U.S. equities are likely to open the week aiming higher ahead of a crucial Federal Reserve meeting, although weak technicals persist and investor exuberance, which is leading many traders to focus on positive news and disregard negative news, may be a sign of a market top.
Equities hit fresh all-time highs on Friday, with Alphabet (NASDAQ:GOOGL) leading the charge on strong earnings and U.S. GDP numbers providing a solid backdrop. The GDP report and its signs of solid growth gave investors cheer, but that optimism is also being fueled by expectations of a Fed rate cut on Wednesday, a reduction that is in part a response to slowing global growth.
U.S. growth eased in the second quarter as trade and business investment weighed on growth, but it was still enough to beat expectations. Despite a soft patch in manufacturing, the service sector of the economy is holding steady, which, in combination with healthy consumer conditions, supports the view that the economic expansion will continue. That positive data was not enough to force investors to start back peddling over their expectations for a rate cut. Investors seem to be building their bullish case on a dichotomy: positive economic data and rate cuts to promote slowing growth.
The S&P 500 Index advanced 0.74% with all sectors except Energy (-0.51%) and Industrial Industrials (-0.22%) in the green. Communication Services (+2.86%) surged with Alphabet the outperformer. For the week, the SPX advanced 1.65%, with all sectors but Utilities (-0.65%) and Energy (-0.49%) in positive territory. Communication Services (4.3%) was again the clear leader on Alphabet’s and Facebook’s superior earnings, overshadowing Amazon (NASDAQ:AMZN)’s stock plunge after an end to its record earnings.
From a technical perspective, while the index closed above an evening star reversal two weeks ago, it closed below a broadening pattern since January 2018. Both the MACD and the RSI provide negative divergences, with the momentum-indicator set for a H&S top.
U.S. yields resumed a consolidation with the dollar advancing for the sixth straight day to within the highest since May 2017. The euro dropped to the lowest in the same period. It is taken for granted by many traders that the ECB, along with Germany, will restart stimulus measures due to the worst industrial slump in years.
The pound slumped as a Boris Johnson win is tantamount to a no deal Brexit. Also, uncertainty increases as chances for a new general election rise. The Conservative majority is slim and likely to be whittled down to just one on August 1 when the byelection takes place.
Gold softened for the week on a strengthening dollar, but it had already completed the massive bottom going back more than 5-years. The bottom pattern’s dramatic implied coming rally fits the scenario of a weakening dollar whose legs are about to be cut out from under it by the Fed. On the other hand, both the dollar and gold rallied in the aftermath of Trump’s 2016 U.S. election victory.
Week Ahead
All times listed are EDT
Monday
Tentative: Japan – BoJ Monetary Policy Statement, Outlook Report.
Tuesday
Tentative: Japan – BoJ Press Conference
10:00: U.S. – CB Consumer Confidence expected to jump to 125.0 from 121.5
10:00: U.S. – Pending U.S. Home Sales seen to plunge to 0.5% from 1.1%
21:00: China – China Manufacturing PMI likely to edge up to 49.6 from 49.4, still in contracting territory.
21:30: Australia – CPI probably surged to 0.5% from 0.0%
Wednesday
3:55: Germany – Unemployment Change seen to have jumped in July to 3K from -1K
5:00: Eurozone – CPI expected to have lowered to 1.1% in July from 1.3% in the previous July.
8:15: U.S. – ADP Nonfarm Employment Change expected to jump for the second month to 150K from 102K
8:30: CAD – GDP forecast to drop to 0.1% in May from 0.3% monthly.
10:30: U.S. – Crude Oil Inventories seen to surge to -4.01M from -10.835M
14:00: U.S. – FOMC Statement, Interest Rate Decision expected to be cut to 2.25% from 2.50%.
14:30: U.S. – FOMC Press Conference
21:45: China – Caixin Manufacturing PMI seen to edge up to 49.6 from 49.4 MoM, still within contraction territory
Thursday
4:30: U.K. – Manufacturing PMI probably edged down to 47.7 from 48.0 MoM
7:00: U.K. – BoE Interest Rate Decision expected to remain at 0.75%
7:30: U.K. – BoE Gov Carney Speaks
10:00: U.S. – ISM Manufacturing PMI probably advanced to 52.0 from 5.17 from a month earlier.
21:30: Australia – Retail Sales seen to have climbed to 0.3% from 0.1% MoM
Friday
4:30: U.K. – Construction PMI seen to rise to 46.0 from 43.1 MoM
8:30: U.S. – Private Nonfarm Payrolls expected to fall to 160K from 191K – It is noteworthy that expectations are downward while that of the ADP Nonfarm Employment Change are upward, as the market attempts to rebalance after investors overshot expectations. Will they get it right this time?
8:30: U.S. – Unemployment Rate expected to remain steady at 3.7 %, slightly up from the earlier 3.6%, the lowest since 1969.