NASDAQ to Dilute Dominant Players in ‘Special Rebalance’ Move

The US Dollar significantly declines to a 64-week low, but the Federal Reserve is sticking to its guns. Over the past 24 hours, two further Federal Open Market Committee members have told journalists more interest rate hikes are necessary. This includes Michael Barr, Loretta Mester and Mary Daly. However, the issue for the US Dollar is that investors do not believe the Federal Reserve will be able to continue raising rates. The main reason is the inflation rate which has significantly declined recently. The US inflation rate is also likely to influence the NASDAQ which has announced significant changes to the “weight” of large companies. The US inflation rate has gone from 6.4% to 4.0% in five months, and analysts expect the inflation rate to fall further to 3.2%. The Fed’s inflation target remains at 2%. 

Investors will turn their attention to this afternoon's speech by respected FOMC member James Bullard, who may further clarify the possibility of two or more hikes. Mr. Bullard is known to be one of the more hawkish committee members. In the meantime, the US Dollar Index is trading at 101.73, which is 0.24% lower than the market open. However, the main price driver will be tomorrow’s Consumer Price Index. Traders looking to speculate an increase and take advantage of the discounted price will hope for an inflation rate above 0.4%. The market is expecting a 0.3% monthly CPI figure and the same for the Core CPI data. 

NASDAQ to Dilute Dominant Players

The stock market experienced a tug-of-war scenario between buyers and sellers during yesterday’s trading session. The NASDAQ saw a strong trend renew its recent lows but then rose to a new daily high. 10 of the top 20 most influential stocks ended lower during yesterday’s session. The asset ended the day slightly higher than the open price but considerably underperformed compared to the S&P 500 and the Dow Jones. The Dow Jones was the best-performing US index rising 0.62%. During this morning’s Asian session, US and EU equities increased, signaling a “risk on” sentiment. 

Both positive and negative factors are influencing the US stock market. The latest Chinese data points towards a global economic slowdown as the country is close to deflation. This concerns investors hoping an economic downturn is not experienced globally. On the other hand, investors also anticipate strong fiscal policy support from the communist government. We also note the end of US Treasury Secretary Janet Yellen’s visit to China. Both sides noted its productivity and content, and Yellen said that the US and China could better understand each other, despite some disagreements on economic issues. The visit improved investors sentiment who had previously been concerned another “trade war” was impending. Investors should note that the previous “trade war” resulted in the stock market declining by 21%. 

The NASDAQ has also advised that the weight of the most influential stocks will likely be reduced to limit concentration risk. The NASDAQ has branded the move as their “special rebalance”, which will occur on Monday, 24th July. The move is to make the top seven companies less influential and redistribute weighting across the index. According to NASDAQ, the top five stocks must not exceed 38.5% to mitigate risk, and no stock outside the top five should exceed 4.4%. According to the first reports, the individual stocks from the top five may experience a slight downslide. However, the index's overall performance will also depend on if we see a surge in stocks with a lower weight. 

In the short term, the NASDAQ will be influenced by tomorrow's inflation data. Higher inflation data can pressure the index, but the extent of the pressure will depend on how high inflation is. For example, inflation is expected to decline to 3.1%. If inflation remains above 3.4%, a pivot from the Fed will become less likely. 

NASDAQ 15-Minute Chart on July 11th 

GBP/USD Increases to 15-Month High

This morning's exchange rate rose to a 15-month high as UK salaries rose above traditional levels. The Average Earnings Index for the UK rose from 6.7% last month to 6.9%. This makes the Bank of England’s job more problematic as it is harder to bring down inflation while salaries continue to increase. As a result, the Bank of England may be forced to hike more than it would have liked. 

The GBP/USD rose by 0.40% before forming a retracement and is forming its fifth consecutive day of climbs. Over the past two weeks, the exchange rate has risen by more than 1.65%. The exchange rate is forming its second impulse wave, with three higher highs and two higher lows. As a result, the asset is forming a clear bullish trend. The price is trading above the regression channel, the Volume-Weighted Average Price, and on the upper side of the Bollinger Band. Trend and momentum indicators are pointing towards an upward trend. However, technical analysts are also cautious of the divergence signal forming on most timeframes on the RSI. The divergence signal is known to indicate a reversal or loss of momentum. If the price declines below 1.28487, investors may consider a potential correction down to 1.27490.

GBP/USD 30-Minute Chart on July 11th 

Regarding fundamental influences, the only concern for investors is the slight rise in the Unemployment Claims data, though this was not enough to create significant concern. The Claimant Count Change read 25,700, slightly above the 20,500 expectations. The Average Earnings, Excluding Bonuses, remained at 7.3%. Tomorrow, the focus of investors will be the publication of the minutes of the June meeting of the Bank of England and the reports of the Financial Policy Committee.

Summary:

• This morning's exchange rate rose to a 15-month high as UK salaries rose above traditional levels. 
• The Average Earnings Index for the UK rose from 6.7% last month to 6.9%. This makes the Bank of England’s job more problematic as it is harder to bring down inflation while salaries continue to increase.
• Over the past 24 hours, two further Federal Open Market Committee members have told journalists more interest rate hikes are necessary. However, investors remain uncertain whether the Fed can continue hiking. 
• The global stock market improves as investors expect financial support from the Chinese government. However, risks remain as China’s economy grows slower and is close to experiencing deflation. 
• The NASDAQ will lower the weight of large tech companies, which mitigates risks, but potentially may limit the uptrend.