Last week, the financial markets were partially able to recover thanks to positive corporate results, the restart of Russian gas deliveries, and the European Central Bank (ECB) announcement that it would increase key rates by 50 basis points in order to combat inflationary pressures.
However, the market turned bearish on Friday, and US stock prices dropped, ending a three-day rally that had been primarily propelled by investor reactions to the earnings reports of individual companies.
Consider the case of Snap (SNAP), whose stock dropped by almost forty percent on the last trading day of the week after the company missed both its top and bottom line results. The disappointing results from Snap weighed on the tech-heavy Nasdaq.
Despite an unfavorable macroeconomic environment, there is evidence of a rebound for markets in the United States and Europe as the earnings season gets underway.
Given the strong performance of defensive stocks (and dividend stocks) over the past week, we believe extreme caution is still warranted as we approach the start of this trading week.
A global economic slowdown and a return to recession continue to be on the minds of investors and could once again be a source of huge volatility as the Fed makes its rate decision and a huge amount of earnings come in.
KEY MARKET DRIVERS & CALENDAR
- China Mortgage Crisis (May Boil Over)
- Tuesday, July 26 – CB Consumer Confidence (July)
- Wednesday, July 27 – Fed Interest Rate Decision
- Thursday, July 28 – Quarterly Growth Rate GDP
The week will be the biggest of the earnings season. Microsoft (MSFT), UPS (UPS), Meta Platforms (META), Boeing (BA), Pfizer (PFE), Apple (AAPL), and Amazon (AMZN) are just a few of the powerhouses due to report earnings during the busiest week of the earnings season, which will keep investors’ heads on a swivel.
This week will likely be a busy one regarding economic statistics. Tuesday, the numbers for consumer confidence in the United States will be made public. This will get the ball rolling. It is an important statistic that can be used to track future spending by households.
After this, on Wednesday afternoon, the Federal Reserve will finally reveal the news that everyone has been anticipating for so long. It is recommended that a rate increase of 0.75 points.
The quarterly growth rate of the US economy is scheduled to be announced on Thursday at 2:30 p.m., and it is anticipated to be +0.4 percent. This coming Friday will see the release of the Core Consumer Price Index for the month.
Last but not least, the Consumer Price Index for the Eurozone in July will also be released on Friday. It is anticipated to be 8.7 percent annually, which is a rise from the 8.6 percent projection made in June.
S&P 500 SECTORS
Tip: Use this section to know various sectors’ performance and weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have outperformed others like utilities. This is also a way to narrow the sectors to find investment opportunities.
Two Things to Watch For Fed Rate Hikes
Many investors are looking at jumping back into equities because they believe the Fed will stop rate hikes to save the market. This could be premature as the market could drop 10% or more.
We believe that the Fed is looking at two things when deciding to raise rates:
- Inflation Rate Sub 5%: Annual inflation rate needs to be below 5%, with a short-term goal of 3%.
- Unemployment Rate + or = 5%: This could be a primary indicator for the Fed, and we believe that the unemployment rate needs to be 5-6% percent before the Fed stops increasing rates.
The Fed is likely to keep raising rates as expected until these terms are met. They are more worried about inflation than crashing the economy and markets. What this means to investors is that there will be opportunities in the future to buy stocks/ETFs once a true bottom has been reached.
China Mortgage & Investors’ Problems
China is the setting for one of the other stories we are following now. An estimated one million home buyers have stopped making mortgage payments, accusing developers of failing to deliver apartments for which they had already paid in full.
Why does it matter? It is estimated that this situation could impact approximately $300 billion worth of mortgages. In addition, the real estate market is accountable for roughly 70 percent of the wealth held by Chinese households and accounts for one-fifth of China’s total economic activity.
These are people from the middle class who are unhappy about the decline in their net worth that they have been experiencing. In the meantime, President Xi Jinping aims to secure a third term in office at the upcoming Communist Party meeting, which occurs every five years and takes place in just a few short months.
Housing Market Drops
Last week’s focus in the financial news was primarily on housing data. The home builder’s index that is tracked by the National Association of Home Builders (NAHB) is falling, as are building permits and housing starts, existing home sales, and mortgage application volume, which has reached its lowest level since the year 2000. The decrease in demand for housing combined with the increase in available homes for sale is beginning to put downward pressure on home prices in some markets.
