A moment of calm in markets before the potential storm

The US markets will be closed as Americans observance Independence Day. Consequently we are expecting to experience a quiet afternoon session. But with US technology companies coming under pressure lately and government bond yields rising sharply, and key data coming up later on in the week, this could be the calm before the storm.

The US markets will be closed as Americans observance Independence Day. Consequently we are expecting to experience a quiet afternoon session. Today's big moves may have already occurred. Overnight's main news was from Australia. Here, retail sales came out stronger than expected. But this failed to underpin the Aussie dollar as the market's focus was on the Reserve Bank of Australia. The RBA was widely expected to have tilted more toward the hawkish side following similar moves from other global central banks. However, it disappointed those expectations in a rate statement which was very similar to its previous one. The disappointment caused the Australian dollar to fall across the board, though the local equity markets rallied. In Europe, Spanish unemployment fell sharply again in June. However, the 98,300 month-over-month drop was still short of expectations of a 120,300 fall. In the UK, the focus was on the construction PMI after we learnt yesterday that activity in the manufacturing sector had weaker last month. As it turned out, activity in the construction also slowed down last month as the PMI printed 54.8 compared to 55.6 last and 55.0 expected.

Plenty to look forward to this week

Looking ahead to the rest of the week, there will be plenty of key economic data to look for forward to. The hat-trick of UK PMIs will conclude on Wednesday with the release of the dominant services sector PMI. If there was a marked deterioration in confidence as a result of the UK's dire political situation and recent terrorist attacks, it will most likely show up in the services sector PMI. Wednesday will also see the release of the FOMC’s last meeting minutes. The minutes are unlikely to cause a major reaction in the markets on Wednesday as several FOMC members have already spoken since that meeting. The preparation for Friday’s US jobs report will begin on Thursday as there will be a couple of leading employment indicators released then: the ADP private sectors payrolls report and the employment component of the ISM non-manufacturing PMI. As well as the key US jobs report, we will also have the latest monthly employment data from Canada on Friday, too. In addition, there will be a speech from the Bank of England’s Mark Carney and some UK data, including manufacturing production and trade figures, to look forward to on the last trading day of the week.

Nasdaq 100 could lead a potential market sell-off

With US technology companies coming under pressure lately and government bond yields rising sharply, and key data coming up later on in the week, this could be the calm before the storm. But even if it is not exactly a storm, at a minimum we are expecting to see heightened volatility in the second half of the week. So, get ready. In the equity markets, one sector that could come under pressure is technology. If tech names do go down further then the tech-heavy Nasdaq 100 could be the index to watch/trade, for the Dow and to a lesser degree the S&P 500 have been supported by the outperformance in the banking and energy sectors, owing to rising yields and firmer oil prices. The higher borrowing costs are seen as being negative for sectors such as technology as it raises their borrowing costs, and could hit consumer demand. The Nasdaq 100 has actually created a possible reversal formation on its monthly chart, creating its first red candlestick formation in eight months. Technically this is more bearish when you consider the monthly RSI being not only overbought but in a state of negative divergence – so the momentum indicator has made a lower high relative to the underlying Nasdaq 100 index. This divergence is typically found at major tops, and the higher the time frame the more significant it becomes.  

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