Oil falls further, China claims chip break-through, and market contemplates Fed hike tomorrow

There are three developments to note today. First, the lack of hostilities in the Middle East has oil prices continue to unwind this month’s surge. This has also taken some pressure off major bond markets. Second, reports that China has started to mass produce its own chipmaking tools and has developed DUV lithography tools that etch chip patterns onto silicon weigh on the equities in this space, which had already been hit with profit-taking. South Korea’s Kospi fell nearly 11% today and Taiwan’s Taiex slumped a little more than 4.5% today. The Nasdaq is poised to gap lower today. 

The third development is the heightened speculation of a rate hike by the Federal Reserve tomorrow. On July 16, the Fed funds futures were pricing in about a 10% chance of a hike and now about a 33% chance. The US dollar itself is trading with a clear firmer bias. It is made a new high for the month against several pairs, including the euro, sterling the Australian dollar. 

Prices 

G10

The euro reached the session high a little before in early European turnover yesterday slightly below $1.1420. It gradually declined from there and slipped below $1.1370 before European markets closed. It traded in a narrow range and settled on its lows.  The euro slipped to a little below $1.1355 today and made a marginal new low for the month. There is little standing in the way of the year’s low, set June 24 near $1.1325. 

Lower oil prices and lower US yields dragged the greenback slightly below JPY163.35 yesterday. The US dollar recovered and approached the session high that was shy of JPY163.80. It has firmed JPY163.95 today to approach the 40-year high from last week near JPY164. The level does not appear to hold much in the way of stops or optionality. The next inflection point might be nearer JPY165.

Sterling snapped a six-day fall before the weekend but recorded an ostensibly bearish outside down day yesterday. It traded on both sides of last Friday’s range and settled below its low. In fact, it settled below $1.33 for the first time since July 1. That was the (61.8%) retracement of sterling’s rally from the June 24 low of the year (~$1.3140). Follow-through selling today has pushed sterling to about $1.3275. Options for GBP375 mln at $1.3280 expire today. The next area of chart support may be in the $1.3240-50 area. 

The US dollar edged higher against the Canadian dollar yesterday and reached CAD1.4120, its best level in nearly two weeks. The CAD1.4125 area marks the halfway point of the greenback’s decline this month. The 20-day moving average is near there as well. The US dollar reached a high near CAD1.4130 in Asia today. Above there, the CAD1.4155 area holds the next retracement objective. The two-year US premium widened a little yesterday and reached near the highest level in 14-months recorded last week around 144 bp. It is a couple of basis points softer today. 

Yesterday, for the eighth consecutive session, the Australian dollar traded on both sides of $0.7000 and failed to close above it even once. The Aussie tested last week’s low and the 20-day moving average, slightly below $0.6965 today. That area also corresponds to the (38.2%) retracement of this month’s rally. The next retracement level is near $0.6945.

EM 

MXN consolidated in the North American session yesterday. The dollar reached the session high near MXN17.49 in early Asia Pacific trading on Monday and recorded the session low in early European turnover (~MXN17.4120). The peso rose by about 0.2% yesterday. The greenback is testing yesterday’s high in the European morning. Resistance is seen in the MXN17.54-MXN17.56 area. The Chilean peso led the regional advance with a 0.85% gain followed by the Colombian peso’s 0.65% gain. The Brazilian real was the weakest in the region. It fell by almost 0.5% as the greenback settled above BRL5.10 for the first time in a week. 

The dollar was sold to session lows against the offshore yuan a little after midday in NY yesterday, near CNH6.7630. It is also a new low for the month. Last month’s three-year low was about CNH6.7540. The dollar is bid above CNH6.77. Last Friday’s high near CNH6.79 offers the nearby target. The PBOC set the dollar’s reference rate slightly higher today (CNY6.7928 vs. CNY6.7911 yesterday. The first fix below CNY6.80 in three years was on July 10. It has not been fixed above there since then and July 23 was the new low (CNY6.7906). 

Reports of continued intervention by the Reserve Bank of India heled to initially push the dollar to INR95.6275, its lowest level since July 13. However, the greenback’s strength emerged late in the session, and it settled near the session high around INR95.86, though slightly below the 20-day moving average for the first time this month. 

Other markets

Equities are mixed today. As was the case before the weekend, the Nasdaq was unable to sustain early gains. After gapping lower last Thursday, it posted an ostensibly bearish outside down day yesterday. The futures are trading around -0.85% lower. A break of the 24700 area could signal a test on the 23940-retracement area, which also holds the 200-day moving average. The S&P is off marginally. Most of the large bourses in Asia fell today, led by a precipitous 10.8% plunge in South Korea and a 7.7% drop in Taiwan. Hong Kong, India, Australia and New Zealand posted small gains. Europe’s Stoxx 600 is up about 0.4%, its third consecutive gain, if sustained. 

The sharp drop in oil prices saw a modest 3-6 bp decline in US and European benchmark 10-year yields yesterday. And yields continue to pull back today. They are 2-4 bp lower in the Europe and the 10-year US Treasury yield is off three basis points to about 4.62%. The two-year Treasury yield is off around the same to dip slightly below 4.30%. 

Gold gapped higher yesterday, and after it reached a little above $4116, it reversed lower and filled the opening gap that extended to the pre-weekend high (~$4082). It settled below there and remains uninspiring. IT has pulled back to around $4020 today. The price action of silver tells a similar story. It popped above $60 briefly but has not settled above it in three weeks. It was sold below $57 today but has steadied late in the European morning. 

September WTI surged ~30% in the past three weeks and gapped lower yesterday amid new hopes for the end of the Middle East war, which the IEA has said was the most disruptive in history. Momentum traders and trend followers go caught leaning the wrong way. The session low was recorded late in the North American session a cent below $82.00. Follow-through selling today took the contract to $79.80, a little beyond the halfway point of this month’s range is about $80.30. The next retracement (61.8%) is found around $77.20 and the 20-day moving average is ~$77.80. 

Data

There is a flurry of US economic data that will be reported today in a two-hour window (8:30-10:30 AM ET) but outside of headline risk, the reports will be overshadowed by the outcome of tomorrow’s FOMC meeting (hawkish hold) and the first estimate of Q2 GDP on Thursday. The merchandise goods balance (deficit) may be the most political sensitive. The goods deficit widened in May by the most in more than a year. Exports pulled back (-5.4%) from record levels and imports rose (3.6%). Consumer goods imports increased to their highest level in six months. The trade and inventory data (US businesses have been re-stocking in Q2) will help drive last-minute adjustments to Q2 GDP forecasts. The median forecast in Bloomberg’s survey is for 2.1% annualized growth in Q2 (that same as in Q1). The Atlanta Fed’s GDP tracker has it at 1.7%. House prices and the Richmond and Dallas Fed surveys may draw passing interest. The Conference Board’s July survey is expected to see small improvement in confidence and the current assessment, but softer expectations. 

Spain reported a decline in Q2 unemployment but at 9.87% in Q2 (10.83% in Q1), it remains elevated despite solid growth (Q2 GDP due Thursday and it is expected to have grown by 0.6%, the same as Q1, making it among the strongest EMU members). June retail sales rose 2.4% year-over-year in June in constant prices, after a revised 0.3% decline in May (-0.4% initially). The wildfires in Spain (and France) will likely spur an emergency fiscal response. 

India reported June industrial output rose 7.3% year-over-year after a revised 5.0% pace in May (initially 5.1%).  It matches the largest rise since March 2024. The gain was broad-based. Capital goods output jumped by a little more than 14% followed by electricity and gas production (10.6%)  and manufacturing rose 7.8%.