US Dollar Falls, Japanese Yen Gives Up Some Gains as JPMorgan Earnings Surge, Jobless Claims Plunge

Starting with the good news, JPMorgan Chase reported better than expected Q2 earnings, as profits surged 36 percent. Meanwhile, initial jobless claims fell by 47,000, or 8.3 percent, during the week ending July 11 to 522,000 and continuing jobless claims fell a whopping 642,000, or 9.3 percent, to 6,273,000 during the week ending July 4. While these are definitely notable moves that signal improvements in labor market conditions during July, we also have to consider that the continuing claims result is for a holiday week.

Now, on to the bad news: the Federal Reserve Bank of Philadelphia's manufacturing index fell more than anticipated to -7.5 in July from -2.2, indicating that activity in the sector continued to contract for the tenth month. Adding to the mix, the latest TIC data showed that international investors sold, on net, $19.8 billion worth of long-term equities, notes and bonds in May, compared to net purchases of $11.5 billion in April. A closer look at the data shows that the bulk of sales were in Treasury notes and bonds, while stock purchases rose by the most since January 2008, highlighting how strong risk appetite was during the month of May. Adding to evidence of this, typical "safe haven" currencies like the US dollar, Japanese yen, and Swiss franc were the weakest of the majors during that period time.

Since these market correlations still hold, it is very important to watch what’s going on in broad financial market news. Through the end of the week, there are a few companies to watch: CIT, Bank of America, Citigroup, and BB&T.  CIT Group, a large and troubled commercial lender, was denied additional federal aid and a bankruptcy filing could be on the way, which would highlight the fact that financial market conditions remain unstable.  Also, Bank of America, Citigroup, and BB&T will publish their Q2 earnings results on Friday. Of the three banks, only Citigroup is expected to announce another quarter of losses, but following the astonishingly strong results we saw from Goldman Sachs on Tuesday, there's a risk that the bar has been set too high and any disappointing result could resonate deeply with investors and spark flight-to-quality toward the US dollar and Japanese yen, while weighing on carry trades and stocks. On the other hand, additional round of surprisingly strong results could help to boost investor sentiment even further.