Written Commentary
STOCK INDEX FUTURES
Global equity markets overnight were generally lower with the exceptions to that rule markets in Tokyo, Shanghai, Moscow, and Madrid. With the potential for hot inflation readings from several countries over the coming 48 hours and several foreign central bank meetings ahead the bear camp should have a fundamental edge. Even the technical condition favors the bear camp with yesterday’s 6-day high (S&P) resulting in a definitive reversal down .
S&P 500: Bullish fundamentals remain elusive with yesterday’s reversal from 3900 shifting the charts bearish. So far, corporate earnings have been generally positive but high costs have resulted in disappointing margins. Adding into the negative environment is an IBM warning of a significant negative impact from a surging dollar/declining nondollar currencies.
CURRENCY FUTURES
DOLLAR: A big range down extension and 9-day low in the dollar shifts the technical picture further favor of the bear camp. While not a major negative to the dollar, seeing Chinese US treasury holdings decline for a 6th straight month last month combined with less global equity market anxiety should set the stage for a September dollar index trade below 106.00. Given the potential for the focus to shift toward foreign central bank rate hikes, more declines in the dollar are expected.
EURO: Noted early strength in the euro is largely attributed to talk that the ECB might surprise with a strong rate hike in their Thursday meeting. While the trade currently expects a 25 to 50-basis point hike, some outlying predictions suggest a 75-basis point hike should not be ruled out. We suspect the euro is also drafting a small measure of support from positive EU construction output readings for May and from ongoing strength in HICP index readings for June.
YEN: While other currencies might see support/buying interest into domestic central bank meetings, the BOJ meeting later this week is highly unlikely to present any tightening.
POUND: Like most other nondollar currencies the Pound bias has shifted up off a combination of classic technical short covering, corrective weakness in the dollar and a slightly positive report from the UK jobs front overnight.
CANADIAN DOLLAR: With the Canadian already posting a significant short covering rally over the prior sessions, and benefiting from very hawkish Bank of Canada rate hike dialogue last week, seeing June housing starts decline 3% this week should mean upside action in the Canadian will be hard-fought and fleeting.
INTEREST RATES
After a significant trading range yesterday, the charts in bonds favor the bear camp, with a venture below 138-00 likely directly ahead. Adding into the bearish technical track in bonds, is news from the Treasury International Capital Flows report yesterday afternoon which showed Chinese holdings of US treasuries declining for the 6th month in a row! With the Australian central bank indicating its rates are still too low and ECB policymakers expected to consider a 50-basis point rate on Thursday, bond and note markets have near term headwinds. However, the Peoples Bank of China tonight might reduce rates or leave rates unchanged.
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