Stock and bond markets tell very different stories about what’s next
Euro/dollar continues to chop sideways, gold claws its way higher
Oil in focus as Iran talks reach ‘final text’, deal awaits approval
Equity and bond markets have been at odds with each other lately, painting conflicting pictures of what lies ahead. The price action in stocks has been consistent with a soft economic landing, with Apple shares down less than 10% from record highs and the meme stocks making a comeback lately, whereas a deepening yield curve inversion in the bond complex points to a painful recession.
One of these asset classes has it wrong. Funnily enough, the prime reason Wall Street has recovered so much over the past few weeks has been precisely because of intensifying recession risks, which have dragged bond yields down and eased the pressure on valuations. And despite all the talk about a decent earnings season, real earnings growth for the S&P 500 has been negative by almost 2.5% year-over-year once inflation is accounted for.
Therefore, real earnings are in contraction, most shares have rallied because the bond market is scared of recession, and the resulting loosening in financial conditions is counterproductive for a Fed trying to cool inflation, pressing the officials to roll out another triple rate hike in September. Pair this with the S&P 500 encountering resistance around 4,180 - a crucial Fibonacci retracement region - and it seems like the seven-week relief rally might be running on fumes.
Of course, the deciding factor will be the latest CPI inflation report tomorrow.
Euro/dollar chops, gold inches up
Crossing into the forex arena, it was a quiet session. Most major pairs traded in narrow ranges and closed near their opening levels, with the prevalent theme being a slight retracement in the US dollar. Some notable exceptions were the Australian and Canadian dollars, which staged a decent rally, finding some solace in recovering commodity prices. Meanwhile, euro/dollar continued to chop sideways around the $1.02 zone.
Gold prices capitalized on the minor retracement in the US dollar and real yields, clawing their way higher for another battle with the 50-day moving average. The latest positioning data from the CFTC suggests funds and money managers briefly turned net-short on the yellow metal last month - a very rare phenomenon.
It is difficult to like gold at this stage of the cycle. It seems like all news is somehow bad news for bullion as market participants keep shifting back and forth between inflation or growth concerns. Either inflation pushes yields higher or recession worries feed the US dollar, which in turn cap advances in gold. Any trend reversal remains unlikely until the Fed backs off.
Oil in the limelight
Following months of inconclusive talks, a nuclear deal between Iran and Western nations that revives some lost oil production seems to be imminent. The ‘final text’ of the agreement is reportedly ready and will need to be approved by Washington and Tehran before it goes into force.
There are several question marks about whether this deal will be accepted, and if so, by how much Iran can ramp up production. Nonetheless, any deal would be important at least for psychological purposes, helping to flush speculators out of their long oil positions.
Oil prices are standing on quicksand as traders evaluate whether this deal will be ratified, and the outcome could have repercussions for every asset class considering that soaring energy prices have been behind much of the inflationary storm. The euro and yen stand to gain the most, as lower oil prices could help restore their terms of trade and improve their growth trajectory.