The S&P 500 hit a fresh record this year for the 38th time on Tuesday, banks rallied on earnings which showed that the big banks’ trading revenue jumped nearly 20% in Q2 and investment banking revenues rose significantly on increased dealmaking.
The technology-heavy Nasdaq 100 lagged, with smaller gains. The Russell 2000 rallied another 3.5%, on the other hand, hinting at a developing sector rotation from Big Tech to others.
As such, the Russell 2000 gained more than 10% since last week, while the S&P 500's equal weight index (NYSE:RSP) rose faster than the technology-heavy, normal-weighted index.
And all this, regardless of a better than expected retail sales data in the US and a jump in Atlanta Fed’s GDP forecast to 2.5% – which could’ve cool down the Federal Reserve (Fed) rate cut expectations, but did not.
Activity on Fed funds futures suggests that the market is now pricing in a 100% chance for a September rate cut from the Fed (odds of a 50bp cut are on the rise – yet unreasonable without a severe shock/stress).
Yesterday’s retail sales data and the first few hours of Amazon (NASDAQ:AMZN) Prime day sales – which climbed by almost 12% compared to last year – are not necessarily supportive of dovish Fed expectations. But the dovish Fed expectations are gaining momentum, the machine is running, and it’s difficult to stop it.
The thinking behind the sector rotation is simple: the upcoming rate cuts should support smaller and more cyclical pockets of the market and convince investors to rotate from highly valued technology names to other sectors.
Some say that the rising odds for a Donald Trump win in November election is also supportive of smaller and cyclical pockets of the market, provided that his domestic and growth-focused policies will benefit disproportionally to these sectors.
But hey, another set of strong earnings could get investors to think twice. Plus, Mr. Vance – that Trump just revealed as his running mate earlier this week – is a tech and crypto investor. It’s said that Vance is one of the strongest blockchain advocate on Trump’s shortlist, it appears that he perceives cryptocurrencies as ‘the only realistic way to shake up big tech and finance’.
No wonder Bitcoin is also having a good run since the assassination attempt on Donald Trump last weekend boosted his chances of returning to the White House, with Vance by his side.
Gold Shines, Eyes $2500
Gold also hit a fresh record on the back of falling US yields – that decrease the opportunity cost of holding the non-interest bearing gold, and on the back of rising geopolitical tensions on news that Iran reportedly tried to kill Trump in the past weeks (although there has been no evidence that the weekend’s shooting has anything to do with them).
It’s probably just a matter of time before we see the yellow metal hit the $2500 per ounce milestone. Some profit-taking could kick in at that level though, given that, at the current levels, gold is entering the overbought market territory.
This suggests that the yellow metal may have been bought too fast in a too short period of time – as the rest of the assets that have been boosted by the super duo of Trump and Powell - and it would be healthy to see some minor downside correction.
FX and Oil
The US Dollar Index is still sitting on the major 38.2% Fibonacci support on this year’s rebound and should – based on the rising dovish Fed expectations – be in a position to clear this support and step into the medium-term bearish consolidation zone.
Cable jumped this morning as a kneejerk reaction to the latest inflation figures, but gains rapidly faded. The data showed that inflation in Britain stagnated in June versus the expectation of a further easing. And higher-than-expected figures cooled down the expectation of an August rate cut from the Bank of England (BoE).
But because the September Fed rate cut is already fully priced in, there is still room for a dovish BoE pricing into late summer – which means that we shall still see a limited upside potential in Cable: the 1.30 level could be hard to clear.
Across the Channel, the EUR/USD is drilling the 1.09 offers to the upside and the euro bulls are targeting the 1.10 level. The Eurozone will reveal the latest inflation figures this morning which should show steady-to-slightly lower figures across the board.
What’s interesting is that crude oil is not benefiting from the actual Trump/Fed euphoria. The sluggish Chinese growth is weighing on the black gold since the week started.
The barrel of US crude is back below its 100-DMA and is preparing to test an important Fibonacci support neat $80pb – the major 38.2% retracement on June to July rebound – to determine whether the price should stay on the actual rising path or sink into a medium-term bearish consolidation zone.
Fundamentally, the reflation environment is supportive of oil prices, therefore we should see a decent support into the $80pb technical and psychological level.