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Chart of the Day: US500

We’d seen some angst in markets ahead of Federal Reserve Chair Jerome Powell’s testimony to the House Panel. But he’s quashed any concern that the Fed won’t ease in the July meeting (you can read the full script here), and effectively pre-announced a rate cut in July. I’d argue that his speech has reinforced the debate as to the extent by which they’ll ease, with rates market now pricing in a 22% chance of a 50bp cut.

Chart of the Day - July 11, 2019 - US500 daily

Certainly, US two-year Treasury liked it, closing 8bp lower on the day at 1.82%. This is usually enough to compel equity traders, with the S&P 500 closing up 0.5%. A slight negative here was that while the index climbed to 3002.98, it failed to hold the 3,000 levels. The defensive sectors (of the S&P 500) outperformed the more cyclical sectors. We also saw a 4.5% gain in crude. Driven by a monster 9.4mil draw in the weekly Department of Energy inventory report, this helped lift the S&P 500 energy sector by 1.4%.

This is market craving an easing cycle. With the index trading on 17.09x forward earnings (a 7% premium to the seven-year average), I’d argue any reasons that give the market belief that we won’t see an easing cycle heightens the risk of a material drawdown in the index. That said, for now, the bulls have heard what they wanted to hear and re-exerted themselves. A weak US CPI print (22:30 AEST tonight) would only increase the prospect of a 50bp cut. We, therefore, watch for a break of the all-time highs, and suggest staying with the trend ahead of the ramp-up of next week’s Q2 corporate earnings reports.

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