0:10 Chinese, eurozone and UK manufacturing PMIs
2:23 Eurozone unemployment rate
2:48 Australian downturn key to interest rate decision
3:38 US ISM manufacturing PMI due out later
Forex research: Global markets daily
[B]Europe off to a positive start, US manufacturing data up next[/B]
Today’s US opening call provides an update on:
[ul]
[li]Chinese manufacturing slowdown adds to growth concerns;
[/li][li]Eurozone PMIs largely positive as Spain avoids contraction;
[/li][li]Eurozone unemployment revised significantly lower;
[/li][li]US manufacturing in focus this afternoon.
[/li][/ul]
European equities are back in the green this morning, following the release of some encouraging figures out of the eurozone and the UK.
The day got off to a shaky start over night, when both the HSBC manufacturing PMI and the official PMI fell in June, adding to concerns about Chinese growth this year and next. The ongoing cash crunch in China, along with falling external demand, is already expected to have a negative impact on growth. The fact that these figures are heading in the wrong direction goes some way to confirming these fears.
While these figures both suggest that a slowdown in China is likely, there is a very key difference between the two. The official PMI shows that the industry is growing, while the HSBC figure suggests otherwise. Given that there are many who believe the official Chinese figures are unreliable, then based on the HSBC data, there could be much more pain to come.
Things are looking much better for the eurozone, where most PMIs showed a significant improvement in June. Spain’s progress has been the most impressive, moving from deep in contraction territory in March to avoiding contraction in June. This is the first time it has not contracted since April 2011. Things also continued to improve for the UK, with the manufacturing PMI rising to 52.5, much higher than expectations and last month’s figure. It’s also the first time we’ve seen three consecutive months of manufacturing growth since the start of last year.
Eurozone unemployment has also been a real positive point this morning, after April’s figure was revised down 0.2% to 12%, although this did rise to 12.1% in May. This is still well below expectations of 12.3% and suggests that the decay in the eurozone may be slowing and it may be finally turning a corner.
The focus for the rest of the day is now going to switch to the US, where we have more manufacturing data due. An improvement in both the ISM PMI and the official PMI is expected here, with both remaining comfortably in growth territory.
Ahead of the open we expect to see the S&P up 10 point, the Dow up 92 points and the NASDAQ up 18 points.
[B]Markets expected to open lower ahead of UK construction PMI[/B]
Today’s UK opening call provides an update on:
• European equities expected to open lower
• Australian interest rate remains at 2.75%
• Spanish unemployment expected to fall
• UK construction PMI second consecutive month of growth
• US factory order figure predicted to improve
A mixed morning for the markets, as Europeans equities are expected to open lower despite the Japanese Nikkei continuing to advance higher. A comparatively quieter day today from an economic release standpoint, with markets focused upon the RBA decision to hold rates steady, along with the upcoming UK construction PMI and Spanish unemployment figures.
European markets are expected to open lower today, off the back of strong gains seen yesterday. The ability of markets to rally globally yesterday morning, against a backdrop of a worsening Chinese manufacturing sector, provides evidence that we have moved back into a more bullish period. The ability of markets to rally on both good and bad news provides increased credence to the notion that we are set to return to the kind of bullish market sentiment which saw the creation of highs seen back in late May.
However, today appears to be one of consolidation after yesterday’s gains, paring some of that upside before a further push higher. Taking a look to the Japanese market, the Nikkei 225 is beginning to look increasingly isolated in it’s activity despite previous clear linkages between the overnight performance of this key Asian market and the subsequent open of markets within Europe. A shift seems to be in place where previously Europe took its lead from Japan, moving in a similar direction, albeit with a more muted rate. However, this correlation appears to be waning somewhat, with the Japanese becoming increasingly isolated in it’s activity and able to rally despite global markets looking lower for the day.
This morning we had the latest interest rate decision from the RBA which decided to hold the headline rate at 2.75%. Australia has suffered significantly over the recent period, with the deterioration of both export prices along with export recipients, in the form of China. This was highlighted clearly yesterday, with the release of Chinese manufacturing PMI data pointing to a deteriorating environment along with export price deterioration of -10.5% against this time last year. Subsequently, there seemed to be an increased chance that RBA governor Glenn Stevens was set to reduce this rate today as a means to further deteriorate the value of the Australian dollar. This was not the case and may provide some stability for their ever weakening currency going forward. That being said, I do expect the RBA to serious consider a rate reduction to 2.5% next month.
