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  • Weekly Summary: Lower Debt Yield Curve Inversion is Threatening the S&P 500

Weekly Summary: Lower Debt Yield Curve Inversion is Threatening the S&P 500

The S&P 500 broad market index rose by 2.5% to the heartbreaking 4511 points. Brent crude prices jumped by 3.8% to $81.20 per barrel, while the U.S. Dollar is recovering from its extreme weekly drop of 2.5% to its 15-month lows.

It was hard to expect such high volatility in usually indolent July, but the U.S. inflation data agitated investors. The Consumer Price Index (CPI) in the United States at 3.0% YoY missed Wall Street expectations at 3.1%, which was far lower than 4.0% YoY in May. Producer Price Index (PPI) dived sharply to 0.1% YoY in June from 0.9% YoY in May, or to the lowest since 2020 level, which was way before the global inflation tsunami. So, investor overreacted in the first moment, but the enthusiasm faded by the end of the week.

Yields were sharply down as many believe the Federal Reserve (Fed) has to stop rate hiking at once with a sooner than expected lowering interest rates. Investors are certain the Fed would rise its interest rates by 0.25 percentage points in July, but would be forced to decrease them in March 2024, earlier than anticipated May 2024. Lower yields have made debt yield curve inversion much tighter. The speed of this contraction was the same that was seen in April 2022 as S&P 500 index made a sharp correction, and close to the speed that was witnessed during the banking crisis in the United States this March. This week the contraction slowed down. Putting it to the perspective if the inversion would continue to get the tightening momentum a serious stress in the markets could be expected next week. Thus, this situation should be monitored very closely.

The Q2 2023 earnings reporting season is seen in rather negative angle. FactSet, which is tracking the corporate performance and providing market analysis, expect that S&P 500 listed companies, will lose 7.2% YoY of their profit, the largest contraction since Q2 2020. So, investors might be very disappointed with these negative developments amid Fed decision to hike its interest rates in July.

The stepping down of the St. Louis Federal Reserve President James Bullard, who is leading the hawkish camp of the regulator, is seen in a very different reflection now. Mr. Bullard is a bright economist, and he was acting as such when voting on interest rates changes, putting away any political issues. His resignation may point to a unusual dovish shift in the Fed’s rhetoric, which he was opposed to.

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 has failed to pass the support at 4340-4360 points and bounced back towards the resistance at 4440-4460 points in the begging of the week, but latter it gained additional traction to the extreme targets at 4550-4460 points. The downside signal was not completely formed, while there are still some incentives for this signal to be completed.

Brent crude prices passed the resistance at $76-78 per barrel after Organisation for Petroleum Exporting Countries (OPEC) and its allies demonstrated commitment to continue with production cuts. This made Brent prices to go up towards the resistance at $86-88 per barrel. Once this ceiling would be reached the recession scenario might be activated. Its first targets are at $67-69 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 fell to its 15-month lows after inflation in the United States was reported much lower in June. The rising real interest rates were contributing to this. Thus, even mid-term long positions for the U.S. Dollar are seen not to be appropriate. 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.

The overheated rally in the EURUSD this week opened a nice opportunity for the pair to go short towards 1.10700-1.11000. So, short operations from 1.12300-1.12500 with the target at 1.10900 and stop loss order at 1.13100 are seen very attractive.