Dollar in the Crosshairs and Earnings Compression | Morning Express 07/19/22
Posted: July 19, 2022, 8:30 a.m.
E-mini S&P (September) / NQ (September)
S&P, yesterday’s close: Settled at 3833.75, down 31.25
NQ, yesterday’s close: Settled at 11,907.00, down 100.50
Fundamentals: U.S. equity benchmarks coughed up a strong start to the week on reinvigorated recession fears after Apple said it would slow hiring and spending on some teams. Just as we said one week ago when Alphabet announced it would slow hiring through 2023, we view this as a positive over the intermediate-term. The job market is frothy and companies, especially those in tech, were forced to hire under poor circumstances, providing exorbitant benefits packages to many with unaligned goals and little motivation. The “recession” allows these companies to cut ties and therefore run leaner. Let us also remember the Federal Reserve wants to see this froth come out of the job market and as the economy absorbs these maneuvers it puts the central bank closer to its goal.
The U.S. Dollar is atop everyone’s mind, pointed to in earnings, as we near Thursday’s ECB policy announcement, and ahead of next week’s Fed meeting. IBM blamed the strong U.S. Dollar in its earnings beat last night, the stock is -6% ahead of the bell. Johnson & Johnson also beat both top and bottom line estimates, but U.S. Dollar strength slowed its outlook. The stock is trying to hang in positive territory. It is our belief the U.S. Dollar tops in the early stages of a hiking cycle. However, in today’s scenario, a steadfast rise in inflation has forced the Federal Reserve to continually move the goal posts. Last week’s spike in the U.S. Dollar Index has eroded and has the makings of a blow off top. Additionally, Gold all too often trades at the mercy of the U.S. Dollar. According to the CME’s CoT, Managed Money (hedge funds) officially went net-short Gold in the week ending last Tuesday, joining Silver and Platinum. For those unaware, this is a counter-trend indicator and one supporting the idea we are in the later innings of the U.S. Dollar’s ascent, if not already realizing its peak.
Novartis AG, the Swiss drugmaker, beat on EPS but missed revenue estimates early this morning. Three weeks ago, the company announced a plan to cut 8,000 jobs and save as much as $1 billion through 2024. The stock is trading higher by 3% after the mixed report and the leaner narrative seems to be buoying sentiment.
Halliburton beat estimates and is +1.5% ahead of the bell. Lockheed Martin missed expectations this morning and lowered its outlook, dragging the stock down by about 5%. Netflix will be front and center after the close. Building Permits and Housing Starts are due at 7:30 am CT.
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NQ (September)
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Crude Oil (August)
Yesterday’s close: Settled at 99.42, up 4.85
Fundamentals: Crude Oil had a hot start to the week and price action is now settling in a bit with virus cases in China weighing on sentiment. This can be seen as both Crude Oil and Copper are trading lower this morning. About two thirds of the 699 reported cases are in two rural provinces, but it is the expansion of testing in Shanghai that has traders on edge; if you test, you will find cases. Daily cases in Shanghai are lingering around 20, down from earlier this month and it is unclear how many are outside of quarantine zones. Additionally, early estimates for weekly inventory data are for +0.33 mb Crude and +1.2 mb of Distillates, with Gasoline only -0.73. Traders also want to keep a pulse on Nord Stream 1, which was supposed to restart Thursday and is expected to be delayed.
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Gold (August) / Silver (September)
Gold, yesterday’s close: Settled at 1710.2, up 6.6
Silver, yesterday’s close: Settled at 18.84, up 0.246
Fundamentals: Gold and Silver started the week on strong footing Sunday evening and through the early hours of Monday, but this quickly deteriorated through U.S. hours. Price action in the metals has not reacted as positively as we would have imagined to the U.S. Dollar slipping from last week’s spike high. However, we do believe a continued weakening of the U.S. Dollar will underpin a strong rebound in precious metals. The metals complex is working through extreme negativity. According to the CME’s CoT, Managed Money (hedge funds) went net-short Gold in the week ending last Tuesday for the first time since 2019. Managed Money is now net-short Silver for the second week, increasing its position. In 2018, a plunge in the Chinese Yuan versus the U.S. Dollar due to the trade war brought continued pressure and negativity to the metals complex and Managed Money went net-short Gold in the later stages. The only other instance of net-short Managed Money in Gold came in 2015, right at the historic 1046 low. As we noted in the S&P/NQ section, we view this as a counter-trend indicator.
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Silver (September)
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