Asian-Pacific indices generally firmer

US stock index futures were firmer across the board on Wednesday, adding to gains made in the previous session. All the majors spiked higher yesterday following a softer-than-expected inflation report that eased concerns about aggressive Federal Reserve tightening.

Source: TN Trader

Core CPI (which excludes food and energy) fell to 2.6% in June from 2.9% previously. Headline CPI dropped to 3.5% from 4.2%. It’s worth noting that this takes both numbers back to levels last seen in March and shows that inflation is still significantly above the Fed’s 2% target. It’s also worth noting that hostilities between the US and Iran have escalated again and that oil has jumped 25% since the beginning of this month.

Fed Chair Kevin Warsh gave his first day of testimony in Washington after the release. He noted that one print did not make a trend and that the situation remained uncertain. Yet despite his hawkish tone, rate hike expectations dropped significantly after the CPI release.

The probability of at least one 25-basis point rate increase before year-end dropped to 80% from 90%, although the likelihood of a September hike was little changed at around 60%. Perhaps the biggest surprise was that there’s now an 85% probability that the FOMC will keep rates unchanged at its next meeting later this month. This stood at 41% before the inflation update.

The second quarter earnings season notched up a gear yesterday as five of the largest US banks updated the market. All exceeded expectations, especially in their ‘equities' divisions. Goldman Sachs jumped around 7% on the news and went on to add over 9% on the day. The stock prices of the other banks were slow to respond initially, and the eventual response was mixed.

JP Morgan and Bank of America added 2.6% and 1.6% respectively, while Wells Fargo lost 3.2% and Citigroup dropped 4.7%. Meanwhile, IBM slumped 25% for its worst stock price performance ever after it issued a profit warning. Despite this, there was little reaction to the news in semiconductor and other AI-related stocks. Attention now turns to earnings from Morgan Stanley, Johnson & Johnson, United Airlines and BlackRock, amongst others.

Meanwhile, there’s another important update today in the form of the Producer Price Index, the main measure of wholesale inflation. After that, Kevin Warsh will deliver his second day of testimony in Washington, this time before the Senate Banking Committee.

European stock indices were lower across the board in early trade this morning. This was in stark contrast to the gains seen across US stock index futures. The weakness came even after another strong set of quarterly numbers from the giant Dutch supplier of chip manufacturing machinery, and Europe’s most valuable corporation by market capitalisation, ASML.

Source: TN Trader

Not only did it beat expectations on earnings and revenues, but it also raised its full-year guidance. The stock jumped over 5% initially but then proceeded to give back most of these gains. It’s worth noting that ASML had already added 5.3% in yesterday’s trade. But it does look as if European investors have been shaken by IBM’s profit warning and its subsequent 25% slump in market value.

European stock indices made back a fair proportion of their early losses as the morning session progressed. But the German DAX was a notable laggard and seemed reluctant to follow the upward march of US stock index futures. Eurozone Industrial Production fell 0.2% in June, following a +0.3% reading for the previous month.

The US was a touch firmer this morning, making modest gains versus all the majors. The recovery came after it dropped sharply yesterday afternoon, following the release of the softer-than-expected US CPI data.

Headline CPI fell to 3.5% in June, down from the 4.2% reading in the previous month. Core CPI (which excludes food and energy) dropped to 2.6% from 2.9%. The news prompted traders to reduce expectations for Federal Reserve rate hikes for the rest of this year.

While there’s an 80% probability of at least one 25-basis point rate rise before year-end, down from 90% before the release, the likelihood that the Fed’s FOMC will leave rates unchanged at their next meeting at the end of this month rose to 83% from 41%. Despite yesterday’s sharp selloff, the cash Dollar Index once again found support around 100.30.

This morning it pushed up to 100.70. The bounce came after Fed Chair Kevin Warsh maintained a hawkish tone during his congressional testimony. He made it clear that the central bank has “no tolerance for persistently elevated inflation” and remains committed to restoring price stability.

In addition, geopolitical risks are supporting the dollar. Ongoing military confrontations between the United States and Iran, combined with concerns about energy supplies through the Strait of Hormuz, continue to drive safe-haven demand.

The USD/JPY continues to hover near multi-decade highs. The pair slipped below 162.00 as softer US inflation data weighed on the dollar. However, downside moves were limited due to Japan’s vulnerability to disruptions in energy supplies through the Strait of Hormuz.