Later today, Spanish unemployment is expected to fall for a fourth consecutive month, with a reduction of around 83,500 expected for June. This comes off the back of a strong manufacturing PMI figure yesterday and serves to portray the Spanish economy in an increasingly positive light. Given the previous conjecture surrounding the perceived innate weaknesses within the Spanish economy personified by rampant unemployment, a strong figure today would highlight the strides that has been made in the country over the past 12 months.
Later in the day, the construction PMI for the UK is released, which is expected to remain in growth territory for a second month. Like with the manufacturing PMI yesterday, it’s very rare that the construction PMI remains in growth territory, so a figure above 50 today would be a very encouraging sign for the UK economy after what has been a largely positive second quarter. The construction PMI has outperformed expectations on the past two occasions, along with the manufacturing and services figures. Given yesterday’s strong manufacturing PMI release, there is high expectations that we may see today’s number also come in above expectations for the third consecutive occasion.
Over in the US, the focus is going to be on the May factory orders figure, which is expected to increase by 2.1%; an improvement over April’s 1% figure. This would provide a boost given the last time we saw two consecutive months of growth was over six months ago. That being said, this figure has disappointed on the past two occasions and thus markets will be wary of another beat. Furthermore, given the regular movement into and out of expansion, the volatility provides markets with less reason to follow this figure as a key indicator of economic performance.
European markets are expected to open lower, with the FTSE -5, CAC -1 and DAX -14 points.
[B]EURUSD[/B]
The euro has had a positive start to the week against the dollar, however just as we saw last week, it’s facing significant resistance again around 1.3065, from both the 50 and 200-day SMAs. Just above here we also have the 50 fib level, of the move from this year’s lows to last month’s highs, that it broke below last week. The pair appears stuck now between the resistance here and the 61.8 fib level below that has been a solid support over the last four days, around 1.30. Over the next couple of months, I expect the pair to remain in a range between 1.30 and 1.34, before eventually breaking to the downside. That said, this may come sooner and just depends on who wins the current tug of war between the bears trying to push the price below 1.30 and the bulls trying to push it above 1.3065. With traders likely to be cautious ahead of the ECB rate decision on Thursday and the US jobs report on Friday, we may have to wait a few days for this move, with the pair continuing to trade in the 1.30 – 1.3065 range in the meantime.
[B]GBPUSD[/B]
Sterling is trading higher against the dollar this morning, after finding support once again around 1.52, where the descending trend line that it broke above on 5 June intersects the 61.8 fib level. The gains in the last 24 hours in the pair have been minimal though which suggests, as with EURUSD, that traders are acting with caution ahead of the BoE meeting and US jobs report later this week. We could continue to see the pair push higher in the coming days, although it is currently finding resistance from the descending trend line, dating back to 19 June highs, which is limiting any move to the upside. If we see this resistance broken, it should trigger a move towards 1.5275, a previous level of support and resistance, followed by 1.53, where it should find resistance from another descending trend line, dating back to 17 June highs. If instead we see a break below the 61.8 fib level, the next support should come around 1.5150, a previous level of resistance, followed by 1.5120, from the ascending trend line, dating back to this year’s lows.
[B]USDJPY[/B]
The dollar rally over the last few weeks has seen this pair climb around 600 pips, before inevitably finding strong resistance just below 100. Not only is this a previous level of resistance, it’s also the 61.8 fib level, of the move from May’s highs to last month’s lows. There was never really a doubt that this pair would reach 100 again, especially once the Fed hinted at tapering, which is positive for the dollar. It was always about how the pair would react to the 100 level. In the longer term, I do think we’ll see this level broken. However, before we see this, we may see another retracement, following such an aggressive move higher. If we do see this, then the next major support levels will come around 99 and 98.50, previously key levels of support and resistance. A break above 100 should see the pair find resistance around 100.50, followed by 100.80 and 101.40.
[B]Traders risk averse ahead of volatile end to the week[/B]
Today’s US opening call provides an update on:
[ul]
[li]Economic calendar looking pretty thin ahead of a busy end to the week;
[/li][li]RBA keeps interest rates on hold but talks down the currency;
[/li][li]UK construction grows at fastest pace in a year;
[/li][li]Spanish unemployment falls at fastest rate since before the financial crisis.
