- Futures slide suggests bulls bit off more than they can chew
- Odds are against Fed's ability to lower inflation without recession
- Dollar drops
- Eurozone CPI is published on Friday.
- US PCE Price Index is printed on Friday.
- On Friday, Canadian GDP figures are released.
European stocks opened higher on Thursday in an attempt to catch up with yesterday's exuberant Wall Street rally after comments from the US Federal Reserve Chair Jerome Powell suggested the central bank will temper its pace of tightening from here on out.
However, US futures on the Dow, S&P, NASDAQ, and Russell 2000 ran out of steam and were trading in the red today led by NASDAQ 100 contracts. The NASDAQ led yesterday's rally in the US market and closed twice as high as the Dow and about 1.5% higher than the S&P 500.
So, what's going on? I was taken aback by the market's risk-on reaction. After all, the Fed is hiking interest rates at the fastest pace in a generation. Furthermore, Powell put another jumbo increase on the table. However, yesterday traders preferred to focus on the Fed boss's comments that hikes will slow down, eventually.
However, traders may be focusing on what they want to hear. Powell himself said in June that policymakers expect to raise rates to roughly 3.4% this year and 3.8% by the end of 2023. These official Fed projections are above current market expectations. Why? I am not sure.
Traders will be keenly watching today's US GDP data in the hope that it shows that the economy did not post two consecutive quarters of negative growth which is an established indicator of a recession.
Furthermore, bulls seemed to have forgotten about the inverted yield curve yesterday, which is a leading indicator of a recession.
The inversion steepened, with the 2-year yield rising about 32 basis points higher than the 10-year, which declined after the rate announcement.
The yield curve was already at a multi-decade low earlier in the day but hit a new one after the policy release.
The 10-year yield is down for the fourth straight day for the first time in two and a half months.
Rates are below the neckline of an H&S top. If the price closes at this level, up to 2.8%, it will have completed the H&S top.
Powell repeatedly said that the US economy needs to slow down in order to bring down inflation. However, he also said that policymakers didn't think that a recession was a foregone conclusion. In other words, Powell is expressing confidence in being able to "thread the needle" and manage to navigate between soaring inflation and a recession. But remember this is the same Fed that either didn't identify or refused to acknowledge the problem of rising inflation, insisting it was "transitory."
Meanwhile, European shares hit a 7-week high, with solid earnings, including quarterly profits for Shell (LON:RDSa), reinforcing overall optimism. However, the STOXX 600 Index is showing signs of weakness.
The pan-European benchmark retreated from session highs, forming a shooting star (bearish on a closing basis) distancing from the downtrend line from the index's all-time high.
Most of Asia's stocks took a cue from yesterday's US session, while investors are awaiting news on a call between US President Joseph Biden and his Chinese counterpart, Xi Jinping.
The dollar opened lower, extending yesterday's 0.73% drop, the steepest since the 1.45% selloff on June 16. The lack of forward guidance appeared to bulls as less hawkish. Technically, I expect demand for the greenback to rise.
The dollar may develop a Falling Flag, bullish after the preceding 5.42% jump in nearly a straight line. The DXY has been ranging for eight sessions as the currency neared the June 15 highs. Also, the rising trendline is nearing.
Gold opened higher, soaring amid a weakening dollar. I also expect the yellow metal to go higher after completing a bullish pattern.
The price completed an H&S bottom. Although the range's size does not imply a distant target, the fact that it developed on the lows since June 2020 may increase a rally's momentum. The H&S's implied target is $1,775, coinciding with the channel top.
After yesterday's surge, Bitcoin slowed its advance to a standstill.
The cryptocurrency may be slowing down, having reached the top of its short-time rising channel.
Oil advanced for the second day on improving risk appetite, compounded by low inventories and Russia's cuts in gas exports. Technically, I remain bearish.
The current rally is nothing more than a return move to test the Symmetrical Triangle after the price found support by lows on Feb. 28. If the Symmetrical Triangle endures, the price will also complete a Descending Triangle, with an implied target of $56.
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Disclaimer: The author currently does not own any of the securities mentioned in this article.