In today's daily market updates, we are going to look at what happened in the fixed income, money market, commodities and U.S. equity markets yesterday (i.e. 18 Jul 2022).

Investment Disclaimer:

• I am not a registered investment, legal, or tax adviser or a broker/dealer, and all opinions expressed by me are from my research for educational purposes only.

• Past performance presented here is not an indicator of future performance.

• This post expresses my own opinion about the financial market. It is not an offer to buy or sell, or a solicitation of any offer to buy or sell any security mentioned in this post.

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Fixed Income and Money Market

U.S. Treasury par yield curve increased across all tenors, with short-term rates (2-month to 6-month) rising more than both intermediate-term rates (1-year to 7-year) and long-term rates (10-year to 30-year).

U.S. Treasury breakeven rate (a quantitative parameter that estimates the expected inflation priced in by the market participants) rose across all tenors following upbeat retail sales data in June and the signal given by Fed officials last Friday that they will likely stick with a 75 bps hike at their July 26-27 Federal Reserves Open Market Committee (FOMC) meeting.

(Note: 1 basis point, bp = 0.01%)

Before last Friday, the market has mostly priced in a full percentage point (i.e. 100 bps) hike in the upcoming meeting according to CME Group’s Fed Watch Tool.

On 13 Jul 2022, the market has priced in an 80.35% probability of a 100 bps rate hike (i.e. from the current 150-175 bps guidance to 250-275 bps guidance). On the other hand, only a 19.65% probability of a 75 bps rate hike (i.e. from the current 150-175 bps guidance to 225-250 bps guidance) was expected.

The market reacted fast following the Fed officials’ statement last Friday, which sees a 70.92% probability of a 75 bps rate hike being priced in while the change of a 100 bps rate hike being priced in at 29.08% probability.

Commodities

U.S. dollar weakened as the probability of a full percentage point rate hike in the coming FOMC meeting has largely decreased. Because the U.S. dollar is the main currency of commodities trading, a weakened dollar has undoubtedly boosted the demand for crude oil.

On the backdrop of rising oil demand, Saudi Arabia has reported that they do not have enough production capacity to produce more than 13 million barrels per day, bpd of oil.

As a result of this supply-demand mismatch, crude oil futures rose by 4.2 % to 5.1 % yesterday across all maturities.

Natural gas futures rose by 2.3 % to 6.6 % following the weather forecasts which expect a longer and more intense hot climate, raising the demand for natural gas which is critical for all cooling appliances.

Equities

All key factor ETFs fell yesterday following the dismal release of the July National Association of Home Builders (NAHB) index. NAHB index fell for a seventh straight month to 55, the lowest level since May 2020, from 67 in June. As the readings are still above 50, it means there are still more builders viewing the market conditions as favorable.

On the other hand, oil & gas exploration and energy stocks rose on the news of tightening oil supplies and rising energy prices.

Crypto

Bitcoin has had a good trading day yesterday, with a 7.92% gain over the day and a 16.36 % increase over the week. The “risk-on” sentiment of Bitcoin has gradually decreased as its correlation with S&P 500 index fell slightly from a high of 0.88 to now 0.83 over the week. With a correlation that is greater than 0.80, Bitcoin is still being seen by the market as a risk-on asset.

Despite its monumental gain over the week, Bitcoin’s risk of larger drawdown has increased based on observed historical data, with an increasing negative skew (i.e. larger probability of making losses than gains) and a higher kurtosis number (i.e. greater risk of large draw-down).

That’s what you need to know for today’s market updates. Please like, share and follow if you find this article useful.

Reference:

1. Thumbnail image here was downloaded from Unsplash, where credit is given to Jamie Street, the creator of this photo.

2. https://www.businesstimes.com.sg/government-economy/us-retail-sales-beat-expectations-in-june

3. https://finance.yahoo.com/news/fed-officials-still-leaning-75-152300747.html

4. https://www.reuters.com/markets/us/us-home-builder-sentiment-plunges-july-nahb-2022-07-18/

5. https://www.reuters.com/business/energy/oil-drops-chinas-rising-covid-cases-renew-fuel-demand-concerns-2022-07-18/

6. https://www.upstreamonline.com/production/no-capacity-saudi-arabia-cannot-expand-oil-production-beyond-13-million-bpd/2-1-1262005

7. https://www.naturalgasintel.com/spurred-by-searing-heat-natural-gas-futures-continue-to-march-higher/