Treasuries Show Strength Overnight

INTEREST RATES

While treasuries showed some strength overnight with a test of 48-hour highs, the prospect of a rate hike from the European Central Bank should leave pressure on prices. However, the primary focus of the trade this morning will be on US initial claims with the initial claims reading last week falling to the lowest level since the week of May 12th. On the other hand, the trade is expecting an uptick in the readings which might set the markets up for a bearish surprise. With the markets also facing core personal consumption expenditures, GDP, durable goods, pending home sales and a Kansas City Fed Manufacturing activity report for July there is a chance for a clear signal on the direction of the US economy. Unfortunately, the pattern of US scheduled data has usually presented mixed results which could ultimately help September bonds firm up support between 125-16 and 125-10.

However, with the US Fed action yesterday combined with today’s ECB rate decision, the treasury markets will likely remain in a hyper focused mood resulting in any deviation in today’s data producing a mini volatility event. In the end, we see the path of least resistance pointing down but see prices this morning near the bottom of the upcoming trading range than near the middle of the range! Downtrend channel selling resistance in bonds is 127-03 today and at 126-31 on Friday. The North American session will start out with a preliminary reading on second quarter US gross domestic product which is forecast to have a minimal downtick from the first quarter’s 2.0% annualized rate. A weekly reading on initial jobless claims is expected to have a modest uptick from the previous 228,000 reading while ongoing jobless claims are forecast to have a minimal weekly decline from the previous 1.754 million reading. June durable goods are expected to have a moderate downtick from May’s 1.7% reading. The June goods trade balance is forecast to have a modest uptick from May’s $91.3 billion monthly deficit. June wholesale inventories are expected to have a minimal uptick from May’s unchanged reading. June pending home sales are forecast to have a moderate uptick from May’s -2.7% reading. The Kansas City Fed’s July manufacturing index is expected to have a moderate uptick from June’s -12 reading.

STOCK INDEX FUTURES

Global equity markets overnight were mostly higher except for the markets in Shanghai which traded fractionally lower. However, the NASDAQ is showing very significant gains early today from improvement in Facebook advertising revenues as that helps the recent weakest sector of the market (big tech). However, if data is better than simply offsetting, fear of a September rate hike could jump to center stage again. Earnings announcements will include Mastercard, AbbVie, McDonalds, Comcast, Honeywell, and Bristol-Myers Squibb before the Wall Street opening while Intel and Mondelez report after the close.

With a significant upside extension early, the bull camp has seized control again and follow through buying action is likely. In fact, favorable earnings for meta-platforms from rising Facebook ad revenues and relief from the passing of the latest Fed event, should leave investors with confidence not seen recently. While Dow futures have not forged a higher high yet today, the index is tracking higher and is showing signs of tracking upward in the wake of strong upside action in the NASDAQ.

CURRENCY FUTURES

DOLLAR: Apparently, the dollar trade is experiencing a “sell the fact” reaction to yesterday’s US Federal Reserve rate hike and initial declines today could be accentuated by the widely anticipated ECB rate hike later this morning. However, the trade will be presented with an avalanche of US scheduled data, but expectations mostly see offsetting results, which should leave the dollar in a downward tilt today. In other words, the central bank with the last rate hike has the edge. In fact, for the US dollar to regain its footing and throw off this week’s downside track probably requires a downside breakout in US claims to the lowest levels since April.

EURO: In our opinion the rally in the euro today is a fundamental knee-jerk reaction resulting in a final “buy the rumor” trade ahead of the ECB rate decision. Certainly, ECB officials could put up a very hawkish front to the markets, but we see recent European data as lacking and suggest that traders with long positions implement trailing profit stops on today’s rally. Initial resistance today is 1.1178 and then at 1.1208.

YEN: Like the ECB suggestions from the bank of Japan of the potential for policy tweaks is taken with a grain of salt. Therefore, we suggest traders prepare to get short the Yen with post US scheduled data action capable of becoming the near-term trend. Optimal short entry pricing in the September Yen is 72.53 but the currency may not reach that level before reversing.

SWISS: With the aggressive range up breakout extension in the Swiss overnight accentuated by weakness in the dollar, momentum not fundamentals look to provide more gains. However, traders should expect a measure of temporary volatility following US data, with a setback in the Swiss to 1.1719 a buying opportunity.

POUND: Unlike other nondollar currencies we see the Pound capable of extending current gains off internal instead of external forces. In other words, even though the UK economy is struggling to maintain positive traction, we see the UK economy on a par with the US economy especially with respect to standing up against additional rate hikes. Buying support in the Pound today is 1.2927.

CANADIAN DOLLAR: The best projection for the Canadian is for further chop/range trading with a very minor tilt in favor of the bull camp. However, recent chatter that the Bank of Canada might delay the next rate hike extracts a layer of buying interest, thereby leaving the Canadian dollar in a reactionary position relative to the dollar.

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