Good Morning, Friends. Another earnings season kicks off today as Alcoa (AA) reports after the closing bell. ECB Pres. Draghi, who has generally been a friend to bulls of late, gives a couple of presentations this morning (one at 8:30 EDT, one at 9:30) and could, I suppose, offer something that market participants regard as meaningful. I went through the usual reading material this weekend (Barron’s, Financial Times, New York Times, WSJ, Economist and, of course, Inside Lacrosse) and didn’t find much that I found interesting, at least from a markets standpoint. Egypt is a dangerous mess, but the army is expected to do whatever is necessary to keep the Suez Canal open, and China has issues with a slowing (but still growing) economy and with periodically tight short-term credit conditions.Â
Back in the U.S. the yield curve is steepening. This is generally good for banks; it’s fun to be a bank when you can borrow short at next to zero, but it’s less fun when you can only lend long at zero plus a little. Since the prospect that the Fed will begin dialing back its Quantitative Easing program in September, or thereabouts, has hammered prices/raised yields at the longer end of the yield curve, the spread that banks can charge on loans should increase, on balance. This may be offset to some extent by declining real estate activity as rates rise, but the market appears to believe that the net result will be positive. I prefer the regional banks to the behemoths, particularly since the latter will be required to hold more capital (a drag on earnings) than will their smaller cousins. There is also less political risk with the latter. One way to own them is via an ETF such as IAT (disclosure: my daughter, who is an intern at a money management firm this summer, is competing against the other interns in an ETF-picking contest, and this is in her portfolio). It would be a little tough to buy more than a placeholder position in IAT at these levels; it seems to me that a pullback to 29.50 or so would provide a more comfortable entry.Â
As for the broader market, the weekly chart of the E-minis continues to display good health; the pullback was scarcely enough to create a buyable dip. The daily chart is transitioning back into an uptrend, although it feels a bit tentative. Normally, a steepening yield curve is considered a sign of good economic health, but because of the heavy Fed involvement, that’s less certain this time around. I’ve seen some references to the strong Dollar creating headwinds for U.S. exporters, but the marked rise in the buck has been recent; while there was some volatility in the quarter, the net rise from the beginning of April to the end of June was a less than impressive 0.2%, as measured by the (trade weighted) DXY.Â
Speaking of the Dollar, one way to play a trade weighted basket is via a couple of ETFs that are mirror images of each other. One, UUP, represents a Dollar-bullish view, while UDN, not surprisingly, is the opposite. Both had gap moves on Friday. Since they are trade weighted, they are dominated by the Euro, at 57.6%; the Yen is a poor second, at 13.6%. While many FX participants prefer to choose their own currency pairs, I have found UUP and UDN to be a reasonably efficient way to gain some general bullish or bearish USD exposure, or to hedge other holdings. Although I’m generally constructive on the outlook for the Dollar – more accurately, while I’m largely negative on the outlook for the Euro and the Yen – I’d certainly be looking for a correction now before getting short of EUR/USD, in particular. Patience isn’t one of my few virtues, but impatience has cost me money far more often than it has enabled me to make any. Something around 1.3040 looks like a reasonable level to leave an alert, with a view to getting short slightly above that level, if possible.Â
Here’s hoping that everyone had an enjoyable holiday weekend; now for the shock involved in returning to a five-day working week. Best of luck!
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