The bulls surged into the long holiday weekend, stretching the Dow up more than 2500 points in just six trading days.  But, unfortunately, it would appear the high speculation all, or nothing market is here for a while longer, with the VIX closing above 25 handles despite the bullish rush to buy.  This morning we have Case-Shiller, Chicago PMI, Consumer Confidence, and some earnings reports to keep traders guessing what comes next.  In addition, price action is likely to remain challenging as China’s economy struggles and Europe’s inflation continues to surge as the Fed begins quantitative tightening.

Asian markets traded mixed during the night as China’s factory activity slowed and the government faces a funding gap of 6 Trillion yuan.   European markets trade mainly lower this morning as food and energy prices set new record highs of inflation.   U.S. futures are trying to climb off of overnight lows but still point to a gap down open with Brent Crude trading over $123 a barrel. 

Economic Calendar

Earnings Calendar

To kick off a shortened week of trading, we have just under 30 confirmed earnings reports.  Notable reports include CRM, AMBA, PLAN, CHPT, APPS, HPQ, KIRK, NAT, SPWH & VSCO.

News & Technicals’

In May, the Eurozone inflation continued higher, hitting a record high for the seventh month at 8.1%, as food and energy prices surged higher.  French inflation also surpassed expectation in May, rising to 5.8%.  In addition, oil prices jumped after EU leaders reached an agreement late Monday to ban 90% of Russian crude by the end of the year.  The embargo is part of the European Union’s sixth sanctions package on Russia since it invaded Ukraine.  Responding to the measures, Mikhail Ulyanov, Russia’s permanent representative to international organizations in Vienna, said the oil ban negatively reflects the bloc.  “As she rightly said yesterday, #Russia will find other importers,” Ulyanov said via Twitter, referring specifically to European Commission President Ursula von der Leyen.  The Chinese government faces a growing shortfall of cash, analysts say, as they predict an increase in debt to fill the gap.  The analysts did not share specific figures on how much additional debt might be needed.  But they pointed to growing pressure on growth that would require more support from debt.  Nomura estimates a funding gap of about 6 trillion yuan ($895.52 billion) — roughly 2.5 trillion yuan in decreased revenue due to tax refunds and weaker economic production, and another 3.5 trillion yuan of lost land sales revenue.  Federal Reserve Governor Christopher Waller said Monday he expects 50 basis point interest rate hikes to continue.  Federal Reserve Governor Christopher Waller said Monday he expects 50 basis point interest rate hikes to continue.  Waller added that he thinks the Fed can raise rates and tamp down demand without causing a severe economic downturn.  Treasury yields rose in early Tuesday trading, with the 10-year trading up to 2.80% and the 30-year rising to 3.007%. 

The bulls surged into the holiday weekend, with the Dow closing up more the 2500 points from the low in just six trading days.  The VIX, however, closed above 25 handles, suggesting the extended relief rally still has a lot of work to do before price volatility calms down.  Moreover, the T2122 indicator also warns of a short-term overbought condition suggesting a pullback could be just around the corner.  So, the big question is, can the bulls defend the recent market lows by putting in a higher low to raise hope of an uptrend?  With quantitative tightening beginning and the Fed expected to raise rates by another 50 basis points in just over a week, the bulls will have their work cut out for them as food and energy prices soar.  Though it may be a short trading week, I expect it’s likely to remain very challenging.

Trade Wisely,

Doug