[/li][/ul]
European indices are trading in the red across the board on Tuesday, as traders turn more risk averse ahead of what is going to be a volatile end to the week.
There was a lot of economic data out on Monday, most of which was quite encouraging, sending equity markets higher. The economic calendar today though is looking pretty light by comparison, with factory orders in the US the only noteworthy release. As a result, there’s likely to be an element of caution in the markets today, with US employment figures due tomorrow and Friday and two major central bank meetings on Thursday.
The Reserve Bank of Australia rate decision over night came as no real surprise to the markets, although the comments from central bank officials in the statement did a good job of talking down the currency. Officials claimed that the Aussie dollar was not cheap, which prompted talk that the RBA could be prepared to cut rates again in the coming meetings.
Talking down the currency is something we’ve seen on numerous occasions by central banks, with ECB President Mario Draghi doing it better than most. This may be the tactic for the RBA over the next couple of months, despite the aussie falling more than 13% since April. I still think we could see another rate cut from the RBA as early as next month, given the ongoing slowdown in China and the collapse in commodity prices. It’s only a matter of time before the aussie breaks below 0.91 against the greenback and targets the previous lows around 0.88.
The UK economy is continuing to show signs of a recovery in 2013, with growth now expected to rise from 0.3% in the first quarter to around 0.5% in the second. This morning it was the construction PMI which gave investors reason to be optimistic about the UK, rising to 51.0 in June, the highest level since May last year.
It was also another good day for Spain, after seeing its manufacturing PMI move out of contraction territory for the first time since April 2011, yesterday. Today, official figures confirmed that the country’s unemployment fell by 127,200 in June, the biggest drop in the figure since before the financial crisis began.
Looking ahead to the rest of the day and the focus is going to be on the factory orders release in the US. We’ll also hear from Jerome Powell, an FOMC voting member, which is likely to followed closely, especially ahead of the US jobs report on Friday.
Ahead of the open we expect to see the S&P up 3 point, the Dow up 19 points and the NASDAQ up 9 points.
James Hughes talks about a big week for economic data as markets prepare for Friday’s job numbers. He also looks at today round of PMI readings.
Forex research: Global markets daily
[B]Europe to open lower on Chinese growth concerns[/B]
Today’s UK opening call provides an update on:
• Chinese services figures weigh on Asian and European equities;
• Eurozone PMIs expected to improve across the board in June;
• UK services expected to remain comfortably in growth territory;
• Plenty of data out of the US, with markets shut tomorrow for Independence Day.
European futures are in the red across the board on Wednesday, following in the footstep of their Asian counterparts over night, which fell on concerns about Chinese growth.
The official services PMI for China fell slightly in June, to 53.9, while the HSBC PMI rose marginally to 51.3. However, the latter was accompanied by HSBC Chief Economist, Hongbin Qu, claiming that growth in services will probably slow in the coming months.
Next up, we have the release of the services PMIs for the eurozone, shortly after the European open this morning. Following the release of the manufacturing PMIs on Monday, when the majority showed a significant improvement in June, expectations are probably going to be raised ahead of these PMI releases. As it is, all of them are expected to show an improvement in June, although only Germany is expected to be in growth territory.
This is still an encouraging sign though from the eurozone, given that the services sector of most members have been stuck deep in contraction territory for most of the year so far. And with the rest of the data out of the eurozone showing vast improvement in recent months, we could be looking at a strong end to the year for the single currency block, following a miserable few years.
One of the key contributors to growth in the eurozone, which has been lacking over the last couple of years, has been consumer spending. This is hardly surprising when you take into consideration the record levels of unemployment, the sky rocketing youth unemployment levels and the freeze on many people’s wages which leaves people worse off in real terms.
With unemployment now looking to have peaked around the 12.2% level and the EU actively trying to tackle the youth unemployment problem, albeit with only a token effort, we could see an improvement in consumer spending in the second half of the year. Retail sales in May are expected to increase by 0.2%, which would represent the first improvement in the figure since January.
The services PMI is hugely important for the UK, given that the services industry accounts for around three quarters of GDP. The improvement in the services industry recently has been one of the key reason for the stronger performance in the UK, especially in the first quarter of the year. The PMI is expected to show that the industry remained strong in June, with the figure falling slightly to 54.5, which is still well in growth territory. Manufacturing and construction both weighted heavily on growth in the first quarter, but with both showing significant improvement in recent months, we could be looking at a pretty solid growth figure in the second quarter.
