US stocks gave back some of yesterday’s gain as investors await a critical Fed policy decision tomorrow and ahead of mega-cap tech earnings on Thursday. Tuesday trade has a cautious tone as corporate earnings kick into high gear. Pfizer shares rose after posting strong results and raising their guidance, while 3M disappointed with results coming in shy of expectations and as July month-to-date sales only rebound low-single digits. McDonald’s delivered mixed results, but the focus was on the softer-than-expected comp sales.
Financial markets might come to a crawl as the focus shifts to tomorrow’s FOMC decision. The Fed is expected to remind financial markets that they are ready to do more. The Fed is not ready to commit to yield curve control or locking in future rate hikes to overshooting their inflation target, but they may hint they are getting closer.
The other key drag for the markets today is the expected collapse in talks over next stimulus package. Republicans and Democrats will try to stick to their proposals but eventually cave in before the month ends.
FX
The dollar is licking its wounds and recovering a small portion of yesterday’s losses. Until we get through the Fed, the dollar could strengthen as investors lock in profits.
Oil
Oil prices are being weighed down on coronavirus resurgence in Europe and Asia. Germany is concerned infections from a farm in Bavaria are spreading, while China sees the most local cases in at least four months as resurgences occur in the western and northeastern regions. Earnings results from McDonalds and 3M do not paint a positive picture of the US economy and that is also weighing on the crude demand outlook.
After the close, the weekly API oil inventory report could see another strong build as producers try to get as much output over the next few weeks as hurricane season heats up. The first hurricane is in the books and concerns remain elevated this could be a very active season.
Gold
Gold exhaustion settled in after prices fell short of the $2,000 level. Gold will need to get past the Fed policy decision, three key tech behemoth earnings results on Thursday, and as the federal government debate the latest virus belief bill. The dollar slide was due for a pause and the next catalyst will likely stem from whether Fed Chair Powell signals more accommodation is coming.
Today seems like the standard consolidation we see ahead of a Fed event and given gold’s sharp rise; weakness could see prices settle just ahead of the $1900 an ounce level.
Gold might see a healthy pullback if this week delivers a broader market selloff, but the outlook for the rest of the summer is still bullish. Gold continues to see steady inflows on virus resurgence, vaccine uncertainty for a couple of months, reopening reversals and massive job losses.
Democrats and Republicans will drag the virus relief bill talks down to the wire, but no one should doubt that more stimulus is coming and the federal government.
