Stocks make gains with one eye on megacap tech earnings

Headlines

* Pelosi endorses Harris for President after pushing Biden to exit

* Gold falls as dollar loses footing following Biden withdrawal

* S&P 500 and Nasdaq 100 rises as Nvidia leads tech rebound

* USD slides marginally after safe haven bids as election shifts narrative

FX: USD was modestly softer to start the week. Biden dropping out of the Presidential race was expected over the weekend so relieved some uncertainty. Kamala Harris will run on the same policies, but the odds of Trump winning were marginally lower. There is a major Fib level at 104.26 and the 200-day SMA at 104.38.

EUR printed a doji candle and was little changed on the day. ECB policymakers continue to suggest that the ECB is in no rush to cut rates and essentially are data dependent all summer until September.

GBP printed an inside day above 1.29 with little data to move the August rate cut debate. PMIs are released tomorrow which may help turn the odds, which currently stand around a 44% chance of a 25bps move.

USD/JPY outperformed as prices dropped to 156.28 before paring losses. US Treasury yields modestly picked up. Bloomberg sources reported that the BoJ is said to see weak consumption complicating its rate decision. Officials are likely to wait until the last minute to finalise their rate decision on 31 July, after checking the latest data on markets and economic conditions.

AUD fell sharply for a sixth straight day below 0.6650. The antipodeans were the clear underperformers with a surprise rate cut to rates by China but lingering geopolitical concerns.

US Stocks: US markets started the week with solid gains. The benchmark S&P 500 closed 1.08% higher at 5,664. The tech heavy Nasdaq 100 finished up 1.54% at 19,822. The Dow Jones closed 0.32% higher at 40,665. Stocks pared some of last week’s losses with gains led by the Nasdaq and the small cap Russell index. Upside moves were broad-based with most sectors green, while the equal-weight S&P also surged. Large-cap sectors led gains, with tech advancing 2% and communication and consumer discretionary also outperformed. Semis performed well with Nvidia upside leading the chip space after reports the giant chipmaker is working on a version of its new flagship AI chips for the Chinese market that would be compatible with US export controls. Google and Telsa report after the US closing bell tomorrow.

Asian stock futures are in the green. Asian stocks struggled after the soft Wall Street handover and Biden’s election decision. The ASX 200 was lower with energy and miners lagging on lower oil prices. The Nikkei 225 extended recent declines after gapping below 40,000. The Hang Seng and Shanghai Composite were mixed with the former bucking the trend due to tech strength.  

Gold dropped very modestly lower with prices trading just below $2400. Eyes are on the US PCE deflator figures released on Friday.

Day Ahead – Biden drop out/Trump trade implications

Kamala Harris is very likely to get the nod to be the Democrat Presidential nomination. She is the continuity candidate with no obvious difference on any key issue so uncertainty has been reduced. The chances of Trump losing are slightly higher than they were. A Republican majority is still likely in the Senate, although Democrats might be focusing on winning that House to crimp Trump 2.0.

Regarding markets, a small unwinding of the Trump trade has been seen.A Trump trade in FX is slightly tricky to define as he explicitly wants a weaker dollar, while consensus at present is that higher yields and greater uncertainty, would lead to a stronger dollar. Trump’s fiscally expansive economic agenda, in combination with extra tariffs, should be bad for bonds, but so far hasn’t been. Ten-year Treasury yields are lower than before the debate, while the yield curve has steepened, but not by much.  

Trump’s likely agenda of cutting corporate taxes and deregulating should be good for stocks especially infrastructure, energy and defence. That said, the S&P 500 had its worst week in months following the attempted assassination that seemed to improve his chances. If it’s tough to understand price action, perhaps it’s because Fed monetary policy is more important, and we are also in summer markets and thinner liquidity.

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