There’s plenty of data out of the US today, including the weekly jobless claims which are usually released on Thursday. These are being released on Wednesday this week due to the fact that it’s Independence Day in the US on Thursday and markets will therefore be closed. Also being released is the ADP non-farm employment change figure, ahead of the release of the non-farm payrolls on Friday and the services PMI for June.
Ahead of the open we expect to see the FTSE down 33 points, the CAC down 18 points and the DAX down 37 points.
0:10 Markets lower after Portuguese ministers resign
1:14 European and UK services PMI figures in focus
2:12 Chinese non-manufacturing PMI disappoints
2:33 Australian trade balance shows signs of improvement
Forex research: Global markets daily
[B]US employment data eyed ahead of jobs report[/B]
Today’s US opening call provides an update on:
[ul]
[li]Chinese growth concerns weigh on risk appetite;
[/li][li]European stocks hit by resignations in Portugal;
[/li][li]WTI Crude hits $102 as tensions grow in Egypt;
[/li][li]Services PMIs mixed in Europe;
[/li][li]US economic calendar full ahead as markets close tomorrow.
[/li][/ul]
European indices are trading lower on Wednesday, dragged down by concerns over Chinese growth and potential early elections in Portugal.
It’s been no secret in recent months that China is experiencing a slowdown in growth as it begins its transformation from an investment driven economy that relies heavily on exports to one with a growing middle class and higher levels of domestic spending.
However, the slowdown seen in China has been made worse by the cash crunch, as interbank lending rates rise and the People’s Bank of China refuse to step in and bring rates back down to the levels seen earlier this year. Now we’re starting to see that reflected more and more in the economic data, with manufacturing activity contracting and services looking like heading in the same direction. The official services PMI fell to 53.9 in June, while the HSBC PMI rose slightly but came with a warning that the figures will likely fall in the coming months.
Also weighing on sentiment this morning is the resignations in Portugal of both the Finance Minister and the Foreign Minister in the last couple of days. With anti-austerity rallies gathering support, it’s looking increasing likely that we’ll see early elections in Portugal. This is far from ideal for the eurozone at a time when it has benefitted from not being centre stage for a few months, and only a couple of months before the elections in Germany. The last thing Angela Merkel needs in the run up to the election is more bailout and austerity discussions with a new Portuguese government.
Oil prices are spiking again today, with Brent crude rising to above $105 earlier in the session while WTI is back above $100. The rise in oil prices has come as a result on the increasing tensions in Egypt after President Mohammed Morsi refused to resign despite warnings from the military that it will intervene at the end of the 48 hour deadline, which was set on Monday. A conflict now looks inevitable, which has the potential to disrupt oil supplies.
Services PMIs were mixed in Europe this morning, with many coming in below expectations, but still well above May’s number. The PMI figures are looking really encouraging for the eurozone, which appears to have turned a corner, although until we see this reflected in the data over the course of a few months, it has to be taken with a pinch of salt.
The same can be said with the UK data, which has also been much better recently. June’s services PMI came in at 56.9, up from 54.9 a month ago. This is very encouraging for the UK, given how much the country relies on its services industry. Although, as with the eurozone data, unless it’s reflected in the GDP and employment figures, it’s not worth getting carried away with it.
The US economic calendar is packed full on Wednesday, with markets being shut on Thursday for Independence Day. The jobless claims are the most notable release to have been brought forward as a result of the bank holiday, while we also have ADP non-farm employment change data due out ahead of the jobs report on Friday, as well as the June services PMI and MBA mortgage applications.
The ADP figure is meant to be an estimate of the non-farm payrolls release on Friday, however it is rarely accurate, which means we only get any kind of reaction when we the number massively deviates from the expected figure. If we see this today, the reaction in the markets should give an indication to how investors will react on Friday. For example, will they buy a strong figure as it suggests the recovery is gathering pace, or sell it as it means the Fed will begin tapering later this year, and vice versa.
Ahead of the open we expect to see the S&P down 8 point, the Dow down 73 points and the NASDAQ down 17 points.
