Summary: Yesterday saw an uninspiring session in US equities, with the major averages closing lower on the day while small cap and value stocks were quite weak, perhaps in part on falling yields at the long end of the US yield curve. Those lower yields inspired fresh yen strength and a weak session in Japan, while China is looking at finishing its session in green after slightly stronger than expected June economic data.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the Nasdaq 100 index ended the day very slightly lower, perhaps partly held up by a new steep drop in US treasury yields after the prior day saw treasuries yields pulling sharply higher. The median stock did poorly, and small cap and value stocks were notably weak on the session, a strong sign of concern for the broader averages, which could see a consolidation of some scale here. The S&P 500 Index momentum was divergent at the recent highs (lower momentum readings at the price high). First levels of note are perhaps the 21-day averages at 14,525 in the Nasdaq 100 and 4,291 in the S&P 500 if a bout of consolidation sets in.
Wells Fargo (WFC:xnys) has been the long banking giant in the US to get a boost from its earnings report this week, as the main street-focused bank announced a solid beat on profits, revenue and expenses. But all of the big banks have noted a fall in lending as consumers and businesses have enjoyed the largess from US stimulus programs.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Cryptocurrencies pulled back higher after the recent slide, keeping Bitcoin well away from the critical 30k area for now and Ethereum from the equally pivotal 1,700 area. Fed Chair Powell was questioned on the cryptocurrency market in testimony yesterday and mentioned that “there are some risks with stablecoins right now” and that they could need to be more closely regulated if they are to play a significant role in US payment systems.
EURUSD – the EURUSD support area below 1.1800 has so far held with yesterday’s reversal (the 1.1775 area is the approximate neckline of a head-and-shoulders like formation that has developed since late last year, with 1.1704 the major price low of this year). The bounce coincided with an unwinding of the reaction in Fed expectations to the very hot US June CPI print and perhaps to a degree on the lack of any new urgency on the need to tighten in Fed Chair Powell’s testimony yesterday (more on that below). But steering away from support is one thing – a solid rally that retakes 1.2000 is needed to bring new energy to the long-term bullish case.
USDCAD – as noted below, the Bank of Canada meeting was less hawkish than anticipated, with the maintenance of a forecast for no rate hikes until at least the second half of next year as perhaps the key disappointment that led CAD lower, taking USDCAD well back above 1.2500 as of this morning as short Canadian yields dropped slightly, although a chunky correction in oil prices also played a part in sending CAD lower. USDCAD bears will want the 1.2600 area resistance to hold in USDCAD, otherwise the territory back toward the massive 1.3000 may open up in the weeks ahead.
WTI Crude Oil fell sharply yesterday in the wake of the US DoE crude oil and product inventory reports yesterday as gasoline stockpiles rose a bit over a million barrels versus expectation for a drop of two million barrels. Overall crude oil stocks dropped nearly eight million barrels versus the drop of four million barrels expected, taking US stockpiles further below five year averages. Brent crude also sold off, but less so, with the local support for TWI coming in at 70.76 and for Brent just above 72.00 per barrel.
Gold (XAUUSD) is trading nervously after a poke at its 200-day moving average yesterday around 1,826, and managed to maintain that level into this morning, likely in part on US real yields coming under strong pressure this week on the hot US June inflation data. Fresh assurances from Fed Chair Powell were also a boost. Still, the 1,850-1,900 zone looks a high hurdle to clear for now, but if the market loses its faith in buying into the Fed’s “transitory” inflation narrative, a rally could yet be in the making. A rally to 1,850 would mark a neutralization of the entire downside in the wake of the June 16 FOMC meeting.
US Treasuries (SHY:xnas, TLT:xnas, IEF:xnas) Long US treasuries found support yesterday as the reaction to the weak T-bond auction the prior day was reversed and as US Fed Chair Powell indicated no fresh discomfort after recent US inflation readings and said that reaching “substantial further progress” is still “a ways off”.
What’s going on?
US Fed Chair Powell holds ground on Fed’s policy stance. In semi-annual testimony before a House panel yesterday, Fed Chair Powell held his ground on the Fed’s view of inflation despite heated question from House members, saying that it has risen more than expected, but continuing to expect that it will prove transitory. Clearly, the Fed is also very focused on the labor market, where the “substantial further progress” that the Fed has cited as important for signaling more tightening is still “a ways off”. The Fed is clearly confused about how still high unemployment will be resolved, especially given the clear availability of jobs. Powell said that he will watch closely whether the expiration of enhanced unemployment benefits will help bring new labor supply to meet the demand, although he predicted that “even after this supply comes, it is still likely that we will still be short of maximum employment”.
Bank of Canada the latest central bank to taper QE – the Bank of Canada yesterday announced a tapering of its asset purchases of C$1 billion per week, taking the pace to C$2 billion per week, a move that was widely expected. In its statement, it waxed fairly optimistic, but seemed to want to buy some insurance on fresh Covid variant concerns and lowered its GDP growth estimates for this year, while raising them for next year. Maintaining a forecast for no rate hikes until at least the second half of next year.
Strong Australian jobs report overnight. The employment change number for June was strong, coming in at +29.1k, but importantly, full time positions rose +51.6k, and the unemployment rate dropped back to 4.9%, nominally below the pre-pandemic lows of 2018-2019, although a drop in hours worked was noted and Australia’s largest city Sydney is in a new lockdown
Chinese data marginally better than expected. China’s Q2 GDP rose slightly lower than expected year-on-year at 7.9% (vs. 8.0% expected), but the sequential QoQ measure was stronger than the 1.0% expected, printing 1.3%. June Retail Sales data rose 12.1% YoY vs. 10.8% expected and June Industrial Production rose 8.3% YoY vs. 7.9% expected.
What are we watching next?
US child tax credit payments set to go out starting today. The payments, set to run for the next six months and paid mid-month, are a part of US President Biden’s $1.9 trillion stimulus plan and would mean that just under 40 million households (with 65 million children) will be eligible to receive $250-300 per child, depending on age. As this is money for households that earn under $75k, the proclivity to spend the $15+ billion per month could be high and feed straight into the economy, retail sales, etc.
EU publishes “Fit for 55” climate plan – making its aggressive climate targets clear (55 is a reference to a 55% reduction in CO2 emissions relative to 1990 levels by 2030). The comprehensive plan outlines initiatives like the carbon border tax that would tax imports based on the carbon emissions involved in their production, the phase out of petrol-burning cars, etc.. This is an enormous project that would have enormous consequences, but would first have to be ratified by member EU countries.
Earnings for the rest of this week. More big US banks reporting today, with the pattern noted from all banks that lending activity is weak on the strength of US fiscal largess, while the investment banking is flying high on M&A, even as trading activity has generally declined (note Charles Schwab reporting tomorrow, for example).
Economic Calendar Highlights for today (times are GMT)
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
