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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

US equities slipped yesterday to a close of 4,120 in the S&P 500 futures and the index futures have pushed lower again this morning trading below the 100-day moving average. Key single stock event that could impact US equities today is earnings from Caterpillar with its weight in the global mining and construction industry. The tensions over Taiwan could also add negative short-term impact on US equities.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)

Equities fell with Hang Seng Index nearly 3% lower and CSI300 down 2% as Nancy Pelosi, speaker of the U.S. House of Representatives, is scheduled to arrive in Taiwan on Tuesday evening and meet with Taiwan’s president, Tsai Ing-wen on Wednesday (more below). Hang Seng TECH Index (HSTECH.I) dropped 3.6% with mega-cap tech names 2% to 8% lower.

AUDUSD and AUD crosses

The RBA surprised overnight by loosening up its forward guidance in a way that the market interpreted as dovish and certainly was not explicitly hawkish, a surprising development relative to expectations and one that saw the AUD selling off sharply and broadly just after the key AUDUSD pair was challenging the key 0.7000 chart area this week after a rally off lows just below 0.6700. The next tactical area of note lies just above 0.6900 followed by 0.6820.

JPY as global yields drop

US treasury yields fell again yesterday, with the US 10-year benchmark treasury yield reaching the lowest level since early April at nearly 2.50%. The RBA overnight seemed to represent a dovish downshift similar to last week’s Fed meeting and oil prices fell several dollars a barrel, all factors supportive of the recent JPY strength, as USDJPY took out the major 131.50 chart point and traded as low as 130.41 as of this writing. JPY crosses broadly were very heavy: EURJPY plummeting close to its 200-day moving average, which comes in just below 134.00. US data releases and the reaction in US yields through the end of this week will be critical as JPY momentum has built a considerable head of steam here.

Crude oil prices gain on risk-on and supply concerns. (OILUKOCT22 & OILUSSEP22)

Oil prices tumbled on Monday and extended their decline overnight in Asia as demand concerns were aggravated by a slide in China and European PMIs while the US ISM manufacturing PMI also weakened. Meanwhile, improved supply from Libya weighed, as the country is seen rebounding to producing 1.2mb/d after a series of disruptions that halved supply. WTI futures slid below $94/barrel and Brent was also seen below the $100 mark.

Gold challenges key resistance

Gold prices yesterday touched the key chart resistance at 1,780 – a key support on the way down to the lows below 1,700 recently as US yields have now dropped nearly 100 basis points from the highs in mid-June. The 1,780-1,800 is a critical zone for whether gold can achieve relevance again after easing yields have taken real interest rates sharply lower since the June peak.

US Treasuries (IEF, TLT)

US yields dropped further yesterday, in part on the Prices Paid component of the ISM Manufacturing survey dropping sharply to the lowest since 2020. The US 10-year yield benchmark has reached the psychologically important 2.50% yield area, though there was only a minor pause near this area as yields surged earlier this year, with the 2.00-2.25% area a more robust area of resistance for treasuries. The 2-10 year yield curve inversion is near the extreme for the cycle at –30 basis points.

What is going on?

Australia’s RBA hikes 50 basis points, weakens forward guidance on next steps

The RBA surprised overnight with guidance that was interpreted as dovish after hiking rates by 50 basis points as most observers expected. The new statement removed wording from the prior statement that the rate hike represented a “further step in the withdrawal of the extraordinary monetary support”, replacing it with the increase representing simply a “further step in the normalisation of monetary conditions”. Guidance near the end of the statement that the RBA “is no on a pre-set path” and said that the size and timing of interest rate increases will be data dependent, suggesting the RBA is taking a leaf from the most recent FOMC meeting, in which the Powell Fed generally avoided guiding for future moves outside of pointing to data dependence. The RBA did raise its inflation forecast to 7.75% this year. However, surprisingly the RBA thinks inflation will fall to 4% in 2023 (then 3% across 2024). More broadly, the RBA dropped its growth and employment outlook, which proves we could see a stagflation environment. It expects GDP to slow to 3.25% in 2022, then 1.75% next and the following year. It sees unemployment creeping up from 3.5% (50-year lows) to 4% later this year; probably as businesses need to trim their balance sheets to account for wage growth and interest rate hikes. Australian rates at the front end of the curve dropped sharply and the Australian dollar was sharply weaker.

Earnings season proves energy companies have the strongest momentum

With much of US earnings season behind us for Q2, with almost 300 of the S&P 500 companies reporting results, we have again continued to see the most earnings growth come from energy companies. For the second straight quarter energy companies have beat the most as gas, coal and oil prices continued to move higher. Average energy company earnings growth of 288% was reported by 13 energy companies in Q2. Stand out companies include Valero Energy, Hess Corp, Devon Energy, Diamondback, and Chevron, all reporting earnings growth of over 200% each.

Wheat and corn futures slide as Ukraine shipments begin

Wheat and corn futures fell after the first grain shipment since Russia’s invasion left for Lebanon from Ukraine. While some of the good news from the shipments out of Ukraine may have been priced into the market’s sentiment, as is evident from the drop in grain prices from the peak in May, there is still potential for a further slide if shipments pick up considerably.

US ISM manufacturing shows price pressures easing

The US ISM Manufacturing survey was nearly unchanged in July, at 52.8 versus 53.0 in June, slightly better than expected. The New Orders component, however, dropped deeper into contraction territory with a reading of 48.0 vs. 49.2 in June. The Prices Paid component raised eyebrows with a steep drop to 60.0 vs. 74.3 expected and 78.5 in June. This was the lowest reading since August of 2020.

Pinterest shares jump 21% on Q2 earnings

The company has suffered with the rest of the social media industry and investors were worried about user figures in Q2 as Pinterest has struggled with user engagement. However, the Q2 results show monthly active users of 433mn vs est. 429mn with revenue in line with estimates at $666mn and revenue growth outlook in Q3 was 15% compared to estimates of 10%. On the negative side EBITDA disappointed. Finally, the activist investor Elliott announced that it is now Pinterest’s largest shareholder.

What are we watching next?

US Speaker of the House Nancy Pelosi set to visit Taiwan Wednesday

The visit was not in Pelosi’s official itinerary but has been anticipated and has created much tension between China and the U.S. in recent days.  There is speculation that China might take drastic measures to prevent Pelosi from landing in Taiwan.  China announced holding a military exercise in Bohai. The House Speaker is well-known for being critical about China and in support of closer ties between Washington and Taipei.  The visit will at its minimum set the stage of further escalation of tension in the Sino-American relationship for months to come.

Fed speakers on tap today

While the PCE or ISM data remains back-dated, the Fed speakers can provide us some insights into what the central bank is thinking in terms of policy options going forward and whether there is any pushback against the market’s interpretation of the FOMC meeting last week. Having kept the forward guidance vague at the FOMC last week, Powell has increased the volatility around data and Fed speakers in the weeks ahead. Chicago Fed president Charles Evans (non-voter this year), Cleveland Fed president Loretta Mester (voter) St. Louis Fed president James Bullard (voter) are scheduled to speak later today. Investors are likely to pay close attention to their remarks for insights into the Fed’s thinking, and to build further views on the inflation vs. recession argument.