US markets closed slightly lower overnight with the SP500 retreating after testing 3,800. It seems that for now markets are set to consolidate as investors mull over interest rates and recession. Fed Chair J Powell did little to spur equities higher after giving a speech overnight. telling Congress, that the central bank is “strongly committed” to bringing down inflation. He also noted that a recession is a “possibility,” It seems at least for now equities have priced this in. From here US GDP next week and then CPI on July 13th are the next two key pieces of the puzzle.
Markets are looking a bit oversold but in a bear trend after falling a little over 10% from the last US CPI reading. The SP500 now sits roughly 22% below the all-time high. Energy was the weakest sector with Crude crashing further now sitting at 103.84 from 120.00 US a barrel. Copper also broke a key level overnight trading down to 3.92.
But most notable is the buying in the Bond space with yields falling strongly. In Australia, the local 1-year government bond yield fell from 2.90 to 2.48 which is an indication that perhaps the bond is mispricing the future of interest rates? The US 10 year fell from 3.50 to 3.16. If commodities continue to fall as well as bond yields it will be the first signs that the central banks are perhaps bringing inflation under control. Many out there are starting to say -“The bear market will not be over until recession arrives or the risk of one is extinguished,”
Where to from here? US GDP next week will be an important piece of information next Wednesday night. From there we will need to keep an eye out for any other inflation indications, the big one is the US CPI on the 13th of July. At this point, investors could whip themselves into another frenzy if the reading is high as the FED is set to raise rates again on the 26-27th July.
Locally the RBA will raise rates again on the 5th of July, it is a question of how much. .25 – .50 points are on the table. 0.50 will bring the RBA rate to 1.35. This is still low compared to what the bond market is pricing, with the 1-year government bond trading at 2.67%
Australian Outlook
The XJO is expected open flat this morning following a similar move from the U.S overnight. Their futures have dipped but lately that hasn’t meant much. Yesterday we started to price in heavy falls overnight indicated by strong bearish U.S futures. Recently though, how their futures trade during our session and how they finish by close has not been too in line, and so we have been more muted in our response to large moves from their futures during our sessions. This highlights the uncertainty that continues to underpin markets. Stagflation remains a huge worry for markets, but things look cheap here. Doom scryers are fighting with bargain hunters, and the next move for our market will be decided by the winner.
US Markets
US shares closed moderately lower overnight. Prices opened lower but pushed higher throughout the session to close relatively flat. The big news overnight was that of the CPI for the United Kingdom in in May. Their CPI came in at a high level of 9.1% Year-on-Year growth, as expected, though their core CPI, removing food and energy, came in lower than expected. Before this reading US futures were significantly lower, but they stabilised in its wake. The key CPI reading will be US CPI for June, which will be released on the 13th of July. In US economic data overnight, there was another big build-up in US oil inventories, which helped suppress oil prices.
Movements in the sectors of the SP500 were mixed overnight, with the Energy space taking a massive hit as it was the weakest performing sector overnight. The materials space also fared relatively poorly. On the positive side the Healthcare space fared best, followed by Real Estate and Utilities stocks. If the market switches to the view that inflation is peaking, which is definitely possible in the coming months, we could see weakness in Energy and Materials stocks, which had fared well so far this year.
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Tim Michaelides is the Head Trader at Emerald Financial Group.
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