Markets rally into all-time highs, equities across the board. S&P 500 futures manage to break the large inventory at 3015 and high ticked the 3018 level, the new intraday high. While Nasdaq managed to climb to all time intraday highs just shy of 7970 closing at 7959.00. The S&P cash closed above 3000 for the first time ever while rate cuts were the center of attention from Fed Chair Powell’s comments this week. The bulls are out and they’re loving it and they’re loving the priced in rate cut at the end of July. No matter the economic data its coming, see below. We head into the Q2 earnings season as well which will be interesting for markets.

The UST yield curve steepened, the equities on the other hand are still looking for that cut at the end of the month. While global economic data continued to firm up along with US data, CPI strengthened too.

The trade talks this past week were somewhat muted in relation to the central bank news. This is a quiet period in trade talks said White House adviser Navarro, and we are still waiting for news to come out from either side. Trump made it clear that he is expecting China to purchase US agriculture, while Xi has yet to confirm. Now traders, investors and everyone else is waiting patiently for news. It might be because markets are doing so well, Trump has refrained from his trade war tweets.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks up 2.42%
  • Technology up 2.42%
  • Financials up 1.11%
  • Retail up 0.76%
  • Utilities down 0.44 %

Overview of key markets last week (bottom chart):

  • Crude oil down 6.25%
  • S&P500 up 0.41%
  • Silver was down 0.52%
  • Gold down 0.12%
  • US dollar up 0.08%

Fed influence and Central banks.

We think over, finally over! Central Bank independence that is… From Powell’s recent neck squeeze by politicians (Trump) To cut rates, he doesn’t have an option some would say. The man’s job is under fire, that’s not only the case in the US. Everywhere else too, including Turkey, where Erdogan fired Turkey’s monetary policy head. All we have is markets at highs, low rates and quantitative easing. Out of Germany, we got comments that the new ECB head should look into a monetary policy that complies with the ECBs inflation-targeting mandate.

We’ll break down some of the worlds largest central banks before we dive into the Fed.

In the EuroZone the current ECB president is Draghi, being replaced by Lagarde soon. So far the proposed rate hikes from the ECB have been delayed time and time again, while the proposed rate cut timeline was supposed to be this summer. Draghi has received criticism from Eurozone countries for his monetary policy, easing that is. Luigi Di Maio, the Italian Deputy Premier said that Draghi is “poisoning the climate” with the monetary policy he has implemented. Lagarde is not safe from the criticism though, she’s under fire for not having the economic background to be the head of a central bank even though her experience at the IMF is impressive.

The UK and Governor Carney have been under surveillance for their political influence for some time now, the pro-Brexit side of the political spectrum. He was in the center of criticism last year when the peak of the Brexit was circulating the world. Why is that? Because the BOE managed to publish many Brexit scenarios, one of which included a no-deal Brexit will result in max fear in the markets and UK economy. Which later gave Carney the nickname of “high priest of project fear” because the worst case scenario of the no-deal Brexit included the collapse of the pound and a recession.

Finally, the US and the Fed. In comes Mr.Powell, who has been under fire for a long time now. The Fed has been data dependent, market data dependent due to political grip. It took three decades for a president to publicly address his discourse with a Fed Chair, and it was this year with Trump’s tweet. Something along the lines of “If the Fed had been doing its job, US equities would be trading thousands of points higher”. Not an exact quote, so here is the screenshot of the tweet. Trump was pissed that the Fed had the audacity to hike several times in 2018, now he’s a little happier with all these proposed cuts. Which at first were considered a joke by most. Now reality.

Now Trump is nominating Doves to the Fed’s board to increase the rate cutting influence. Not to mention that Trump expressed interest in the Fed’s intervention in the trade talks with China. By that we mean he wants the Fed to match his moves and take preventative measures against China. No matter when they do, they want the Fed to play defense to make sure the US has the upper hand when China takes preventative measures on the tariffs placed on them. In order to offest the tariffs, Trump expects Powell intervention. Another thing Trump wants the Fed to do is push the USD lower because Europe and China are doing so. What makes currencies drop? Dovish monetary policy, rate cuts. The Fed keeps claiming independence… ok.

Powell is clearly getting pushed around by politicians, the main point he had this week was that inflation readings were weak, too far below the target, then the CPI print for June comes out HOT. CPI came out at 0.3% month over month, the highest level since 2018, after Powell prepared his dove speech.

The final point we’ve got for a dependent Fed is the markets. Why is there rate cut interest if markets are at highs? S&P 500 cash market above the 3000 level. Markets are reacting poorly to good news, why? Because that means there is less of a probability of a cut, less money potentially flowing into the market from a low-interest rate environment.

Oil prices on the rise, good news?

