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Weekly look-ahead

By David Morrison  |  06/07/2018 14:24

This article looks ahead to next week’s data and the start of the second quarter earnings season and covers stock indices, FX, oil and gold


With Non-Farm Payrolls now in the rear mirror next week’s economic calendar is relatively light. We have UK Manufacturing Production on Tuesday and investors are hoping for another positive report following recent better-than-expected readings for Manufacturing, Construction and Services PMIs. This pick-up in UK data has helped to steady sterling although it remains at risk to further selling.  

There’s a rate decision from Canada on Wednesday when the Bank of Canada is expected to raise its key overnight rate to 1.50% from 1.25%. Thursday sees the release of minutes from the ECB’s last monetary policy meeting and US CPI. While Friday is data-light it does mark the start of the second quarter earnings season. We see results from some big US banks including Citigroup, JP Morgan Chase and Wells Fargo. This should prove interesting following a stunningly good first quarter. But investors will be watching out for any signs that the flatter yield curve is eating into banks’ profitability. Otherwise, it’s the same as ever with investors hoping for better-than-expected revenues and earnings even as the year-on-year comparisons get harder. Despite this, corporations continue to fuel the bullish narrative through stock buy-backs and raised dividends. Someday (soon) this will come to an end.

Stock indices

Friday’s Non-Farm Payroll report for June surprised to the upside coming in at +213,000 on expectations of an increase of just under 200,000. Average Earnings fell back a touch to +0.2% month-on-month from +0.3% previously, suggesting that there’s little inflationary pressure from wage growth coming through. The Unemployment Rate came in at 4.0%, up from last month’s 3.8% reading. Overall, the tone was positive for equities (at least that was the initial reaction) while the dollar pulled back sharply as inflation expectations moderated. But the US Treasury yield curve flattened further and this could be a major headwind for the dollar and equities going forward.

The stock market rallied as the weekend approached and as US traders returned from their Independence Day break. This helped to offset a shaky start to the week which saw a sell-off across global indices. Partly this was a result of the Fed cutting its balance sheet by $30 billion over the weekend, but there was also concerns over the upcoming 25% tariff by the US on $34 billion-worth of Chinese imports. This kicked in on Friday morning and China has said it would retaliate in kind, opening the door for an escalation in the US/China tariff tit-for-tat. However, President Trump will be congratulating himself on a job well done as US equity markets have shrugged off trade concerns while China’s Shanghai Composite remains in bear territory, having fallen over 20% from recent highs. This could encourage the Trump administration to pile on additional tariffs. US and European equities were also lifted by a Reuters story that the US ambassador to Germany said Trump could back away from imposing tariffs on imports of European vehicles if the EU agreed to certain concessions.

Meanwhile, German Chancellor Angela Merkel managed to hammer out a compromise package over immigration between her own party, the Christian Democratic Union (CDU), and her coalition partners the Christian Social Union (CSU) and the Social Democratic Party (SPD). At the beginning of this week the euro sold off on fears that Chancellor Merkel’s Bavarian partners (the CSU) may cause a split in the coalition by setting up their own border controls in the south of the country. That fear has receded for now, as the compromise agreement allows Germany to reject people who have already sought asylum in other EU countries. However, Merkel must get agreement from other EU members and she’s unlikely to get much joy from Austria, Italy or Hungary.

Minutes from the Fed’s last monetary policy meeting were released on Thursday. These were interpreted as hawkish as FOMC members viewed the economy as “very strong” with inflation set to “run at 2 percent on a sustained basis over the medium term”. This suggests that the committee is prepared to raise rates by an additional 50 basis points this year. In addition, the minutes noted that: "A number of participants thought it would be important to continue to monitor the slope of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States."

US yield curve continues to flatten. One of the main bond market barometers is the spread between the 10 and 2-year Treasuries. Following Friday’s Non-Farm Payroll release it fell below 28 basis points making a fresh ten-year low.

Looking at a few technical levels for the major indices: The S&P continues to bounce off support around 2,700 which marks the 50% retracement of the Jan-Feb sell-off earlier this year. This is also where the 200-day simple moving average is currently coming in. There’s some mild resistance around 2,744 (the 61.8% Fibonacci retracement of the sell-off) while the index has so far failed to break and hold above 2,795 which is the 76.4% fib retrace of the same move.

There’s support for the Dow around 24,000 and minor resistance around 25,000 while the index has been unable to break convincingly above 25,400 since March.
There’s some decent support for the German DAX around 12,150 which marks the 23.6% Fibonacci retracement of the Jan-Feb sell-off. A break below here could see a retest of this year’s lows around 11,700-800 Feb lows. If the DAX can hold above 12,400 then 12,600 is the next big target to the upside.

The FTSE has made a series of lower highs since mid-May and has recently run into resistance marked by the 21-day SMA. It hasn’t been helped by the recovery in sterling which is weighing on exporters. There’s some mild support around 7,500 but the chart looks a bit scrappy and indistinct to me.


The US dollar sold off sharply on Friday after June Average Hourly Earnings slipped back to +0.2% month-on-month, down from +0.3% previously. Sellers also appeared as the US Treasury yield curve continued to flatten. The move took the EURUSD through minor resistance around 1.1720 (see below).

