Yellen's testimony to the HoR should be same event as yesterday

Market Review

Yesterday’s session was packed full of top-tier news flow that generated good activity across the markets. We had Q2 corporate earnings from JP Morgan, J&J, Goldman Sachs and Intel all of which beat expectations to continue a very positive start top the earnings season. Macro data was mixed with German ZEW economic sentiment hitting a new 18 month low and US Retail sales for June marginally disappointing. However, this was offset by a very bullish New York Empire manufacturing survey that hit a 4.5 year high. On top of this Yellen delivered her semi annual testimony in front of the Senate banking committee and amongst the usual dovish commentary (“a high degree of monetary policy accommodation remains appropriate”) she added the sentence: If the labour market "continues to" improve more quickly than anticipated by the Committee, rate hikes likely would occur "sooner" and be "more rapid" than currently envisioned. This triggered the biggest move of the day with sharp Dollar strength driving EURUSD down through key support at 1.36, equity market and T-Note weakness. Of the three markets only EURUSD has sustained these moves and it tracks inevitably towards the 1.35 handle. Both the S&P 500 and T-Notes rebounded strongly into the close. On a separate note, WTI crude oil surged below the $100 handle after Libya announced their production levels have risen to 585k barrels per day.

Today's Fundamental View

Overnight China have delivered better than expected Q2 GDP and Industrial production data but this was offset by weaker Retail Sales figures. Intel produced a strong earnings report and boosted their full year revenue forecast. We await Bank of America earnings due in 30 minutes to see if the strong performance so far from the financials can continue. Yellen is due to deliver her testimony to the House of Representatives this afternoon and this should be exactly the same event as yesterday. Although it will be important to see if she repeats her comment regarding the ‘sooner’ and ‘more rapid’ rate hikes. If this is missing today perhaps the dollar will weaken. We have PPI, Industrial Production and NAHB Housing data to look out for as well. Equities have generally been very positive this morning and we are looking for the S&P to test yesterday’s high, if not the all time high, this afternoon. We expect the EURUSD to track down to the 1.35 handle and for T-Notes to remain fairly balanced. Crude oil has rebounded strongly from yesterday’s big sell off and now trade back at $100.74 having tested the $99 handle yesterday. The EU are set to implement further sanctions on Russia which has helped with this rebound but ultimately we look for short positions going into the US session.
 

Alternative View

If Yellen backtracks on yesterday’s comment on the timing of rate hikes then we expect the dollar to weaken. Please adjust your strategy and risk appetite accordingly.