[B]BoE and ECB in focus as US markets close for bank holiday[/B]
Today’s UK opening call provides an update on:
[ul]
[li]Lower trading volumes expected ahead of central bank rate decisions, while US markets close for Independence Day;
[/li][li]Improvement in UK data likely to see no change in policy from BoE following Carney’s first meeting as Governor;
[/li][li]ECB likely to leave rates unchanged, with Draghi pointing to improved data as a sign of recovery in the eurozone;
[/li][li]Eurozone first quarter GDP expected to be unchanged at -0.2%, leaving the area in recession.
[/li][/ul]
European indices are expected to open higher on Thursday, as investors turn slightly more optimistic following the release of strong employment figures out of the US yesterday.
It’s likely to be a pretty quiet start to the European session on Thursday, with very little economic data out and two central bank rate decisions coming around midday. We tend to see lower trading volumes in the lead up to these rate decisions, not just in case either announce stimulus measures, but also because of Mario Draghi’s tendency to send financial markets all over the place in the press conference shortly after.
Contributing to those lower trading volumes today will be the fact that US markets are closed for Independence Day. What we could see as a result is more volatility than normal during Draghi’s press conference, as lower volumes can bring higher volatility.
The rate decisions themselves are actually likely to be quite uneventful, with both the Bank of England and the ECB expected to leave monetary policy unchanged. There has been a lot of focus on these in recent months, with former Bank of England Governor Sir Mervyn King, along with two other policy makers, Miles and Fisher, unsuccessfully pushing for more quantitative easing (QE), while at the ECB, there have been in depth discussions about negative deposit rates.
It’s the beginning of a new era at the Bank of England, with Mark Carney, the first ever non-British Governor, taking over from King, who retired at the end of last month. There’s been a lot of chatter about whether Carney will try and kick off this new era with a bang, either by pushing for more QE or a commitment to lower rates until a certain date in the future, or until certain conditions are met.
This looks unlikely though at this early stage, given that we’ve seen a significant improvement in the economic data in the last few months. If two thirds of the MPC couldn’t be convinced to vote in favour of more stimulus when the UK was facing a triple dip recession, that’s unlikely to have changed now, no matter how much Carney works his charm. Unlike at the Bank of Canada, Carney only has one vote here so he’s going to have to make a lot more effort to get people of his side, which is likely to take more than one meeting. That is of course, if Carney is actually dovish himself. Given the improvement in the data, there a good chance that Carney would rather leave policy as it is for a few months to see how things play out.
The ECB has been a lot more active than the BoE in recent months, cutting interest rates to record lows and seriously considering cutting the deposit rate into negative territory, which would effectively charge banks to deposit their money with the ECB. There’s also been a lot of talk about the ECB adopting some kind of Fed-style QE, however this has been rejected by certain ECB officials and looks extremely unlikely at a time when the ECB doesn’t want to be seen as financing governments and encouraging them to take their foot off the gas in their austerity efforts.
While rate cuts are likely to have been discussed among the ECB, with inflation on the rise again, despite still being well below the 2% target level, any action today looks quite unlikely. Draghi is instead likely to point to the recent improvements in the economic data and suggest the recovery is underway, despite the fact that anti-austerity rallies in Portugal have forced two members of the government to quit and may force early elections.
We also have the release of the final first quarter GDP figure for the eurozone this morning, which is expected to remain unchanged at -0.2%, leaving the eurozone mired in recession.
Ahead of the open we expect to see the FTSE up 14 points, the CAC up 10 points and the DAX up 20 points.
[B]EURUSD[/B]
The rally in the dollar over the past couple of days has finally pushed the pair below 1.30, which had been providing significant support recently. Just below here though it ran into further support, around 1.2922, from the ascending trend line, dating back to July last year. This suggests that, in the short to medium term, the pair is going to remain in the consolidation phase that it’s been in all year. This could now prompt a move back towards the upper end of the consolidation range, around 1.34. Along the way, it should find resistance around 1.3030, 1.3077 and 1.31. Two major levels for the pair will be 1.3169 and 1.3227, the 50 and 61.8 fib levels, of the move from June’s highs to yesterday’s lows. Alternatively, we could see further pressure on the ascending trend line, a break of which should prompt a move, initially, to 1.2837.
