by Pinchas Cohen
Key Events
- Stocks move up on opposing outlooks—faster and slower paths of rising interest rates
- Asian markets rally on China’s economic growth, plunge on tightening regulations
- Treasuries and gold head higher
- Industrial metals climb
- Oil gains for sixth consecutive day
On Friday, both the S&P 500 and the Dow Jones Industrial Average reached new highs, even after US inflation growth disappointed the Federal Reserve’s expectations. Friday’s CPI was an unchanged 0.1 percent growth versus an expected 0.1–0.2 percent growth, increasing pre-existing doubts, spotlighting the concerns of some Fed members and proving Treasury and dollar traders were right, that the Federal Reserve may not be able to increase interest rates a third time this year.
Global Affairs
In a market where anything can happen, equities rallied to fresh highs on the Fed’s June 14 rate hike, along with the central bank seeing a faster path to additional raises on a quickly growing economy at that time. Then, when Fed Chair Janet Yellen gave her July 12 Congressional testimony, Yellen went from hawkish to dovish, and a slower path of rate hikes appeared as a possibility. In turn, stocks recorded fresh records, but this time for the opposite reason, on the greater availability of liquidity being used to prop up higher valuations.
On Friday, shares recorded fresh highs on the slower economic growth and its confirmation of a slower path of to rising rates. Investors prefer cheap cash to a healthy economy, as they are focused on the here and now, while not following to the inevitable conclusion. A contracting economy will ultimately lead to a market sell-off.
While economists yearn for a sustainable and slow rising economy, investors seem to want something more super-charged, no matter the consequences. Investors have seem to forgotten that everyone loses when markets aren't sustainable and they inevitably implode.
In Asia, China’s GDP beat the 6.8 percent expectation from last quarter, showing 6.9 percent growth YoY and rising from 1.3 percent to 1.7 percent QoQ. At first, Asian markets hit new all-time highs on the news and even China’s shares rallied—despite tightening Chinese regulations—but ultimately markets plunged on those very concerns, as investors expect Chinese deleveraging to hurt profits.
The MSCI All World Index advanced for a seventh day, on the narratives that China’s ability to maintain economic momentum compensated for the slower US rate path and softer US data release on Friday.
Treasuries ended the week by registering gains on a weekly basis, after two weekly declines. The rally provoked by Yellen’s shift to a slower rate hike path on a tepid inflation—below the Fed’s 2-percent target—culminated with the most recent discouraging release in a long stream of disappointing economic data.
The dollar plunged after the release, to a 10-month low. It remained close to its lowest since September, with speculators holding on to their most bearish positions since 2013, while traders canceled bets on another hike this year. Treasury and dollar traders had demonstrated that they don’t care what either the US president or the Fed has to say. They care only about the cold, hard facts, and have been buying Treasuries and selling dollars at such a rate that even Yellen had to concede that interest rates will not likely move up as quickly as she'd hoped.
This morning Europe’s equity markets opened higher, building on gains from the past two weeks.
The ECB’s much anticipated Thursday meeting is adding pressure to the dollar. Of concern is that ECB President Mario Draghi might signal plans for shrinking the balance sheet when he attends the Fed symposium in August. This news is more than just about the ECB. Investors have begun to realize that the Fed is not the only game in town and other central banks will be catching up to the Fed. Case in point, last week's Bank of Canada rate hike, the first in almost seven years, which caused the loonie to surge.
The kiwi fell after the deputy governor of New Zealand's central bank said a lower currency could help rebalance growth.
Gold gapped up 0.85 percent, after Friday’s 0.85 percent climb—over the violated uptrend line since January 26—stuck to the 50 dma (purple). The next move may prove critical to its momentum.
Oil extended its advance for a third day, and sentiment increased regarding rising oil prices. As long as the price doesn’t overcome the $50 level, where the key price level meets with the top of the bearish channel in which it trades, this rise is considered a correction. Furthermore, it provides a better price for shorting on what is expected to be a continued downtrend. The 50 dma proved it earned its paycheck, twice verifying its resistance on July 5 and July 12. This is a good place for a stop-loss which would be above the July 5 $47.32 peak which would be exptect to provide resistance, as those who went long lost money, while those who shorted were rewarded, and those who were on the fence prior to July 5 wanted to jump off—resulting in a scenario for everyone to short (barring, of course, unforeseen news).
In the US, earnings season ramps up this week with Microsoft (NASDAQ:MSFT) and Unilever (NYSE:UL) among those companies set to report.
Up Ahead
- Netflix (NASDAQ:NFLX) is scheduled to report earnings after-market. Consensus estimates are for $0.16 EPS vs $0.09 YoY, on $2.76B in revenue, with a $69.44B market cap. The stock had broken above its tech sell-off downtrend line, but it still needs to overcome its $1.6687 June 8 high, from one day before the first sell-off began. Otherwise, it could turn into a double-top. The MACD provided a buy signal on July 12, indicating it broke above its sell-off downtrend line, confirming the break. The RSI is not yet oversold.
- Round Two of Brexit talks gets underway in Brussels. On Friday, the pound blew out of a potential double-top reversal, turning the pattern into a consolidation with a 1.3400 upside target implication.
- New Zealand's Q2 CPI, released at 18:45 EDT, is expected to decline from 1.0 percent to 0.2 percent QoQ and decline from 2.2 percent to 1.9 percent YoY.
- The Reserve Bank of Australia Meeting Minutes will be released at 21:30 EDT. Investors will look for clues as to whether the RBA is giving in to mounting pressure to join the rest of the world and raise rates, or whether it will stay the low rate course because of its desire for a weaker Aussie dollar. The AUD is already at a two-year high against the greenback, while Australian inflation is extremely low. The country's biggest two-way trading partner, China, has a shaky economic outlook. At the same time, if Australia raises rates, that could increase the risk of widespread mortgage defaults, reviving memories of 2007.
Market Moves
Stocks
- The MSCI ACWI Index of emerging and developed markets was up 0.1 percent as of 8:05 a.m. U.K.
- The FTSE 100 advanced 0.4 percent.
- The Euro Stoxx 50 was up 0.1 percent
- South Korea’s Kospi rose 0.4 percent to an all-time high
- Japanese markets were closed for the Marine Day holiday.
- Hong Kong’s Hang Seng climbed 0.3 percent.
- Australia’s S&P/ASX 200 was down 0.2 percent.
- China's Shanghai Composite was down 1.4 percent amid concerns over the implications of a weekend meeting in which President Xi Jinping said the central bank would play a greater role in defending against risks. The ChiNext small-cap stock index slid 5 percent.
Currencies and bonds
- The pound and euro were both off 0.1 percent.
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- The yen was steady at 112.56 per dollar after climbing 1.2 percent last week.
- The Dollar Spot Index is up 0.14 at 95.28, after first falling 0.9% percent Monday.
- The Korean won was the strongest major Asian currency, rising 0.4 percent. It is the region’s best performer year-to-date, climbing 7 percent versus the greenback.
- The Aussie and kiwi both declined 0.2 percent.
- The 10-year yield on U.S. Treasuries was down one basis point at 2.33 percent, after dropping five basis points last week.
Commodities
- West Texas Intermediate crude advanced 0.1 percent to $46.58 a barrel, heading for a sixth day of gains.
- Gold rose 0.1 percent to $1,230.30 an ounce.
- Copper climbed 0.9 percent to $5,981 per metric ton.
- Iron ore was up 2.6 percent in Dalian.
- LME aluminum rose 0.5 percent.