Summary: Market sentiment took a sudden dive yesterday in the US, although about half of the damage was undone by later in the session. Sentiment has softened again overnight on a mixed reaction to US megacap earnings reports and on Chinese equities trading lower still after their very rough start to the week. Today is FOMC day and with low expectations for the Fed to say much, the potential is enhanced for any surprises in the less dovish direction to see an amplified reaction.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – a rough session for US equities yesterday, with the more mega-cap heavy Nasdaq 100 index experiencing more weakness than the broader S&P 500, perhaps as the largest companies’ earnings reports are in focus (see highlights below). Whether new talk of mask mandates from the US CDC or some contagion from China or nervousness ahead of today’s FOMC meeting is the driver, the selling comes at a time of divergent technical momentum that could mean a more significant pullback on another weak session. The next focus for support is perhaps the 21-day moving average, for the Nasdaq 100 at 14,792 (after yesterday’s low was a precise test of the 21-day MA) and for the S&P 500 at 4,344.
Apple (AAPL:xnas) – Apple exceeded top-line and profit expectations handily, but complained of forward risks of chip shortages and neglected to provide specific forward sales guidance but said that sales growth may be slowing. As well, the services growth that was particularly strong over the last two quarters eased back to a lower level, in part on Apple reducing its cut on apps sold on its platform to 15% from 30%. Shares were lower in late trading.
Microsoft – (MSFT:xnas) – Microsoft reported a strong quarter that exceeded estimates and provided a strong outlook, although some concern was focused weakening growth in the company’s cloud platform Azure, which seemed to drive an initial negative reaction to the report before shares later recovered and posted an after-market gain.
Alphabet (GOOGL:xnas) – Alphabet, the parent company of Google, easily beat estimates on a strong online ad market, especially for retailers. YouTube sales were an especially bright stop, with revenues up 84% to $7 billion. Shares were up around 3% in late trading.
AMD (AMD:xnas) – AMD beat estimates and saw a 99% rise in revenue versus a year ago, and also provided a stronger than expected forecast for Q3 revenue of $4.1 billion versus $3.8 expected by analysts. The pace of growth suggests that the company is taking market share from its far bigger rival Intel.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Bitcoin has managed to add to recent gains, trading just above the key 40k area as of this writing – needing to stick above this area and perhaps above 42k into coming sessions to suggest it is mounting a significant comeback. The action in the market thumbed its nose at US Senators negative comments on the “phony” populism of Bitcoin yesterday. The action in Ethereum lagged Bitcoin as the trading range remains below the important 2,400 area so far overnight and this morning.
EURUSD – Still trading in a very compressed range, but interesting to see the lack of USD outperformance amidst an ugly period of risk off yesterday. But it is all about today’s FOMC and whether any taper hints could surprise the market and spark a sell-off through the key downside trigger area around 1.1750, which would encourage the view toward 1.1500. The upside is so thick with resistance levels that it will take a considerable rally to cook up a more constructive outlook for bulls, but 1.2000 would be an obvious first step.
AUDUSD – as noted above for EURUSD, it was somewhat interesting that yesterday’s significant bout of market volatility failed to bring a stronger bid under the greenback – but the real test will be today’s FOMC meeting. AUDUSD is in a narrow, nervous trading area, having broken down below the key 0.7400 area, but not yet following through toward the next major milestone toward 0.7000.
US Treasuries (SHY:xnas, TLT:xnas, IEF:xnas) The bond market is expecting status quo at today’s FOMC meeting, leaving US Treasuries vulnerable to surprises (TLT, IEF). Yesterday’s 5-year auction has sent a strong signal that the Federal Reserve will not turn hawkish at today’s meeting. Indeed, the bid-to-cover ratio was in line with last month’s auction despite the highest yield slipping roughly 20 basis points to 0.71% from 0.904% last month. Therefore, US Treasuries are vulnerable to a hawkish surprise if the Federal Reserve adjust language and prepares for a formal Jackson Hole announcement. Although the massive amount of money chasing very few assets and the Treasury General Account drawdowns can still contribute to lower yields, in the long term yields will rise inevitably driven by aggressive monetary policies.
European sovereigns (VGEA, IFRB, IS0L). European bond yields fell, led by German Bunds as investors bought safe-havens amid an equity selloff (VGEA, IS0L). Ten-year Bund yields fell to the lowest since February closing at -0.44%. The recent rally in Bunds puts today’s FOMC meeting under the spotlight for European investors. A hawkish Federal Reserve can quickly turn the direction in yields on both sides of the Atlantic with German Bunds being the biggest victims. Yet, if the Federal Reserve sticks to the message it sent at the June meeting, we can expect valuations to be supported until a change of monetary policies happen in the US or the German election brings a new change.
What’s going on?
Hungary’s central bank hikes more than expected. The National Bank of Hungary hiked the policy rate 30 bps to 1.2% vs. a 20-bp hike expected, a move that is perhaps less of a surprise considering the sharply weaker Hungarian forint (HUF) since a brief strengthening period when the central bank signaled its intent to hike rates back in May. This comes after the headline Hungarian CPI rate reached 5.3% in June. The forint strengthened in the immediate wake of the decision from new local lows.
BoJ Governor Haruhiko Kuroda confirmed the central bank will look to tackle climate change. The initial plan consists in buying green bonds via the BoJ’s small pool of foreign reserves. However, for the time being, the BoJ will refrain from aiming to prioritize green bonds in corporate bond buying. It does not plan neither to implement a shift in policy for the 2% goal as part of climate action.
France’s vaccination campaign reaches a new milestone. According to data released yesterday by Santé Publique France, 4.7 million doses of the coronavirus vaccine were administered last week – half of which were first jabs. This is a new record. As of 27 July, 80% of people aged between 60 to 74 and 47.5% of those between 18 and 49 were fully vaccinated. The French are looking to get vaccinated before the health passport is expanded to further public spaces (bars, restaurants, cafés, long-distance travel within France, and hospitals) as of 1 August.
US July Consumer Confidence – unlike the preliminary July University of Michigan Sentiment survey, the US Conference Board Consumer Confidence survey stayed at very elevated levels, coming in a 129.1 versus an upwardly revised 128.9 in June, better than the dip to 123.9 expected.
Australia Q2 CPI – the headline number was 3.8% year-on-year versus 3.7% expected, but core readings were in-line with expectations, with the “trimmed mean” in a 0.5% QoQ and 1.6% YoY, suggesting little pressure on the RBA to shift its guidance for now, although it is a long wait between CPI releases.
EU backs away from confrontation with UK over the Northern Ireland customs border issue, agreeing to talks over the rest of the summer rather than filing an official complaint or “reasoned opinion”. EURGBP is trading this morning near multi-month lows just above 0.8500.
What are we watching next?
FOMC meeting late today. The FOMC meeting today is one without economic and policy projections, so any clues on changes in the Fed thinking will have to be gleaned from the statement, which usually sees minor alterations, and in Powell’s press conference. The general level of anticipation of a change of stance is low, given Powell’s recent dovish performance in semi-annual testimony before Congress, in which he bemoaned the need for substantial further progress in the labor market and insisted that the Fed sees the recent inflation spike as transitory. Still, the surprise potential here only really runs in one direction, on the hawkish surprise, which could mean a more specific outline of intent to taper asset purchases.
Earnings for the rest of this week. After yesterday’s bonanza of mega-cap earnings reports out of the US, we have interesting names reporting today as well, with Facebook topping the list after the market close. Ford also reports after the market close, while Boeing and McDonalds are out before the market opens today.
Economic Calendar Highlights for today (times are GMT)
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