Dollar continues to rise, tracking bond yields higher

The dollar continued to surge against all major cross-rates, with the dollar index hitting a year-to-date high. Bond yields continued their seemingly relentless climb to new decade highs. Fixed income markets seem more concerned than equities about the Fed’s recent "higher for longer" interest rate strategy and fears of a US government shutdown. The broadly based Russell 2000 was the equity market leader at midday.

Bottom-line: risk-on.

TODAY’S MAJOR NEWS

Bond yields threaten Magnificent Seven leadership

As our global macro strategist Vincent Deluard recently pointed out, the Magnificent Seven (Mag7) stocks have become synonymous with this bull market: Amazon, Alphabet, Apple, Nvidia, Meta, Microsoft and Tesla, making up a quarter of the S&P 500 market value. But these megacaps have a very high valuation premium at a time when some area seeing slowing earnings growth.  Growth stocks derive most of their capitalization size from their expected long-term earnings, and these long duration stocks should suffer the most if bond yields rise. The relentless rise in 10 year bond yields poses a risk to the Mag7 and, by extension, the broader equity market for which they provide leadership.

Fed’s focus shifts to the PCE deflator

One of the Fed’s favored inflation indicators, the ‘core’ Personal Consumption Expenditure (PCE) deflator, which strips out the costs of food and energy, is expected to record a 3.9% year-on-year increase on August, down from 4.2% in July. Good progress certainly, but not close enough to the Fed’s 2% inflation target. The University of Michigan consumer confidence index is forecast to 105.7 in August from 106.1 in July, again encouraging the Fed that higher rates are slowing economic activity.

Auto sector strikes hits GM hard, Ford less so

Strikes continue at plants operated by the Big Three automakers Stellantis, GM, and Ford, but with different impacts. Ford stock rallied on Friday after UAW president Shawn Fain cited “real progress” in negotiations with Ford. GM has taken a tougher line, with its stock falling 4% last week as analysts questioned its approach and the impact on the companies’ Electric Vehicle roll-out.

Crunch time in Chinese property sector?

Chinese property developer Evergrande made headlines again today when it surprisingly cancelled scheduled meetings with foreign creditors to discuss a restructuring plan, with fears that recent sales have been worse than expected. The companies listed liabilities stand at $327 billion, according to the latest update in June.

TODAY’S MAJOR MARKETS

Russell 2000 leads equities higher

• Equity markets bounced back, led by the Russell 2000 up 0.6%, while the Nasdaq and S&P 500 were up 0.2%
• European markets fell overnight, as they digested the Fed’s negative messaging, with the Dax off 1.0%, FTSE 100 off 0.8%, but the Nikkei 225 was up 0.9%
• The VIX, Wall Street’s fear index, held steady at 17.2

Dollar strengthens, bond yields higher

• 10-year yields fell rose sharply to 4.52%, suggesting real fear of the Feds’ interest rate policies and a prolonged government shutdown. 2-year yields were pretty much unchanged at 5.11%
• The dollar index hit a year-to-date high of 106, up 0.4%
• Versus the dollar, the Euro was down 0.5%, the Yen was off 0.3%, and Sterling was off 0.2%

Oil sees profit-taking

• Crude oil prices fell 0.6% to 89.5 per barrel on profit-taking
• Spot gold prices fell 0.5% to $1,936 per ounce, while silver was off 2.0% to $23.4 per ounce
• Grain and oilseed market were mostly weaker

• The exception is Chicago wheat, buoyed by Russia's overnight attack on Ukraine port facilities at Odessa

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com 

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com