So, what do we know?
(A forex, index, and commodity market review)
Equity markets concluded the month of June in spectacular fashion as the NASDAQ surged 1.4% and the S&P500 1.2%. US equities have confounded critics and many analysts with the NASDAQ gaining 32% in the first half-year which is the best performance since 1983.
Weekly change (amount change and percentage change on the week)
Global equities benefitted from another strong performance from US equities with technology shares outperforming the broader S&P500 index.
Those companies associated with the surge in interest in AI did particularly well. Nvidia joined the ranks of the $1 trln plus club as its shares tripled in value over the past 6 months. Specialised chips that are focussed on the processor hungry AI applications were in huge demand which saw Nvidia share price leap from $140 a share at the start of the year to close on Friday at 423 – a rise of just over 300%. The other tech heavy which helped power the NASDAQ to its dizzying heights include the well-known stocks, Apple, amazon, Microsoft, Alphabet, Tesla, and Meta. The move is all the more remarkable when considering the backdrop of significantly higher rates than 15 months ago, the banking crisis in early March, the ongoing war in Ukraine and the persistently above target core inflation.
Despite the threat of two further rate hikes in the next two FOMC meeting, tech stocks just shrugged off the news. The price of apple also achieved another milestone last week as the stock price hit an all time of closing high of 193.97, valuing the company at just over $3 Trln.
The concern many analysts have is that the market breadth is low which means much of the rally in the NASDAQ and S&P500 is because of this very small band of super-tech stocks. This suggests that if these stocks were to turn down then they would pull the NASDAQ and S&P500 sharply lower.
What might cause this? The prospect of higher rates. Curiously this is exactly what Jay Powell implied when he spoke at the European banking summit in Portugal last week.
He said, “although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough”.
Tech stock valuations are a dark art that depend on several factors. The threat of two further 0.25% rate rises that could push the US economy into a mild recession and cause these tech shares to slide and that’s the worry.
If data suggests that core inflation is heading towards the FED’s target, then the Fed may back away from two rate rises. The PCE data out last Friday was better than forecast, which helped propel stocks to their highest level this year, suggesting that inflation is heading lower. However stronger consumer sentiment and a strong core durable good reading earlier last week helped push up the probability of a rate hike in July and another one sometime between September and December. Higher funding costs will not bode well for many tech stocks.
In the UK, the FTSE100 Managed a meagre 1% gain since the start of the year and is the worst performing major index, as it is weighed down by oil and mining giants that have been overwhelmed by falling oil, energy, and commodity prices. Brent crude oil started the year at $86 per barrel – On Friday evening Brent Crude Oil closed at $75 per barrel. – a fall of $11 or nearly 13%. Twelve months ago, Brent crude oil was trading at $114 per barrel.
The prospect of higher interest rates in the US has had more of an effect on the prospects for the US Dollar than US equities. Dollar bulls expect the US Dollar to recover lost ground from early June when the EURUSD rate was at 1.07.
Sterling had benefitted from the prospect of still higher rates to come but traders started to factor in the risk of a recession in the UK as the bank of England looks set to raise rates by another 1% by year-end.
The Japanese Yen continues to fall against the US Dollar as the BoJ continues with their zero-interest policy whilst inflation continues to fall following the energy shock early last year.
UK OIL +0.72 +0.97%
US OIL +0.90 +1.30%
Oil prices recovered some ground lost earlier on in the week but remain caught in a broad trading range with Brent crude trading between $71 and $77 per barrel since early May.
Gold remains at the mercy of the value of the US dollar. On Thursday last week, Gold touched a 3 ½ month low as traders speculate on a rebound in the US Dollar.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
The first Friday of a new month means we have the release of US non-farm employment data. We also have Minutes from the last FOMC meeting which will help inform the market of the Fed’s thinking on further rate rises. We also have out independent readings on both the manufacturing and service sectors in China.
China Caixin Manufacturing PMI. Released overnight, 50.5 versus 50.0 consensus.
Marginally better than expected although offset by weak New Orders from overseas customers which decreased in June the fastest in four months.
US ISM Manufacturing PMI. Higher forecast but still well below 50. USD sensitive
Australia Reserve Bank of Australia rate decision. No change is the consensus. AUD sensitive to this announcement.
US Independence Day. Federal holiday with all markets closed.
China Caixin Services PMI. Services continue to do better than manufacturing in developed economies as the burden of higher rates has a much greater impact on manufacturing. Services weakening but still comfortably above 50.
OPEC Oil Cartel’s monthly meeting.
US FOMC minutes from meeting held on 14th June. USD, US, and global assets sensitive.
US ADP Non-Farm employment data. One day late due to Independence Day holiday on Tuesday.
US ISM services. Uptick from June’s disappointing number. USD sensitive
UK Andrew bailey – participating in a panel discussion at the Economic Meetings in France. Bailey has morphed into a more recognisable hawk on rates now. Not something that is pleasing to UK mortgage holders. Interesting comments from investment boss of Pimco, the world’s largest bond fund, who predicts that central banks could be making a policy error by over tightening. Daniel Ivascyn, the CIO at Pimco pointed out that policy changes (changes in interest rates) can take up to 5 or 6 quarters before they have their full effect. Part of central banker’s task is to effect psychology and change people’s expectation about inflation and interest rates. In effect, central bankers are almost certain to over-tighten in that regard.
US US Non-Farm employment change. Key release this week. Expect 222K new jobs in June. Revisions to previous months need to be watched. Average hourly earnings at +0.3%. USD, and all US and global assets sensitive to this data as it has a direct effect on US monetary policy.
What should we be trading?
(Analysis of the popular markets and what we like)
A relatively quiet month in July, with only 33 trades identified by the D1 Sniper Strategy, compared with an average of 48. But a solid month, up 6.4%, and now +50.1% for the year. The D1 Accelerator is currently up 12.3% for July’s trades and 92.8% on the year.
Over the past week, we have only had 5 new D1 Sniper trades trigger, 2 of which (GBP/CAD and NAS100) only opened on Friday, so not much to tell there, but of the trades that are closed, we made 0.9% on EURCAD, 1.8% profit GER40 and 1.9% on US30, giving another excellent week. This week’s podcast reviews these trades.
What’s the problem?
(Examining a problem many traders face and what to do about it)
This week’s problem is trying to identify which economic announcements are the most important, what they can mean and how should Day Traders and Swing Traders tackle them.