Home › Market News › Crowded Trades, the Stock Sector Rotation, and Grain Futures Pullbacks
The Economic Calendar:
MONDAY: Dallas Fed Manufacturing Index (9:30a CT), Treasury Refunding Financing Estimates (2:00p CT)
TUESDAY: Redbook (7:55a CT), House Price Index (8:00a CT), Consumer Confidence (9:00a CT), JOLTs (9:00a CT), Dallas Fed Services Index (9:30a CT), 2-Day FOMC Meeting Begins
WEDNESDAY: MBA Mortgage Applications (6:00a CT), ADP Employment Change (7:15a CT), Employment Costs (7:30a CT), Treasury Refunding Announcement (7:30a CT), Chicago PMI (8:45a CT), Pending Home Sales (9:00a CT), EIA Petroleum Status Report (9:30a CT), Fed Interest Rate Decision (1:00p CT), Fed Chairman Press Conference (1:30p CT)
THURSDAY: Challenger Job Cuts (6:30a CT), Jobless Claims (7:30a CT), S&P Global Manufacturing PMI Final (8:45a CT), Construction Spending (9:00a CT), ISM Manufacturing Index (9:00a CT), EIA Natural Gas Report (9:30a CT), Fed Balance Sheet (2:30p CT)
FRIDAY: Non Farm Payrolls (7:30a CT), Unemployment Rate (7:30a CT), Factory Orders (9:00a CT), Total Vehicle Sales (9:00a CT), Baker Hughes Rig Count (12:00p CT)
Key Events:
The markets expect we are not quite ready for a rate cut.
We expect the Fed to keep its policy rate unchanged in July while signaling progress on
reducing inflation has resumed. The Fed is optimistic that cuts are likely in the near-term, but we do not think it is willing to signal September is a done deal.
We expect Powell to indicate that the Fed’s focus on inflation has shifted toward a more balanced reaction.
Rotation is the lifeblood of a bull market, and relative strength for sectors has broadened. As of 7/26, MTD returns for July show positive absolute returns and relative leadership for all sectors except Consumer Discretionary and Technology.
Here is a table of the 30-day returns for the different sectors:
STOCK INDEX FUTURES
The S&P 500 experienced a modest decline last week despite encouraging economic data, including softer-than-expected PCE inflation and robust second-quarter GDP growth. The S&P 500 fell -0.83% and the Nasdaq 100 was lower by -2.58%.
While earnings season has unfolded positively thus far, investor sentiment remains cautious ahead of next week’s crucial Federal Reserve meeting.
The market’s retreat has been primarily driven by a sell-off in growth and technology stocks, as evidenced by the underperformance of the FANG+ index. However, it’s important to note that the broader market, represented by the equal-weighted S&P 500, has exhibited more resilience, suggesting that the decline has been concentrated in a select group of large-cap names.
Several factors are contributing to market trepidation. Elevated valuations, mainly as measured by the forward P/E ratio, combined with a highly concentrated market, have created a vulnerability to sharp corrections.
Moreover, persistent concerns about a potential economic slowdown and the sustainability of the recent AI-driven rally (too far too fast) are exerting downward pressure on the AI theme.
The market is currently grappling with the unwinding of several highly concentrated positions. Over the past fortnight, we’ve witnessed a notable decline in gold, a classic inflation hedge, and a significant drop in the Japanese Yen (spot), a traditional deflationary asset. This inverse correlation suggests a broader shift in market sentiment, potentially driven by reevaluating global economic prospects.
The recent price action is likely exacerbated by the confluence of two primary factors: anticipated interest rate cuts by the Federal Reserve and a potential Trump presidency. These developments could trigger a mass liquidation of some of the market’s most popular trades, including short Yen, long copper, and long technology stocks.
To gauge the health of this correction, we’re closely monitoring key support levels. If these levels hold, it suggests a healthy market adjustment. Conversely, a breach could signal deeper-rooted issues.
Our critical levels to watch are:
We feel market expectations for rate cuts are running ahead of the Fed. While a September cut is increasingly likely, the Fed is signaling a preference for a more gradual easing path. The central bank is focused on maintaining flexibility and data dependency.
The key question is whether the Fed will preemptively cut rates to guard against a potential economic slowdown. While the recent GDP data is encouraging, the Fed remains watchful of the labor market. A significant weakening in employment could accelerate the pace of cuts.
Our forecast remains one rate cut in December. However, we acknowledge the growing possibility of an earlier cut in September. The market is overly optimistic about the depth and pace of the upcoming easing cycle.
We expect a slower pace of rate cuts in 2025 and 2026 due to factors such as an increasing labor force, persistent inflation pressures, and large fiscal deficits.
Corn and soybean futures experienced a significant pullback in prices on Friday. After several days of intense short-covering fueled by mounting concerns over hot and dry weather, the market appears to have taken a breather.
While the Plains region continues to grapple with hot and dry conditions, the initial intensity of the forecast has eased slightly. This moderation in weather expectations has contributed to a pullback in grain prices. Corn, in particular, has struggled to break through resistance levels as traders anticipate increased crop condition reports in the coming weeks.
Historically, August tends to be a bearish period for corn futures as market participants digest crop progress updates from various sources. This seasonal trend, combined with the recent weather reprieve, exerts downward pressure on prices.
Crude oil’s anticipated summer rally is running out of steam. WTI and Brent crude are sinking to their lowest levels in over six weeks and are on course for only their second monthly drop of the year.
Low summer liquidity and quantitative strategy selling, with commodity trading advisers (CTAs) dumping or getting stopped out of their bullish positions after futures traded below both the 50-day and 100-day moving average (support levels), have been predominantly behind the leg lower in crude oil in recent trading sessions.
U.S. spot ETH ETFs received net inflows of $107 million in their debut last Tuesday. The launch could drive Ethereum prices up in the long run, although inflows may be lower than spot bitcoin ETFs. Prices traded lower after their launch on Tuesday.
Here is a rundown of the ETFs, the exchange, and the ticker they trade under:
These performance charts track the daily, weekly, monthly, and yearly changes of various asset classes, including some of the most popular and liquid markets available to traders.
