The market mood turned sour again, and the S&P500 fell after a short relief. S&P’s bank rating downgrades – which came a few days after Moody’s downgraded some US small and mid-sized banks and Fitch downgraded the US’ rating, came as a reminder that the rising rates won’t be benign for banks as depositors move their funds into higher interest-bearing accounts, increasing banks’ funding costs. The decline in bank deposits squeezes liquidity, while the value of securities that they hold in their portfolios decline. Plus, regional banks continue to face the risk of a sharp decline in commercial real estate loans. As a result, the S&P500 fell 0.28% on Tuesday, Invesco’s KBW bank ETF dived more than 2.50%.
Elsewhere, the rising rates and declining purchasing power finally start showing in some retailers’ quarterly announcements. Macy’s for example sank 14% yesterday on rising credit card delinquencies and Dick’s Sporting Goods slumped more than 24% on ‘elevated inventory shrink – in particular theft. Both companies gave a morose outlook for consumer demand moving forward. Could that be a sign of potentially slower consumer spending in the next few months? We will see that. For now, the latest US data remains strong, the Fed expectations are hawkish, no one sees Jerome Powell back off with the Fed’s tightening policy, and the US yields are rising. The US 2-year yield pushes higher above the 5% mark, while the 10-year yield struggles near 4.30%, where it sees decent resistance. In one hand, there is a strong demand for US 10-year papers at these levels as many asset managers consider that the levels are good entre points. On the other hand, the hawkish Fed expectations, prospects of – maybe – higher rates, which will be held for a prolonged period of time continue pressuring the yields higher along with the US Treasury’s plan to issue more bonds in H2 – as they issued too many T-bills so far to fund their deficit.
And there is one more thing weighing on US treasuries and that’s China. Yes, the sluggish Chinese growth is tempering energy and commodity prices and doesn’t add to inflationary pressures. But Beijing adds on the US Treasury selloff as it fights against a softer yuan. The People’s Bank of China (PBoC) set its daily yuan fixing surprisingly higher than expected this week in a move that Bloomberg described as the most forceful on record.
When the USD/CNY rallies due to higher US and lower Chinese yields, the Chinese sell their US denominated assets to defend yuan. And doing so, they contribute to the further strengthening of the US yields, and the US dollar is pressured higher on the back of stronger yields. Then, the cycle starts all over again. A stronger Dollar and weaker yuan forces the PBoC to sell USD assets. The UST selloff pushes US yields higher and strengthens the dollar and the yields.
In the FX
The dollar index remains bid above its 200-DMA – though we see a slowing positive trend, and weakening trend and momentum indicators. While I believe that there is room for further USD recovery, we could well see a temporary downside correction in the next few days, depending on what Powell will say, and how the markets will react. The EURUSD is still on a decidedly bearish path. Trend and momentum indicators remain comfortably bearish, and the pair is not yet at the oversold market conditions; the actual selloff could extend toward the 200-DMA, near the 1.08 mark. The USDJPY is steady a touch above the 145 mark, as the possibility of a direct FX intervention holds many traders back from topping up their short yen positions. Cable on the other hand sees resistance at its 50-DMA, a touch below the 1.28 mark.
In energy, the US crude remains close to the $80pb psychological mark, lacking a clear short-term direction. Therefore, this week’s US inventories report could help traders decide whether they want to play the slow China demand rhetoric or continue backing the supply tightness narrative. In both cases, we shall see range-bound trading within the $75/85 range, including the 200-DMA and the August peak.
Nvidia goes to the earnings confessional
Today, all eyes are on Nvidia earnings due after the closing bell. Investors will focus on whether Nvidia’s Q2 sales meet the $11bn estimate. Anything less than absolutely fantastic could trigger a sharp downside correction in Nvidia’s stock price which rallied 345% since the October dip.