[B]GBPUSD[/B]
A rally in the pair yesterday saw it climb 150 pips before finding resistance around 1.53, a previous level of support and resistance. This is also where the 100-day SMA intersects the 50 fib level that the pair originally broke below last week, which could be quite a bearish signal, especially given that the 61.8 fib was also broken last week. That said, just below the 61.8 fib, we have an ascending trend line, dating back to 12 March, which is providing significant support for the pair. If this is broken, it should prompt a move back towards 1.50, followed by 1.4830. Alternatively, a continued push higher could see the pair target 1.56, the upper end of the consolidation range that the pair has traded in this year. Along the way, the pair should find resistance around 1.5342, 1.5442, 50% retracement of the move from last months highs to yesterday’s lows, and 1.5476.
[B]USDJPY[/B]
We’re continuing to see a pull back in the pair this morning, following the rally towards the end of June, which saw it climb almost 400 pips. Yesterday, the pair found support around99.25, from the 50-day SMA, before rallying towards the end of the session. This morning again we’re seeing more pressure on the pair, which has found support around 99.50 and is currently trading above the ascending trend line, dating back to 19 June lows. If this trend line is broken, it should prompt a move back towards 98.9, where another ascending trend line, dating back to 17 June lows, intersects the 50 fib level, of the move from 25 June lows to 3 July highs. Along the way though it should find support around 99.25, yesterday’s lows. If we see a push higher, the pair should find resistance around 100, followed by 100.45 and 100.85, yesterday’s highs…
0:48 - Portuguese coalition talks ease concerns over new elections
2:44 - BoE expected to keep rates and QE unchanged
3:43 - ECB expected to hold on rates as inflation creeps higher
4:39 - Traders have one eye on US jobs report on Friday
Forex research: Global markets daily
[B]US jobs report wraps up a hectic week for the markets[/B]
Today’s UK opening call provides an update on:
• Asian shares boosted by BoE and ECB commitment to low rates;
• Is it forward guidance when there’s no benchmark?;
• US jobs report in focus on Friday.
Investors responded very positively yesterday to comments from both the Bank of England and the ECB in relation to forward guidance. European indices ended the session 2-3% higher, while Asian stocks also benefitted from the more dovish stance from both banks, with the Nikkei, Topix and Hang Seng all currently posted more than 1% gains. Usually there’s a lot more caution among investors ahead of the US jobs report but this doesn’t appear to be the case in Asia.
Taking the comments from Mario Draghi and Mark Carney into consideration though, can’t help but think the markets have overreacted here once again. The statement following the BoE rate decision only claimed that they will assess forward guidance for August, which in itself tells us nothing. Firstly, it was always expected that the BoE would issue some form of forward guidance, it’s the details of the guidance that matters and we know none of these. As far as I’m concerned, we’re no more clear now than we we’re this time yesterday.
The ECBs attempt at forward guidance was no better. Draghi did what he does best in this press conference, told us absolutely nothing we don’t already know while managing to talk down the euro and yields on eurozone bonds. He claimed that the rates will remain at present or lower levels for an extended period of time, before suggesting that will be longer than 12 months, although he never actually gave a date. The problem here is that without a benchmark, whether it be a date, unemployment target or growth target, it actually means nothing. No one expected the ECB to lift interest rates in the next 12 months, the eurozone could still be in recession at this point. Draghi did also hint that rates could be lowered, but again this is not surprising. I think what we’ve seen once again is a commitment to nothing and the markets have just taken the bait.
Now that we have the BoE and ECB meetings out of the way, attention can now shift back to the US for the release of the monthly jobs report. While this release is generally seen as the most important item on the economic calendar each month, between now and the end of the year, it’s going to be that little bit more important, with the Fed monitoring the employment situation closely as it plans for life without quantitative easing.
Bernanke claimed last month that the Fed will begin tapering later this year if the economy begins to improve in line with projections. The Fed has pair particularly close attention to the employment situation in the US over the last few years and has even used it as a benchmark for when rates will begin to rise again. As a result, it’s safe to say that if the employment situation continues to improve, the probability of tapering in September or December will rise with it.
The interesting thing today is going to be how investors respond to the data. The ADP figure, an estimate on the non-farm payrolls figure, released Wednesday, came in well above expectations at 188,000, which would ordinarily be seen as a positive thing for the US and therefore prompt a rally in the equity markets. However, over the last few years, with investors more concerned about Fed stimulus rather than the economy, it hasn’t been unusual for them to sell on strong data. This wasn’t the case on Wednesday though, investors bought on the stronger figure, which suggests that they have now accepted that QE is not permanent feature in the markets and some normality is beginning to return.
