Over the past week, we have seen the S&P 500 +6.7%, Nasdaq +8.9%, CAC40 +3.2%, Hang Seng +3.1%, Crude Oil -3.1%, and Copper -6.7%, while the NOK was the best performing G10 currency, and the JPY the worst.
The USD has eased back, following US 2yr Treasury yields, which have pulled back from 3.45% to 3.06%., and we have seen a pennant consolidation pattern in the USDX daily that needs to play out and may impact sentiment in broad markets when it does.
Investor mood lifting
Certainly, the mood in equities has lifted but remains unconvincing. We’ve seen both the S&P 500 and Nasdaq fill and break above their respective 10 June gap. Will month-end flows continue to support an updaide, with further fund rebalancing, trader short-covering and relief buying?
Clearly, sentiment was so shot to pieces and positioning so light into mid-June that (with hindsight) there was always going to be a risk of a sustained bear market rally in risk assets. Let’s see if the bulls can build on sentiment, as we assess the potential to take the Nasdaq into 12,800 and S&P 500 into 4100. How the market digests this week’s economic data will be closely watched. Notably the US ISM manufacturing report.
Recession
With Jay Powell validating the ‘recession’ callers growing belief, there has been some easing in US and global rate hike expectations, with 29bp priced out of the US swaps market over the next two years. FX volatility has dropped, and most pairs on my volume matrix sit around the 40th percentile of the 12-month range. Equity volume is still elevated with the VIX index at 27.23% and there is scope for the market to push into the 23-25% range. We see the Chicago Board Options Exchange S&P500 put/call ratio dropping back to 0.51 and well off the highs we saw in April/May, so the demand for puts and portfolio hedges has been unwound.
Anyhow, keeping a close eye on US equity indices, crude, and commodities more broadly and what they signal on growth. Copper has become the bellwether again on economics and having lost 16% in the past 14 days, this is one that is getting the love from the shorts. That said, we saw some indecision to push this significantly below $3.70 on Friday and shorts are at risk of a quick move into $3.95. I’m keen to watch The Energy Select Sector SPDR® Fund (NYSE:XLE) and whether this can find buyers. I see risks that will be the case.
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