The Overnight Report: September Rate Cut

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Fed Chair Powell implicitly guided towards a -25bp rate cut in September and investors like the prospect.

World Overnight
SPI Overnight	7721.00	+ 18.00	0.23%
S&P ASX 200	7718.20	– 32.50	– 0.42%
S&P500	5509.01	+ 33.92	0.62%
Nasdaq Comp	18028.76	+ 149.46	0.84%
DJIA	39331.85	+ 162.33	0.41%
S&P500 VIX	12.03	– 0.19	– 1.55%
US 10-year yield	4.44	– 0.04	– 0.96%
USD Index	105.69	– 0.12	– 0.11%
FTSE100	8121.20	– 45.56	– 0.56%
DAX30	18164.06	– 126.60	– 0.69%

By Chris Weston, Head of Research, Pepperstone

Good morning,

-The S&P500 closes above 5500, NAS100 above 20k the bulls in firm control
-The form guide for US equity indices long and strong
-Tesla flying high the worst is behind the EV name
-Fed chair Powell reinforces the Fed put’
-Developments in the French election
-Asia opening calls and the event risk in play

European equities indices may have closed lower in cash trade, but the silver lining was that respective EU markets did close near session highs, and given the tape seen in the S&P500 and NAS100, one would suspect they get support upon reopening today.

Asia too will take some inspiration, not just from the net change in US markets, but because it wasn’t just tech (plus Amazon & Tesla) that has propped up the respective indices, and we’ve seen somewhat better breadth and participation.

From a price action perspective, both the S&P500 and NAS100 futures printed a bullish reversal (price traded below Monday’s low but ultimately closed above Monday’s high), showing the sellers tried to pull the market lower, but the buyers regained control and asserted their authority if the intraday flow of supply and demand is akin to a battle, the bulls won today’s affair and statistically this bodes well for further upside.

The fact that the S&P500 closed above 5500 and NAS100 20k both new closing all-time highs, could also be taken as another win given the psychological significance that round numbers’ hold.

One can then also revisit the form guide where the S&P500 has gained in July for the past 9 years, while the NAS100 has closed higher in July every year since 2007. History may not repeat, but it could rhyme once again.

Again, the one factor that does concern is the incredibly starched equity positioning where investors and traders have gone all in on tech and discretionary names. Positioning – in isolation – is not a signal to trade on the short side, but if the market environment did change sufficiently, it would result in a more aggressive move should it happen.

Tesla is the stock of the day gaining 10.2% and closing higher for a sixth consecutive day, with the market seeing Q2 delivery numbers coming in at 443,956 and beating analysts’ consensus estimates the market clearly feeling the worst is behind the EV play, although that’s easy to say with the share price -66% off its April lows.

We’ve also seen new all-time highs in Apple, Microsoft, and Amazon, and while Nvidia closed -1.3%, when 6 of the MAG7 names close higher, then large-cap indices will typically fare well. US financials also look in a really good place, and we see new highs in JP Morgan and Bank of America, with MS, Citi and Wells Fargo not far off further upside seems likely in these names.

The equity bulls received some additional tailwinds from Fed chair Powell’s speech at the ECB’s Sintra conference disinflation, he feels, is back on track and making progress, where he expects inflation to fall to the “low to mid-2s” in a year’s time.

In a tilt to the Fed put’, Powell acknowledged that he would not be happy to see a further increase in the unemployment rate and that a weaker labour market from here could bring the Fed into play this, therefore, puts additional weight on the unemployment rate, which is due as part of Friday’s US payrolls report.

We’ve also seen better buying emerge in the US Treasury market despite a higher-than-expected US jobs openings (JOLTS) report – with yields lower by -1bp to -3bp across the curve. Hardly huge moves and the intraday tape was choppy, but the net change was lower (in yields) and this may have offered equity additional tailwinds.

One point on the French elections is that some 218 candidates have dropped out of the second vote this coming Sunday, which has decreased the 3-way races by some -70%, with the majority of these coming from the left bloc (NFP). Mathematically, the Le Pen’s RN party can still get a working majority, and it will be interesting to view the polls in the coming days to see if voting intentions change because of candidates dropping out however, the prospect of a hung parliament has increased.

In commodity markets crude trades -0.3%, gold -0.2% at US$2329, copper +0.3%.

In the session ahead, our calls for Asia equity suggest the ASX200 opens at 7731 +0.2%. By way of event risk in the session ahead, we get Australia retail sales (11:30 AEST consensus +0.3% m/m), US ADP payrolls, weekly jobless and continued claims, ISM services, and the June FOMC meeting minutes.

It’s hard to see which of these could really promote sizable market volatility. US Jobless claims could move the dial, but we’d need to see a number above 243k. The FOMC minutes are largely stale given the raft of recent Fed chatter and the ISM services print would need to be a big beat/miss to consensus (at 52.6).

The real vol event remains Friday’s US payrolls, which come at a time when liquidity may be reduced due to traders taking an extended break post the 4 July holiday.

On the calendar today:

-In Australia: Building Approvals (May)

-GrainCorp ((GNC)) ex-div 24c (100%)

Elsewhere:

-China Caixin services PMI

-Eurozone PPI

-US ADP payrolls

-US Factory orders (May)

-US FOMC minutes (June)

-US Trade balance (May)

-Globally service PMIs

– Independence Day holiday on Thursday (tomorrow)

Corporate news in Australia:

-Liontown Resources ((LTR)) receives US$250m from LG Energy to increase production at the Kathlee Valley mine

-Origin Energy ((ORG)) acquired 20% in Climatech Zero

-Telstra ((TLS)) and Optus have pledged to Australia’s competition regulator they will not renew agreements with Google to make its search engine the default on Android devices

– West African Resources ((WAF)) is raising $120m by offering 87.6m new shares at $1.37 each, a -13.8% discount to its last traded price

Spot Metals,Minerals & Energy Futures
Gold (oz)	2338.80	– 3.10	– 0.13%
Silver (oz)	29.82	+ 0.07	0.24%
Copper (lb)	4.43	+ 0.01	0.23%
Aluminium (lb)	1.13	– 0.00	– 0.04%
Nickel (lb)	7.68	– 0.17	– 2.22%
Zinc (lb)	1.31	0.00	0.00%
West Texas Crude	83.18	– 0.23	– 0.28%
Brent Crude	86.59	– 0.05	– 0.06%
Iron Ore (t)	108.00	+ 1.17	1.10

Michael Brown Senior Research Strategist at Pepperstone 

Fed Chair Powell’s remarks at the ECB’s annual Sintra forum this afternoon sounded, at the margin, just a touch more dovish than those made of late, with the Chair noting that the US economy has made “quite a bit of progress” back towards the 2% inflation target, while also flagging that the economy is back on a disinflationary path, as suggested by the May CPI and PCE reports.

Commentary of this ilk appears to further open the door to a September rate cut, especially with Powell also flagging the risk associated with leaving it too late to deliver the first rate reduction. A softer-than-expected jobs report on Friday, were it to come to pass, would likely further cement the case for said cut, to which markets assign a roughly 70% chance – perhaps, a touch underdone.

Naturally, risk sentiment has been given a lift by Powell’s comments, with equity futures back into positive territory on the day; dip buyers continue to rule the roost, with the medium-run path of least resistance continuing to lead to the upside, ably assisted by the ongoing ‘Fed put’, and policymakers clear desire to deliver a -25bp cut – and more beyond that – sooner rather than later.

The dollar has also faced some modest headwinds, though remains well within recent ranges against most G10 peers, ranges that should persist for some time, given the relatively narrow divergences between DM central banks, and the synchronised disinflationary path that most major economies continue to take.

The Australian share market over the past thirty days

Index	02 Jul 2024	Week To Date	Month To Date (Jul)	Quarter To Date (Jul-Sep)	Year To Date (2024)
S&P ASX 200 (ex-div)	7718.20	-0.63%	-0.63%	-0.63%	1.68%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AGL	AGL Energy	Downgrade to Neutral from Buy	UBS
LLC	Lendlease Group	Upgrade to Buy from Neutral	Citi
LTR	Liontown Resources	Downgrade to Neutral from Buy	UBS
MGR	Mirvac Group	Upgrade to Buy from Neutral	Citi
STX	Strike Energy	Downgrade to Underperform from Neutral	Macquarie
UNI	Universal Store	Upgrade to Buy from Neutral	UBS

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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