China To Drag On Sentiment Across Markets

KEY DRIVERS

• China and the prospects for a Federal Reserve rate hike remain the key drivers of sentiment on global markets. This has been especially the case in the past few days. For the US, the Non-farm Payrolls report and a series of FOMC members’ comments have kept the speculation going. However this is also being impacted by China’s decision to devalue the yuan. This could now help to drive the trade weighted dollar even higher which acts as a pseudo form of monetary tightening (it is deflationary) which could impact on the FOMC’s decision to hike rates. These impacts are being felt across the asset classes.

• China is increasingly becoming a key factor for trading sentiment. The sharp decline in China’s exports (by 8.3%) announced at the weekend could have been a key reason behind why the People’s Bank of China has chosen to devalue the yuan by 1.9% against the dollar. The yuan has been one of the strongest performing currencies in the past few years and this seems to have impacted on China’s exports. The problem is that a devaluation by China will make it harder for competitor nations in Asia and the Emerging Markets (EM). The stronger Dollar is negative for commodities (hence Aussie, Kiwi and Canadian dollar weakness), but also put pressure on EM currencies (such as Indonesian Rupiah and Malaysian Ringgit) which will not only feel the pressure to weaken their currencies but also suffer from huge current account deficits.
• The impact is seen across the commodities space from this Chinese action. Commodities already under pressure from falling global demand and a stronger dollar are really feeling the pressure. Crude Oil has fluctuated today but is again lower, as is copper. The interesting exception to this is the gold price. There are suggestions that a Chinese devaluation of the yuan will mean that Chinese investors who have suffered from the stock market blowout and now fearful of further yuan depreciation/devaluation, will opt for gold. Hence why the gold and silver prices have been pushing higher. These trades are very much in their infancy, and on a technical basis they still look like merely unwinding oversold momentum.
• Oil remains under consistent pressure. The concerns over a lack of demand (again a play on China), whilst oil remains oversupplied as despite the sharp declines, the high debt levels of producers means that the response to falling prices is to increase production. A retest of the lows is seemingly inevitable.
• The Non-farm Payrolls report has not dispelled any suggestions of a September rate hike, but for me, they have not strengthened the arguments either. I still feel that the Fed is putting more emphasis on the lack of inflation than the market is accepting. The comments from Fed vice chairman Stanley Fischer yesterday seemed to back my views, as he was emphasising the low inflation that the US was still facing. Hence why we had sterling and the euro appreciating against the dollar yesterday.
• There is less key US data this week, but the announcement of Retail Sales will gather a lot of attention. Retail Sales have disappointed the market in every month this year apart from June. The month on month growth of +0.4% will do little to improve the situation with the year on year growth still sitting at under 1%. It will be interesting to see if the sharp decline in Consumer Confidence last month will have a feedthrough to another disappointment. Seeing as consumer indicators such as retail sales are a lead indicator this would not bode well for a September rate hike either.
• The euro has continued to remain firm today as the signs are (as suggested by a Greek finance ministry official) that an agreement had been reached over Greece’s third bailout. The negotiations have progressed well since 20th July and this comes just over a week ahead of the next payment that Greece is required to make to the ECB (c. €3.4bn). Although the agreement over the details of the bailout are yet to be officially confirmed, this now removes the need for further bridge financing to cover the repayment. The euro is strengthening on this news.
• On the data front the UK earnings growth will have a big impact on sterling. The 2.8% adjusted average weekly earnings achieved last month is expected to be repeated and would continue to pull real wage growth close to 3%. China will remain in the news again on Wednesday with the industrial production data which will have a further impact on risk appetite in forex and commodities. Friday is a big day for the euro traders, with final CPI and also flash GDP. There is also another consumer indicator for the US with the flash Michigan Sentiment.
• Watch for: US Retail Sales & UoM Consumer Sentiment

MARKETS

EUR/USD – Continue to use rallies as a chance to sell

• The euro has rallied in the past few days but latterly it has been a combination of the Greek deal for a 3rdbailout coming close to completion but also apparently the euro being bought back amid the unwinding of short positions on EUR/CNY (ie short covering in the wake of the China devaluation). I see both these as near term situations and the dollar bulls are likely to see an opportunity to sell once more.
• Despite the near term rebound moving into a 5th day, I still see this as another rally that will be sold into. The falling 144 day moving average has been an excellent basis of resistance and is where the euro is currently trading. I continue to see technical rallies as selling opportunities for further pressure back on $1.0810. Until $1.1130 resistance is breached this will remain the case.
• Watch for: US Retail Sales & UoM Consumer Sentiment, Eurozone CPI & GDP

GBP/USD – Choppy trading to continue, with data driving moves

• The data driven fluctuations and central banker rhetoric will continue to pull Cable around in the coming months. The latest move has been driven by dovish comments from FOMC’s Stanley Fischer, but again I see this as short term, it was less than a week ago when dovish comments from BoE’s Mark Carney pulled Cable lower. This means it will be difficult for trends to emerge and trading needs to be short term of time horizon.
• Again, false signals and fluctuations in the trend result in a sideways trading phase continuing. Selling towards $1.5670/90 resistance seems to still be in play, whilst the support comes in around $1.5450 still.
• Watch for: UK employment data, US Retail Sales & UoM Consumer Sentiment

USD/JPY – Resistance at 124.50 holds the key

• The dollar strength in the wake of the China devaluation has pulled the pair higher again. The moves will be data driven but I continue to see a trend of dollar strength as the BoJ remains firmly on track with its 80 trillion yen per month QE and the US pushes towards tightening.
• I see the breakout above 124.40/50 having been confirmed as the bulls have returned once more to push back towards 125.00. A near term uptrend channel has formed and this should continue to move the pair higher towards the multi-year high at 125.85.
• Watch for: US Retail Sales & UoM Consumer Sentiment

Gold – Sell any bounce to $1131

• Gold has rallied as safer havens have bounced in the wake of the China devaluation.
• Gold is now into a 4th consecutive day of rally, with the volatility increasing by the day. The latest rebound has been helped to unwind the long term oversold momentum but I will see this as a near term bounce. The rally could pull higher into the overhead barrier of the old key floor at $1131.85 but this is a huge resistance and once which I would expect to be seen as another chance to sell.
• Watch for: China Industrial Production, US Retail Sales & UoM Consumer Sentiment

Indices – Commodities still driving markets, DAX is still a mover on the negative correction with the euro

• S&P 500 – The lack of drive from earnings season has been a concern, whilst the acceptance that a stronger dollar is no positive for US companies has also been a drag. This has meant little or no trend has been able to develop, with near term support at 2064 and resistance at 2114 the key trigger levels.
• DAX Xetra – A the euro has rallied the DAX has been sold off sharply on Tuesday as the negative correlation continues. Although the DAX has little exposure to commodities the huge export market of China is not going to be helped by a 1.9% devaluation of the yuan. This has dragged the market sharply lower and now the supports are back in play. The key Fibonacci retracement levels remain as turning points potentially, so this makes 11,177 key this week.
• FTSE 100 – The concern is that the rally has once more rolled over at a lower level, with key resistance around 6800 intact. Continued pressure on commodity and oil prices is a huge drag on FTSE 100 which has been unable to get any upside traction recently. The support at 6645 is key as a breakdown would open 6500 again.

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