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July 19 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com
WHEN PESSIMISM IS SO BAD, IT’S A BUY SIGNAL (1101 EDT/1501 GMT)
Bank of America’s July global fund manager survey showed a “dire level of investor pessimism,” but that doesn’t mean that stocks can’t rally this quarter, assuming that there is no Lehman Brothers moment.
Strategists Michael Hartnett and Myung-Jee Jung said that stocks and credit could rally in the coming weeks despite the second half of the year facing poor fundamentals, with the contrarian third quarter trade being risk-on “if no Lehman, CPI down, Fed pause by Xmas.”
In this case, investors should be short cash and long stocks, short the U.S. dollar and long the eurozone, short defensive stocks and long banks and consumer stocks, they said in their report titled “I’m so Bearish, I’m Bullish.”
Bank of America’s survey showed that investor expectations for growth and profits hit an all time low and cash levels and equity allocation are worse than during the global financial crisis. The BofA Bull & Bear Indicator is “max bearish” at 0, which is a contrarian buy signal.
AND THEN THERE WERE THREE - TRUSS FAVORITE TO SUCCEED JOHNSON (1045 EDT/1445 GMT)
The race to replace Boris Johnson as head of the Conservative Party and his role as Britain's Prime Minister is heating up, with the number of candidates vying to replace him down to three: Liz Truss, Rishi Sunak and Penny Mordaunt.
Truss, the foreign minister in Johnson's government, has jumped to the favorite spot in the betting markets following the fourth round of voting by Conservative MPs, although it remains a close race between herself and Sunak.
Truss's odds of 2.18 on the Betfair Exchange imply around a 46% chance that she'll win the leadership position, versus odds of 2.4 for Sunak, approximately a 42% chance.
Sunak, the finance minister in Johnson's government, saw his odds drift after the latest round of voting and after a poll published by Sky News showed that he would struggle in a runoff against all the other candidates.
The YouGov poll of Conservative Party members, those who get to vote in the final stage of the contest, showed Sunak would lose against all the other candidates.
Betting markets don't expect Mordaunt to come out on top and at odds of 8.0 (a 12.5% chance), she is the rank outsider.
Mordaunt was a strong favorite in the early stages of the contest, with betting markets at one stage giving her more than a 60% chance of winning.
The final vote of MPs takes place on Wednesday where the three candidates will be whittled down to two. They will then face a vote of Conservative Party members over the summer with the announcement of Johnson's successor set for September 5.
(Samuel Indyk)
CRANKING THE A/C: COOL HOUSING DATA ON A HOT DAY (1030 EDT/1430 GMT)
Market Participants on Tuesday were given another set of snapshots to add to the end of their scrapbook entitled "The Rise and Fall of the COVID-era Housing Market."
Ground-breaking on new U.S. homes unexpectedly dropped 2.0% last month to 1.56 million units at a seasonally adjusted, annualized rate (SAAR), the lowest level since September 2021 according to the Commerce Department.
The number undershot consensus by 1.3%.
Building permits, among the more leading housing market indicators inched 0.6% lower to 1.69 million SAAR, 2.1% above the average forecast.
Single family projects were responsible for the overall decline in both starts and permits, both of which fell by about 8%, offsetting modest gains on the multiple unit side.
Still, the declines echo Monday's Homebuilder Sentiment print from the NAHB, which plunged to its lowest post-COVID reading as home affordability evaporates amid soaring home prices and rising mortgage rates.
Ordinarily, the gap between starts and permits often points to a backlog. But that might not be the case this go-around, writes Nancy Vanden Houten, lead U.S. economist at Oxford Economics.
"We can't rule out the possibility that some projects get canceled," says Houten. "The NAHB reported yesterday that 13% of builders reported in the July homebuilder sentiment survey that they were lowering prices to support sales and/or to limit cancellations."
"Anecdotal evidence points to an elevated rate of new home sales contract cancellations," Houten adds.
The graphic below shows that while building permits are coming down to pre-pandemic levels, housing starts have sunk past them:
Rising home prices, scarcity of materials and labor, and steadily climbing mortgage rates have all rained on the housing sector's parade in recent months.
And the home construction side of the market is coming under increasing pressure from the market of existing, pre-owned homes.
"Homebuilders need to adjust rapidly to a world with fewer buyers and much more competition from private sellers of existing homes, whose listings jumped by a third in the three months to May, with much more coming," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "In short, housing construction is nowhere near the bottom."
Stock market investors have certainly fallen out of love with housing-related stocks, and the honeymoon ended about that time the average 30-year fixed contract rate embarked on its hike up Mount Everest:
Wall Street is a sea of green in morning trading, with cyclicals, small caps, chips and transports , all signs of economic optimism, taking the lead.
(Stephen Culp)
U.S. STOCKS HAVE EARLY THRUST (0955 EDT/1355 GMT)
Wall Street's main indexes are higher on Tuesday as earnings season moves past big banks, with investors keeping a close eye on the impact of a stronger dollar on corporate America.
That said, although the U.S. dollar index has hit fresh highs back to 2002 this month, it is on track to fall for a third-straight day, and for its biggest weekly drop since early February.
In any event, earnings season continues to gear up with Netflix due to report on Tuesday after the bell.
Small caps, banks and chips are among early outperformers.
All major S&P 500 sectors are gaining with materials leading. Tech, and staples are the laggards.
Here is a snapshot of where markets stood in early trade:
(Terence Gabriel)
U.S. STOCKS: PRESSURE IN THE PIPE (0900 EDT/1300 GMT)
Similar to bitcoin, major U.S. stock indexes have seen daily historical volatility readings recently collapse - click here:
Daily Bollinger Band (BB) width on the Dow Industrials has fallen to its lowest level since April 25, while the S&P 500 is at its lowest since April 14. Back then, it was early-on in developing swoons that culminated with the June lows.
The Nasdaq Composite's daily BB width has fallen to its lowest level since Jan. 6, which was just around the time that the SPX and Dow began to collapse from their record highs.
Meanwhile, readings on the small-cap Russell 2000 are even more compressed:
Its daily BB width is at its lowest level since Nov. 1, which was just five trading days ahead of its record high.
Compressed historical volatility does not in itself predict direction, but it can suggest a market ripe for some wild gyrations, or indeed, its next significant trend.
Readings can become even more compressed, but traders will be watching for a RUT breakout of the range defined by its upper and lower BBs, which ended Monday around 1,785 and 1,670. Such a turn can spark follow-through momentum in the direction of the break.
As it stands, bitcoin may be blazing the trail with an upside breakout. In any event, given that U.S. indexes have pressure building in the pipe, and with a much-anticipated FOMC meeting, as well as tech-titan earnings reports, all coming next week, stocks certainly appear primed to blow-off some steam.
(Terence Gabriel)
FOR TUESDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE:
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)
