OANDA Market Insights podcast (episode 23)

OANDA Senior Market Analyst Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Trump NATO summit meltdown, Tory big beasts depart Cabinet, PM May defends Brexit white paper, Bank of Canada raises interest rates and the ECB releases the minutes from its June meeting.

Trade war and Trump European trip boost US dollar

GBP/USD – British pound slips over white paper blues

What sparked the dollar rally ? ( OANDA Trading Podcast on Money FM 89.3)

Markets higher as earnings season gets underway

Earnings season eyed as trade war fears remain

We’re seeing some risk appetite return on Friday even as concerns about trade remain front and centre and shows no signs of improving.

European equity markets are trading in the green on Friday, taking the lead from the US session on Thursday where tech stocks drove a rally that saw the NASDAQ hit a record high. With earnings season getting underway, investors will be looking for reasons to be more optimistic having spent months reading about the risks that a trade war poses to the economy.

JP Morgan, Citigroup and Wells Fargo will kick things off today and over the coming weeks, investors will be paying close attention not just to the results but also references to trade tariffs and the impact they are expected to have on future results, particularly those that have already been targeted in counter-measures taken or proposed against the US.

DAX steady as investors search for cues

Sterling slips as Trump warns of risks to US/UK trade deal

Trump has very much been in the spotlight this week, attending the NATO summit in Brussels before heading over to the UK to meet Prime Minister Theresa May. As ever, Trump was not afraid to express his views on the UK and Brexit ahead of the visit, warning that a trade deal with the US would not be possible under the model that May is seeking with the European Union, while also expressing his belief that Boris Johnson would make a good PM. This appears to have weighed on the pound in trade on Friday given the complications it could cause May and her team.

None of this will go down well with May – who has previously pushed strongly for this visit despite much protest – and comes at a terrible time for her but as Trump well knows, she is in a very weak position right now and is unlikely to fight back and, more importantly, he wants a Brexit that best suits the US. Whether Trump’s comments give more voice to dissenters among Brexiteers is yet to be seen but it certainly doesn’t help the PM as a trade deal with the US has long been touted as one of the benefits of leaving the EU.

First signs of tariffs impact in China’s June trade numbers

Chinese trade surplus increases as Trump plans more tariffs

Chinese trade data released overnight may be used as a source for Trump’s next attack on the world’s second largest economy, with exports having soared once again – rising 11.3% – increasing the surplus the country has with the US to $41.61 billion in June. While the main reason for such a spike is likely to be exporters front loading sales ahead of the tariffs being implemented, it’s likely that a stronger US economy and weaker yuan is also playing a role.

I expect this will be used as another example of the bad trade policies that Trump has repeatedly references but been unable to so far influence. Trump is attempting to force them back to the table with threats of another $200 billion in tariffs, something that has so far only been met with retaliation from China and others.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Live FX Market Analysis – 10 July 2018 (Video)

In this week’s webinar, Senior Market Analyst Craig Erlam discussed the latest Brexit developments as two members of her team resign after an apparently united and productive meeting on Friday. He also talks Trump, after the latest imposition of trade tariffs and ahead of his trip to the UK and the NATO summit, and previews the week ahead.

Craig also gives his live analysis on EURUSD (12:20), GBPUSD (15:03), EURGBP (17:50), AUDUSD (19:35), USDCAD (24:12), GBPCAD (26:19), NZDUSD (28:31), USDJPY (30:22), GBPJPY (32:25) and EURJPY (34:52).

GBP/USD – British pound steady on modest GDP growth

USD/JPY – Japanese yen dips to 7-week low, inflation reports next

Commodities Weekly: Gold saved by dollar’s retracement

What does Davis resigning mean?

The resignation of a key driver of the U.K.’s Brexit process is a blow for British Prime Minister Theresa May, but analysts believe she can survive the departure.

Brexit Secretary David Davis resigned Sunday evening, objecting to May’s withdrawal plan that seeks to maintain close economic ties with the European Union (EU), rather than a harder separation favored by Davis and other so-called “Brexiteers.” Former Housing Minister Dominic Raab was named as Davis’ successor on Monday morning.

