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.

DAX steady as investors search for cues

The DAX index is showing limited movement in the Friday session. Currently, the DAX is at 12,510, up 0.14% on the day. On the release front, there are no major German or eurozone events. The German Wholesale Price Index dipped to 0.5% in June, down from 0.8% a month earlier. This edged above the estimate of 0.4%.

European equity markets held their own this week, and the DAX and the CAC indexes have shown little movement over the week. Still, the trading tensions hovering in the air have many investors wondering if this is the calm before the storm. On Tuesday, the Trump administration said it was considering imposing tariffs on some $200 billion in Chinese goods, which would be a significant escalation in the trade war between the two economic giants. China has promised to respond with “firm and forceful measures”, but hasn’t provided any details. With neither side showing any flexibility, the markets could be heading for stormy waters if China retaliates.

At last month’s ECB policy meeting, the markets finally received some clarity with regard to the Bank’s asset-purchase program (QE). ECB President Mario Draghi said that the ECB would taper the purchases from EUR 30 billion to 15 billion in September, and terminate the program completely in December. True to form, Draghi left open the possibility of extending QE if needed. Still, with the eurozone economy generally performing well and inflation up to 1.7%, the markets are optimistic that the ECB will wind up QE on schedule. That means that attention is focusing on the timing of a rate hike. At the June meeting, the ECB said it would keep hold rates at current levels “through the summer” of 2019, but this wording is vague, leaving the precise timing open to debate. Does this phrase mean that that the ECB will wait until the October meeting, or could the ECB raise rates during the summer, if conditions warrant a hike? ECB policymakers will be carefully monitoring growth and inflation data in the eurozone, with strong numbers reinforcing the case to raise interest rates sooner rather than later.

  The sky hasn’t fallen just yet

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

Economic Calendar

Friday (July 13)

  • 2:00 German WPI. Estimate 0.4%
  • All Day – ECOFIN Meetings

*All release times are DST

*Key events are in bold

DAX, Friday, July 13 at 6:10 DST

Previous Close: 12,492 Open: 12,539 Low: 12,498 High: 12,584 Close: 12,521

EUR/USD – Euro heads downward, investors eye US consumer confidence

EUR/USD has posted losses in the Friday session. Currently, the pair is trading at 1.1615, down 0.48% on the day. In economic news, German Wholesale Price Index dipped to 0.5% in June, down from 0.8% a month earlier. Still, this beat the estimate of 0.4%. In the U.S, the key indicator is UoM Consumer Sentiment, which is expected to dip to 98.1 points.

At the ECB’s June policy meeting, Mario Draghi spelled out his plans to wind up the Bank’s asset-purchase program (QE). Draghi said that the ECB would taper the purchases from EUR 30 billion to 15 billion in September, and terminate the program completely in December. True to form, Draghi left open the possibility of extending QE if needed. Still, with the eurozone economy generally performing well and inflation up to 1.7%, the markets are optimistic that the ECB will wind up QE on schedule. That means that attention is focusing on the timing of a rate hike. At the June meeting, the ECB said it would keep hold rates at current levels “through the summer” of 2019, but this wording is vague, leaving the precise timing open to debate. Does this phrase mean that that the ECB will wait until the October meeting, or could the ECB raise rates during the summer, if conditions warrant a hike? ECB policymakers will be carefully monitoring growth and inflation data in the eurozone, with strong numbers reinforcing the case to raise interest rates sooner rather than later.

Jerome Powell spoke in a radio interview on Thursday, and gave the U.S economy as solid report card. Powell said that the economy is “in a really good place”, pointing to President Trump’s massive tax cut scheme and increased spending as key factors in boosting economic growth. Powell did not address monetary policy and said he was uncertain as to the effects of the current trade disputes which has embroiled the U.S and its trading partners. The Fed will likely press the rate trigger in the second half of the year, but it is an open question as to whether we’ll see one hike over the next six months. The Fed is projecting growth of 2.8% in 2018, compared to 2.3% in 2017. Powell will be in the spotlight next week when he appears for his semi-annual testimony before Congress.