I therefore expect a similar reaction again today, as long as the NFP figure comes in above expectations of 165,000, which the ADP figure suggests it will. That said, the ADP figure is well known for its inaccuracy when the first estimate is released so it’s probably not worth paying much attention to. The unemployment rate is expected to fall to 7.5% today, from 7.6% last month.
Ahead of the open we expect to see the FTSE up 15 points, the CAC up 6 points and the DAX up 15 points.
0:48 - Portuguese coalition talks ease concerns over new elections
2:44 - BoE expected to keep rates and QE unchanged
3:43 - ECB expected to hold on rates as inflation creeps higher
4:39 - Traders have one eye on US jobs report on Friday
Forex research: Global markets daily
Today’s US opening call provides an update on:
[ul]
[li]US futures higher on dovish BoE and ECB comments;
[/li][li]Traders cautious ahead of US jobs data’
[/li][li]Stronger dollar and rising NFP expectations weigh on Gold.
[/li][/ul]
US indices are expected to open around 1% higher on Friday, after the markets were closed on Thursday due to Independence Day.
The gains in US futures are broadly down to the comments that came following the Bank of England and ECB rate decisions on Thursday. The BoE released a rare statement along with the rate decision yesterday, in a bid to clarify the new direction of the central bank under Mark Carney.
In the statement, the BoE suggested that the higher rates seen in the bond markets are not warranted, while pointing out that the inflation rate is expected to fall to the 2% target in the longer term. This suggests that the door to further asset purchases in the coming months is certainly open. The statement also confirmed that guidance on interest rates, which has been expected ever since Osborne announced the BoEs new remit during the budget, will probably be announced next month.
The ECBs statement was much more ambiguous, and the reaction a little over the top. While Mario Draghi confirmed that forward guidance had been discussed and agreed by all members, the lack of detail in relation to this guidance makes it worthless. Mario Draghi did not set a target for unemployment or growth, and avoided naming a date when rates would rise again. All he confirmed was that rates would remain at or below 0.5% for an extended period of time, which was already pretty obvious.
Today, markets are pretty mixed ahead of the US jobs report. Most European indices are paring some of yesterday’s strong gains, while the FTSE is continuing to push higher, currently up around 0.6%. As always, there’s an element of caution in the run up the release of the jobs data.
Not only do these figures have a significant impact on when the Fed will begin tapering, there’s also an element of uncertainty about how traders will react to the data. Ordinarily, strong jobs data would be positive for equities and other risk assets. However, given that an strong data could result in tapering of QE, which is negative for stocks, the opposite reaction could be seen. That said, the reaction to the ADP figure, which came in well above expectations on Wednesday, was positive for stocks. This may suggest that investors now accept that QE is on borrowed time and have already moved on.
One thing that won’t benefit from tapering is Gold. The price has plummeted over the last few months, and is currently trading lower again today. A combination of a stronger dollar, following the sell-off in the euro and sterling yesterday, and higher expectations for the payrolls figure today is weighing on Gold again today.
Ahead of the open we expect to see the S&P up 14 points, the Dow up 130 points and the NASDAQ up 27 points.
[B]Europe higher ahead of German and eurozone data[/B]
Today’s UK opening call provides an update on:
• Europe higher following Friday’s better than expected payrolls;
• Bernanke speech and FOMC minutes Wednesday may provide tapering clues;
• German trade balance and industrial production released this morning, along with eurozone investor confidence figure;
• Mario Draghi due to speak before the Committee on Economic and Monetary Affairs.
European indices are expected to open more than half a percentage point higher on Monday, after much better than expected US jobs data on Friday provided a major boost to investors.
While the non-farm payrolls figure released on Friday does increase the chances of Fed tapering later this year, investors appear to have accepted that this is going to happen now and are more focused on the fact that the US labour market is improving more than originally thought. The most encouraging part of Friday’s data was actually the fact that the participation rate rose last month, which suggests that the message of an improving economy is starting to filter through to those who had previously given up looking for work.
The participation rate has been falling for a while now, which has helped bring the unemployment rate down but not in a positive way. Now that we’re seeing the participation rate on the rise, it may take longer for the unemployment rate to drop, in fact it could even rise to begin with. However, this is a positive thing as it means that people who have previously given up now believe they can find work again.
We should learn more about how Friday’s data impacts the Fed decision on Wednesday, when we hear from Ben Bernanke. Bernanke is due to speak shortly after the release of the FOMC minutes from last month, which should also provide further insight into when the Fed plans to begin tapering its asset purchases.
