added to fears of lacklustre demand. Weakness in property investment in China also weighed. Copper fell 2.3% to test support at $3.82 while iron ore was down 1.6%. Low stockpiles are however likely to limit the downside of any selling. Aluminium inventories on the LME fell to their lowest level since 11 April, with large drawdowns in Asia. Copper inventories are down nearly 25% this month and sit just above its 18-year low.
Treasury gained modestly with yields falling 2 to 3 bps across the curve, in the absence of headlines. The weaker-than-expected data out of China added a bit to the Treasury market sentiment positively while Treasury Secretary Yellen’s optimism toward the US economy had muted reactions from the market. The 2-year yield slid 2bps to 4.74% while the 10-year yield fell by 3bps to 3.81%.
Adding further concerns on the global food supplies after the weather vagaries, now Russia has formally withdrawn from a UN-brokered deal to export Ukrainian grain across the Black Sea, potentially imperilling tens of millions of tonnes of food exports around the world. Reasons cited were the drone strike that damaged a bridge to Crimea and non-fulfilment of agreement to allow Moscow’s agricultural exports. Recep Tayyip Erdogan said he'd try to persuade Vladimir Putin to reconsider. Wheat futures spiked on the announcement before erasing the gains later.
The NY Fed Manufacturing survey for July remained in expansionary territory at 1.1, but slower than June's 6.6 albeit still above the forecast of a contraction print of -3.5. New orders saw a marginal increase to 3.3 from 3.1, while shipments cooled to 13.4 from 22 (moderating after June’s jump from -16.4). Prices continued to moderate, prices paid cooled to 16.7 from 22, indicative of rising prices, but at a slower pace than the prior month, while prices received eased to 3.9 from 9.
Tesla (TSLA) finally began production of its electric pickup truck, the Cybertruck, after nearly four years since its initial prototype was revealed. The automaker is also planning to double the size of its factory near Berlin to produce up to one million electric cars a year, which could make the plant the largest auto manufacturing facility in Germany, according to WSJ citing documents filed in recent days. Meanwhile, Ford (F) lowered its F-150 Lightning prices and said it is taking advantage of increased plant capacity, continued work on scaling production and cost, and improving battery raw material costs. Tesla reports earnings on Wednesday.
June retail sales and industrial production are up later today. Higher car sales following price cuts could drive retail sales and manufacturing activity higher, although expectations for industrial production remain muted with softening manufacturing PMIs. Bloomberg consensus expects retail sales for the control group (which feeds into the GDP) to increase by 0.3% MoM from 0.2% MoM in May, while industrial production is expected to be flat from -0.2% MoM in May. In-line data could keep the soft-landing narrative alive but strong upside surprises could reinforce Fed’s higher-for-longer message and disrupt the recent dollar downtrend if yields rise.
The pace of the Q2 earnings season picks up this week before peaking over the next couple of weeks, with more US banks reporting today after a rebound in financial stocks yesterday from Friday’s weakness. The first two major regional banks of note – PNC Financial and Western Alliance are among banks reporting. Tomorrow, Tesla, Netflix and ASML are in focus.
Earnings this week:
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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