  The sky hasn’t fallen just yet

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

EUR/USD Fundamentals

Friday (July 13)

  • 2:00 German WPI. Estimate 0.4%. Actual 0.5%
  • All Day – ECOFIN Meetings
  • 8:30 US Import Prices. Estimate 0.1%
  • 10:00 US Preliminary UoM Consumer Sentiment. Estimate 98.1
  • 10:00 US Preliminary UoM Inflation Expectations
  • 11:00 US Fed Monetary Policy Report

*All release times are DST

*Key events are in bold

EUR/USD for Friday, July 13, 2018

EUR/USD for July 13 at 4:35 DST

Open: 1.1672 High: 1.1675 Low: 1.1627 Close: 1.1615

EUR/USD Technical

S1 S2 S1 R1 R2 R3
1.1312 1.1434 1.1553 1.1637 1.1728 1.1829

EUR/USD inched lower in the Asian session and has posted further losses in European trade

  • 1.1553 is providing support
  • 1.1637 is the next resistance line

Further levels in both directions:

  • Below: 1.1553, 1.1434 and 1.1312
  • Above: 1.1637, 1.1728, 1.1829 and 1.1910
  • Current range: 1.1553 to 1.1637

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

Imports drop as tariff wars bite

Today’s release of China’s trade data for June showed imports starting to feel the effect of tariff implementation, while exports managed a small increase. Imports rose a mere 14.1% in dollar terms, below the estimate of 20.8% and a severe drop from May’s 26.0% advance. Exports held up, recording 13.8% growth compared with a forecast of 10.0% and the previous month’s 12.6% gain. The trade surplus ballooned to $41.6 billion from $24.9 billion on the lower import bill.

At the same time, data for the first six months of the year were also released. Exports to the US rose 13.6% in dollar terms while imports climbed 11.8%. Commenting after the release, China Customs official Huang Song Ping said the H1 growth sets a solid foundation for the full year, though there are downward risks in H2.

China Data Calendar July 13

Source: MarketPulse

US economy “in a good place”

In a radio interview yesterday, Fed Chairman Jerome Powell said he believes the US economy remains in a “good place” with recent tax cuts and spending programs likely to boost GDP for the next three years, adding that it is unclear how the trade disputes will end.

Fed Chairman Powell

Note: Powell will appear before Congress next week for his semiannual Humphrey Hawkins testimony.

EU growth forecast scaled back

Yesterday the European Commission cut its forecast for Euro-zone economic growth this year to 2.1% from 2.3% previously due to ongoing trade tensions with the US and rising oil prices. It singled out Italy as one to suffer most, with its growth forecast slashed to just 1.3%, the lowest among the 28-member bloc, citing ”re-emerging concerns or uncertainty about economic policies”. Germany and France, the two largest economies in the zone, are also expected to lose steam with forecasts of 1.9% and 1.7% respectively. This compares with 2.2% both economies grew by last year.

Fed’s Monetary Policy Report is the data highlight

The week finishes with a relatively nondescript data calendar. BOE’s Cunliffe, who sits on the dovish side of the fence, is scheduled to speak and it’s doubtful he will say anything different to his stance. US export and import prices feature in the US session while the Fed’s monetary policy report comes later. FOMC member Bostic closes off the week ahead of the weekly Baker Hughes oil rig count.

You can access the full data calendar on MarketPulse at https://www.marketpulse.com/economic-events/

Have a great weekend.

The sky hasn’t fallen just yet

Trade War Escalates, but the sky hasn’t fallen just yet as optimism crept back into the market on reports of fresh bilateral trade negotiations between China and the US coupled with a slightly firmer RMB scrim. “Where there is a will, there is a way”. But when it comes to backroom negotiations, one can only imagine that talk is not going to come cheap.

The broader market continues to remain in wait and see mode for further details on how China might retaliate on trade, while equity markets continue to press higher under the guise that “no escalating news is good news”. Indeed equity markets continued to retrace the sharp mid-week sell-off. But again, the US technology sector comes shining through as US internet and technology stalwarts are leading markets to a solid finish in Thursday’s New York session.

While investors could be breathing a sigh of relief, they’re probably just happy their investment portfolios are breathing and alive and kicking after the latest trade war episode. But even the most pessimistic investors must take note of just how enduringly bullish these markets are, after having everything thrown at them including the kitchen sink (Trade, Italy Germany, Long Bond Rates). It’s incredible what global bourses have withstood all this harmful noise and continue to march higher. But indeed, the solid foundation of a bull market is that it ignores the bad news and keep on grinding higher. And one can only imagine what levels the S&P would be trading if trade war fizzled out.

Equities shrug off trade tariff tensions

Speaking of bull markets, USDJPY continues to grind higher and perhaps a bit of the above is starting to factor in (i.e. ignore the bad news and keeps moving higher). The break above 111.75 was one of the most unambiguous signals in some time, and a move into the 113’s could trigger an unwind in longer-term structural risk-off (long JPY) positions which could see this current rally extend much higher.

There was little movement on Powell interview on Marketplace but here are the full transcripts.

