Currencies, Stocks and Bonds await Fed Powell’s Testimony

Tuesday July 17: Five things the markets are talking about

Corporate earnings and monetary policy is expected to be the main driver of market sentiment this week- it’s currently giving a ‘temporary’ break to trade relation tensions amongst G7 economies.

Global equities have drifted lower overnight on mixed earnings, while capital markets await the latest clues on U.S monetary policy.

Today’s focus will be on new Fed chair Jerome Powell’s first testimony before the Senate Banking Committee, where he is expected to give further clues on how fast the Fed is likely to keep pushing U.S interest rates higher. His prepared remarks may ‘not’ be too hawkish, but keep an eye on his Q & A session.

Note: Futures prices are currently pricing in a +62% probability that U.S rates will rise at least twice more this year.

Elsewhere, U.S Treasuries prices continue to slip along with the ‘big’ the dollar and crude oil prices.

1. Stocks mixed results

In Japan, the Nikkei share average rallied to a one-month high overnight as a weak yen (¥112.36) lifted exporters, offsetting weakness in machinery stocks after data showed China’s growth momentum cooling a tad. The Nikkei ended up +0.4%, the highest closing level since mid-June, while the broader Topix advanced +0.9%.

Note: Japanese markets reopened after a three-day weekend due to a national holiday yesterday.

Down-under, Aussie and S. Korean shares fell earlier this morning, as an overnight slump in oil prices and weaker commodities hurt domestic energy and mining stocks. Following Monday’s decline of -0.4%, the S&P/ASX 200 index fell -0.6% at the close of trade, while in S. Korea, the Kospi lost -0.18%.

In Hong Kong and China, same story, equities ended lower overnight, dragged by energy firms following a sharp decline in crude oil prices. The Hang Seng index fell -1.3%, while the China Enterprises Index lost -1.1%. In Shanghai, the blue-chip CSI300 index closed -0.7% down, while the Shanghai Composite Index ended -0.6% lower.

In Europe, regional bourses have opened lower and currently trade sideways. The financial sector remains the best performer in muted volatility, while the tech sector underperforms.

U.S stocks are set to open unchanged.

Indices: Stoxx50 -0.2% at 3,446, FTSE +0.1% at 7,608, DAX flat at 12,562, CAC-40 flat at 5,412; IBEX-35 flat at 9,714, FTSE MIB +0.4% at 21,906, SMI -0.4% at 8,812, S&P 500 Futures flat

2. Oil prices fall again on oversupply concerns, gold higher

Oil prices remain under pressure as market worries about possible disruptions to supply eased and as investors focused on potential damage to global growth from the Sino-U.S trade squabble.

Brent crude futures have fallen -32c, or -0.5%, to +$71.52 a barrel – the lowest price since mid-April. Prices fell -4.6% yesterday. U.S West Texas Intermediate futures are down -31c, or -0.5%, at +$67.75 a barrel – it too declined -4.2% on Monday.

Note: market volumes at current levels remains poor, which is expected to lead to further slippage.

China this morning said they remain confident of hitting its economic growth target of around +6.5% this year despite market expectations of facing a tough H2 as a trade row with the U.S intensifies.

Note: On Sunday, China reported slightly slower growth for Q2 and the weakest expansion in factory activity in June in two-years.

Crude supply currently is not a market issue. Along with the Saudi’s surge in production, U.S oil output from seven major shale formations is expected to rise by +143K bpd to a record +7.47M bpd next month, according the EIA’s report on Monday.

Ahead of the U.S open, gold prices have edged a tad higher as the ‘big’ dollar remains on the back foot ahead of U.S. Fed Chair Jerome Powell’s first congressional testimony. Spot gold is up +0.25% at +$1,243.18 an ounce. U.S gold futures for August delivery are up +0.3% at +$1,243.20 an ounce.

3. Yields little changed ahead of Powell’s testimony

Trading in government bonds remains subdued ahead of Fed Chair Powell’s testimony (10:00 am EDT).

Eurozone government bond yields have inched lower by -0.5 to -2 bps, with the market naturally unwilling to push yields any higher before Powell’s Q & A in a few hours.

Yesterday, the U.S two-year yield edged to a new multi-year high above +2.60% – it has been struggling at this rate for the past two-months.

