The U.S. Dollar and Mounting Global Pessimism | Morning Express 07/12/22
Posted: July 12, 2022, 8:56 a.m.
E-mini S&P (September) / NQ (September)
S&P, yesterday’s close: Settled at 3856.75, down 44.50
NQ, yesterday’s close: Settled at 11,884.25, down 267.75
Fundamentals: U.S. equity benchmarks finished sharply lower yesterday and the weakness carried overnight. Price action tried muscling higher Friday, after a strong jobs report, but quickly stalled to start the new week. U.S. Dollar strength, global recession fears, and the virus reemergence in China have all weighed on sentiment. With this renewed pessimism ahead of tomorrow’s critical read on inflation (CPI), we are likely seeing a ‘sell first, ask questions later’ mantra acting as a further undertow. Given the air pocket in June, after May’s CPI release, managers are battening down the hatches. We certainly added some insurance at Blue Line Capital, our wealth advisor.
The U.S. Dollar Index extended its run overnight, hitting 108.42. The fresh two decade high came after German ZEW Economic Sentiment came in at the lowest level since 2011, -53.8 versus -38.3 expected. This indicator gauges the six-month outlook and has now come in heavily negative for the fifth straight month, driving the Euro near parity. The U.S. Dollar must reprieve in order for risk-assets to find a sustained rally. With mounting pessimism and the CME’s Fed Watch Tool now showing a 90% probability the Fed only hikes 50 basis points later this month, tomorrow’s CPI could be that turning point.
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NQ (September)
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Crude Oil (August)
Yesterday’s close: Settled at 104.09, down 0.70
Fundamentals: Demand concerns are again weighing heavily on the energy complex, led by fears Shanghai will go into a second lockdown and the OPEC Monthly Report. Price action slipped sharply at 5:30 am CT, ahead of OPEC’s report, as a very soft tape overnight caved to heavy selling. Although OPEC’s expectations for 2023 demand growth are more robust than the IEA, it is at a slower pace than this year, which was left unchanged. U.S. Dollar strength has certainly been a headwind to commodities, but its strength as a safe haven has also become a barometer of the impending global recession; the Dollar Index hit a fresh 20 year high of 108.42 overnight. The focus will begin shifting to weekly inventory data as the session unfolds and Chinese Trade Balance tonight at 10:00 pm CT.
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Gold (August) / Silver (September)
Gold, yesterday’s close: Settled at 1731.7, down 10.6
Silver, yesterday’s close: Settled at 19.132, down 0.104
Fundamentals: Gold and Silver both tested new lows overnight as the U.S. Dollar Index hit a fresh 20-year high and USDCNH has gained as much as 1% on the week. On the bright side, the yield of the 10-year has slipped back to 2.90% this morning. Falling yields will help encourage a rebound in precious metals once the U.S. Dollar stops rising. While Dollar strength comes on global recession fears, it also comes ahead of tomorrow’s CPI data. This also tells us we are likely seeing selling in things like Gold and Silver as traders try to front run the trend in inflation. Ultimately, we believe this could open the door to a steady rebound if tomorrow’s data is contained. Currently, the odds the Fed hikes 50 basis points later this morning have risen to 90%.
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