Stocks pick up some bid after textbook S&P 500 bounce

Morning Note

European stock markets were modestly higher on Thursday after a rebound in the US and another dip for Asian equities overnight. Hong Kong down 1.7% as casino stocks fell again, and is now testing the lows struck in July and August, down about 20% from its Feb peak. Indebted real estate group Evergrande fell another 7%. Gold struggled to hold the $1,800 level as Treasury yields climbed a touch. The dollar is a bit stronger after yesterday’s decline. 

 

FTSE 100 in the middle of the range after the decline of last week. Industrials and healthcare to the top, basic materials the only sector in the red. Ashtead is the top gainer, up 3%, after reporting Q1 revenues of £1.85bn and said it sees the full-year performance ahead of previous guidance. The company now expects growth of 13-16%, ahead of the 6-9% prior guidance. Rolls Royce also rallied 3% after the UK struck a security deal with Australia and the US to help supply the former with nuclear submarines. BAE Systems, another mentioned in the press statement from the government, also rose.

 

Buy the dip: The S&P 500 rallied 0.85% as it found support once more at the 50-day simple moving average, taking it back to where it was a month before – still down almost 1% MTD. The bounce off the 50-day line was pure textbook. Mega cap growth delivered, but cyclicals also got a boost as breadth was solid. Microsoft did some serious heavy lifting after announcing a mega buyback programme. The company will launch a share buyback programme of up to $60bn and raise its quarterly dividend by 11%. A mild gain for MSFT added almost 5pts to the S&P 500, even more to the NDX. Energy led the sectors with a gain of almost 4% as oil prices continued their ascent. Natural gas made another 8-year high. 

 

We’ve digested a couple of inflation readings this week and it’s clear it’s stickier than central bank Panglosses told us. It comes to down to there being too much money – aka liquidity – and not enough stuff to match. People can moan about the supply chain problems and labour shortages, and claim ‘there’s nothing the Fed can do about bottlenecks at ports, or ‘what can central banks do about chip shortages?’, but this is all about the inflationary environment unleashed by governments and central banks through their printing vast sums of cash during the pandemic and failing to suck it all back in afterwards. Instead, they run it hot in the vain quest for jobs when there are plenty of jobs out there, and let inflation get higher to eat into any wage growth and make people poorer. Meanwhile the asset rich get richer. 

 

I talked about this in May, referring to comments made a year before: “Ultimately it goes back to the question asked by the great Paul Tudor Jones about a year ago: can the Fed suck all this money back out of the system as quickly as it injected it. The answer then was almost certainly no, and post the recent policy shift and vast pro-cyclical stimulus it is clearly absolutely no. So we have inflation worries and, as described on multiple occasions last year, the worry is that the Fed allows inflation expectations to become unanchored as per the 1970s.” 

 

Briefly: 

 

Ray Dalio on Bitcoin – if it gets really successful, they’ll kill it and they have ways to kill it. Neatly sums up my long-standing position. Price higher today, but the rally off the Monday dip is losing momentum as it runs into near-term resistance around $48,500.

 

Bank of Japan boss Kuroda – If necessary, BOJ will further relax monetary policy such as by reducing interest rates. The comments ahead of the government’s first cut to its economic outlook in 4 months. USDJPY steady around 109.30 after touching its weakest since Aug 17th yesterday.

 

Cathie Wood reducing Tesla exposure: A $3,000 price target on the stock, but Ark Investment Management has sold more than a million shares in Tesla in the last 5 months, according to a Bloomberg report. 

 

WTI is holding onto gains after briefly rising above $73 after the EIA reported US inventories fell by 6.4m barrels last week, though the impact of Hurricane Ida is to blame.  

European stocks kick off July with strength, eyes on OPEC+

Morning Note

European stock markets have made a solid start to the second half of the year, making up for yesterday’s losses, whilst Asian shares got the session off to a soft start. Equity indices are looking positive this morning as the FTSE 100 rose 1% and popped above 7,100 again, with the Euro Stoxx 50 and DAX also both +1%, but continue to tread over well-worn ranges.

European and global stock markets have enjoyed a strong run-up in the last six months as a combination of ultra-loose monetary policy, fiscal largesse and a vaccine-enabled reopening of economies allowed investors to look ahead to a brighter future for earnings and growth. Now there are risks on the horizon, but the market remains biased to the upside. That’s been evidenced by fresh record highs on Wall Street as the S&P 500 notched its fifth-straight record closing high. The broad index has risen more than 14% this year, while both the Nasdaq Composite and Dow Jones are up by more than 12%. As bond yields remain subdued, US markets have benefitted from a rotation out of the reflation/reopening trade back into the mega cap growth/tech/growth area of the market, which is propelling the market to new records. The lack of such companies in European indices is perhaps a factor in why they have failed to keep pace.

Data from Asia overnight showed China’s Caixin Manufacturing PMI slipped to 51.3 from 52.0, amid concerns about cases in Guangdong. Meanwhile Japan’s Tankan survey showed a bounce for large manufacturers, with the index up to +14 from +5, its highest level in two and a half years. Services was less positive at +1 from -1.

Eyes on the NFP report tomorrow – still expected at around +700k for June. Yesterday’s ADP report printed 692k vs 600k expected, though the headline beat was offset by revisions to the previous report. Anyway no one cares about ADP – the key labour market tomorrow will be a market mover. Still in the US, pending home sales jumped 8% in May compared with April, the highest level of activity for the month since 2005. Today sees the release of the US ISM manufacturing PMI (exp. 61) and initial jobless claims (exp. +388k).

The focus today is on the oil market as OPEC and its allies convene to decide on production for the month of August and potentially beyond. As we explained in our preview, whilst the market is increasing tight there are one or two concerns about the rise of the Delta variant and what that could do to demand in the second half of the year. OPEC thinks demand should rise 6m bpd in 2021, with 5bpd of that figure due to arrive in H2. This presents a risk as oil demand recovery is weighted to the second half of the year and may not emerge due to new restrictions on mobility in response to new waves of the virus. This could leave OPEC+ cautious about raising output now. Moreover, it does not have the spectre of US oil dominance hanging over it in the same way as it has had in the years preceding the pandemic. US oil production remains about 2m bpd short of pre-pandemic levels and the whole paradigm of US energy has pivoted since the election. The US is not the swing producer anymore and can’t just open the spigots at will, which leaves OPEC holding all the cards.

EURUSD bear flag: Solid US data helped lift the dollar, with EURUSD hitting its lowest since April. That bear flag highlighted earlier this week proving reliable and seems to confirm a breakout from the bullish channel of the last year or so. With the new low consider possible extension to the 1.1705 March low, also the 38.2% retracement of the 2016-2018 rally.

Chart indicating EURUSD currency pair performance on 01.07.2021.

Dollar index highest since early April, extending gains after rebounding from the double tap on the 200-day SMA.

Dollar Index performance displayed on chart.

USDJPY: Eyeing breakout from the channel as it keeps above 111 and looks tests the trendline resistance around 111.250. Break of the trendline calls for test of March 2020 highs around 111.70.

Performance of the USDJPY currency pair.

 

Fed holds, pound breaks $1.27 ahead of BoE

Equities
Forex
Morning Note

Stocks firmed and the dollar fell, whilst gold rallied to a 5-year high as the Fed opened the door to cutting rates.

It’s like 2010 all over: the race to the bottom is on. Only this time the global economy is coming off a period of remarkable synchronised expansion, not a terrible recession and the worst financial crisis in a generation or more. So what gives!? Must Powell acquiesce to the whims of his president? Must Draghi end his tenure not normalising, but actually cutting rates even deeper?

