MARKET WRAPS
Watch For:
U.S. New Home Sales for June, Tesla 2Q earnings,
Opening Call:
Stock futures dropped Monday, suggesting that the major stock indexes will retreat from last week's all-time highs after markets in China and Hong Kong plummeted.
Futures linked to the Dow Jones Industrial Average retreated. the blue chip index on Friday crossed the 35000 closing milestone for the first time in its history after climbing over 1% last week.
Rising concerns over the Delta variant of Covid-19 and concerns over economic growth are also likely to challenge the pace at which the U.S. stock market will rise in the coming weeks, investors said. Money managers are also awaiting guidance from the Federal Reserve this week, including policy makers' outlook on inflation and any clues on when the central bank may start scaling back its bond purchase program.
"This will be a choppy environment for the rest of the year as markets deal with growth that isn't as strong, and markets turn to the potential withdrawal of policy support," said Hugh Gimber, a strategist at J.P. Morgan Asset Management. "You would expect that the spread of the Delta variant would put restrictions in place longer and some supply bottlenecks may not last just a few months."
Investors are also awaiting earnings from a bevy of American companies including giant technology companies this week that will indicate how large businesses are weathering the pandemic and a recent uptick in inflation. Lockheed Martin is slated to post earnings before the market opens, and electric-car maker Tesla is due to report after the closing bell.
"This week is really where we enter crunchtime for earnings," Mr. Gimber said. "With tech names reporting, the bar is high."
Chinese shares tumbled after Beijing once again took aim at some of the country's fast-growing listed companies, fueling investors' concerns about regulatory risks.
Over the weekend, Chinese state media confirmed the after-school tutoring sector faced a clampdown, while the national antitrust authority levied a symbolic fine on internet giant Tencent Holdings and ordered it to give up some exclusive music-licensing rights.
Forex:
The dollar could rise if the Federal Reserve signals that its bond buying program won't continue for much longer in a policy decision Wednesday, Commerzbank said.
The Fed could imply this by changing its statement to say that it would continue buying bonds "until further progress has been made" from the current "until substantial progress has been made," Commerzbank currency analyst Ulrich Leuchtmann said.
While the bond-buying program is "pretty irrelevant" for the foreign exchange market, a change in wording would suggest the Fed, unlike the European Central Bank, is "willing to take restrictive steps again," he said.
Cryptocurrencies jumped Monday, with bitcoin rising more than 18% from its 5 p.m. ET level Friday.
Investors pointed to short positions being liquidated and speculation that Amazon.com may be venturing into digital currencies. The price of bitcoin rose to as much as $39,544.29, its highest level since mid June, according to CoinDesk.
EUR/USD, last steady at 1.1773, is likely to "stay sluggish" but stuck within a tight range as both the euro and the dollar are held back, said UniCredit.
Lower U.S. Treasury yields have been "a drag" on the dollar in recent weeks, but lower German bond yields following last week's hints of prolonged stimulus from the European Central Bank aren't helping the euro either, the bank said.
Softer U.S. new homes sales, due later Monday, would likely have a "negligible impact" on the dollar, UniCredit said.
The ongoing clash between the U.K. and EU over post-Brexit trading arrangements for Northern Ireland is likely to limit any sterling gains this week in the absence of market-moving economic data, ING said.
"It appears very little downside risks related to this topic are priced into GBP, and a combination with a USD-positive Fed meeting could make cable [GBP/USD] re-test the 1.3600 support this week."
Bonds:
Morgan Stanley keeps short U.S. Treasuries, seeing the fair value of 10-year U.S. Treasury yields at around 1.60% in the current environment, said strategist Guneet Dhingra.
In assessing the fair value, Morgan Stanley makes assumptions about where it thinks the market can price in the timing of the first rate hike by the Federal Reserve and the subsequent pace.
Taking a conservative approach, Morgan Stanley thinks the market can price the first hike in the first or second quarter of 2023, Dhingra said.
German Bunds are expected to outperform U.S. Treasuries due to the diverging monetary policies of the European Central Bank and the Fed, said Morgan Stanley.
"We think that the increasingly divergent reaction functions between the Fed and the ECB will likely favour Bund outperformance versus USTs over the near term," said strategists Alina Zaytseva and Lorenzo Testa.
They see the risks for the July FOMC meeting as skewed toward an upbeat and hawkish message, while the ECB's position is dovish. The 10-year UST-Bund spread is 168 basis points, according to Tradeweb.
Morgan Stanley thinks a reversal to above 200 basis points may not be attainable in the short run, though.
Commodities:
Oil prices fell, continuing the volatility the market has experienced in recent weeks.
Investors are increasingly worried about rising coronavirus case numbers in several major Asian economies and "any significant reversal of easing in restrictions in parts of Europe and the U.S. would send a fairly bearish signal to the market, particularly when you consider the higher vaccination rates in those regions," said ING's Warren Patterson.
In addition, traders reduced their net bets on rising Brent and WTI prices last week to their lowest since May and November respectively
Base metal prices slipped as China's crackdown on the equity market prompts inventors to flee from risk assets. Three-month copper on the LME was down 0.6% at $9,571.50 a metric ton, while aluminum fell 1% to $2,483.50 a ton and nickel edged down 0.2% to $19,440 a ton.
China on Monday continued efforts to tighten regulations on some companies by placing strict restrictions on the country's booming after-school tutoring industry.
That prompted sharp falls for the country's stocks as investors shunned risk assets.
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07-26-21 0612ET
