In this week’s market review in what was a chaotic week, we look at how the financial markets reacted to bad news on inflation, and rising target rates from Central Banks, and solid earnings from tech megacaps which brought some solace to traders though worries about recession risk remain.
After Thursday’s data showed the U.S. economy contracted in the second quarter, stocks rose as traders bet rates would rise more slowly. But is this rally within a bear market or the start of a new bull market. I will give you a clue – hopium is driving things not logic. But after a horrific first half, the S&P 500 had its best month since November 2020 and Nasdaq 100 had its strongest performance since April of that same year. But this could come to haunt the Federal Open Market Committee.
US financial conditions are looser than they were when Fed hiked in March. So the spike raises the question of when the rebound itself starts to work against the goal of draining bloat from the economy.
It’s an issue investors must weigh in calculating the recovery’s staying power. “Our view is that earnings for all equity classes likely will peak in 2022 and move lower as the economy weakens, revenue growth stalls and input costs remain elevated,” strategists with the Wells Fargo Investment Institute wrote in a note on Thursday.
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One characteristic of a Bear market are relief rallies, which start strong, but which also eventually run out of steam.
We have seen this during the week, as a gauge of global stocks fell on Friday to end the trading week on a down note after five straight sessions of gains. In addition, the dollar dipped against a basket of major currencies after soft data on U.S. business activity was released.
Friday was wobbly on Wall Street which posted modest losses in early trading but declines on the S&P 500 accelerated as Big Tech names such as Meta and Alphabet lost ground in the wake of earnings from Snap Inc which plunged 39.08%.
Defensive sectors such as utilities and consumer staples were among the few advancers
“Every rally we have had during this bear market, there have been a number of sharp rallies and then they fade and we set new lows and that has been a pretty consistent pattern here,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York. “Everybody is looking for the turn, everybody is trying to guess at when we get a sustained rally, and everybody is hoping for one, but to me there is still a lot of unknown ahead of us.”
[CONTENTS] 0:00 Start 0:15 Introduction 0:12 Bear Market Bounces 3:30 Fed and Economic Data 5:40 US Markets 8:20 US Dollar 09:40 Oil 11:10 European Markets 14:00 Wheat Agreement 18:20 Gold 19:30 Asian Markets 20:20 Australian Markets 23:20 NAB Rate Outlook Up 24:30 Outlook 27:25 Crypto 28:00 Summary and Close
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The ECB joins the rate rise club, with a 50 basis point hike – which was bigger than expected by the markets. They expect inflation to hang around, and they expect further normalization ahead.
So this marks the end of the negative interest rate experiment, other than in Japan, Denmark and Sweden. Banks will see profit uplifts as a result.
But the result will be higher rates around the world – until something breaks…
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JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon and his Morgan Stanley counterpart, James Gorman, both said Thursday that they aren’t steering their firms toward shelter even as they see a confluence of global events denting the economy in the months ahead.
“The consumer right now is in great shape,” Dimon said on a conference call discussing his company’s second-quarter results. “So even if we go into a recession, they’re entering that recession with less leverage and in far better shape than they did in ’08 and ’09.”
Gorman, on his bank’s earnings call, said a deep or dramatic recession in the US is unlikely, and Morgan Stanley is “long the US” in most of its businesses. “The US is a great region to be in the world.”
Those verdicts come even as second-quarter results at both JPMorgan and Morgan Stanley were hurt by a slowdown from the pandemic-era bonanza that gave them record revenue and profits.
Risks abound, with soaring inflation spurring central banks around the world to dial back the easy-money policies that had pushed markets to all-time highs. Russia’s invasion of Ukraine, along with worries about food and energy security as well as political instability across regions, are also keeping investors on edge.
“If I had to use one word to describe it, it would be ‘complicated,’” Gorman said on the challenges facing the global economy. He said that “Europe is fighting the hardest,” with the dual threat of the war in Ukraine and pressure on gas prices that’s been particularly problematic for countries such as Germany.