The US dollar has been trading in a sideways channel since mid-June, just after its sharp bounce following a dovish ECB monetary policy meeting. This has taken some of the wind out of the greenback’s rally since April when the Dollar Index broke out of its tight trading range. This is somewhat surprising as most commentators agree that fears of a global trade war should boost the dollar given its reserve currency status. Investors tend to head out of riskier assets (emerging markets) back into the liquidity and relative safety of the dollar in times of uncertainty. However, the bullish dollar positioning has been going on for so long now that there may not be many fresh buyers left. On top of this US Treasury yields have come off their highs with the 30-year now quite happy below 3.0%. While the interest rate differential between the US and the rest of the developed world remains dollar-positive, the ongoing flattening of the yield curve has taken some of the heat out of the dollar’s rally. As far as the technical picture is concerned, the EURUSD is running into some mild resistance around 1.1720 the 23.6% Fibonacci Retracement of the April-May sell-off. Above here the next barrier is 1.1850 which is the 38.2% retrace of the same move. Support comes in around 1.1500 which marks the May sell-off low. This has been tested a few times since but has managed to hold so far.
Meanwhile, sterling has had a better week rallying against both the US dollar and euro. The pound got a lift from a clutch of positive data releases including Manufacturing, Services and Construction PMIs. Then on Thursday Bank of England Governor Mark Carney delivered a speech in which he expressed “greater confidence” of a bounce-back in the UK economy. He issued his usual Brexit warning but overall his comments raised the prospect of a rate hike next month. Sterling was even holding its own going into Friday’s session as Theresa May’s Cabinet gathered for the Brexit away-day at Chequers. Markets were convinced that leave-backing ministers will be persuaded to for the softest of exits from the EU.

It now looks as if there’s decent support for the GBPUSD just below 1.3100 and a few technical indicators including the Relative Strength Indicator, Stochastic and Commodity Channel Index have turned positive. Nevertheless, there’s a strong level of resistance around 1.3400 which could be a barrier to additional gains going forward. The EURGBP pulled back from June’s multi-month high and is now back in the middle of its 0.8700 – 0.8900 trading range.

On Tuesday gold broke below $1,240 to hit its lowest point for the year so far. The slide has felt relentless and the move since April has seen gold lose over 8% of its value. However, it managed a modest bounce later in the week and there’s increasing chatter amongst gold bulls that the worst may be over. They cite data from the weekly COT (Commitment of Traders) report from the US CFTC (Commodity Futures Trading Commission) which indicates that large speculators have been reducing their long positions as commercial traders have been reducing their shorts. This is often (though not always) a bullish sign. Of course, the dollar price of gold will remain under pressure if the dollar continues to rally. However, as pointed out in the FOREX section above, the ongoing trade dispute may not prove to be as positive for the dollar as many traders currently believe.
But on the daily chart gold has broken below the upward trendline that has been building for the last two and a half years. While the longer-term uptrend remains in place, this recent downside break does mean that gold could still push lower. However, if the tariff tit-for-tat escalates over the summer and the dollar fails to rally, then gold (and silver) will be back in demand as safe-havens. Technically, there’s short-term support around $1,240 and major support at $1,200. There’s some minor resistance at $1,280 but if it breaks and holds above $1,300 then this year’s high around $1,360 is an obvious target.

Crude oil

Crude prices are consolidating following a sharp rally that began ahead of and carried on after the OPEC+ meetings on 21st and 22nd June. This was despite the expectation, subsequently borne out, that this group of oil producers would agree to add back supply by reducing the 1.8 million bpd output cut that has been in place since the beginning of last year. Although there was a lack of clarity after the meeting, it subsequently emerged that OPEC+ had agreed to boost output by one million bpd. This was higher than many early forecasts but well below the top end of estimates which coalesced around an increase of up to one and a half million barrels per day.
On Tuesday front-month WTI crude briefly topped $75 taking it to its highest level since November 2014. But it suddenly reversed course to break below $73 just a couple of hours later, ahead of the truncated Independence Day break. The sell-off followed publication of a story from Al Jazeera, quoting the Saudi Press Agency, saying that Saudi Arabia was preparing to increase output to stabilise the market.
This follows on from US President Trump’s claim last weekend that he had persuaded Mohammad bin Salman, Crown Prince of Saudi Arabia, to agree to raise output by up to two million barrels per day (bpd). The news didn’t please Iran, already fuming over Trump’s renewal of sanctions against the country, a senior OPEC member. This will only add to tensions within OPEC with Venezuela also pushing back against what they see as unacceptable interference from the US in the oil cartel’s business.
The problem is that a loss of output from Venezuela and Libya, together with US-led sanctions on Iran, look set to take off as much as 1.3 million bpd going into the second half of the year. Consequently, a promise from Saudi Arabia to boost output by more than agreed by OPEC+ could ensure the offset of lost supply and help keep a lid on prices. The problem is that there are doubts that the Kingdom has the spare capacity, despite an assurance from the chief executive of Saudi Aramco that the Kingdom has the capacity to produce an additional 2 million bpd.
Nevertheless, concerns over a lack of supply due to disruptions and as US inventories continue to decline continue to support the market. On top of this there are currently no indications of a drop off in global demand growth despite worries of the economic outlook for emerging markets and China.
Key events
Monday -             JPY Bank Lending, Current Account, Economy Watchers Sentiment; EUR Sentix Investor Confidence

Tuesday -             CNY CPI, PPI, M2 Money Supply, New Loans; GBP Manufacturing Production, Goods Trade Balance, Construction Output, Industrial Production; EUR ZEW Economic Sentiment; USD JOLTS Job Openings

Wednesday -     USD Core PPI, Crude Oil Inventories; CAD BOC Rate Statement and Press Conference

Thursday -           GBP BoE Credit Conditions Survey; EUR ECB Monetary Policy Meeting Accounts; USD Core CPI, Unemployment Claims, Federal Budget Balance

Friday -                 CNY Trade Balance; USD Fed Monetary Policy Report, Consumer Sentiment, Inflation Expectations
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