June has been hard on equities as the upward trend of prior months has proved to be a bear market rally. Meanwhile, the outlook for July doesn't offer much hope for the bulls. Analysts expect an ECB rate hike early this month; the move could put renewed pressure on the dollar and be the catalyst for crude oil futures seeking out the unprecedented $150 level. The drumbeat of inflation will likely continue to weigh on markets as the month unfolds, while earnings season and the upcoming G8 meeting will give traders plenty to think about as the second half of 2008 unfolds.
US Markets
After a rocky stretch of profit warnings, earnings season is upon us again. Over the next five weeks, most of the 30 DJIA components will report, including Alcoa (reports 7/8), Chevron (7/10), Intel (7/15), J&J (7/15), JP Morgan (7/16), IBM (7/17), Microsoft (7/17), Coca-Cola (7/18), Citigroup (7/18), Merck (7/21), Caterpillar (7/22), Dupont (7/22), McDonald's (7/23), MMM (7/24), Boeing (7/25), Exxon (7/25), American Express (7/28) and Disney (7/30). Among these, the commodity names should attract the most interest as investors wait and see the extent to which rising commodity prices boost the bottom lines of Alcoa, Chevron and Exxon. Recall that last quarter Exxon reported record results but still failed to meet analyst projections. The fertilizer space is another hot area, with Potash (7/24) and Mosaic (7/27) reporting late in the month.
Among other equity market events of note is the July 11 launch of Apple's 3G iPhone. The hoopla surrounding the new iPhone could give Apple and the rest of the tech sector a shot in the arm even if earnings season as a whole falls flat. Apple's earnings report on 7/21 could also be of particular interest following smartphone competitor RIMM missed estimates for its quarter recently.
Economic Data
On the data front, the first big number of the month arrives on July 3 when the US June payrolls data is released, which is expected to have declined for the sixth month in a row. Market watchers are also awaiting the CPI and PPI data mid-month for a read on inflation. Any signs of improvement this month could help make the case for the FOMC to seriously consider tightening, which would help firm up the dollar.
Forex
In currencies the debate among central bankers has been whether to focus on slowing economic growth or squash the potential of secondary inflationary effects. Dealers have noted that the difference in views between the Fed and the ECB could signal "increased volatility" in summer markets. Central bankers have noted an increasingly uncertain interest rate path over the past few weeks.
The market is expecting the ECB to hike rates at its July 3 policy meeting, in order to counter inflationary effects. The FX and fixed-income markets have been well prepared for any interest rate hike, as ECB members have broadcasted their intentions since the bank's last policy meeting a month ago. One lingering question has been the definition of what the ECB means by a “small” hike. Typically the central bank moves in increments of 25bps, but there are rumors that it may move only by 12.5bps, taking rates to 4.125%.
Rising commodity prices have hurt the dollar, and non-G7 members have raised their level of verbal intervention, most notably concerns expressed by both Chinese and Russian political officials. Chinese Prime Minister Wen called on the US to take action to stabilize the USD, while the Russian President noted that a weak dollar is an international problem. G-7 ministers will meet in Japan on July 7-9.
France will assume the EU presidency on July 1 for its six-month term at the helm of Europe. Naturally France has been a very vocal critic of a strong euro, with President Sarkozy recently stating the EUR is 30% overvalued against the dollar. It remains to be seen whether the French will temper their rhetoric or rather crank up the volume.
Commodities
Oil and other commodities show no signs of giving up center stage in this economic climate. Gold futures underwent a resurgence in June, closing near the $930 mark. Crude futures approached the forecast “super spike” level of $150/bbl late in the month; the ECB rate decision could help them over this level in July. Conversely, a statement from the ECB highlighting its satisfaction with one small hike could help deflate the commodity bubble if Fed rate hikes are seen to be forthcoming. Possible wildcard events include more rumors about Israel bombing Iran or a hurricane headed for the Gulf of
Mexico
Conclusion
All told, the growing rift between central bank styles will shape how the second half of 2008 shakes out. It may involve further uncomfortable inflation and the central banks starting rate hiking campaigns regardless of the effect on growth. With the DJIA having reached the 20% off its peak that officially defines a bear market, only time will tell how low the bear will take us; the average bear market hits bottom down 30% from highs.
Notable Events:
7/1: France takes over EU Presidency
7/3: ECB rate decision; US Nonfarm payrolls and unemployment
7/7-7/9: G-8 meeting
7/11: Apple iPhone 3G goes on sale
7/15: US PPI
7/16: US CPI
7/31: Q2 Advanced GDP, the first reading for Q2
G8 Presidents meet
8/1: Yahoo! Shareholder meeting
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