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European stock markets ended Monday down after trading higher for much of the session and are a little weaker again this morning, though the FTSE nudged a bit higher with help from the oil majors. US stock markets drifted a touch lower in yesterday’s session without too much to energise investors either way after July’s strong recovery. This morning the highlight for the London market are some very strong results for BP, as you would expect. Underlying replacement cost profit was $8.5 billion in the second quarter, compared with $6.2bn for the previous quarter. Good refining margins and oil trading delivering strong underlying cash growth. Or you could just say oil and gas prices are so high it’s like printing money. The quarterly dividend was raised 10% – the usual suspects will complain. BP said the windfall tax introduced last month on profits through to the end of 2025 will result in a one-off deferred tax charge of $0.8bn – a drop in the ocean by today’s numbers it would seem. Oil prices have stabilised this morning after a sharp decline yesterday towards the bottom of the bear flag/descending wedge formation.

The S&P 500 perfectly played to an old technical level, pulling back from the 4,145 horizontal resistance formed by the Jun ‘21 and Mar ‘22 lows. We’re constantly wondering – when is the bottom in? I’m tended to believe this is just the middle of a strong bear market rally; the 9% rally for the broad US market in July simply a reflex reaction to the oversold conditions, beaten-down valuations, earnings strength and hope the Fed is about to pivot to a more accommodative stance. Most notably, the 10yr Treasury yield has crumbled 100bps since the S&P 500’s low in the middle of June. That has enabled a big multiple expansion for tech stocks in particular which had been heavily offloaded on Fed tightening and inflation worries in the first half of the year. Caterpillar, Starbucks, Airbnb and Uber report earnings later.

I’m not convinced the bottom is in, even if there could yet be more near-term strength towards the 4,200 level. JPM notes: “During the 5 major bear markets (i.e. 40%+ drawdowns) in the S&P500 since 1929, on average we have seen 5 ‘bear market rallies’ with an average return of 18% over a 2-month period.” For context, since the lows in mid-Jun the S&P has gained around 13%.

There’s plenty of disquiet about Nancy Pelosi’s rumoured visit to Taiwan. Asian markets fell around 1-2% overnight. It’s really quite hard to read too much into this mooted visit by the Speaker of the House of Representatives – the war of words between the US and China is likely to be spicy but unlikely to be material. Longer term, we simply don’t know how Beijing will respond; for today it’s a case of muscle flexing: buzzing the skies with jets, military drills and even firing the odd missile. Ultimately the worry is that tensions becoming inflamed enough for Beijing to use this as the pretext it seeks to invade? I’m not an Asian policy expert so I will leave that to those in the know; for traders I would simply urge you to play what’s in front of you. 

Whilst manufacturing PMIs in Europe and Asia were soft, the US ISM number was a little better than expected. A key factor in the low reading was a very sharp decline in the prices paid element – a win for the Fed. Wells Fargo: “ISM Prices Paid component unexpectedly slowed to 60.0. For policymakers tasked with slowing the economy just enough to get prices in check but not so much that it causes a recession, this 18.5 point drop in prices paid is a welcome development.” 

Remember that M&A arbitrage trade ding-dong over Twitter? David Einhorn’s Greenlight Capital has taken a position in Twitter at an average price of $37.24. As I said in May, the r/r might favour the deal completing by hook or by crook.  Einhorn wrote: “At this price there is a $17 per share of upside if TWTR prevails in court and we believe about $17 per share of downside, if the deal breaks. So we are getting 50-50 odds on something that should happen 95%+ of the time.”

Elsewhere, Australia’s reserve bank continued the aggressive tightening by central banks, increasing rates by 50bps and saying it “expects to take further steps…but it is not on a pre-set path”. AUDUSD fell 1% on the session to a low at 0.6933 as this slight shift in the forward guidance hinted at a potential slowing the pace of tightening by the RBA. 

Japan’s yen hit a two-month high against the dollar as the yield picture continues to evolve. US 10yr Treasury yields have sunk to a little above 2.5% as of this morning from around 3.5% in the middle of June. That’s just scrubbed a lot of the yield differential premium that drove the dollar to a two-decade high against the yen last month; yen shorts unwinding to take profits in this case it seems. 

Key level for the greenback: The US dollar is a bit firmer as the risk-off tone just wins out. DXY recovered 105.40 after touching the 50-day SMA around 104.90, where the 38.2% and trend support lines come into play.

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