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Employment Data, Earnings Season, and Interest Rate Hikes

Market Update - Daniel Ang The Accidental Trader Traders Academy International 12

As we enter the month of July, investors are bracing themselves for a precarious period in the market. After a strong closing in June, the focus now turns to employment data and an earnings season that could significantly impact market dynamics. All eyes are on the Federal Reserve, which remains determined to raise U.S. interest rates. In this market update, we’ll explore the recent trends and indicators, potential market-moving events, corporate results, inflation concerns, currency dynamics, and the performance of gold, oil, and Bitcoin.

Positive First-Half Performance
Despite recession fears and a banking crisis, the S&P 500 demonstrated resilience, delivering a notable gain of 15.9% in the first half of the year. The Nasdaq Composite outperformed with a remarkable 31.7% increase, marking its most substantial first-half gain in four decades. Drawing from historical patterns, market participants who anticipate the upward trend to continue over the coming weeks have reason to be optimistic. The S&P 500 has consistently posted positive returns in eight consecutive Julys, while the tech-heavy Nasdaq 100 index has experienced 15 years of July growth.

Growing Optimism and Favorable Indicators
Several indicators reveal a growing sense of optimism among investors regarding equities. The American Association of Individual Investors survey has consistently shown positive sentiment above its historical average for four consecutive weeks. Additionally, positioning measures tracked by banks indicate that investors have been increasing their exposure to stocks. A notable sign of confidence is the Cboe Volatility Index, which measures investor demand for protection against stock market volatility and recently hit its lowest level since early 2020.

Key Market-Moving Events in July
July brings a series of events that could significantly impact the market. The U.S. employment report, scheduled for release next Friday, will provide investors with insights into the state of the economy after significant rate hikes from the Federal Reserve over the past year. Signs of continued solid job growth will reinforce the belief that the U.S. economy can weather the storm of tightening monetary policy. Additionally, Q2 corporate results will kick off this week, with S&P 500 companies expected to show an overall drop in earnings of 5.7% compared to the previous year. Investors will pay close attention to results from major tech companies such as Apple, Microsoft, and Nvidia, which have been instrumental in driving the S&P 500’s performance this year. The release of the consumer price index report on July 12 will also be crucial in assessing inflation before the Federal Reserve’s policy decision on July 26.

Interest Rate Hikes and Bond Yields
While stocks have remained resilient to projections of higher interest rates, rising bond yields could potentially alter the market landscape. Benchmark yields have recently reached three-month highs, with the 10-year U.S. Treasury yield currently standing at around 3.8%. This significant increase, more than double the year-end figure in 2021, could diminish the appeal of stocks in comparison to bonds. However, despite rising yields, equity valuations have continued to climb in recent months.

Doubts and Economic Fallout Concerns
Despite the market’s positive performance, some investors doubt the staying power of the rally. A Deutsche Bank survey revealed that more than three-quarters of investors believe the next 10% move in the S&P 500 will be downward. These doubts may stem from concerns about potential economic fallout resulting from the Fed’s rate hikes.

Currency Dynamics: Dollar and Yen
Last Friday, the Dollar index experienced a slight decline after two consecutive days of gains. The drop was attributed to economic data indicating a cooling in consumer spending, raising doubts about the Federal Reserve’s aggressive stance against inflation. Nevertheless, the Dollar Index remains relatively stable. On the other hand, the Japanese Yen strengthened against the Dollar, signaling a potential end to its weakening trend. The Bank of Japan’s intervention in the currency is being closely watched, as U.S. and Japanese central bank policies are expected to remain at odds.

European Inflation and UK Economic Growth
Eurozone inflation data has fallen for the third consecutive month, albeit with a small drop in underlying inflation. This decline is unlikely to dissuade the European Central Bank from proceeding with a rate hike at its July meeting. In contrast, the UK’s economy experienced minimal growth of just 0.1% in Q1, largely due to inflation eroding household disposable income.

Gold and Oil Performance
Gold rebounded last Friday after three consecutive losing sessions, primarily due to the weakening Dollar. The Personal Consumption Expenditure (PCE) index rose less than expected, providing some relief to gold prices. Despite the recent volatility, COMEX gold for August delivery closed higher, reaching $1,929.40/oz. Oil prices also experienced a rise last Friday after the International Energy Agency (IEA) noted tight markets. However, concerns over inflation and the potential impact of U.S.-Iran tensions may result in weekly losses.

Bitcoin’s Price and Recent Developments
Bitcoin’s price currently stands at $30,558, experiencing a slight drop of nearly 0.50% on Sunday. Bullish investors hoping to maintain BTC’s price above $31,000 were surprised by the rejection of BTC spot-price ETF applications by the U.S. SEC. However, there have been positive developments as CBoE has resubmitted Spot BTC ETFs in partnership with Coinbase, although the SEC remains cautious. FTX’s successful recovery of billions in assets has also had a positive impact on Bitcoin prices.

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