U.S. Opening Bell: Dollar Climbs; Oil Slides; Powell Testimony Boosts Stocks

Key Events

European stocks as well as the US dollar extended their rallies this morning. The former benefited from a two-day slide in the euro while the latter won favor with FX traders even before Fed Chair Jerome Powell testified before the US Senate yesterday. His outlook for US economic expansion was broadly seen as bullish.

The FTSE recovered losses from Monday and Tuesday on Wednesday thanks largely to a struggling pound, boosted commodity stocks and earnings. The London exchange was up 0.6 percent mid-session.

Powell's portrait of a Goldilocks economy, where unemployment is near an 18-year low and inflation is hovering around the Fed's 2-percent target, would support the Fed's current trajectory for tightening. It also sent the NASDAQ Composite and the NASDAQ 100 to new record highs.

Currently, however, futures on the S&P 500, Dow and NASDAQ 100 are mixed. Which suggests that this morning traders may still be weighing a broader variety of triggers.

Conversely, it seems that there were only buyers trading the STOXX Europe 600, setting it up for a strong opening. They bid prices up 0.3 percent from yesterday’s close in order to find willing sellers, thereby creating a rising price gap. The rally then extended to 0.55 percent, registering higher prices than the preceding June 11, 386.87 high. The higher peak extended the uptrend within the rising channel since late June.

The concurrent euro selloff made the region’s exports more competitive, contributing to the strong stock performance. This followed a volatile, mixed session in Asia. Here, traders initially channelled the upbeat outlook posted by the previous US session, sending local shares vigorously higher. However, profit-taking and ongoing trade worries impacted the overall performance, which ended mixed.

Japan’s TOPIX climbed 0.35 percent for a four-day 2.55 percent gain, though trimming a 0.88 percent intraday high. Technically, it retreated from a downtrend line since May 21.

China mainland Shanghai Composite slipped a further 0.39 percent, giving up an earlier 0.75 percent rally and bringing its aggregate four-day slide to 1.75 percent. Technically, it remained above yesterday’s hammer, but below the uptrend line since the July 6 bottom.

Hong Kong’s Hang Seng closed 0.23 percent in the red, at the lowest level since September 29. It lost 1.51 percent over two days.

South Korea’s KOSPI edged 0.34 percent lower after the country's government dramatically cut its outlook for the job market, as well as revising its GDP growth forecast lower. The index still managed to post a positive 0.93 percent intraday high. Technically, its higher open, 0.7 percent above yesterday's close and higher than the two preceding sessions, formed a dominant bearish engulfing pattern. However, upon dipping onto the uptrend line since the July 5 low, the price rebounded slightly, demonstrating some demand.

Australia’s S&P/ASX 200 once again fared as the regional winner, posting a 0.68 percent rally. Technically, it bounced off a bullish flag, for the second time since Friday.

Global Financial Affairs

Yesterday's US session saw Netflix (NASDAQ:NFLX) recover dramatically from its 14 percent plunge in after-hours trading—having provided traders with a dip buying opportunity.

Both the NASDAQ Composite and the NASDAQ 100 moved 0.63 percent higher, hitting double records: on an intraday high and one on a closing basis. The ideal market environment painted by the Fed chair, coupled with positive earnings reports, helped traders forget about the worsening trade relations between the US and China.

The S&P 500 climbed 0.4 percent, with gains in Materials (+1.31 percent) providing strong evidence that investors overcame their concerns around trade uncertainty. Meanwhile, the Dow Jones Industrial Average and the Russell 2000 gained 0.23 percent and 0.51 percent respectively.

The greenback is trading at the top of the session and is only 0.12 percent from its June 28 close, its highest in over a year. Technically, it found a resistance by the top of a shooting star registered on July 13. While media indicated the greenback was boosted by Powell's upbeat outlook on the US expansion, the truth is that traders didn't know how to convert the chairman's words into a coherent dollar strategy; he also provided some dovish signals, emphasizing that interest rate hikes will be gradual and are not on autopilot.

Powell’s signal that accommodation will continue a bit longer may be positive for equities—after all, looser monetary policy was responsible for the record-breaking string of stock rallies last year—but not for the greenback, whose intrinsic value is determined by its yield.

In fact, the dollar started climbing higher well before Powell's 10:00am EDT testimony. When it began the reserve currency was already rallying for five hours. Moreover, after it fluctuated throughout his address, it ticked higher for three hours only, followed by a consolidation that lasted for 11 hours, till 12:00am EDT today.

Perhaps there are other drivers that have not yet come to light, or, maybe, it was simply random trading. The stronger USD sweighed on commodity prices and emerging market currencies.

WTI crude is falling for a third day, heading below $67, on reports that US President Donald Trump may look to tap into emergency oil supplies to offset higher prices, ahead of key midterm elections.

In other news, the pound hit a ten month low on Wednesday morning following the release of weaker than forecast inflation data. The pound fell as low as 1.3011 after the Office for National Statistics released data showing inflation grew 2.4 percent in June (YoY), in keeping with the growth rate from May, the lowest rate of inflation for one year and off the forecast 2.6 percent. The stagnant inflation for June may hinder the Bank of England at its August MPC rate setting meeting.

Up Ahead

• Earnings season continues with reports due from:

• Morgan Stanley (NYSE:MS), reporting today before market open, with $1.08 EPS forecast vs $0.87 for same quarter last year

• American Express (NYSE:AXP), reporting today after market close, with $1.83 EPS forecast vs $1.47 for same quarter last year.

• IBM (NYSE:IBM) publishing results today after market close, with $3.03 EPS forecast vs $2.97 for the same quarter last year

• Microsoft (NASDAQ:MSFT), reporting tomorrow, after market close, with $.07 EPS forecast vs $0.98 for same quarter last year

• Euro-zone inflation data for June is expected on Wednesday to show the annual rate inched higher to 2 percent.

• UK retail sales for June will be released on Thursday.

Market Moves

Stocks

• The FTSE climbed 0.6 percent, recovering losses from earlier in the week.

• The STOXX 600 gained 0.5 percent, the highest level in a month.

• Futures on the S&P 500 climbed 0.1 percent to the highest level in more than five months.

• The MSCI All-Country World Index slid less than 0.05 percent.

• The MSCI Emerging Market Index lost 0.2 percent to the lowest level in a week.

Currencies

• The British pound dropped 0.6 percent to $1.3030, the weakest level in ten months.

• The Dollar Index gained 0.3 percent to the highest level in more than two weeks.

• The euro edged 0.2 percent lower to $1.1636, the weakest level in almost three weeks.

• The Japanese yen fell 0.2 percent to 113.06 per dollar, the weakest level in more than six months.

Bonds

• Britain’s 10-year yield climbed less than one basis point to 1.258 percent.

• The yield on 10-year Treasuries climbed one basis point to 2.87 percent, the highest level in more than two weeks.

• Germany’s 10-year yield gained less than one basis point to 0.35 percent.

Commodities

• The Bloomberg Commodity Index slipped 0.1 percent to the lowest level in 11 months.

• West Texas Intermediate crude lost 0.7 percent to $67.57 a barrel, the lowest level in almost four weeks.

• LME copper dropped 0.7 percent to $6,110.00 per metric ton, the lowest level in about a year.

• Gold fell 0.2 percent to $1,224.61 an ounce, the weakest level in about a year.