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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

BMO chief investment strategist Brian Belski sees the June lows as the beginning of a sustainable rally,

“Many market pundits remain skeptical of the recent July rebound, suggesting it is a dead cat bounce driven by the most oversold companies in the index. While these so-called laggards have certainly been the key drivers of recent upward price pressure, our work suggests this is a common characteristic of market troughs. In fact, in six of the last seven market corrections the most oversold stocks were the key drivers of the rebound and posted the strongest returns on average six months after the market troughed. More importantly, a significant portion of the recent rebound has been driven by quality factors, which meaningfully underperformed in the early part of the year as investors became increasingly skeptical on the sustainability of profit margins, particularly in the face of rising inflationary pressures. As such, it is not surprising to us that these have been among the best-performing factors during the rebound, especially given the resilience of profitability metrics over the last year. Furthermore, we believe the sharp rebound in quality factors highlights rising confidence in fundamentals as we officially head into the second half of the year.”

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The Bespoke Investment Group detailed what might be a break in the outsized U.S. dollar rally,

“In the wake of Wednesday’s weaker-than-expected CPI, the US Dollar Index traded down over 1%. With that decline, the Dollar Index also finds itself in the unfamiliar position of trading below its 50-day moving average (DMA), a level it hasn’t closed below since 2/17/22. Not only did the Dollar Index end a streak of 123 trading days above its 50-DMA, but it also looks to have broken its uptrend that has been in place from when the streak started in February … The Dollar Index’s streak of closes above its 50-DMA ends what was been the third longest streak of consecutive closes above the 50-DMA going all the way back to the early 1970s … At the surface, dollar weakness following a long streak of closes above the 50-DMA looks to be a headwind for equities. As mentioned above, however, the relationship between the performance of the Dollar Index and stocks has been both important and evolving. US companies were exposed mostly to just the US economy fifty years ago, but now they have global exposure. It may come as a surprise to many, but while companies like Coca-Cola (KO) and McDonald’s (MCD) are as ‘American’ as they come, they both now generate more than 60% of their sales outside of the United States”

“Bespoke: Finally a break in the USD rally” – (research excerpt) Twitter

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Citi’s global strategy team see the equity rally continuing until the Federal Reserve reasserts itself,

“In the near term, risk assets will probably continue to squeeze higher and the USD will continue to fall until either: 1) the Fed reasserts itself and is forceful in its pushback to looser financial conditions or 2) the economy starts to materially weaken, feeding into lower EPS expectations. The levels of inflation are still eyewatering, and the labour market is still uber-tight, so the Fed will want to keep going until inflation is back to target or the labour market breaks. Therefore, upcoming labour market data needs to be very weak and CPI needs to see another big miss in order for the Fed to start its victory lap. This means that bad news for the labour market = good news for the financial market. Until then, squeezy risk assets can remain. Local rates that have negative inflation surprises look interesting. We exit our short EURUSD position.”

“Citi: Bad news for labour markets is good news for equities” – (research excerpt) Twitter

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Diversion: “How the FBI’s Mar-a-Lago Raid Could Expose Trump’s Secrets” – Wired

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