Stocks pull back on soft-earnings, geopolitics, and Fed miscommunication

Sentiment reverse as Fed admits mistake

Risk appetite waned on Friday, after the New York Fed had-to clarify comments made by its President, John Williams, the day prior about the necessity to cut interest rates aggressively at the first signs of “economic stress”. The comments, markets were told, were purely “academic”, and shouldn’t be considered a reflection of current policy considerations. Markets were forced to walk-back the increased likelihood of a 50-basis point cut from the Fed this month, as-a-result. Bullishness was also dented in late Friday-trade on news that Iran had captured a British oil-tanker in the Persian Gulf, raising the prospect of a trade-interrupting conflict in the economically significant region.

Last week ends with a fizzle

The sentiment-shifting stories capped off a weak week for global equity markets, following the commencement of a thus far tepid US reporting season. US stocks have failed to clear the very low bar the market has set for second quarter results, with the S&P 500 fading from its record highs through the week’s trade. The benchmark index challenged and failed to break about the key psychological level of 3000 on Friday, to close the week -1.20% lower. Comparable losses were sustained by European stocks, the FTSE100 and the Nikkei, with futures markets suggesting the softness to carry over into the new week.

ASX range trades; lacks internal drivers

The ASX 200 ought to open 26 points lower according to the SPI Futures contract, backing-up a week where the local market closed practically flat. The ASX was ultimately held together again by a rally in industrial metals in the last 5-days, after Chinese economic data earlier on in the week showed a slightly better than expected set of numbers. The market was otherwise middling, tracking overseas leads and only really rallying in the back end of last week courtesy of Fed-member John Williams’ communications-gaff. Though the trend remains to the upside, momentum has waned for the ASX200, suggesting its recent pullback has the capacity to run further.

Confusion in fixed income markets

Greatest attention was perhaps granted to fixed income markets last week, due to the Fed’s mixed messaging and PR-fumbling. Traders were forced to unwind their bets of a major 50-basis point cut from the Fed at its July 31^st meeting, taking the implied probably of such a move to about 20 per cent, from roughly 50% the day prior. The yield on the interest rate sensitive US 2 Year Treasury note climbed 6 basis points on Friday, while long-term bond yields rallied across the globe. It sets up a confused state of affairs for fixed-income markets, as the Fed enters its pre-meeting “black-out” period.

Currencies shift around Greenback

A recalibration of US Fed rate expectations prompted a lift in the USD on Friday, rallying just shy of 0.4%. The greenback finds itself in a contentious position now, clearly suffering from a bout of bearishness, but not yet demonstrating evidence of a definite trend-reversal. The weaker USD is leading the AUD’s moves, which remains above 0.7000. The Euro pulled back into the low 112s, as the shared currency comes into focus ahead of this week’s ECB meeting. The Pound is also on the cusp of breaking back into the 1.24 handle, with markets preparing for a likely Boris Johnson Prime Ministership.

Commodities trade mixed

Marginally higher global bond yields and a stronger Greenback punctured gold’s rally, driving the price of the yellow-metal back towards the level at which it began the week – though only after gold prices managed to register a fresh 6-year high. Growth-tied commodities performed solidly throughout last week’s trade – copper being the appropriate bellwether, here– but remains clearly in an overall downtrend. And oil prices lifted due to the rapidly escalating tensions between Iran and the West in the Straight of Hormuz, as the chance of global supply disruptions due to outright conflict in the region offset the broader, prevailing concerns about diminishing global growth.

The themes to watch this week

The week ahead will rest on the interplay of several themes: the release of a number of global-growth related economic data; continued speculation about the path of global interest rates; the digesting of what is the meatiest week in US earnings season; and several, sustained global geopolitical conflicts. For stocks, the long-term up-trend is still intact, sustained by an expected improvement in the US earnings outlook, and global interest rate cuts. But in the short-term, a pullback in global-benchmark indices seems still underway. While in fixed-income and currencies, markets continue to shuffle languidly on speculation of which central bank will win the global race-to-the-bottom to cut rates.