Note: Current futures prices suggest there is nearly a +90% chance discounted in the Fed funds futures strip of a September rate hike and that there is about a +60% chance of a December hike, which would take the Fed fund target to 2.25-2.50%. If true, that would seem to make the two-year yield still relatively low if one expects at least one hike next year and no cut in 2019.

Elsewhere, the yield on U.S 10-year notes advanced less than +1 bps to +2.86%, the highest in more than two-weeks. In Germany, the 10-year Bund yield fell -1 bps to +0.35%, while in the U.K, the 10-year Gilt yield decreased -1 bps to +1.27%, the lowest in more than a week.

4. Cable drifts higher after jobs data

This morning’s U.K labor data in line with market expectations has sent the pound a tad higher. GBP/USD has rallied to £1.3263, up +0.2% on the day, while EUR/GBP has fallen to €0.8847.

Digging deeper, earnings growth ex-bonuses for the three months to June was +2.7% – it’s smaller than the +2.8% in the previous period. The unemployment rate also stayed flat at +4.2%, as expected.

Note: Market consensus does not expect this morning print to change expectations of an interest rate increase in August – currently; futures suggest there is a more than +70% chance of a rate rise in three weeks.

Elsewhere, down-under, NZD (NZ$0.6830) managed to rally aggressively overnight, the most in six-weeks following the RBNZ’s sectorial factor model inflation gauge surging to the highest level in seven years.

5. RBA flags rising trade war risks in meeting minutes

In its July minutes overnight, the Reserve Bank of Australia (RBA) said that downside risks to the global growth outlook increased in June amid rising tensions over trade between the worlds two largest economies.

Board members remain concerned that trade tensions extended beyond the U.S and China and “could escalate through non-tariff measures such as administrative delays,” adding that “escalation of trade tensions could harm global growth by undermining confidence and delaying investment decisions and could dampen international trade.”

They said that while heightened international trade worries had already weighed on global equity prices, as well as on some long-term government bonds and base metal prices, the bank still forecast Australia’s economic growth to “pick up to be a bit above +3% over 2018 and 2019”.

Forex heatmap

DAX subdued on lack of fundamentals

The DAX index has ticked lower in the Tuesday session. Currently, the DAX is at 12,566, up 0.05% on the day. On the release front, there are no major German or eurozone events. In economic news, the eurozone trade surplus slipped to EUR 16.9 billion, short of the estimate of EUR 17.6 billion. This marked the lowest surplus since January 2017.

European equity markets showed little change last week and the DAX continues to trade quietly on Monday. 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.

Trade policy is not part of the Federal Reserve’s mandate, but Fed policymakers continue to voice concern about the escalating trade war between the U.S and its major trading partners, particularly China. On Friday, Dallas Fed President Robert Kaplan said he would have to downgrade his outlook if the tariff battle continues. Kaplan said that U.S tariffs on steel and aluminum imports had dampened capital expenditures plans and further trade tensions could lead to currency fluctuations and geopolitical instability.

 

Economic Calendar

Tuesday (July 17)

  • There are no German or eurozone indicators

Wednesday (July 18)

  • 5:00 Eurozone Final CPI. Estimate 2.0%
  • 5:00 Eurozone Final Core CPI. Estimate 1.0%
  • Tentative – German 30-year Bond Auction

*All release times are DST

*Key events are in bold

 

DAX, Monday, July 17 at 6:50 DST

Previous Close: 12,561 Open: 12,555 Low: 12,521 High: 12,594 Close: 12,566

EUR/USD – Euro edges higher, investors eye Powell testimony

EUR/USD has posted gains in the Tuesday session. Currently, the pair is trading at 1.1733, up 0.18% on the day. In economic news, there are no events in the eurozone. The U.S releases manufacturing and housing indicators. Federal Reserve Chair Jerome Powell testifies before the Senate Banking Committee. On Wednesday, the Eurozone releases Final CPI and the U.S publishes building permits and housing starts. Fed Chair Jerome Powell testifies before the House Financial Services Committee.

After a sluggish first quarter, U.S  retail sales reports have rebounded in the second quarter. Core retail sales were revised upwards to 0.8% in May, and the June gain of 0.5% edged above the forecast of 0.4%. Retail sales gained 0.4%, and were up an impressive 6.6% on an annualized basis. Consumer spending is a key driver of economic growth, and a tight labor markets and firming inflation are further indications that the economy is in excellent shape. The Fed is widely expected to raise rates again at the September meeting, with odds of a quarter-point hike at 87%, according to the CME Group.