Chairperson Powell’s Marketplace interview

And the NATO summit ended on a more cheerful note, with President Trump reaffirming his commitment to the alliance while focusing more closely on the financial obligations of the other countries. So, the market is happy to hear the NATO band marching on.

Oil market

The oil markets are trying to make some inroads after Wednesday’s spill, but are having trouble holding both tops and momentum. I think this is a one-part trade war and one-part supply coming back online. But Wednesday was one of those steep selloffs on record volumes that will give even the bravest of bull’s cause /pause for thought about holding long positions, especially into the weekend. On the supply front, the latest news from Libya is short-term bearish with the El Feel or Elephant field restarting for the first time since February, and there is some discussion suggesting the supply rebound could increase and more than offset the impacts from the Eastern port closures.

Gold market

The precious space continues to hold critical support at $1,240, but the Gold complex is still hovering in the mixed territory zone. The global equity market is bouncing higher overnight, and there are very few defensive allocations into Gold. However, with Fed Chair Powell not ringing any alarm bells for more aggressive fed tightening, gold picked up a bit of goodwill. But ultimately, the USD looks to be on solid footing while preparing to take the driver seat once again, especially on USDJPY, which should hold the gold bulls at bay.

Currency Markets

The USD is looking to get back in in the driving seat once again.

JPY: USDJPY is signalling the most significant break out in years, and the long USDJPY is a position severely under-owned which suggests the pair will explode higher on any positive news. One can only imagine where spot will trade if an intense wave of risk on kicks in or trade war fizzles out.

CNH: The Yuan remains at the centre of all the action, but with further signs of policy easing on the cards given the economic slowdown has been much deeper rooted than feared, markets will continue to buy dips until a definitively positive shift in trade war sentiment.

USDAsia
Strong demand on the platform for long USDAsia is consistent with the general market views.

Trade war escalation is a definite plus for the dollar and coupled with robust US economic data; it does support this view.

MYR: Despite some optimism creeping back in on reports of bilateral trade negotiations between China and the US, while most of $Asia pulled back from yesterday morning highs, the Ringgit continued to lag the moves.

The Ringgit continues to suffer from political risk and fiscal uncertainty. If the USD does start to reassert itself and coupled with short-term bearish signals on oil prices,  the USDMYR will likely slice through the 4.05 level like a hot knife through butter in this environment.

INR The Ruppe hit and all-time interday  low and has now plummeted over 7.6 % versus the USD will wiping out a significant portion of carry-trades in its wake. But the Rupee will continue to trade at the mercy of oil prices

KRW.After testing 1130.00, the dissenting policy vote injected some life into the Won and coupled with the firmer RMB backdrop saw the USDKRW fall below the 1124 level. The won will be the go-to trade on the escalation of trade war tensions, but in the meantime, the RMB complex will continue to dictate the pace of play

Dollar Gains vs JPY and CHF

The U.S. dollar held steady at a six-month high against the Japanese yen and a two-month high against the Swiss franc on Thursday, bolstered by solid inflation data and investor sentiment that the greenback stands to benefit from a trade war.



The yen and the Swiss franc are favoured as safe-haven investments. But against the dollar, both have weakened in the past week as trade tensions between the United States and China have mounted. That suggests investors believe the greenback is better suited to withstand trade volatility, as a safe-haven investment or as a beneficiary of new policies.

“The U.S. dollar has been playing more of a role as a safe-haven,” said Juan Perez, currency trader at Tempus, Inc in Washington.

via Reuters

US Sec Mnuchin Says China Trade Could Re-Open

The United States and China could reopen talks on trade but only if Beijing is willing to make significant changes, U.S. Treasury Secretary Steven Mnuchin said on Thursday.



“I would say to the extent that the Chinese want to make serious efforts to make structural changes, I and the administration are available any time to discuss those,” Mnuchin said during a hearing before lawmakers in Washington.

via Reuters

GBP/USD – British pound ticks higher, U.S consumer inflation remains soft

The British pound is showing slight gains in the Thursday session. In North American trade, the pair is trading at 1.32246, up 0.15% on the day. In economic news, the BoE released its credit conditions survey. In the U.S, CPI edged down to 0.1%, shy of the forecast of 0.2%. Core CPI remained steady at 0.2%, matching the forecast. Unemployment claims dropped to 214 thousand, easily beating the estimate of 226 thousand. The indicator last posted a gain since November. On Friday, the U.S releases the UoM Consumer Sentiment report.

