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July Jolt: Small Caps & Bond Yields Plunge Most Since March 2020 COVID Crash

July Jolt: Small Caps & Bond Yields Plunge Most Since March 2020 COVID Crash

Small Caps end the month with a loss for the first time since…

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This article was originally published by Zero Hedge
July Jolt: Small Caps & Bond Yields Plunge Most Since March 2020 COVID Crash

Small Caps end the month with a loss for the first time since March 2020, and only the 2nd monthly loss since then (Trannies were also down on the month, its 2nd monthly loss in a row). Nasdaq 100 outperformed on the month but was 'only' up 2.5%...

Source: Bloomberg

S&P up for 6th straight month, its longest streak since 2018 (but fell 0.5% today - its worst day in two weeks).

Diving into this week, Amazon saw no bounce at all today after crashing from earnings last night...

Which pushed AMZN below GOOGL in market cap...

Source: Bloomberg

Energy stocks were ugly in July while Healthcare outperformed...

Source: Bloomberg

Intramonth, the markets got a scare from Delta and then shrugged it off just as the Biden admin ramped up their fearmongering...

Source: Bloomberg

Still, it was China that was really monkeyhammered in July with the Shanghai Comp suffering its worst month since Oct 2018 (that's even with The National Team's rescue this week)...

Source: Bloomberg

July saw the biggest yields drop in the belly of the curve since March 2020. Bonds were consistently bid in July with the 7Y/10Y outperforming (-24bps)...

Source: Bloomberg

The Yield curve (2s10s) tumbled 18bps (its 4th straight month of flattening)...

Source: Bloomberg

The Dollar ended the month flat - after quite a roller-coaster...

Source: Bloomberg

Cryptos also had a rollercoaster month but Bitcoin and Ethereum ended significantly higher...

Source: Bloomberg

Commodities were mixed on the month with gold up, silver down; and copper up and crude flat...

Source: Bloomberg

Coffee rollercoastered too amid Brazil Frost concerns (today was biggest drop since 2010 as freeze fears subsided)...

Source: Bloomberg

Finally, real yields collapsed in July to record, negative lows, suggesting gold has room to run here...

Source: Bloomberg

And just in case you think everything is tickittyboo because stocks are near record highs, investors parked more than $1 trillion at The Fed overnight!!! Think we aren't over-liquidified?

Source: Bloomberg

US Economic Surprise data turned negative this week and is at its weakest since June 2020...while stocks levitate along with The Fed's balance sheet...

Source: Bloomberg

So, real economic data is slumping, the virus is re-emerging in a more "dangerous" variant, and China's Capital Markets are collapsing... but US stocks are at record highs...

Phew!

Tyler Durden Fri, 07/30/2021 - 16:00

Economics

SNB expected to hold the course

The Swiss franc is trading quietly in the Wednesday session. USD/CHF is currently trading at 0.9220, down 0.17% on the day. Markets await FOMC decision…

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The Swiss franc is trading quietly in the Wednesday session. USD/CHF is currently trading at 0.9220, down 0.17% on the day.

Markets await FOMC decision

The Federal Reserve will be in the spotlight, as the FOMC holds an important policy meeting later today. We may see another twist in the taper-on-taper off saga, as expectations are running high that the Fed may signal that it will make an announcement at the November meeting as to whether it will commence tapering. Fed Chair Powell has stated on numerous occasions that there is no link between a decision to taper and a hike in rates. Still, the markets are keenly following any clues about rate movements, which makes the dot plot at today’s meeting a potential market mover. If the dot plot indicates that FOMC members have brought forward projections of a rate hike, the US dollar could get a significant lift in the North American session.

In sharp contrast to the FOMC meeting, the markets are not expecting any interesting developments at the SNB policy meeting on Thursday with regard to monetary policy. The SNB will maintain its deposit rate of -0.75% (the lowest of any major central bank) and there are no plans for any changes in policy. SNB Vice President Fritz Zurbruegg said in an interview earlier this month that the negative rate policy was essential to ensure that the Swiss franc does not appreciate and curb economic growth. Taking a page for the Fed’s playbook, Zurbruegg said that the spike in inflation was temporary, and he expected inflation to remain low in the medium term. For the SNB, it’s business as usual, despite other central banks hiking rates or moving in that direction.

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USD/CHF Technical

  • USD/CHF is testing support at 0.9216. Below, there is support at 0.9110
  • There is resistance at 0.9377, followed by resistance at 0.9432

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Economics

TSX gains on Trudeau’s re-election, loonie up

Canada s broader TSX Index on Tuesday September 21 lifted post the re-election of Prime Minister Justin Trudeau as investors see it as largely a continuation…

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Canada’s broader TSX Index on Tuesday, September 21, lifted post the re-election of Prime Minister Justin Trudeau as investors see it as largely a continuation of the present economy although few jitters might be witnessed due to the bankruptcy of Chinese property developer, Evergrande. Thus, the TSX Composite Index closed with a gain of 89.75 points or 0.45% to settle at 20,244.29.

The one-year price chart (as on September 21).

Volume active

Canadian Natural Resources was the most actively traded stock where 16.46 million exchanged hands, followed Cenovus Energy Inc. where 10.30 million exchanged hands, and the National Bank of Canada with 6.31 million shares exchanging hands.

Movers and laggards

Wall Street update

Wall Street was turbulent as traders awaited the Federal Reserve's monetary policy statement on Wednesday. Following the sell-off observed during trading on Monday, stocks exhibited a lack of direction throughout Tuesday's trading session.