We’ve been so concerned over the health of the US economy and stock prices due to the trade war and rate decisions that we’ve ignored the recent spike in oil with the difficulties overseas. First things first, on Tuesday, after market hours, the API data came out which is the precursor to the crude oil inventory news the next day on Wednesday. The API data came out as a mega draw, check out the data below, API and Inventories (DOE) compared.

API

  • Crude -8.129mm (-2.5mm exp)
  • Cushing -754k
  • Gasoline -257k
  • Distillates +3.690mm

DOE

  • Crude -9.50mm (-2.9mm exp)
  • Cushing -310k
  • Gasoline -1.46mm
  • Distillates +3.729mm

Now the numbers that should stick out that drive crude prices the most as well, bolded for you even, crude… Initially, API came out as a huge draw over 5.5mm of the expected draw, this cause a lot of bullishness in the crude oil market, outlined below. Then the DOE came out, this time nearly drawing over 7mm over the expected, a larger draw, yet not a larger spike. Well, into the report at least, at the end of the session the bulls certainly took over. This may have been caused by some of the other numbers such as positive builds in distillates. Regardless of the matter, the end day extension was drastic which could be building for a more bullish crude oil as we cracked the $60.20 resistance into the close. The upcoming OPEC proposed production cuts won’t hurt the upside, which may artificially inflate oil as per Trump.

The API data caused a large spike in oil then slight fade. The initial move (seen in the green ellipse below) ran all the way to $59.15 before the fade. However, off the back of that and inventory news, oil kept to the upside, nearly hitting $61.00 by Thursday.

However, there is also one very pressing matter to tend to which may be worse for everyone than it may appear for traders. That is the conflict in the Persian Gulf. The US is slapping sanctions left to right and center on Iran and not allowing the country to export its oil, for the most part. Iran will not sit idly by as this occurs and they are taking action in what may turn into a full-blown war. Tankers being attacked or blocked off and even the UK is dipping their toes into this. Iran has gone as far as to attempt to close the Strait of Hormuz due to recently increased tanker traffic and potential outbursts (destruction of US drone).

Tariffs? Well not quite, but Iran is interested in tolling if it cannot export its own oil to make sure others can either. Think about it, should the Strait be close, we’re going to get outrageous oil prices. The effects are limited to how much oil is stopped from entering the market of course. The less supply there is the more oil will cost per barrel. Currently, there are about 20.7 mm barrels of crude through the Strait each day. This will take a lot of supply away through the closure. Somewhat offset from the 4 mm barrels per day shipped through a spare pipeline across Saudi Arabia to Red export areas. The Strait may be closed only for commercial use only which would be a better case scenario and only for the short term. That also means that crude oil will spike short term.

This would be the best case scenario it seems. The other scenario is a two-month closure of the Strait and the world’s oil emergency response system would be deployed and fully taxed which would increase oil drastically.

Options Trade of the Week

Last week TRADEPRO Academy had a great equity options trade in the markets. Each week will we dissect the best trade and trade idea of the week. In addition, below another options trade idea will be discussed. The best trade this week was a long position on Chevron-CVX.

The following was our trade idea to TPA members:

CVX dropped into our long zone on weak volume which suggests that there could be some upside at this level should equity markets continue rising. The bounce off the support level was on strong volume and momentum is to the upside, we want to see a rotation back into the support level and a burst higher into the end of the week to the $127 level. Should equities fall we may be done with this idea as Fed Chair Powell is set to take center stage this week. 
-Long Idea $122-122.50
-Options trade of at least 90-180 days of time value
-Long Call strike at 122
-Short Call at 126-128 (skip this step if outright bullish)
-Stop below 121.50

 

 

How did our AMD idea do? Check it out below:

We had a more conservative idea planned for AMD, however, we had to get a little more aggressive with the long side in order to catch this move, right into all-time highs. The strength of the tech sector and general tech stocks helped this idea. For more TRADEPRO options ideas check us out at: TRADEPRO Academy. 

 

Weekly Economic Calendar

Pretty news heavy day coming up with our favorite Fed Chair jumping on the wire. For the majority of the week, we don’t have much of US high impact events. There are some high impact events out of other countries that may present traders with currency trade opportunities.

Sunday, GDP data out of China

Monday, CPI data out of New Zealand, Monetary policy meeting minutes out of Australia which will present us with opportunities in their respective currencies.

Tuesday, GBP average earnings index. Then the rest of the day is absorbed by the US. Core retail sales, retail sales, the Fed Chair Powell jumps on the wire with Fed Evans right after ( a voting dove).

Wednesday, CPI data out of the UK and Canada pre-market. Employment change and unemployment rate out of Australia which will present traders with opportunity in the Aussie dollar.

Thursday, retail sales out of the UK.

Friday, retail sales out of Canada.

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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.