Analysts are seeing the latest move as a “crunch point” for May, but that the vagaries of British politics and need for leadership just nine months before the official Brexit date could mean that she can soldier on.

CNBC

May Faces Difficulties Keeping Cabinet United Over Brexit

Theresa May is braced for her Cabinet to split when the European Union rejects her demands for a sweeping free trade deal, after her senior team agreed to put off the hardest Brexit decisions until later.Despite the Cabinet truce after months of internal division, three senior government officials said May will face her most challenging task keeping her ministers united when — as they expect — EU leaders formally reject the British approach.The U.K. prime minister won the backing of her ministers to ask the EU for the most ambitious and wide-ranging trade agreement the bloc has ever signed, after a marathon eight-hour meeting at her country house on Thursday.

Source: May Knows Danger of Cabinet Split on Brexit Still Lies Ahead – Bloomberg

DAX Edges Lower as German GDP Slows in Q4

24 hours of reconciliation

50 50 Chance of Halting Brexit

Opponents of Britain’s exit from the European Union are preparing a major campaign they say now has close to a 50:50 chance of stopping Brexit by blocking Prime Minister Theresa May’s divorce deal, a leading pro-EU campaigner said.With Britain scheduled to leave the EU in March 2019, opponents of Brexit are exploring various ways to stop what they say is Britain’s biggest mistake since World War Two.‘Best for Britain’, a campaign group which received a 400,000 pound donation from billionaire financier George Soros last year, hopes to convince lawmakers in the 650-seat parliament to block the withdrawal deal May aims to bring back from Brussels in October.

Source: Chance of halting Brexit now close to 50:50, says leading campaigner – Reuters

DAX Edges Lower as German GDP Slows in Q4

24 hours of reconciliation

Merkel Wants Overhaul of EU Finances After Brexit

Brexit offers the European Union an opportunity for a broad rethink of its financial set-up, German Chancellor Angela Merkel said on Thursday before an EU summit that will tackle the bloc’s future budget.Chancellor Angela Merkel addresses the German lower house of parliament Bundestag in Berlin, Germany, February 22, 2018. REUTERS/Axel SchmidtAddressing the Bundestag (lower house of parliament), Merkel made clear that the future of the EU would be a priority in her fourth term, provided a coalition deal between her conservatives and the pro-EU Social Democrats is approved by SPD members.“We need a new start for Europe,” said Merkel, adding the looming debate on a new budget for the 27-member bloc after Britain’s withdrawal in 2019 could lead to some major changes.

Source: Merkel eyes overhaul of EU finances for post-Brexit bloc – Reuters

Futures Flat After Hawkish Fed Minutes

Dollar maintains its firmer tone

Macron Inspires New UK Party Intent on Blocking Brexit

A new British party inspired by French President Emmanuel Macron’s movement launched a campaign on Monday to thwart Brexit by convincing MPs to block any EU withdrawal deal Prime Minister Theresa May can strike.Sandra Khadhouri, together with fellow Renew party members James Clarke and James Torrance, speaks at the launch of the new political party in London, Britain, February 19, 2018. REUTERS/Peter NichollsWith just over 13 months left until Britain is due to leave the EU, opponents of Brexit are exploring ways to stop what they call Britain’s biggest mistake since World War Two.The Renew party, founded last year after Macron’s En Marche! movement propelled him to power, said it would target pro-Brexit MPs in constituencies with high levels of support for EU membership.

Source: New British party inspired by Macron seeks to overturn Brexit – Reuters

Don’t go barking up the wrong tree in the Year of the Dog

Dollar Regains Ground Ahead of Fed Minutes

A day of calm

A day of calm

Equity markets have begun the week on a somewhat positive not picking up from Friday rebound as bargain hunters have returned on the first sign of stability. I guess if you owned a stock for fundamental reasons seven days ago and its 5 % lower this week, why not add to the portfolio? So the story goes.