The Dow Jones Industrial Average was down 50.63 points or 0.2% to 33,919.84, while the S&P 500 fell 3.54 points or 0.1% to 4,354.19, while the Nasdaq climbed 32.50 points or 0.2% to 14,746.40.

Commodity update

As Evergrande concerns continued, gold climbed 0.82% to $1,778.20. Brent oil rose 0.60% to US$ 74.36/bbl as the aftermath of the US hurricane Ida squeezed supplies, while Crude oil rose 0.38% to US$ 70.56/bbl.

Currency news

The loonie stood higher against the U.S. dollar on Tuesday, while USD/CAD closed at 1.2815, a slide of 0.08%.

The U.S. Dollar Index was down against the basket of major currencies on September 21, and ended in the red at 93.22, falling 0.06%.

Money market:

The U.S. 10-year bond yield traded higher on September 21, and ended in the green at 1.328, up 1.17%.

The Canada 10-year bond yield also gained on Tuesday’s trade and closed at 1.229, up 0.49%.

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Economics

The Market is Deeply Oversold And Looking For A “Dovish” Fed

As we will discuss, the market is deeply oversold and looking for a "dovish" Fed to spark buying. Traders and investors will be laser-focused on the Fed…

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As we will discuss, the market is deeply oversold and looking for a “dovish” Fed to spark buying. Traders and investors will be laser-focused on the Fed meeting adjourning at 2 pm ET. Of importance, the decision on taper and their characterization of the economic recovery and inflation. If they do elect to announce a taper schedule, the pace of tapering and any caveats that may delay tapering will be of utmost importance.

Like yesterday markets are opening up a half to one percent higher. Will they hold onto the gains, unlike yesterday? The answer likely lies with the Fed at 2 pm.

What To Watch Today

Economy

  • 7:00 a.m. ET: MBA Mortgage Applications, week ended September 17 (0.3% during prior week)
  • 10:00 a.m. ET: Existing home sales, month-over-month, August (-1.7% expected, 2.0% in July)
  • 2:00 p.m. ET: FOMC policy decision

Earnings

Pre-market

  • 7:00 a.m. ET: General Mills (GIS) is expected to report adjusted earnings of 89 cents per share on revenue of $4.30 billion

Post-market

  •  4:10 p.m. ET: KB Home (KBH) is expected to report adjusted earnings of $1.62 per share on revenue of $1.57 billion
  • 5:05 p.m. ET: BlackBerry (BB) is expected to report adjusted losses of 7 cents per share on revenue of $166.80 million

Politics

Market Deeply Oversold – Looking For Some “Dovish” Tones

The rolling correction over the last 3-weeks has pushed the market into deeply oversold conditions on a short-term basis. Such provides plenty of “fuel” for a decent rally over the next month or two given some news to spark buying. Today, the Fed could do the trick with Jerome Powell delivering his post-FOMC press conference with a “dovish” tone. With Congress battling over the debt ceiling, the Treasury running out of money, and the risk of a Government “Shutdown” looming, the Fed has all it needs to provide plenty of “caveats” to its “taper” plans.

Fear Greed Index Near Lows

Another reason for near-term bullish optimism, is that both the AAII bullish allocation and the “Fear/Greed” index are near their respective lows. Combined with the oversold market conditions, such typically provides a buying catalyst as traders reposition themselves in equity risk.

Trading Game Plan for the S&P 500

The markets are trading well in overnight trading following yesterday’s flat-trading day. The bounce provides us with another set of levels, in addition to the 50, 100, and 200-dmas, to guide our trading. The graph below shows the Fibonacci retracements from the recent high to low. If this rally proves to be a bull trap, it is likely to give up between the 38% retracement (4395) and the 62% retracement (4451). There is also a gap between 4400 and 4430.

It is common for such gaps to fill and then reverse direction. If the market surges higher through the gap and retracement levels, the outlook becomes more bullish. A rally above the 4451 retracement level and well through the 50dma (4436) will likely lead to new highs. Conversely, the 50 dma (4436) may prove to be resistance. The first line of support is yesterday’s lows and the 100dma (4328). A break of the recent low leaves a target of 4106, the 200dma.

Follow Up to Monday Market Mayhem

Easy Lending Standards

Employment and inflation tend to get the headlines as far as rationales for the Fed to take action. As we consider what the Fed may do tomorrow, we should also consider lending standards. The graph below shows the lending standards for large banks’ credit card customers are as easy as they have been in 20 years. On its own, very easy lending standards, as we have, push the Fed toward a more hawkish stance. Easy borrowing conditions incentivize personal consumption. More consumer activity, especially given current supply line problems, is likely to further agitate inflationary conditions.

Chinas & Evergrande. Will They or Won’t They?

In addition to concerns with China, Evergrande, and possible contagion, the markets are also grappling with Wednesday’s Fed meeting. In what was likely a purposeful leak last week, the WSJ laid the groundwork for a taper announcement Wednesday and the reduction in asset purchases in November. With the U.S. and foreign markets skidding yesterday some are asking how the Fed might react. In a Bloomberg interview, ex-New York Fed President, Bill Dudley, warns “They’re not going to react to small market moves and defer the tapering on that basis. They have to change their economic forecast,” he said Monday during an interview on Bloomberg Television with Lisa Abramowicz, Tom Keene and Jonathan Ferro. “At this point, it’s really premature to reach that conclusion.”

The post The Market is Deeply Oversold And Looking For A “Dovish” Fed appeared first on RIA.

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