Global Equity Markets Post Positive Action

EQUITY INDICIES:

As indicated already, global equity markets posted positive action overnight despite a measure of lingering skepticism toward the tech sector and larger NASDAQ companies. While we suspect investors will remain buyers of NASDAQ/tech sector on dips, US/Chinese chip sector tensions and EU antitrust efforts against Google and Samsung yesterday is spooking some investors. However, the bull camp should retain a general underpin from an expanding dovish US Fed posture and from modestly dovish ECB signals. In fact, with US claims expected to increase, Domino pizza sales disappointing and poor United airlines earnings, the rate cut theme should help make yesterday’s lows credible support! While it appears as if an investment rotation is underway with small-cap companies coming into vogue among Wall Street analysts, a small-cap rally will not carry prices higher without some big tech gains. On the other hand, overnight Taiwan Semiconductor Manufacturing Co. posted strong results and offered a positive forward view and that is likely to control the headlines over chip trade tensions. In the end, interest in tech/AI issues should prompt buying on dips especially after this week’s aggressive washout.

INTEREST RATES:

Treasury bulls should remain in control of the “trend” despite this morning’s weaker track, as the Fed’s Beige Book release yesterday afternoon showed nearly half of US Federal Reserve districts reporting flat or softening activity and several Fed members this week suggesting proof of softer inflation is beginning to stack up. Therefore, a slight uptick in US initial or ongoing claims this morning should see September bonds solidify support at 119-26 and at 111-03 in September treasury notes. Adding into the bullish vibe emanating from the impressive July recovery in Treasuries is evidence of strong demand for this week’s wave of US auction supply. However, today’s 10 year TIPS auction could prompt a modest selling wave as the allure of inflation adjusted instruments is declining along with inflation fears. It is also possible that the Treasury International Capital flows report release late this afternoon could facilitate modest pressure on Friday if the markets embrace the ongoing rotation of China away from US debt. The outflow of Chinese money from US debt has become a trend since the peak holdings in 2014 around $1.3 Trillion. The most recent Chinese US debt holding was $770 billion which is nearing a 50% reduction over the last decade.  In the short term, analysts expect initial claims to post 230,000 today and that highlights a slow uneven drift higher from the 2024 low in claims of 198,000.

CURRENCIES:

While the dollar is short-term and intermediate oversold, both fundamental and technical signals favor further erosion in the index. Surprisingly, the ECB and the US Fed are both expected to cut rates in September, but the trade currently thinks the ECB is not as committed. This morning the CME Fed watch tool pegs the probability of a September US rate cut at 91% and that leaves the fundamental trend down in the Dollar. In fact, an uptick in US initial claims should add to dollar selling pressure which should combine with residual selling from the assassination attempt. Like the yen, the euro is also short-term overbought from very aggressive recovery action from the Monday low especially with the ECB leaning slightly toward easing in September. However, the ECB held rates steady overnight and indicated service inflation remains troublesome.

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