Global Equity Markets Overnight Mostly Higher

STOCK INDEX FUTURES

Global equity markets overnight were mostly higher with Chinese, Japanese and Australian stocks breaking the pattern with declines. A quick perusal of overnight headlines offers little reason for equities to be tracking higher. In fact, Chinese growth readings were disappointing, Chinese infections continue to rise, Covid fears are surfacing around the globe again and central bank dialogue this morning is expected to remain very hawkish. Lastly, the equity market focus recently has been locked onto a strange historical pattern where positive data is negative to equity prices as that is thought to stoke inflation and bring about even higher base interest rates. Earnings announcements will include UnitedHealth, Wells Fargo, BlackRock, and Citigroup before the Wall Street opening.

S&P 500: Other than a technical need to balance an oversold condition, it is extremely difficult to produce a justifiable fundamental reason for equity prices to rally. In fact, the conundrum facing equity markets is extremely difficult to unwind, as the prescription for reining in inflation is likely to make the patient (the economy) sicker. The conundrum for equity investors is also highlighted today by the markets likely inability to benefit from a positive retail sales report.

CURRENCY FUTURES

DOLLAR: While the dollar index reversed aggressively from yesterday’s spike up contract high, bullish

fundamentals have not moderated. In fact, if US retail sales match expectations of a gain of 0.8% and the Fed’s Bostic calls for big rate hikes again this morning the dollar is likely to recover and extend its pattern of fresh contract highs into next week.

EURO: Obviously, the euro is significantly oversold from the carnage of the selling from the first half of July. Unfortunately for the euro bulls, the surging inflation/sagging economy conundrum was highlighted again overnight with a hot Italian consumer price index reading for June. Therefore, a minimally supportive narrowing of the EU trade deficit is unlikely to offer any material support to the currency.

YEN: Given this week’s sharp downside extension and a better-than-expected Japanese tertiary industry index reading for May, the Yen might bounce enough to offer a favorable fresh short entry opportunity.

POUND: While the trend in the Pound remains down from political, economic and inflation issues, we advise against fresh shorts sales at current levels.

CANADIAN DOLLAR: Apparently, the massive washout in the Canadian yesterday was overdone as the currency has bounced aggressively overnight. While the bear camp is likely to retain control in the near term, the very aggressive rate hike by the Bank of Canada could set the table for a quicker end to the painful battle against inflation. In other words, Canada might suffer greatly in the near term, but the aggressive central bank action could payoff in the long term.

INTEREST RATES

While equity markets overnight have posted some positive action and tamped down economic anxiety somewhat, the fear of recession has become entrenched and will not be removed easily. In fact, reports of the highest Chinese infection count since May, combined with discouraging Chinese GDP report readings ratchets up the prospects of global recession. While treasury prices have stalled this week in the face of distinct evidence of slowing, it is premature to suggest that a paradigm shift in focus by the treasury trade is underway. However, it should be noted that treasury futures price action did deviate from recent patterns as if inflation inspired selling pressures were beginning to dominate over recession inspired buying interest. In other words, the markets have shown signs of returning to classic/historical trading patterns, which in turn could force an inflation premium back into yields. Many participants are beginning to think that the dichotomy of the Fed pushing up rates rapidly, at the same time implied futures yields fall is coming to an end.