U.S. Opening Bell: USD Rebounds; Earnings Outlook Fuels Global Stock Rally

Key Events

Equities in Europe and Asia and US futures on the S&P 500, Dow and NASDAQ 100 all traded higher on Tuesday, pressing forward with a rally that was triggered by last week's favorable US employment report and further boosted by a bullish outlook for the upcoming earnings season. The upbeat momentum allowed investors to place trade war fears on the back burner.

Energy and resource companies helped the pan-European STOXX 600 seal a sixth straight advance, though profit-taking by traders is paring much of those early gains. In currency markets, sterling found its footing after the latest high-ranking resignation over PM Theresa May's "soft" Brexit plan–with Boris Johnson and David Davis stepping down from their roles as foreign secretary and Brexit secretary on Monday and Sunday respectively (see below for more analysis on the pound).

The FTSE edged 0.1 percent higher on Monday as oil majors BP (LON:BP) and Shell (LON:RDSa) were up 0.8 percent and 1.2 percent respectively. Some mid-cap stocks also held the London index firm.

Japanese pharmaceutical company Takeda (T:4502) received approval for its acquisition of Shire PLC (LON:SHP). The deal, worth $62 billion was given approval from the US Federal Trade Commission on Tuesday. Approval is still required from the European Union and China. Shares in the London listed biopharmaceutical company Shire were up 1.12 percent on the news.

Twenty-First Century Fox (NASDAQ:FOX) was rumoured to be preparing a new offer for SKY PLC (LON:SKYB) to top the offer made by Comcast (NASDAQ:CMCSA) of £22 billion. Fox were looking at a bid of £25 billion, lifting Sky shares by 2.1 percent on Tuesday.

Shares in Ocado (LON:OCDO) were up by 6 percent mid-session, a rebound the market open when the stock hit a three week low. The online grocer revealed mixed results from the first half of 2018 with revenue increasing by 12.1 percent however earnings before tax, depreciation and amortization dropped by 13.9 percent.

Regional markets also lost steam through their trading sessions. The Shanghai Composite, Hong Kong's Hang Seng, and South Korea's KOSPI gave up half or more of the day's gains.

Japan's TOPIX outperformed, climbing for the fourth consecutive session. Australia's S&P/ASX 200 was the only key Asian benchmark to slip lower. However, this setback can be viewed as a correction, a return-move following a bullish pennant pattern; the Aussie index is the only one in the region currently posting an uptrend.

Global Financial Affairs

Today’s rally follows a strong performance during yesterday's US session, which saw shares advance to their highest levels in nearly a month. The S&P 500 climbed 0.88 percent, helped by gains in Financials (+2.32 percent). Two of the only three sectors sliding in red territory were defensive: Utilities (-3.08 percent) and Consumer Staples (-0.38 percent). This provides further evidence of a markedly risk-on market.

This shift in sentiment is also backed by the fact that both the SPX and the Dow Jones Industrial Average have achieved technical milestones.

The former reached the top of a consolidation since late February, as it tests the 2,800 round psychological level, after bouncing off the 100 DMA and crawling above the 50 DMA last week, in a sign of support for the price.

The Dow Jones pierced through the 50 DMA and 100 DMA, closing at the top of the session, showing that bulls were in charge. Investor willingness to bid the mega cap benchmark higher, even after its week-long slump under the 200 DMA (red), clearly illustrates this sentiment reversal.

With US President Donald Trump focusing on his pick for the next Supreme Court judge and on his upcoming trip to Europe, trade war headlines have eased from their peak on Friday, when the US formally pressed ahead with tariffs on $34 billion worth of Chinese products and Chinese officials responded with comparable levies.

As investor focus moves to the corporate earnings season, which kicks off later this week, there’s a growing expectation that strong company results will complement the recent run of positive economic data.

