KEY DRIVERS
- Perception of the slowdown in China continues to be a key driver of financial markets. The continued decline in commodity prices is a constant play on the negative outlook on China, the world’s second largest economy. The devaluation of the yuan last week also helped to play into these concerns (even if the reason may have been concerned with looking to liberalize the “peg” to the US dollar). This is all putting risk appetite under consistent pressure and equity markets are feeling the brunt, especially those with exposure to China. The devaluation of 3% of the Yuan is a drop in the ocean and without further devaluations the forex markets have steadied. However, safe haven plays seen to be remaining firm and this seems to be a theme of the moment.
- Falling oil, falling base metals prices and reflective of not only the oversupply that still exists in many commodity markets but also the concerns over the slowdown in China. These commodity price weaknesses are consistently hitting market sentiment and for now there is little to suggest any respite is on the way.
- The US dollar strength has been seriously tested and many forex majors are consolidating with debate still raging over whether a Federal Reserve rate will be in September or December. Falling US Treasury yields is asking some serious questions over whether a September hike is too soon, whilst commodity currencies are consolidating despite the consistent declines in their commodity prices that underpin the economies.
- Hawkish comments from the Bank of England’s MPC member Kristin Forbes at the weekend set us up nicely for the strong improvement in core UK CPI today. This has driven GBP/USD to a 7 week high and finally perhaps end the consolidation. Could it be that the Bank of England and the Fed are closer on the moment of their respective rate hikes that perhaps the market had priced? My expectation for a UK rate hike remains February and for the Fed in December.
- As ever the focus will switch back to US data with US CPI this week. Whilst this is not seen as the Fed’s primary indicator on inflation (watch for core CPE next week), the market would still take note if the inflation started to pick up.
- Greece should be able to get its third bailout secured this week with just a handful of Eurozone parliaments still to vote on the issue. Even if the Germans do stall, there is still the potential to have further bridge financing in order for Greece to repay the ECB is €3.2bn of bond payments. This will help to stabilize sentiment as and when it happens.
- Oil remains under consistent pressure. The technical downtrend is consistently shadowing the move to ever lower levels with the price of WTI now at 6 and a half year lows. With $40 the next realistic support area, there is little to prevent a move back towards the December 2008 low at $32.40. Brent crude is similarly weak but is still yet to breach its January lows and is in fact still over 6% away. Again, technical momentum suggests a test of the lows looks highly likely in due course.
- On the data front the flash manufacturing PMIs on Friday will be of ken interest as they are forward looking and big focus will be on whether China can show some improvement, otherwise risk appetite will come under even more pressure. The US flash PMI will also be of note. The FOMC meeting minutes are always of interest, coming ahead of Jackson Hole next week, the tone of the minutes will be watched for signs of hawkish pressure.
- Watch for: US CPI, FOMC minutes, flash China PMI
MARKETS
EUR/USD – The pivot band $1.1050/$1.1100 remains key
- The drift lower suggests the dollar is gaining strength again and the market is settled over the impact of the China devaluation last week. US CPI and FOMC minutes will drive sentiment whilst flash Manufacturing PMI will also be interesting.
- I see the 50 pip pivot band $1.1050/$1.1100 as key for the outlook and a close below it would see the dollar bulls gathering strength again. The technical outlook remains neutral in the meantime.
- Watch for: US CPI, FOMC minutes, flash US PMI
GBP/USD – A closing break above $1.5690 confirms the breakout
- UK core CPI has driven the strong move today as the market now looks to re-price the potential for a UK rate hike. The focus though will turn quickly back to the US data for the remainder of the week and I expect to see the fluctuation between sterling strength/dollar strength continue for the months to come.
- Is this finally the breakout of a range, as Sterling moves to a 7 week high? It needs a closing break above $1.5690 to suggest so, whilst the daily RSI moving above 60 would also help to confirm the move. However the technical outlook remains mixed in the medium to longer term and I do not believe this will be the beginning of a strong sterling leg higher.
- Watch for: US CPI, FOMC minutes, flash US PMI
USD/JPY – Mixed signals means consolidation for now
- Despite Q2 GDP coming in at -0.4% which was better than expected, the call will still be for more QQE from the Bank of Japan. Momentum policy is released this week and with the BoJ previously suggesting that there was little need for further stimulus, expect the programme to remain intact at 80 trillion yen per month, but not to be increased.
- Technically, Dollar/Yen has been rather neutralised and the next catalyst is needed for a decisive move.
- Watch for: US CPI, FOMC minutes, BoJ monetary policy
Gold – Sell the bounce to $1131
- Gold continues to be supported by safe haven flows and in reaction to the China devaluation which will be driving Chinese traders into hard assets such as gold
- I continue to see the near term rebound into the big resistance of the old floor at $1131.85 to be ultimately a selling opportunity. However, with a little way still to go in the rebound, I am also aware that bear market rallies tend to undershoot their targets. I am therefore now in search of sell signals.
- Watch for: US CPI, FOMC minutes, flash China PMI
Indices – Performance is based on exposure to commodity plays and China
- S&P 500 – A move above 2105 would suggest the markets has confirmed an upside break from the symmetrical triangle. However, with commodity plays holding back the index still and earnings season winding down, there is little to drive the market forward in the coming weeks. I am neutral at best on Wall Street.
- DAX Xetra – Germany’s export links to a devalued Chinese Yuan has been a big drag on the euro, whilst the negative correlation to the euro has just stopped for the time being. I expect this correlation to return though and be the driver of the DAX. This could make trading rather choppy. Key support band 10,650/10,800.
- FTSE 100 – With 26% weighting in Energy and Basic Materials, the FTSE remains an underperformer of the DAX and also S&P 500. FSTE 100 has actually broken lower from a symmetrical triangle (as the S&P has broken higher) to reflect the troubles that UK equities continue to have. Selling into rallies has to be the strategy.
WATCH OUT FOR THIS WEEK
Tuesday 18th August
- US – Building Permits/Housing Starts
Wednesday 19th August
- US – CPI
- US Crude Oil Inventories
- US – FOMC meeting minutes
Thursday 20th August
- Japan – BoJ monetary policy statement
- UK – Retail Sales
- US – Weekly jobless claims
- US – Existing Home Sales
Friday 21st August
- China – Flash Manufacturing PMI
- Eurozone – Flash Manufacturing PMI
- US – Flash Manufacturing PMI
- Canada – CPI
NEXT WEEK
Tuesday 25th August
- Eurozone – German Ifo Business Climate
- US – CB Consumer Confidence
- US – New Home Sales
Wednesday 26th August
- US – Durable Goods Orders
- US Crude Oil Inventories
Thursday 27th August
- US – Q2 GDP (Preliminary)
- US – Weekly jobless claims
- US – Pending Home Sales
- Jackson Hole Symposium
Friday 28th August
- Japan – CPI
- UK – Q2 GDP (second reading)
- US – Personal Consumption Expenditure
- US – University of Michigan Consumer Sentiment
- Jackson Hole Symposium
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All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.
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