While the Vix has pulled back to the 25 zone, it’s very trying to view this weeks stock market bounce anything other than technical correction after critical Global benchmarks had one of the there worst performances in years. However, the market is trying to find a positive equilibrium, and if we can get through this week’s critical US CPI relatively unscathed, then it would most certainly look as if last week was little more than a corrective episode rather then the commencement of a bear market.

None the less, government bond yields have found some stability after yields moved higher, albeit in very thinly traded Bond markets.
But certainly adding to the semblance of calm which has started the week. But concerns abound that the Bond Markets have only begun to factor in both the global reflation trade and burdening supply which could drive US bond yields considerably higher.

Oil  Markets

Ignoring US supply-side concerns, OIl markets attempted to make a half-hearted recovery overnight on little more than an equity market correlated bounce and indeed the weaker USD added to the momentum.

Despite the Oil market exhibiting all the hallmarks of technical trading, toppling from massively overbought conditions to retracing on an equity correlated bounce. But technical momentum or not, with the EIA data around the corner, it’s hard not to overlook their expectations that U.S. crude output may rise to 11 million bpd by the end of the year.

However, global demand remains firm, and despite the shale oil boom the supply tightening narrative remains prevalent with OIL towing the line.

Battle lines are forming in an around the WTI 60.00 bpd level which should make for an exciting market this week.

Gold Markets

Gold prices were supported by a weaker dollar and physical demand ahead of Chinese lunar new year. The equity market carnage has abated, and the waves of cross assets selling to replenish equity margins have temporarily decreased providing a calmer market to re-establish Gold longs. But prices should remain within a range ahead of this week US inflation data as the US CPI will be a monster print for the markets inflation views and could provide a catalyst for Gold to bounce higher.
Currency Markets

The US dollar traded lower as currency traders are analysing the rebounding global equity markets. Lots of noise but little momentum as traders are keying on this week’s US CPI with volumes and liquidity density much lower to start the week.

Japanese Yen

The markets continue to digest the potential FX trading leverage cap for individuals in Japan. Mrs Watanabe was a considerable player in the market( especially for Retail brokers), so we’re keeping a close eye on the developments

As for the Yen, we seem to be at a crossroads in all Asian markets with currency markets barely budging looking for some inflation clarity in Wednesday CPI. The fear is that a higher print will send bond yields sky high and equity markets will tumble once again.

Australian Dollar

A rebound in risk sentiment has seen USD haven hedged unwind and buoyed commodity markets.As such, the Aussie dollar has found some solid footing this morning
Malaysian Ringgit

We’re at a bit of a crossroads this week as the markets are grappling with inflation versus the global growth narrative.

An uptick in inflation will lead to higher yields and will present the most significant headwind for the Ringgit. While the market has priced in 3 US rate hikes for 2018, a sudden uptick in US inflation could quicken the pace of the FED interest rate normalisation and could weigh negatively on regional sentiment.

We expect the market to trade in a tight range ahead of this domestic GDP and US CPI. Both monster data points for the Ringgits near-term fate

This too shall pass.

This too shall pass

It seems anytime I left my desk last week the market was sure to fall apart but after witnessing 25 years + of market corrections, I know storms don’t last forever, and as far as the recent bout of market mayhem is concerned, this too shall pass.

Traders quickly conjectured that the ‘crash’ was mainly due to over-crowded positioning in short equity volatility trades and, therefore, was a relatively isolated event. But this does not mean equity markets are out of the weeds just yet.

With US cash flow models factoring in higher US bond yields, equity markets repricing was always on the cards, but unequivocally the rapidity of the move higher in yields was stifling and stop losses were combatively triggered. And when factored with the unbridled use of leverage in equity positions it likely caused everyone to head for the exits due to cash and margin requirements. The great unknown in the debate is just how much equity froth is based on leverage and to what extent will higher US bond yields squeeze these positions either from a cash position or through asset rotation perspectives.

It was a crazy week for US rate markets, but with powerful US economic signals and interest rates most certainly to rise quicker than expected,  last week tumult could be little more than the start of the equity rollercoaster. If cumulative boost from tax reform and fiscal stimulus nudges GDP outline 1.5% higher over the next six to 9 months how does the Fed possibly stick to their three dot plot projections for 2018?