The dollar stabilized for a second day, finding support at the 50 DMA, as the 100 DMA (blue) moves past the 200 DMA (red), demonstrating that, more recent prices are outperforming older levels. More notably, yesterday’s rebound, which was extended today, places the USD price back into its rising channel.

The dollar may have benefited from the same dynamic that pushed US yields higher: investors are rotating funds out of bonds and into risk assets. However, yields on 10-year Treasurys may find resistance under the downtrend line since the May peak, compounded with the 100 DMA (blue) and 50 DMA (red).

Additionally, should the 10-year yield start tumbling lower, it would complete an H&S top reversal, which coincides with falling below the 200 DMA (red), a telltale sign of how significant this level is.

In Europe, the pound rebounded from a plunge after Johnson became the third high-ranking minister to resign in under two days over May's Brexit strategy, which is seen by many hard Brexiters as a watered down version of what the country should pursue in negotiations with the EU. This latest development within May's cabinet increases the probability of a leadership challenge, which would throw the current government into chaos.

However, despite losing a third of her cabinet in just nine months, May still holds the numbers to remain in power, which reassured traders into buying the dip on Tuesday. Technically, however, today’s advance is considered a correction within a downtrend, as the price fell in the two preceding sessions, confirming the resistance at the top of a falling channel, compounded with the 50 DMA.

The Office for National Statistics released the first batch of its new GDP schedule on Monday. For the three months to May, the UK economy grew 0.2%, while month over month the economy picked up 0.3% in May, an increase on the 0.2% growth from the previous month.

WTI crude held near $74 a barrel in New York as US stockpiles were seen dropping lower for the fourth week out of five.

Turkey’s lira recovered from an extension of yesterday’s selloff, after President Recep Tayyip Erdogan named his son-in-law as the new economy tsar, removing the last member of a market-friendly financial team that has been gradually pushed to the sidelines. The move drove the lira to its deepest plunge since the failed governmental coup in 2016.

Up Ahead

• Chinese trade data due at the end of the week will probably show slightly slower export growth, after early indicators pointed to softer overseas demand and weaker export orders, according to Bloomberg Economics.

• The most noteworthy US data is the June inflation report on Thursday, which consensus expects will show both headline and core price growth picking up. There’s another deluge of Treasury debt sales too, with a total $156 billion of notes and bills offered.

• Earnings season gets going with JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) among the largest companies due to give results on Friday.

Market Moves

Stocks

• The UK FTSE increased by 0.1 percent on Tuesday.

• The STOXX Europe 600 gained 0.1 percent, hitting the highest level in more than three weeks.

• Futures on the S&P 500 climbed 0.1 percent to the highest level in almost four months.

• The MSCI All-Country World Index gained less than 0.05 percent to the highest level in more than three weeks.

• The MSCI Emerging Market Index ticked 0.1 percent higher to the highest level in more than two weeks.

Currencies

• The British pound climbed less than 0.05 percent to $1.3266.

• The Dollar Index edged almost 0.1 percent higher to nearly a two-day climb of 0.2 percent.

• The euro was unchanged at $1.1751, the strongest level in almost four weeks.

• The Japanese yen slipped 0.2 percent to 111.07 per dollar, the weakest level in almost six months.

Bonds

• Britain’s 10-year yield climbed four basis points to 1.252 percent, the highest level in two weeks.

• The yield on 10-year Treasuries gained one basis point to 2.86 percent, the highest level in more than a week.

• Germany’s 10-year yield gained two basis points to 0.32 percent, the highest level in more than a week.

• Britain’s 10-year yield climbed four basis points to 1.252 percent, the highest level in two weeks.

Commodities

• The Bloomberg Commodity Index gained 0.1 percent.

• West Texas Intermediate crude increased 0.6 percent to $74.28 a barrel, the highest level in more than three years.

• LME copper climbed 0.2 percent to $6,400.00 per metric ton, the highest level in a week.

• Gold slipped less than 0.05 percent to $1,257.24 an ounce.