Financial market research and analysis

Both stocks and bonds extend rally in the US, as the earnings season kicks off.

Monday was Nasdaq’s turn to hit a record high, as technology stocks led gains in the US session. The S&P500 consolidated near its historical high as well, though energy (-0.93%) and financial (-0.53%) stocks held the index back from extending gains to the uncharted territories.

Asian equities didn’t follow up on US gains.

Nikkei (-0.63%) and Topix (-0.45%) fell, as the USDJPY traded below the 108.00 mark.

Shanghai’s Composite (-0.30%) and Hang Seng index (-0.20%) remained on the backfoot although US Treasury Secretary Steven Mnuchin hinted that he could travel to Beijing to resume trade talks with China if this week’s phone call happens to be productive.

Stocks in Australia treaded water, even though the Reserve Bank of Australia (RBA) meeting minutes showed that policymakers are ready for more interest rate cuts to boost growth as the slowdown in China, Australia’s largest trading partner, weighs on its economy.

Gold remained bid near $1410 an ounce, supported by the weak US government bond yields. The looming downside risks in US bond returns will likely keep the yellow metal in demand ahead of the FOMC meeting, scheduled on July 30/31st.

WTI crude slipped below $60 a barrel, as refineries at the Gulf of Mexico resumed production after the tropical storm Barry has been downgraded. Higher US shale output and weaker global demand should continue weighing on oil prices. There is a mounting expectation for a stronger action plan from OPEC and its allies to reduce the global glut, as the latest extension of lower-production regime failed to ease worries.

FTSE futures (-0.16%) point at a slightly softer open in London.


Solid UK jobs could hardly give a smile at pound, ravaged by the Brexit puzzle

The UK will release the latest employment report today. The UK economy is expected to have added 45’000 new jobs in May versus 32’000 a month earlier. The unemployment rate is seen unchanged at 3.8%, the lowest levels in more than 45 years.

Alas, the muddy political scene gives no respite to the pound. The UK enters the final week of the Conservative’s leadership race. Both Boris Johnson and Jeremy Hunt said that even a large concession on the Irish border may not be enough to seal a Brexit deal with the European Union. It becomes increasingly clear that the British government will toughen its tone in the Brexit negotiations under the new Prime Minister and that could well lead to a no-deal exit, even though Britain’s Parliament will try its best to avoid a no-deal outcome.

Cable trades a touch above the 1.25 mark. The selling pressure is real as the market prices in the possibility of a no-deal Brexit. If the pound slips below the 1.25 mark against the greenback, decent 1.25-put option expiries could further vacuum the pair downwards this week.

Cheaper pound should continue providing support to the British equities as the global risk appetite remains solid. The FTSE 100 is expected to see solid support near the 7500p mark.

In the Eurozone, the faster-than-expected contraction in German industrial production in May have dampened the investor mood last week and the German ZEW economic sentiment, due today, could confirm a waning enthusiasm in Eurozone’s growth engine. Any disappointment could revive the European Central Bank (ECB) doves and send the euro-dollar below its 100-day moving average (1.1253) support.


US banks’ interest margin struggle as Fed prepares to cut rates

Citigroup announced solid earnings and revenue growth in the second quarter, but investors focused on the narrowing net interest margin, although Citi’s net interest margin (2.68%) is well above the industry average (1.41%).

JPMorgan Chase, Goldman Sachs and Wells Fargo will release their second quarter results on Tuesday and equity traders will be demanding on big banks’ net interest income outlook as the Federal Reserve (Fed) interest rate cuts will probably further squeeze their profit margin in the coming quarters.

The Fed is expected to lower its interest rates in July meeting regardless of the positive economic data in the US. Fed Governor Jerome Powell sent a clear message to the market at his semiannual testimony last week: the US rate cuts are primarily destined to avoid the US – China trade war from interfering with encouraging US fundamentals. As a result, the economic data and asset price movements could further decouple ahead of the FOMC meeting. This explains why the US 10-year yield slipped to 2.08% on Monday, even though the Empire Manufacturing index beat analyst estimates in July.

US June retail sales and industrial production data are due today. The US retail sales growth may have slowed to 0.2% m-o-m in June versus 0.4% printed a month earlier. Industrial production may have expanded 0.1% m-o-m, slower than 0.4% released last month. Any disappointment could spur the expectation of a 50-basis-point-cut from the Fed in July, while good data should see a muted market reaction amid Fed’s determination to ease policy regardless of strong domestic fundamentals.

The activity in US treasury markets suggest that there is 100% probability for a 25-basis-point cut in July 30/31 FOMC meeting, while the odds of a 50-basis-point cut are back above 25%.