Daily Wrap Up 27 July 2022

27 Jul 2022 04:57 PM

Equities higher in the face of hawkish Fed

Stock markets are pushing higher ahead of the Federal Reserve meeting, even though it is widely believed the bank will reveal a large interest rate hike. According to interest rate futures, an increase of 75-basis points is tipped to be the most likely outcome, but at the same time, an increase of 100-basis points cannot be ruled out. In the past two weeks, we have seen a couple of surprises from central banks as the Bank of Canada and the European Central Bank lifted rates by larger amounts than anticipated. Seeing as the BoC upped the ante, the Fed might use that as cover to press ahead with a 1% lift. The US CPI rate is at a 40-year high of 9.1%, and the central bank is determined to bring that down, but at the same time, the latest services PMI report showed a reading of 47, which is in contraction territory. As a result, Jerome Powell and his colleagues might go with a 0.75% rise but leave the door open for another large hike in September.

US equity traders have shrugged off the disappointing forecast from Walmart yesterday and the S&P 500 is up over 1%. Google’s parent, Alphabet, revealed that advertising revenue jumped by 12% in the second quarter, this was encouraging as it suggests that companies are optimistic despite the growing uncertainty. Microsoft shares are up over 4% as its cloud division registered a 40% rise in revenue. The well-received updates from the big names, combined with a fall in the US 10-year yield to 2.76%, is helping the NASDAQ 100 and the index is up 2.5%.

Natural gas prices have pulled back from the spike witnessed yesterday and that has calmed traders’ nerves in Europe as the DAX and the FTSE 100 are up 0.5% and 0.6% respectively. For now, concerns about energy stability in Europe have eased, but it feels like headlines about squeezed gas supplies will resurface in the weeks ahead.

The US dollar has recovered earlier losses and is now essentially flat on the session, because of the stronger dollar, gold have moved marginally into the red. WTI and Brent crude are rallying as the EIA report showed the US oil and gasoline stockpiles fell by 4.5 million barrels and 3.3 million barrels respectively, the large drawdowns suggest the demand is high, contrary to some disappointing economic report posted recently.

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