POSSIBLE REBOUND
Bitcoin has been experiencing significant turbulence, dropping over 11.7% in the first half of this month due to fears of large-scale market dumps triggered by the ongoing reimbursement of 140,000 Bitcoins by the defunct Mt. Gox exchange and the German government liquidating seized Bitcoin. Nevertheless, despite hitting a five-month low at $53,905, it is worth remarking that several indicators suggest a potential recovery for the largest cryptocurrency. For instance, the likelihood of the Federal Reserve cutting interest rates by 25 basis points in September has increased to 72%, up from 46.60% a month ago, and since lower interest rates typically benefit Bitcoin and other risky assets, there is a chance that the crypto could increase. Additionally, U.S. based Bitcoin ETFs saw an inflow of $143.10 million worth of BTC on July 5, following weak unemployment data, which indicates renewed investor interest. Furthermore, the U.S. M2 money supply has grown by around 0.82% year-over-year, enhancing liquidity and potential investments in Bitcoin. Lastly, miner capitulation metrics are nearing historical lows, suggesting weaker miners are exiting the market, which could stabilize and potentially push Bitcoin prices higher as more competitive miners profit and sell less Bitcoin.
UNDER PRESSURE
This earnings season, a select group of leading tech companies is under significant pressure to maintain the stock market’s positive momentum. The S&P 500 has climbed an impressive 17% this year, largely driven by investor enthusiasm for artificial intelligence (AI), and companies like Nvidia have seen their stock prices more than double, as Nvidia’s market value has been pushed to above $3 trillion. Alphabet, Meta, and Microsoft have also experienced strong double-digit gains, however, the mounting influence of these tech titans means that market stability heavily depends on their ability to deliver robust profits and forward-looking guidance that justifies their sky-high valuations. The top 10 companies in the S&P 500 now account for 37% of the index’s market capitalization but contribute only 24% of its earnings, the largest gap since 1990. This concentration and the bullish sentiment on future earnings present a challenge, especially if results fall short. As for now, the sentiment remains optimistic as S&P 500 companies are expected to report an 8.8% profit increase, the biggest since early 2022. Nevertheless, it is important to be aware that if a slip in these expectations occurs, it could lead to market corrections.
BOLD BET
Wall Street’s major banks are increasingly betting that the U.S. yield curve, the difference between short-term and long-term interest rates, will steepen significantly through the rest of 2024. This speculation gained traction after President Joe Biden’s less-than-stellar debate performance on June 27, which boosted Donald Trump’s chances of returning to the White House. Traders believe that Trump’s policies on tariffs, immigration, and deficits could lead investors to demand higher yields on long-term Treasuries. In addition, the trade saw further encouragement last Friday as signs of a softening job market bolstered expectations that the Federal Reserve might cut interest rates soon. As a result, short-term yields dropped sharply, widening the gap between 5- and 30-year yields, though this movement retraced slightly this morning. Moreover, this week, all eyes are on upcoming inflation data, and if the data encourages the perseption of rate cuts happening soon due to lower inflation figures, it could enhance the potential for a steeper yield curve. Furthermore, it is worth noting that while some, like strategists at Goldman Sachs, are skeptical about significant changes, others, such as TD Securities, forecast substantial widening. Ultimately, the fate of this trade hinges more on economic indicators, particularly jobs and inflation data, than on political developments.
INTERNATIONAL NEWS
French stocks experienced a slight uptick after an unexpected victory for the left in the country’s parliamentary elections. The CAC 40, France’s key stock index, gained 0.25%, recovering from earlier losses. Meanwhile, the euro held steady against the dollar, and bond markets saw minimal changes. Across Europe, the pan-European STOXX 600 rose by 0.4%, with the UK’s FTSE 100 up 0.3%, Germany’s DAX climbing 0.4%, and Italy’s FTSE MIB increasing by around 0.75%. The left-wing New Popular Front won the most seats but failed to secure an absolute majority, suggesting a potential hung parliament. Experts at Kepler Cheuvreux noted that while a hung parliament was expected, it was surprisingly left-leaning rather than right-leaning. Moreover, Deutsche Bank strategists raised concerns about the coalition’s plans for aggressive fiscal policies, including possible wealth and corporate tax increases, which they believe could be harmful to the market. They also projected a possible year-long political impasse due to the challenges in forming a stable government.
KEY EVENTS HAPPENING THIS WEEK
Monday: Consumer credit report for May.
Tuesday: NFIB optimism index report for June, and speeches from Fed Vice Chair for Supervision Michael Barr and Fed Governor Michelle Bowman.
Wednesday: Wholesale inventories report for May, and speeches from Fed Chairman Powell, Chicago Fed President Austan Goolsbee, Fed Governor Michelle Bowman and Fed Governor Lisa Cook.
Thursday: Consumer price index and monthly U.S. federal budget reports for June, initial jobless claims for the week ending on July 6, and speeches from Atlanta Fed President Raphael Bostic and St. Louis Fed President Alberto Musalem.
Friday: Producer price index report for June, and preliminary consumer sentiment report for July.