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Atlanta Fed President Raphael Bostic, until recently among the central bank’s most dovish policymakers, said on Friday he “fully” supports another 75-basis-point rate rise later this month.
Speaking later on Friday, New York Federal Reserve President John Williams did not specify if he favors a half point or three-quarter point increase at the Fed’s upcoming July meeting, but acknowledged rising interest rates were affecting the economy.
[Content]
0:00 Start 0:15 Introduction 0:27 Recession Obsession 1:35 US Non Farm Payrolls 4:45 US Markets 10:15 Gold 10:35 European Markets 12:00 Oil 12:40 Asian Markets 14:20 Australian Markets 16:15 May Trade Surplus 18:30 Market Trends 21:25 Crypto 22:15 DXY 22:35 Summary and Close
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In this week’s market review we look at the action around the world, starting in the US, Europe Asia and Australia, and looking at Gold, Oil and Crypto in passing.
The news is not good, for those believing in a return to Bull markets, supported by a Fed Put. Actually, with inflation running hard, Central Banks will lift rates, and as yet markets are not fully pricing the risks of this change. Why would they, as there are many who profit from transaction, any transactions, so of course they are talking their book. Hope that the Fed can lift rates to counter persistently high inflation without tipping the US economy into a recession are fading, further fraying market sentiment.
CONTENTS
0:00 Start 00:15 Introduction 1:00 Earning Season 1:50 Sentiment Surveys 2:54 US Growth and PCE 5:57 US Markets 9:20 Monetary Policy 12:50 Oil 13:15 Gold 16:10 Silver 18:20 UK Home Values 21:08 Europe 22:27 Asia 25:35 Australia 28:25 Crypto 30:29 Conclusion And Close
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In our weekly market review, we survey trends in the US, then Europe, Asia, and Australia, as well a covering developments in Oil, Gold and Crypto. The main take-out is the continuing uncertainty pertaining to inflation, and interest rates, as well as conflict in Ukraine. The fallout is already significant, with global food prices reach a new all time high, the UN has reported.
The Dow ended higher Friday, but that wasn’t enough to prevent a weekly loss as tech snapped its winning streak under pressure from surging Treasury yields following further details on the Federal Reserve’s plan to rein in inflation.
Finally in Crypto, Bitcoin is nowhere near where it was just five months ago – at that time in November of 2021, the world’s number one digital asset was trading for about $68,000 per unit – the currency has managed to get itself out of the doldrums and spike into the mid to high $40,000 ranges, a solid improvement over the $37,000 it was trading for in mid-March.
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Our latest weekly market update, and what is really going on.
All three major US benchmarks surged higher into the close, with the S&P 500 and the NASDAQ recording their best weeks since November 2020.
Equity transactions spiked at the open as the expiry of stocks and index options collided with that of index futures in a quarterly event known as triple witching. Roughly $US3.5 trillion of single-stock and index-level options were estimated to expire Friday, so the market is likely distorted by these technical issues. This triple witching — when stock options, stock index futures, and index option contracts expire on the same day — usually triggers wild moves as investors move out of old positions and take new ones.
Growth sectors of the market like tech were also helped by falling interest rates even as Fed officials urged the central bank to do even more.
The rally in the broader market has stoked debate on whether this is the start of a bottoming process, or further downside lies ahead.
Market technicians, however, urge caution on reading too much into the rally as options expiry tends to muddy market movements. Technical indicators including volumes and market breadth have yet to improve significantly to signal that the market is establishing a bottom.
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My Friday afternoon chat with Tarric Brooker got philosophical today as we pick apart the events of the week. A number of critical issues are in play which have some potential negative impacts.
Tarric is @AvidCommentator on Twitter. His slides are at https://t.co/v1IVtBzRua
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Digital Finance Analytics (DFA) Blog
Well, It’s All Coming Unglued... With Tarric Brooker [Podcast]