The escalating trade war between the U.S and China is raising concerns not just on the equity markets but at the Federal Reserve as well. On Friday, Dallas Fed President Robert Kaplan said he would have to downgrade his economic outlook for the economy if the tariff battle continues. Kaplan said that U.S tariffs on steel and aluminum imports had dampened capital expenditures plans and further trade tensions could lead to currency fluctuations and geopolitical instability. With Fed policymakers split on whether to raise rates once or twice in the second half of 2018, the outcome of the tariff battle could have a significant impact on the monetary policy and on the direction of the U.S dollar.

  Commodities Weekly: Oil tumbles on supply/demand dynamics

Monday blues or Dog days of summer

 

EUR/USD Fundamentals

Tuesday (July 17)

  • 9:15 US Capacity Utilization Rate. Estimate 78.4%
  • 9:15 US Industrial Production. Estimate 0.5%
  • 10:00 US Federal Reserve Jerome Powell Testifies
  • 10:00 US NAHB Housing Market Index. Estimate 69
  • 16:00 US TIC Long-Term Purchases. Estimate 34.3B

Wednesday (July 18)

  • 5:00 Eurozone Final CPI. Estimate 2.0%
  • 5:00 Eurozone Final Core CPI. Estimate 1.0%
  • Tentative – German 30-year Bond Auction
  • 8:30 US Building Permits. Estimate 1.33M
  • 8:30 US Housing Starts.  Estimate 1.32M
  • 10:00 US Federal Reserve Jerome Powell Testifies
  • 10:30 US Crude Oil Inventories
  • 14:00 US Beige Book

*All release times are DST

*Key events are in bold

 

EUR/USD for Tuesday, July 17, 2018

EUR/USD for July 17 at 5:35 DST

Open: 1.1712 High: 1.1737 Low: 1.1702 Close: 1.1733

EUR/USD Technical

S1 S2 S1 R1 R2 R3
1.1553 1.1637 1.1728 1.1829 1.1910 1.1996

EUR/USD ticked higher in the Asian session and is has posted small gains in European trade

  • 1.1728 has switched to a support role following gains by EUR/USD on Tuesday
  • 1.1829 is the next resistance line

Further levels in both directions:

  • Below: 1.1728, 1.1637, 1.1553 and 1.1434
  • Above: 1.1829, 1.1910 and 1.1996
  • Current range: 1.1728 to 1.1829

GBP/JPY – Bearish Breakout Ahead of Jobs Data and BoE

OANDA Senior Market Analyst Craig Erlam talks to Core Finance about the recent bearish break in GBPJPY and whether it signals more pain ahead. He also previews the UK jobs data and Bank of England inflation report hearing and what they could mean for interest rates this year.

USD/JPY – Japanese Yen Edges Lower as Japanese Manufacturing PMI Dips

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DAX Under Pressure, Investors Eye Fed Minutes

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Ringgit poised for further gains

OANDA Head of Trading for the Asia Pacific, Stephen Innes, anticipated the ringgit to maintain a gradual pace of appreciations next week, given the stronger comprehensive global growth outlook. “We should expect a test of 3.85 for the ringgit-US dollar if the weaker US dollar narrative re-emerges early next week. “Overall, the week comes to […]

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Dollar Falls After Mixed Signals from Trump Administration

Disappointing US GDP and contradictory comments on currency strength at Davos burden dollar The USD depreciated against majors as soft Q4 GDP numbers on Friday and mixed comments on the desired strength and weakness of the currency made at the World Economic Forum in Davos put downward pressure on the greenback. The Trump administration is […]

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USD/CAD – Canadian Dollar Higher, CPI Next

The Canadian dollar has posted gains in the Friday session. Currently, the pair is trading at 1.2310, down 0.53% on the day. On the release front, there are two key indicators, either of which could impact on USD/CAD. Canada releases CPI,which is expected to decline 0.3%. The US will publish Advance GDP, which is forecast to […]

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Dollar in the Dumps

US Commerce Secretary Wilbur Ross defended those tariffs and warned Washington would be prepared to fight back in future against countries it felt had flouted the rules. The dollar’s sell-off was also helped by investors betting on tighter monetary policies by major central banks, bringing them in line with the Federal Reserve. The dollar took […]

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