The British pound benefited from broad US dollar weakness following the inflation report. But it is also getting support from growing expectations that the Bank of England (BoE) may need to raise rates further to combat inflation. Investors now anticipate two rate hikes this year, with the first 25-basis point increase likely to come in September increase fully priced in. Rising energy prices linked to Middle East tensions have reinforced concerns about inflationary pressures in the UK economy.

Source: TN Trader

Yesterday, gold dropped back below $4,000 for the second day in a row. Yet the pullback in US inflation triggered a sharp rally in both gold and silver. Gold briefly broke back above $4,100. But it was unable to hold above here and pulled back from its best levels as Tuesday’s session progressed.

Selling pressure has continued to weigh on gold this morning, although it managed to hold above $4,000 throughout the first half of the session. The precious metal continues to be in thrall to the US dollar, so the greenback’s apparent resilience isn’t doing it any favours.

Source: TN Trader

Investors remain focused on the risk that higher oil prices could reignite inflation and force the Federal Reserve to maintain a restrictive policy stance for longer. This was emphasised by Fed Chair Kevin Warsh during the first day of his testimony in Washington. Mr Warsh reaffirmed the central bank’s commitment to controlling inflation.

Combined with increased military tensions between the US and Iran and the continued disruption of shipping routes in the Strait of Hormuz, investors remain cautious about the inflation outlook.

Despite yesterday’s surge after softer-than-expected US inflation triggered a US dollar selloff, silver continues to move sideways. Just over a week ago, silver dropped below $60 per ounce, and it has been unable to recapture this level ever since.

Like gold, traders are concerned about inflation going forward, given the jump in the oil price since the beginning of the month as US/Iran hostilities intensify. This is supporting the dollar and weighing on silver. Despite this, silver has not yet retested its cycle low of $55.50 from the last week of June.

Source: TN Trader

Oil prices remain elevated as military activity in the Middle East intensifies, and concerns over supply disruptions persist. Front-month (September) Brent has jumped around 25% since the beginning of July. It gapped higher on Monday as it reopened after the weekend, as Iran launched attacks at US military bases in Gulf states, including Bahrain and Kuwait, while Jordan also came under fire.

The US has responded, hitting military targets in Iran and attacking bases on the Strait of Hormuz. The US has renewed its blockade of Iranian ports in the region, effectively ending the country’s oil exports. Yet both sides claim to control the Strait of Hormuz, and it is certainly the case that Tehran can target shipping attempting to traverse the waterway.

This has seen a dramatic drop-off in vessels attempting to navigate the Strait over the past fortnight, just as it looked as if the chokehold was opening to some extent. Meanwhile, President Trump backed down from his threat to levy a 20% tariff on the value of the cargo of any ship or tanker wanting to pass through the Strait.

As far as oil is concerned, it has rallied off very oversold conditions, according to its daily MACD. Yet there could be more upside to come. Technical resistance comes in around $85.50 for the undated WTI contract, while front-month Brent could stretch up to $88 per barrel before hitting a significant technical level.

Source: TN Trader

Bitcoin rallied strongly yesterday. It was already bouncing back following a hefty selloff on Monday. But took another leg up after the release of the softer-than-expected US CPI data for June. Core CPI (which excludes food and energy) dropped to 2.6% year-on-year from 2.9% previously. This took inflation down towards the Fed’s 2% target, which led analysts to dial down their rate hike expectations.

Bitcoin broke above $65,000 to hit its highest level since the 22nd of June. While it pulled back a touch this morning, it has managed to hold on to most of yesterday’s gains. Yet there's still plenty of uncertainty surrounding the US-Iran conflict and concerns that higher oil prices could eventually feed through into inflation.

Fed Chair Kevin Warsh’s testimony to the House Financial Services Committee also reinforced expectations that policymakers remain prepared to tighten policy further if inflationary pressures re-emerge.

Investor attention now shifts to another busy session featuring US Producer Price Index data, a Canadian interest-rate decision, weekly oil inventory figures and more testimony from Kevin Warsh. Investors will also continue digesting earnings from major companies, including Morgan Stanley, Johnson & Johnson, United Airlines and BlackRock.

While yesterday’s softer inflation data provided some relief and helped reduce expectations for immediate Federal Reserve tightening, the broader outlook remains complicated by ongoing Middle East tensions, elevated oil prices and the potential for renewed inflation pressures.

For now, equity markets appear encouraged by resilient earnings, easing inflation and continued enthusiasm around artificial intelligence. However, with geopolitical risks still elevated and policymakers maintaining a cautious stance, volatility is likely to remain a key feature of global markets in the sessions ahead.

* The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance.