The first week of July ends on a rather pathetic note. The S&P 500 broad market index is declining by 0.9% to 4408 points. But the worst came from the debt market as the yields are rising across the entire debt yield curve.
The U.S. 10-year Treasuries’ yield peaked 4.09% this week, while the 2-year Treasuries’ yield surged to 5.10%, the highest since 2007. Tis made the inversion of the debt yield curve the largest since 1981. Strong macroeconomic data pushed the yields up. Services PMI in the United States came out surprisingly strong at 54.4 points vs 54.1 points expected, while Manufacturing PMI was at disappointing 46.3 points in June vs 48.4 in May. Non-Farm Payrolls was surprisingly low at 209,000 missing consensus at 225,000. However, this could be considered rather strong amid declining unemployment.
Still very strong U.S. labour market creates a steady high inflation risks that may prompt the Federal Reserve (Fed) to raise its interest rates not twice, but at least three times this year by 0.25% points. This is what Fed’s Chairman Jerome Powell has recently talked about in the end of June. The Fed might be worried by rising wages that push inflation up. Average hourly Earnings continues to rise by 4.4% YoY, above expectations of a slowdown to 4.2%. The same trend continues on the monthly basis as earnings rose by 0.4% in June, the same as it was in May, which was revised from 0.3%. The unemployment contracted to 3.6% as expected from 3.7% in May.
Investors to the utmost believed the Fed might make a U-Turn in its tight monetary policy. If this won’t be the case rising yields especially on short-term debt may overwhelm the stock market if this belief will continue throughout next couple of months. If investors continue to believe the Fed would raise interest rates in September markets may fall under very strong pressure.
Technically, the S&P 500 index continues to have an upside formation with targets at 4250-4350 points, that have already been met. The market bounced from the resistance at 4440-4460 points, and is moving towards the 4340-4360 points. So, a good reversal conditions are forming with a possible downside signal to emerge next week.
Brent crude prices have failed to test the support at $67-69 per barrel, and bounced back towards the resistance at $76-78 per barrel. Once the support would be broken, recession scenario chances will become very high. Its targets are at $40-60 per barrel of Brent crude.
Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. But the situation has changed dramatically as the important support level of $1980-2000 per ounce was smashed. Short positions were opened after prices tested the $1970-1980 former support level with targets at $1890-1910 per ounce. The first half of this trade was closed at $1910 per ounce, while the second half was left open with the stop-loss order moving to $1980 to avoid any losses, and amid expectations of some extra profit. When prices would pass the $1900 per ounce level this downside scenario will be activated.
The Greenback is struggling after the Non-Farm Payrolls report. Still, It has some chances to resume strengthening. But it is too risky to go long on the Greenback at the moment. It would be better to wait for a decline of the EURUSD below 1.06000 to seek out sell opportunities for the Greenback.
Two major positions were opened for July. First, is a short position for the EURUSD at 1.08900-1.09200 with the take profit and stop loss both set at 5000 points from the opening price. A long trade for the AUDUSD was opened from 0.66400-066600 with the same size of the stop loss and take profit orders as for the EURUSD. Two operations balance each other and should be kept to mitigate risks.