Stocks suffering amid surging yields and China woes
* Fed’s Powell to speak at Jackson Hole Symposium on August 25
* Japan’s core inflation eases, bolstering view the BoJ will stand pat
* Dollar set for fifth winning week on Fed bets, PBoC supports yuan
* Oil set to snap seven-week win streak on China woes, Fed rate outlook
* Gold struggles to move toward $1900 as focus shifts to Jackson Hole
FX: USD closed marginally lower after making a fresh cycle high at 103.59. The DXY remains above its 200-day SMA at 103.20. The June and July highs at 103.54/57 should offer resistance. The 10-year yield made fresh highs at 4.328% yesterday. This is just below the October 2022 top is at 4.33%. The 2-year yield has rolled over below 5%. There is still very little chance of the Fed hiking in September.
EUR fell for a fifth straight day. The July low sits at 1.0833. There was a rare outing from a hawkish ECB official. But he sounded a cautious note on the outlook reflecting the general bias since the July hike. Any additional rate rises would be small and the latest staff projections would be needed before decisions on more hikes.
GBP is lower this morning after on disappointing retail sales figures. Cable has enjoyed a mildly positive week. Positive yield spread support should underpin support for the pound. The 50-day SMA sits above at 1.2787. Decent support is at 1.2630/20.
USD/JPY reached a nine-month peak at 146.56 before closing below 146. A minor Fib level of the October 2022 drop is at 146.63. Japan’s core inflation rate slowed to 3.1% in July from 3.3% in June. That still remains above the BoJ’s 2% target for the 16th straight month. The headline figure was unchanged at 3.3%. That defied expectations for a sharp slowdown to 2.5%.
AUD fell to a nine-month low at 0.6364. That was the eight consecutive day of losses. Prices are oversold on the daily RSI. USD/CAD remains in a tight bull channel and above the 200-day SMA at 1.3451. Short-term trend support off the July 31 low is around 1.3495. Mixed stocks and weaker bond markets are not helping the loonie.
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Stocks: US equities continued lower amid rising real bond yields. The benchmark S&P 500 lost 0.77% to finish at 4370. The tech-laden Nasdaq fell 1.08% to settle at 14,715. The Dow settled down 0.84% at 34,474. It is closing in on prior major resistance/support at 34,281. Energy was the only sector which gained. Retail giant Walmart lost 2.3% even though earnings beat, and guidance was raised. The Vix rose more than a point to 17.89.
Asian traded mostly lower as the global sell-off slowed. Chinese stocks were under pressure as tech and property stocks struggled. The Nikkei 225 was choppy and briefly clawed back opening losses.
US equity futures are flat. European equity futures are lower (-0.4%). The Euro Stoxx 50 closed down 1.3% yesterday.
Gold remains below the 200-day SMA at $1905 and the psychological $1900 level. Rising real yields are hampering any efforts by gold bugs to find a base.
Day Ahead – Bond markets remain a key driver
US bond yields continue to drive markets. The rise in yields has been led by several factors including a large supply of Treasuries, US economic resilience with better data, the US credit rating downgrade and the BoJ’s relaxation of its yield curve control policy. Yields adjusted for inflation (“real yields”) have surged to their highest level in 14 years, which has hit technology stocks hard. Investors have also bet that the Fed can keep inflation under control by keeping rates high while avoiding sending the economy into a recession.
Real yields are watched closely by the Fed and investors as a fundamental measure of how much it costs for companies to borrow money, minus the effects of price increases. Meanwhile, growing risks in China are also helping the dollar which is benefitting on these surging yields and a lack of major alternatives.
Chart of the Day – Nasdaq 100 gets hit
Technology stocks are suffering heavily in the current environment. They offer the promise of high future growth which is more attractive when interest rates are low. Higher yields mean investors can obtain decent returns in lower-risk bond funds and sell their riskier equity positions. Elevated rates also weigh on tech companies as they mostly rely on debt to finance their growth.
The Nasdaq 100 is tech-dominated and is down 6.6% this month. This comes on the back of a rise from the lows in early January of nearly 50%. The bullish channel was broken a few weeks ago. The 50-day SMA now sits above at 15,185. A near-term minor Fib level (23.6%) of this year’s rally is at 14,696. Below here is the 100-day SMA at 14,273.