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Opening Bell: U.S. Futures Drop On Expectations Of Even More Aggressive Tightening

ca.investing.com/analysis/opening-bell-us-futures-drop-on-expectations-of-even-more-aggressive-tightening-200516807
Opening Bell: U.S. Futures Drop On Expectations Of Even More Aggressive Tightening
By Pinchas Cohen/Investing.com   |  Jul 14, 2022 06:42
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  • US inflation jumped 9.1% in June in its biggest yearly increase in 40 years
  • 3/4 percent rate increase is becoming likely, with rising expectations for a 1 percent hike
  • Yield curve inversion deepens, strengthening recession signal

US Futures and European stocks dropped on rising expectations for even more aggressive tightening after data showed inflation reached a new peak. The Russell 2000 continued to underperform among US futures, as higher borrowing costs impact small firms' business growth the most. However, the Nasdaq 100 futures—also highly susceptible to rising rates—outperformed the S&P 500 futures in pre-market trading.

Today is the second straight day in which such a phenomenon has occurred. Maybe the paradigm is shifting, and bulls are finding bargains in the tech sector after falling 34% between its Nov. all-time high and its Jun. low. However, I can't make such a call before seeing a bottom. 

NDX Weekly Chart
NDX Weekly Chart

As of now, the peak-and-trough formation is down.

The STOXX 600 index fell as much as 0.5%, extending a decline to its second day for the first time this month.

STOXX 600 Daily Chart
STOXX 600 Daily Chart

The pan-European gauge ranges between 400 and 420. However, the risk is to the downside, considering the range top is the previous low, and it's trading within a Falling Channel. Furthermore, if bears will drown out demand from those who remember the 14% jump in a couple of weeks since the Mar 7 low, I expect an accelerated decline.

US inflation soared 9.1% in June compared to a year ago, the sharpest rise since 1981. The higher-than-expected reading fueled bets on a supersized Fed rate hike

Atlanta Fed President Raphael Bostic said that "everything is in play" regarding the rate increase. Bostic was among the policymakers urging a second 75 basis point increase at the upcoming policy session on Jul 26-27. 

Moreover, Bostic's statement may suggest he'd consider going even higher. Perhaps, that is why traders are now pricing a possible 100 basis point hike. The Fed may find such an aggressive move more acceptable after the Bank of Canada announced such a rate hike yesterday, for the first time since 1998.

I can imagine that such an aggressive policy would pressure the European Central Bank to keep up, especially after its currency plunged 19% since its Jan 2021 high, reaching parity for the first time since 2002. I don't think it's the end for the single currency's slide.

EUR/USD Monthly Chart
EUR/USD Monthly Chart

On the monthly chart, the EUR/USD completed the second consecutive H&S. The latter, of the Continuation variety, implies a 0.9 target, while the former, a top, points at 0.8. Will the ECB be able to stop floodgates with higher rates?

Even the Japanese yen, a favored haven among institutions in years past, has sunk to its lowest since 1998. The yen could become much weaker too.

USD/JPY Monthly Chart
USD/JPY Monthly Chart

The USD/JPY may have completed a bottom spanning since 1990. The trend dates back as far as 1985, when the world's largest economies came together for the Plaza Accord, a global effort to reduce the spiking dollar, destabilizing financial markets. The Accord pushed the Japanese yen in September 1985 from 242 to 153 in 1986. By 1988, the USD/JPY exchange rate was 120. Now, it's 139.

However, what I consider even more noteworthy are bond movements. 

US 2-10 Year Treasury Spread
US 2-10 Year Treasury Spread

The Treasury yield inversion continues to deepen, a leading indicator of a potential recession.

US stocks continued their decline yesterday. The S&P 500, Russell 2000, and Nasdaq 100 fell for the third day, while the Dow Jones sunk on its fourth day. 

Gold returned to a decline amid dollar strength ahead of further rate hikes. Technically, the yellow metal stands upon the edge of a knife. Stray but little, and it will fall to the ruin of all gold bulls. 

Gold Weekly Chart
Gold Weekly Chart

Gold is on the verge of completing a Double Top, with the implied target being the $1,300s. Some may argue that the precious metal has already completed a Triangle, with an implied target is $1,400. 

Bitcoin declined after yesterday's rally as the price continues to struggle upon support.

Bitcoin Daily Chart
Bitcoin Daily Chart

BTC supply and demand is working itself out at the bottom of a potential Rising Flag, bearish after the initial straight plunge. The flag's implied target is a $14,000 drop from the breakout point, confirming a massive H&S top. 

Oil gave up yesterday's rally attempt, digging deeper to its lowest since Feb. 25. The price found support by the Mar. and Apr. lows. We expect the price to extend the downtrend, which may take it into the $60s (here is my analysis).

WTI Crude Oil Daily Chart
WTI Crude Oil Daily Chart

Up Ahead

Opening Bell: U.S. Futures Drop On Expectations Of Even More Aggressive Tightening
 

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US futures are indicating a lower open as of 04:05 ET. European equity markets have opened lower, following broad weakness in Asia. Developments in China are dominating headlines....

Opening Bell: U.S. Futures Drop On Expectations Of Even More Aggressive Tightening

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Comments (2)
George Thorm
George Thorm Jul 14, 2022 8:48
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The-Federal-Reserve-Created-the-bubble-and-now-they-burst-it-should-be-held-accountable-and-disbanded
Jordan Dion
Jordan Dion Jul 14, 2022 8:24
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very good article
 
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