Afternoon rap: Rates, USD bid, stocks slip

Post-July 4th blues: Rates were bid and yields slipped, with the US 10yr back to post-Fed lows around 1.35%. It could be that there is a fair amount of fixed income flow to greet the start of the new quarter after a solid run for equities in H1. It could also be that the market is betting the Fed won’t let the economy run all that hot, and that infrastructure spending will be a disappointment. It could also be a factor of holiday-week illiquidity in US bond markets and a bit of Independence Day hangover. Personally, I think this is the kind of fake out you need before you see a good run up in yields later this year towards 1.7% on 10s. But if you really simplify it suggests the market doesn’t think growth will be as strong though the surveys say otherwise. The move lower came as the US ISM June services PMI hit 60.1, short of the 53.5 expected and down from 64 last month. As bonds rallied the dollar caught some bid with DXY back above 92.50, while stocks have slipped. Remember this moves also comes ahead of the minutes for the FOMC’s last meeting at which it signalled a renewed concern around inflation – the hawkish pivot.

Reflation winners faded and the FTSE 100, which is exposed to the pace of global reopening, is down around 1% as it took a sharp tumble as US cash markets opened at 14:30. The UK market was also dragged lower by a sharp pullback in oil prices, which seemed to follow the short-term-bullish, longer-term-bearish OPEC talks breakdown playbook, though in a much tighter timeframe than most of us thought. Utilities were higher by around 0.35%, whilst Basic materials and energy led the fallers. Financials were also hit by the decline in nominal rates.

The S&P 500 is down around half of one percent with big tech doing a lot of lifting to offset some sharp falls in other sectors with about 6:1 declining to advancing stocks. Energy and financials declined 2%, while tech advanced 0.5%. SPX currently sits around 4,330 with the Thursday close at 4,319 the key near-term support. The Nasdaq remained flat as lower rates = good for growth/mega cap/momentum names. Conversely, DJIA slipped almost 0.9%.

Oil has retreated sharply in the wake of the post-OPEC spike. It looks like the market is more worried about a potential crisis at the cartel than it likes the lack of fresh supply coming on in H2. WTI tests the 200-hour SMA at $74 where it finding a little support. A break could see $72. Traders seem concerned that the speculative positioning could be unwound in the coming days if the OPEC+ deal were to start to unravel, ultimately leading to more crude and a less stable oil market.

Gold: easing off the highs but remains well supported with bulls in ascendancy above $1,800 and bullish MACD crossover still valid.