On Thursday, the British government released a white paper, which outlined its proposed new trade arrangements with EU when Britain leaves the club in March 2019. The proposal suggests that the UK and the EU will maintain the current agreements with regards to goods but not services. This would hurt the London financial district, which is already facing the loss of hundreds of financial jobs from London to the continent. European policymakers could give the plan a thumbs-down, arguing that the UK continues to cherry-pick, choosing to keep those aspects of trade with Europe that it likes, while rejecting other items such as free movement.

Prime Minister Theresa May is in a precarious position, as her government is in crisis following the stunning resignation of foreign secretary Boris Johnson on Monday. This comes on the heels of the resignation of Brexit Secretary David Davis on Sunday. Both senior ministers were protesting the “Chequers Agreement” in which the cabinet backed May’s stance in which the UK would maintain current customs arrangements for manufacturing and agricultural products after Brexit. Brexit hardliners such as Davis and Johnson have argued that such an arrangement would force Britain to harmonize much of its economy based on the dictates of Brussels. There is growing speculation that May will be replaced, and if the political crisis in Whitehall worsens, the pound could face some significant headwinds.

  Equities shrug off trade tariff tensions

  US Inflation Eyed as Markets Pare Losses

 

GBP/USD Fundamentals

Thursday (July 12)

  • 4:30 BoE Credit Conditions Survey
  • 8:30 US CPI. Estimate 0.2%. Actual 0.1%
  • 8:30 US Core CPI. Estimate 0.2%. Actual 0.2%
  • 8:30 US Unemployment Claims. Estimate 226K. Actual 214K
  • 10:30 US Natural Gas Storage. Estimate 55B
  • 13:01 US 30-year Bond Auction
  • 14:00 US Federal Budget Balance. Estimate -92.3B

Friday (July 13)

  • 10:00 US Preliminary UoM Consumer Sentiment. Estimate 98.1

*All release times are DST

*Key events are in bold

 

GBP/USD for Thursday, July 12, 2018

GBP/USD July 11 at 12:15 DST

Open: 1.3205 High: 1.3245 Low: 1.3181 Close: 1.3224

 

GBP/USD Technical

S1 S2 S1 R1 R2 R3
1.2996 1.3088 1.3186 1.3263 1.3494 1.3613

GBP/USD was flat for most of the Asian session. The pair edged higher in European trade and has posted small gains in the North American session

  • 1.3186 was tested earlier in support
  • 1.3263 is the next resistance line
  • Current range: 1.3186 to 1.3263

Further levels in both directions:

  • Below: 1.3186, 1.3088 and 1.2996
  • Above: 1.3263, 1.3494, 1.3613 and 1.3712

Oil Lower After IEA Says Supply Stretched to the Limit

Oil prices steadied on Thursday after sharp losses the previous session as the International Energy Agency (IEA) said the world’s oil supply cushion “might be stretched to the limit” due to production losses.


West Texas Intermediate graph

Benchmark Brent crude oil LCOc1 rose $1.70, or more than 2.3 percent, to a high of $75.10 a barrel before losing almost all its gains to trade at $73.60, up 20 cents, by 1340 GMT. On Wednesday, Brent had slumped $5.46 or 6.9 percent.

U.S. light crude CLc1 fell 30 cents to $70.08 a barrel, after losing 5 percent the previous session.

“Warnings from the IEA of a potential spare capacity crunch are helping the energy complex … following yesterday’s bloodbath,” said Stephen Brennock, analyst at London brokerage PVM Oil Associates.

via Reuters

Fed’s Mester Says US Economy Can Handle Two More Rate Hikes

Members of the Federal Reserve are telegraphing two more rate hikes this year, with Federal Open Market Committee voting member Loretta Mester on Wednesday repeating the central bank’s expectation for the next six months.

“The economy can certainly handle two more increases this year,” Mester, the president of the Cleveland branch of the Fed, said in an interview with The Wall Street Journal. “We could end up getting behind if we don’t keep moving things up, so I’m very comfortable, if the economy stays on the path it’s going that we move rates up as appropriate this year.”



When hiking its benchmark short-term interest rate a quarter percentage point in June, the Fed stated two more hikes would be appropriate in 2018. This would bring the year’s total to four. Despite this, traders are expecting just a 55 percent chance of a fourth hike in December — a little better than a coin flip and just 10 percentage points or so above the chances before the meeting. Those watching the markets center these comparatively low odds on the belief that the Fed will have limited room to move considering the dovish position of many of its global counterparts.

Mester said she expects the Committee to increase the fed-funds rate to 3 percent, from today’s range of 1.75 percent to 2 percent.

“We are still in an accommodative stance on monetary policy, and yet we have a very strong economy. And we’re very near our goals,” Mester said in the report. “To me, that’s a compelling case that we want to keep on this path” of gradually raising rates.”

via CNBC