Draghi to be fair has little option. In the absence of structural and fiscal reform – blame Germany – he can but tinker around the edges of the zero lower bound, hoping to weaken the currency to get some competitiveness back. Powell is in a different position, although really it looks like central banks are spitting in the wind in trying to shift inflation expectations. They should try to focus on boosting oil prices instead.

FOMC holds

So yesterday the FOMC nudged towards a cut. Nearly half the 17 members of the FOMC think cuts will be warranted this year. The median dot plot suggests 50bps in cuts through 2020. The dots evinced a shift from a tightening bias to an easing bias. The patient mantra was dropped, whilst the economy is now only expanding at a ‘moderate’, not ‘solid’, rate. The market took this as a sign the Fed’s listening to their demands – a cut in July is now fully priced in.

But there’s yet optionality for Powell and co. The Fed refrained from explicit references to cuts. The median dot plot shows no cuts this year still. The market is ahead of itself again. If we believe the dots, rate cuts will come slower than the market wants them to.

In some ways the Fed thread the needle here – keeping the market and the president happy without actually committing to cuts. The dots suggest the Fed is saying: “Of course we will cut, just not yet-good enough?”. For now it is. But the tail seems to be wagging the dog, forcing the Fed to follow sooner or later.

Certainly revising inflation expectations lower points to concerns that tame price growth cannot simply be attributed to transient factors. Yet at the same time the Fed thinks unemployment will be lower and growth stronger than it thought in March.

The problem we have is that Fed looks like it is flip-flopping; changes its mind based not on economic data but on the caprice of financial markets; appears in thrall to the White House; and is therefore at a very serious risk of losing its credibility.

Markets

Yields hit the deck. US 10yr bond yields slipped beneath 2% again for the first time since 2016. Bunds heading deeper into negative territory.

Gold rallied on the outcome as yields sank, breaking north of $1385. It’s now cleared a tonne of important multi-year resistance, paving the way for a return to $1400 and beyond. This is a big move, but if the Fed doesn’t deliver the cuts the bulls could be caught out.

Stocks liked it – the S&P 500 notched gains of about 0.3%, Limited upside as the Fed was not as dovish as the market wanted and because a lot of this was already priced in. Asian markets rallied across the board.

Futures show European stocks are on the front foot, catching a tailwind from Wall Street and the Fed. The FTSE 100 may underperform though as the pound is finding bid.

Oil has climbed as US inventories feel three times more than expected. Brent was up at $63.50, threatening to break free from its recent range – look for $63.80. WTI at $55.50 also close to breaking out of its trough.

FX

The dollar kicked lower after the Fed decision – but with the ECB looking super easy the gains versus the euro are limited. Likewise the yen with the Bank of Japan also ready to step up stimulus. Likewise the Australian dollar, with RBA governor Lowe talking up a further, imminent, cut. The race to the bottom is on. Is it too soon to talk about currency wars?

The exception here is the Bank of England, which is heading towards raising rates. We get to learn more about the BoE’s position later today. The difference here is the inflation expectations, which are moving up, not down like they are elsewhere. Britain’s also enjoying strong wage growth and a super-tight labour market. All of this is dependent on a smooth Brexit – this is not a given by any means.

Indeed, Brexit is keeping the lid on sterling’s gains – the prospect of Boris Johnson taking Britain out of the EU come October 31st is a risk. There’s now talk of a possible general election if he gets in – risky, we know what happened to May. The prospect of a general election would not do anything to remove uncertainty around UK assets. Zero clarity still.

EURUSD moved through 1.12 and was last at 1.1280, but failing to gain enough momentum to rally above 1.13 and scrub out the Draghi-inspired losses.

GBPUSD has reclaimed 1.27. Quite a chunky move here, blasting through a couple of big figures in under a day. Maybe the prospect of a more hawkish BoE is helping the pound, albeit the market is actually pricing in cuts, not hikes. At least Mark Carney doesn’t have to deal with a political leader on his case…

USDJPY lost the 108 handle to trade at 107.50, now breaking free into new 2019 lows (ex the Jan flash crash).”

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