Stocks, Commodities, and Call Option Mania

Top things to watch this week

The Economic Calendar:

MONDAY: Chicago Fed National Activity Index, PMI Composite Flash, 3-Month Bill Auction, 6-Month Bill Auction, 2-Yr Note Auction

TUESDAY: FOMC Meeting Begins, Case-Shiller Home Price Index, FHFA House Price Index, Consumer Confidence, Richmond Fed Manufacturing Index, 5-Yr Note Auction, Money Supply

WEDNESDAY: MBA Mortgage Applications, New Home Sales, State Street Investor Confidence Index, EIA Petroleum Status Report, Survey of Business Uncertainty, 4-Month Bill Auction, 2-Yr FRN Note Auction, FOMC Announcement, Fed Chair Press Conference

THURSDAY: Durable Goods Orders, GDP, International Trade in Goods, Jobless Claims, Retail Inventories, Wholesale Inventories, Pending Home Sales Index, EIA Natural Gas Report, Kansas City Fed Manufacturing Index, 4-Week Bill Auction, 8-Week Bill Auction, 7-Yr Note Auction, Fed Balance Sheet

FRIDAY: Personal Income and Outlays, Employment Cost Index, Consumer Sentiment, Baker Hughes Rig Count, Farm Prices

Key Events:

• The FOMC is expected to hike rates 25 basis points after being on hold at the June meeting. 
• FOMC statement is expected to keep existing guidance and reiterate its data dependent.
• The ECB is forecast to raise rates by 25 basis points and telegraph another hike in September.
• Earnings season is in full swing, with 150 S&P companies reporting this week. 
• Watching notable earnings reports from Microsoft, Meta, Boeing, and Coca-Cola. 
• Strike imminent, and negotiations between UPS and the Teamsters on a new contract will be closely watched before the July 31 expiration. UPS handles roughly 28% of the 75 million packages in the U.S.

stocks

The rally is broadening from a few chip makers and high-flying tech stocks into other areas of the economy, such as healthcare, energy, and banking stocks.

An interesting contrarian play was circulating the trade desk the last few days—things that make you say Hmmm!

Taiwan Semiconductor (TSM) is the largest contract chipmaker (60% market share). With clients like Apple, Qualcomm, and Nvidia, it has revised its full-year outlook downward on continued macroeconomic headwinds developing in China and the rest of the world.

“TSM was much more optimistic three months ago, but now that has changed. The recovery of the Chinese economy is weaker than thought, so end-market demand is not as expected,” said C.C. Wei, CEO of TSM.

Despite that, Nvidia (NVDA) forecasted Q2 revenue in May more than 50% above Wall Street estimates. NVDA stock has been on a parabolic rise since that May forecast. Time for reversion to the mean???

Interest Rate Futures

The FOMC policy meeting is top-of-mind this week.

We expect the FOMC to deliver a 25 basis point hike, with a tightening bias and no signals about the next meeting in September. We expect to hear the “data dependent” chant from Chair Powell at the press meeting.

The FOMC will remain skeptical that conditions are in place for a sustained return to the 2% inflation target-absent data proving slowing in the labor market and wages.

With an extended break before the September FOMC meeting and the Jackson Hole Policy Symposium in August, there is little upside for specifying data thresholds that might trigger a rate pause.

Source: CME FedWatch

COMMODITY FUTURES

Last week JP Morgan’s research noted amidst a broad-based rally in risk assets (growth stocks and crypto), commodities stand out as undervalued, under-owned, and backed by compelling fundamentals and technicals.

This could be a good entry point for a catchup commodity allocation.

In order of preference, JPM’s best commodity long ideas favor natural gas, Ags, oil, and gold and maintain a neutral stance on base metals.

CALL OPTION MANIA

Rather than buy cheap options that protect portfolio gains if stocks fall, traders are reaching for trades that would pay out if the rally continues.

The put-call ratio—a measure of fear in the options market—has fallen to its lowest levels since January 2022, according to Cboe Global Markets data (see graphic below).

Anytime the VIX index is below 20, it suggests little demand for downside insurance. The VIX index closed Friday at 13.60.

CRYPTO

Analyst view on crypto:

Bitcoin experienced a remarkable 80% surge in value from December to mid-July. As analysts, we attribute roughly half of this increase to macroeconomic developments, indicating broader market forces growing influence on the cryptocurrency’s performance. Notably, Bitcoin’s fate became increasingly intertwined with other market indicators, signaling a departure from its once-isolated ecosystem.

The other half of Bitcoin’s surge is driven by factors unique to the cryptocurrency itself. We observed positive developments within the Bitcoin-specific landscape, such as growing optimism surrounding the potential approval of a spot Bitcoin ETF and a notable surge in March following stress in regional banks. These idiosyncratic positives contributed significantly to its soaring valuation, setting Bitcoin on its path within the financial realm.

While the crypto market has shown signs of healing since late 2022, we have noticed a closer alignment of crypto valuations with broader macro trends. As analysts, we caution that higher-risk assets, including equities and cryptocurrencies, may face headwinds if the Federal Reserve tightens its policies.

As such, investors in the cryptocurrency space should keep a watchful eye on macroeconomic developments. They now play a more substantial role in shaping the trajectory of Bitcoin and other digital assets.

Asset Class Performance Summary

This performance chart tracks the daily, weekly, monthly, and yearly changes of various asset classes, including some of the most popular and liquid markets available to traders.

THOUGHT OF THE WEEK

Our trade desk had risk over set limits last week. So, obey your risk RULES, or don’t have rules at all!

If you dislike the RULE, CHANGE them before the trade position is on, definitely not after the trade.

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