What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
Nasdaq 100 and S&P 500 indices are reversing yesterday’s gains with S&P 500 futures trading around the 3,717 level this morning in early European trading hours. If the S&P 500 futures close today below yesterday’s open, then it is an obvious negative short-term signal and could indicate a new low for the cycle this week. So today is an important trading session for US equities as it will test the strength of buyers.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
The two indices consolidated this morning, down 1.2% and 0.4% respectively, despite a strong U.S. session overnight. Alibaba Health (00241) and JD Health (06618) fell 15% and 12% respective, more than giving back all their impressive gains yesterday, following media reports saying the Chinese authorities might prohibit third-party e-platforms from selling medicines online. It reminds investors that regulatory risks in the platform economy are here to stay. Hang Seng TECH Index (HSTECH.I) fell 2%. EV makers did well. Li Auto (02015) jumped 7% after unveiling a new EV model. Geely (00175) surged over 5% as the company’s Swedish EV arm, Polestar, is on track to be listed via SPAC.
EURUSD and USD pairs
An important technical and sentiment test for the US dollar for the balance of the week as we are set for two days of Fed Chair Powell testimony before Congressional panels starting today and as several major USD pairs have been triangulating in the wake of the FOMC meeting last Wednesday. A setup re-establishing the momentum back to the downside in EURUSD looks like a close for the week towards at least 1.0400, while similar marks for GBPUSD are 1.2100 and for AUDUSD below 0.6900.
USDJPY broke to fresh highs of 136.7 overnight
... as both the government and the Bank of Japan continued to press for easy policy. Pair turned lower towards 136 in the Asian session but the BoJ minutes from the April meeting reaffirmed the Bank’s dovish stance in order to stoke up inflation even though FX concerns were seen. Several members asserted that BOJ conducts monetary policy to achieve price stability, not at controlling forex moves. With energy and food prices coming off for now, it may signal some inflation respite for the authorities and the focus will likely stay on wage inflation and inflation expectations. Kuroda lives in the hope that a major recession comes and US yields top out, which will help the yen recover strongly. But until that plays out, markets are likely to continue testing Japan’s yield curve control policy. It is somewhat odd to see the new extension higher this week above the prior 135.59 high water mark despite US treasury yields remaining rangebound and oil prices trading to new 1-month lows (Japan entirely dependent on important fossil fuels). Tactically, watching the 135.00-50 area now for whether this latest jump higher can be sustained, with US long-term Treasuries an important coincident indicator.
Crude oil (OILUKAUG22 & OILUSAUG22)
Crude oil traded lower in Asia with WTI futures sliding to fresh one-month low at $105 while Brent crude futures traded near $110/barrel. In addition to a recovery in Libya’s production, broader macroeconomic developments, namely the rising risk of a recession hurting demand has in recent sessions managed to more than offset a continued tight supply outlook driven by sanctions, peak summer demand, and several OPEC+ producers struggling to raise output to agreed levels. President Biden’s fight against high gasoline prices ahead of the midterm election has also received some attention, although a potential gasoline tax holiday, while supporting consumers, would support demand, thereby prolong the period of tightness.
Industrial metals seeing renewed selling pressure on mounting recession fears
Just like crude oil hit the reverse overnight in Asia, industrial metals did the same with copper (COPPERUSSEP22) trading back below $4/lb and just above key support, while aluminum continues to challenge support around $2500, a level that has not been broken since last July. Firm central bank actions to curb inflation, thereby killing growth, remains a key focus in the market, while China is still struggling with covid outbreaks and declining activity. Below $3.95/lb HG copper may target $3.75/lb next.
Gold trades lower on renewed dollar strength ahead of Fed Chair Powell’s testimony to the Senate Banking Committee on Wednesday where the dominant topic will be inflation and how the Fed will balance the need to bring down prices without tipping the US economy into a recession. An economic downturn with inflation at elevated levels is likely to provide underlying support for gold, given the impact on riskier assets and with that the need for havens to weather the storm. For now, however, gold remains stuck in a wide $1780 to $1880 range, with an upside break unlikely to occur until recession concerns take over and US yields top out.
US Treasuries (TLT, IEF)
US Treasury yields are in tactical limbo here, with the 10-year benchmark yield caught between the pivotal 3.15-20% level (pivot high from May on the way up) and the 3.50% cycle top. A rally in bonds that sees downside resolution would prove an interesting test of market sentiment elsewhere: something to be celebrated due to easing pressure on valuations and the economy or simply a crystallization of growing fears that the outlook for the economy is darkening as we move toward recession?
What is going on?
UK May CPI out this morning in line with expectations
... at +0.7% MoM and +9.1% YoY, both as expected, and versus +9.0% YoY in April. The Core YoY reading dipped to +5.9% YoY vs. 6.0% expected and 6.2% in April.
Expect U.S. housing to severely curtail in the coming months
Existing homes sales fell 3.4 % to 5.4 million units in May according to data released yesterday. This is a new post-pandemic low. They are down 17 % from January. The biggest and most worrying drops are in the Midwest, the West and the South. At the same time, median prices continue to jump (+15 % at $408 000 – this is a new all-time high). Inventory is very low at only 2.6 mo. The market is very unbalanced and with housing affordability at the lowest level since 2007, the coming months will be very challenging.
Lennar confirms housing slowdownhe second largest US homebuilder delivered a strong Q2 result (ending 31 May) with revenue and earnings beating expectations, but new orders guidance for Q3 was 16-18,000 vs est. 17,750 suggesting downside risks to new orders as galloping US mortgage rates are reducing housing demand including new home construction. Lennar has already introduced lower prices and incentives in certain areas to sustain demand and the CEO called the current environment a complicated moment in the market.
What are we watching next?
US Fed Chair Powell semi-annual testimony today and tomorrow before House and Senate committees
The Fed Chair will be in the hot seat today and tomorrow in the required semi-annual testimony before Congress, where politicians on the committees often take a chance to grandstand on their own political positions and observations, but after several months of decades-high inflation and record gasoline prices, will this week’s testimony show that the political pressure on the Fed is mounting? The market will also watch for any new comments from the Fed Chair, although we are just a few days removed from the FOMC press conference.
UK teachers and postal workers warn of industrial action if pay doesn’t rise in line with inflation
This is an important theme to watch in the UK and Europe at large for second round inflation effects as the major unions eye soaring inflation for coming wage negotiations rounds. Germany’s IG Metall union was out recommending 7-8% wage increases.
Earnings WatchThere are no important earnings releases today, but tomorrow investors will focus on FedEx and Accenture.
- Thursday: FedEx, Accenture, Darden Restaurants, FactSet
- Friday: Carnival, China Gas, CarMax
Economic calendar highlights for today (times GMT)
- 0840 – UK Bank of England’s Cunliffe to speak
- 1230 – Czech Central Bank policy rate announcement
- 1230 – Canada May CPI
- 1300 – US Fed’s Barkin (non-voter) to speak
- 1300 – Switzerland SNB Chairman Jordan to speak
- 1330 – US Fed Chair Powell semiannual testimony before Senate panel
- 1400 – Euro Zone Jun. Preliminary Consumer Confidence
- 1440 – Canada Bank of Canada’s Rogers to speak
- 1650 – US Fed’s Evans (non-voter) to speak
- 1700 – US 20-year T-Note auction
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