Investors are still bullish stocks, but very little positioning will take place ahead of tomorrow's key inflation data and the start to US earnings season. With many countries still struggling in the fight against COVID-19, US stocks edged higher into record territory as investors continue to like the US growth story best.
Wall Street is bracing for a volatile week as market participants are divided on a bevy of issues that include whether to bet on growth or cyclicals and if inflation acceleration intensifies. One thing that everyone agrees upon is that second quarter earnings will be stellar. Everyone keeps on bumping up their forecasts as record profits are a given, with the street expecting anywhere from 60% to 75% earnings growth.
The big bank’s will kick off earnings season and they will still see strong results as the need for reserves to cover bad loans fades away, future profits likely to take a hit from a lower for longer belief with yields and as trading revenues normalize.
The big banks will still primarily take a cue from the path of rates and economic growth expectations. If the banks remain under pressure, investors might not hesitate too much to buy the dip. The banks will likely end this week with an overall upbeat assessment of the US consumer.
After a successful Virgin Galactic winged plane trip to outer space, shares plunged after the company filed to sell up to $500 million in common stock. Virgin Galactic is striking while the iron is hot and securing much needed capital to ramp up passenger flights.
Disney shares are rallying after a dazzling performance by “Black Widow”, which saw $80 million made in theaters and $60 million with Disney Plus. Disney just shook up the script in the streaming wars battle. Disney delivered the biggest blockbuster results since the pandemic, and it is largely due to their strategy for content. Disney’s superhero content is an easy strategy, and it is working. They are moving most of the Marvel content to Disney + and that franchise appears poised to dominate indefinitely.
J&J shares were under pressure after the Washington Post reported that the FDA is preparing to announce a new warning for the J&J COVID-19 vaccine. A CDC statement noted that about 100 preliminary reports of Guillain-Barré have been detected after 12.8 million doses of Johnson & Johnson vaccine were administered. This is another blow for the J&J vaccine that is clearly behind the mRNA COVID-19 vaccines.
NY Fed Inflation Expectations
The NY Fed showed the highest one month increase in the inflation expectations survey. The median one-year-ahead inflation expectations jumped almost a full percentage point in June to 4.8%. Long-term expectations remained unchanged. The 3-year inflation expectation remained steady at 3.6%. It was another upbeat survey as expectations for the labor market, household income, and spending growth continue to trend in the right direction. The NY Fed survey along expectations for tomorrow to deliver slightly benign data could support the inflation is transitory argument.
The currency market will continue to react with whatever happens in the bond market and right now many traders continue to believe in the reflation trade. JPMorgan’s Asset Management team believes the rally in the bond market has gone too far, growth could be stronger, and that the market has not priced in enough rate hikes.
The dollar is slightly firmer as global growth concerns continue to trigger some safe-haven flows into the dollar. The US is seeing cases rise as delta variant spreads across many states with low vaccination rates. The 47% surge in the week ended Sunday was the largest increase since April 2020 and it served as a reminder to the rest of the world on how hard it is to defeat this virus.
COVID-19 variant concerns are dragging down crude prices. The robust crude demand outlook is starting to take a hit as many countries continue to struggle with the more infectious Delta variant. Even the US is seeing a surge as low vaccinated states are behind the 47% increase in cases over the previous week. England will end lockdown rules on July19th even though they might see a surge in infections leading to 1,000 to 2,000 people being admitted to the hospital daily till the peak in August. This pandemic once again feels far from over and that is dragging down optimism for a robust crude demand story going forward.
Energy markets are also expecting several days of posturing amongst OPEC+ members. Saudi Arabia and the UAE will eventually be forced to reach an agreement on boosting production otherwise, they risk ending stable prices going forward.
WTI crude seems vulnerable for further weakness given how much prices rallied over the past few months.
Gold prices softened on low trading volumes as the dollar firmed up on safe-haven flows. Bullion traders are waiting to see if inflationary pressures continue to simmer across the economy. Right now the gold market is all about the upcoming US CPI data and not so much safe-haven flows from the spread of the Delta variant.
Gold should remain stuck around the $1800 level until investors decide whether or not Treasury yields will remain flattish. Gold prices could eventually strongly rally if Wall Street begins to believe once again that longer-term structural drivers will make it difficult for rates to go up. Gold has massive resistance around the $1,835 level, which on a break could pave the way for a run towards the $1,870 level.
A strong dollar and some freeing up of cash ahead of a busy week saw cryptocurrencies weaken across the board. News of Plan B passports and concerns of El Salvador's Bitcoin adoption didn't provide much of a catalyst to start the trading week. Bitcoin remains confined to its $30,000 to $40,000 trading range.