This week, things are looking much quieter in the markets, especially when compared to last. On Monday, we have a few pieces of economic data being released, starting with Germany’s trade surplus which is expected to fall slightly to €17.5 billion in May. Shortly after we have the sentix investor confidence figure for June, which is expected to rise slightly to -10, followed by German industrial production, which is expected to fall by 0.5% in May, it’s first drop in four months.
The eurogroup of finance ministers will also meet on Monday, to discuss Greece’s next tranche of its bailout. The Troika was in Greece over the weekend to determine whether Greece had made the necessary reforms in order to receive the next bailout payment. This process has never been straightforward in the past, so I imagine it will be the same today.
Finally, we’ll hear from Mario Draghi a couple of times this afternoon, when he appears before the Committee on Economic and Monetary Affairs. During this, Draghi may provide more insight into the ECBs forward guidance which was issued during the press conference on Thursday. The forward guidance that was given was very vague when compared with other central banks. Draghi may use today to clear this up, or at least provide more insight into why the ECB has chosen now to offer some kind of guidance on rates.
Ahead of the open we expect to see the FTSE up 32 points, the CAC up 18 points and the DAX up 38 points.
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[B]Alcoa to kick off corporate earnings season[/B]
Today’s US opening call provides an update on:
[ul]
[li]Alcoa kicks off corporate earnings season;
[/li][li]Earnings more important now Fed plans to taper;
[/li][li]German and eurozone data disappoints, although markets push higher;
[/li][li]Draghi to speak before the Committee on Economic and Monetary Affairs;
[/li][li]Finance ministers meet to discuss next Greek bailout payment.
[/li][/ul]
The US is going to remain in the spotlight in the coming weeks, as investors try to make sense of companies second quarter earnings at a time when the Fed is looking to withdraw its support and begin tapering its asset purchases.
Corporate earnings season gets under way on Monday, starting with Alcoa after the closing bell. In the last few quarters, earnings season has been largely overshadowed by other major events in the US, with investors focusing more on the fiscal cliff, the sequestration and the Fed’s quantitative easing program. On top of that, in respect to earnings, the bar has been lowered so much that it’s actually very difficult for companies to disappoint.
This time round, with nothing to distract investors and the Fed looking to taper its asset purchases later this year, I expect to see earnings come under a lot more scrutiny. I’m not convinced that investors will let companies off with reporting earnings that are largely driven by efficiency savings and staff layoffs, especially when they’re accompanied by lower revenues as they have been recently. If the stock markets are going to push on higher, we need to see real signs that companies are performing better and are on course for a sustainable recovery. We need proof that the US economy can continue to recover without the support that the Fed has offered since last September.
European markets have had quite a bright start to the week, with all major European indices trading comfortably in the green. US futures are currently pointing to a similar open, with the S&P, Dow and Nasdaq expected to open more than half a percentage point higher.
The positive feeling in the equity markets comes despite the economic data out of the eurozone this morning being rather disappointing. A 2.4% drop in German exports had a negative impact on the country’s trade surplus in May, falling to €14.1 billion from €17.5 billion the month before. Industrial production also fell at a faster rate than expected, falling 1% in May, rounding off a pretty poor morning for German data. The eurozone sentix investor confidence did little to improve things, falling back to -12.6 in July.
Still to come today, we have Mario Draghi who is due to speak before the Committee on Economic and Monetary Affairs. These events are always monitored closely, especially with people looking for more clarity on the ECBs forward guidance, which was offered for the first time on Thursday, although it barely passes as forward guidance given the complete lack of detail.
Finally, we have the eurogroup meeting, where finance ministers will discuss whether Greece will receive the next tranche of its bailout. The Troika was in Greece over the weekend, trying to find out if the government has held up its side of the bargain and implemented the necessary reforms and made the agreed cuts to its spending. Given the complications in the past, we can’t expect this to be a smooth process.
Ahead of the open we expect to see the S&P up 11 points, the Dow up 89 points and the NASDAQ up 19 points.
0:10 - Markets trading higher off back of NFP and central bank sentiment from last week
0:47 - Potential rate cut in sight for Mario Draghi
1:17 - German trade balance disappoints
2:28 - Eurogroup meeting highlights Portuguese and Greece troubles
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