Bond markets are only in the early stages of buying into the global reflation theme, and increasing inflation expectations are driving nominal yields higher. Last week there was a significant topside move in US yields which suggest we could easily tack on another 30-35 basis points 2’s through 10’s given the US fiscal stimulus backdrop. But even without inflation, global central banks will move rates higher, and this will add to higher yield environment, higher inflation or not.

The Feds seem undeterred from the path of gradual normalisation by the recent market turmoil, and we should not expect a Powell ” Put.” given the economic indicators remain strong. And with FED Dudley chiming in, the recent Stock market volatility is ” no big potatoes.” , just imagine a big potato !!
Oil Markets

U.S. crude oil fell below $59 a barrel for the first time in 2018.Rising US production and a resurgent dollar have stacked pressure on oil prices amid a broad financial market sell-off. And on Friday WTI nosedived after the U.S. rig count rose by 26 rigs in the week through Feb. 9 to a total of 791, supporting the EIA revised production forecast that the US would reach the lofty 11 million bpd by the end of 2018

Also, the possible demise of the OPEC agreement has traders on pins and needles after The head of Russian energy giant Gazprom Neft on Friday said producers could adjust their commitments under the deal as soon as next quarter.

Gold Markets
Without question last week was a stressful week in the Gold markets which saw a little appeal for traditional haven assets as Wall streets sinkhole expanded.

At the moment higher US yields continue to weigh negatively on gold’s appeal over the short term, but the recent market tumult likely has overleveraged equity positions scrambling for margin top-ups, and to a degree, there was cause for some cross-asset unwinds including gold allocations which were probably used to fund margins.

In the more extended run with inflation expectations increasing on the back of US stimulus, this should be a consideration for growing one’s gold portfolio.
At the retail levels, Mainland Gold consumption is rising in preparation for Chinese Lunar New Year holidays, not to mention a last-minute splurge for Valentine’s day should keep retailers busy.

Currency Markets

Currency markets were more or less a mixed bag last week, a potpourri of events but not one convincing driver. And with little to glean from Friday close, currency traders could remain sidelined watching equities markets swings in wonderment at least until this week’s US CPI. Given all this rukus started with an uptick in the wage growth component from this months NFP release; this weeks US inflation data will be a monster of a print.
Japanese Yen

Funding positions continue to unwind which at least in the case of JPY, is having a more significant influence over USDJPY than higher US yields. The reappointment of Kuroda could retrace some speculations on the policy adjustments; the Yen will remain the puppet whose strings are manipulated by equities and fixed income price movements.

Australian Dollar

RBA and SOMP behind us and signalling nor rush to hike for a considerable period given the slight dovish lean in the inflation outlook. The AUD should, therefore, be back trading off risk sentiment, commodity prices and ultimately the underlying USD movements. While the Aussie bounced higher above 78 on positive US equity close on Friday, we should expect commodity currencies trade poor amid the recent volatile market. Rallies will likely remain subdued near-term, so the Aussie should remain vulnerable.

Long Euro short Aussie trade set up should return in vogue over the short term given divergent central bank policy expectations.

Malaysian Ringgit

The market continues to grapple with growth versus the inflation narrative, and as this volatility irons itself out, Asian markets tend to exhibit a higher sensitivity to global fluctuations.

And while the Ringgit is better positioned than regional peers to withstand the recent uptick in Global volatility due to strong Marco foundations and the BNM on the path to interest rate normalisation, The domestic economic landscape will come under intense glare when Q4 GDP is released on Wednesday.

While March a rate hike expectations are low due to the dovish inflation overtones expressed by BNM in January,  but a notable above consensus print on this weeks GDP  will increase the odds of a rate hike later in 2018 and strengthen the Ringgit. ( Consensus is 5.8 )

While oil prices continue to move lower due to US supply concerns, I believe this is more technical driven as dollar index is holding above 90 cents, putting pressure on all commodities. Once this period of excess volatility decreases, the global growth narrative should reassert and commodity prices should rise.