We’re likely going to see a lot more of this in the future. Tom Porcelli, the chief U.S. economist for Royal Bank of Canada, wrote in a note to clients that the weakening of the housing market is the beginning of a recession.
Other financial firms share this sentiment. When the Bureau of Economic Analysis releases the gross domestic product (GDP) numbers for the second quarter next week, we will know whether or not the United States is currently experiencing a technical recession. Until then, the GDPNow tool provided by the Atlanta Fed projects a negative 1.6 percent annualized growth in GDP for the second quarter.
Pakistan Default
Pakistan’s currency, the rupee, has fallen to a new all-time low of 225 to the dollar despite the country’s ongoing political unrest and the presence of a caretaker government. This represents a drop of 25 percent since the beginning of the year. Fitch Ratings lowered Pakistan’s sovereign debt rating from stable to negative despite the country’s agreement with the International Monetary Fund (IMF) to restructure a bailout package worth 1.17 billion dollars. On Wednesday, the Secretary-General of Exchange Companies for Pakistan made the following statement: “There is panic in the market, and I fear that the rupee will fall even further.”
Italy Gov’t Collapse
The resignation of Mario Draghi as prime minister, which took place a week ago, is being discussed by both Italian officials and voters. In February of 2021, Draghi was selected to fill the position. Draghi has been lauded for his role in guiding Italy out of a health and economic crisis over the past year and a half. It became abundantly clear that the coalition was no longer cooperating, and as a result, the president initially declined to accept his resignation but did last week. Currently, several politicians are trying to form a new alliance.
RATES
Investors continue to keep a close eye on bond markets despite the current rate environment. Many people believe that there will not be a significant recovery in the stock market until there is some sort of calm in the bond yield market.
This week, following the publication of the PMI index, yields in Europe are falling, which is significant in this regard. The yield on the French 10-year bond is currently around 1.6 percent, while the yield on the German Bund bond of the same maturity is getting closer and closer to 1 percent.
Take note of the spread with the Italian 10-year bond despite the fact that the ECB is willing to protect the country with targeted quantitative easing. The market appears to be requesting additional information regarding this support plan. Still, for the time being, its primary focus is on the ECB’s decision to raise interest rates by 0.5 percentage points on Thursday. The United States bond market is experiencing a relatively calmer environment at the moment, with a 10-year yielding 2.76 percent.
INFLATION UPDATE
This week, inflation is again slightly down but hasn’t reversed the trend. In past rising interest rate environments, rising inflation came in waves. It will also become a major political issue going into elections as Americans pay more for everything.
We follow Truflation. Decentralized finance (DeFi) firm Truflation is based on the same calculation method as the CPI but is different in that it uses real “price data” versus the government’s survey data. It uses current real-market prices data from Zillow, Penn State, and Nielsen to measure and report inflation changes each day.
COMMODITIES
OIL
Oil prices remained relatively stable around $100 last week but dropped this morning to $95 per barrel for both the Brent and WTI global benchmarks. The trip that Joe Biden took through the Middle East did not yield a great deal of news, and as a result, prices continue to be directed in the short term by fundamental data. In this context, the unexpectedly large increase in gasoline inventories in the United States weighed negatively on oil prices because it reflects a decline in demand in the United States. On the supply side, Libya announced that it will produce more oil.
GOLD & PRECIOUS METALS
Industrial metals are also taking a wait-and-see approach, and prices have generally stabilized this week, with copper trading at USD 7,230 per ton on the LME. This indicates that traders are content to wait and see what happens. The price of aluminum increased to USD 2430. The most recent data from the International Aluminum Association demonstrates that there was a leveling off of global supply in June.
To the dismay of the gold bugs, precious metals took a beating earlier in the week as a direct result of the strengthening of the United States dollar and rising bond yields. There was a brief moment when the price of an ounce of gold dropped below USD 1700.
CRYPTOCURRENCY
Bitcoin’s value has increased by more than 10 percent since Monday, and ether’s value has increased by more than 15 percent over the same period as this article was written. The cryptocurrency market has had an explosive week and a significant recovery that follows a period of time during which this market experienced a significant purge. In addition, contrary to all expectations, the value of digital assets has remained relatively stable since Elon Musk’s announcement that he had sold 75% of Tesla’s bitcoin holdings during the second quarter of 2022 “to strengthen its holdings in fiat currency.” This news did not significantly affect the value of digital assets.
