Asian stocks are seeing some hesitation at the new week's outset, recoiling at the possibility of further trade action to come from the United State's President Trump. Japan's Nikkei 225 index is sitting near 22,400.00, falling below last week's trading range and marking in new recent lows as equity trade3rs flock to safe haven assets like the Japanese Yen.
More tariffs are expected in the coming weeks as the US and China continue their standoff on international trade, with tariffs being levied by both sides recently, and equities continue to play to the weak side as market participants brace for impact, with an exponential ramping-up of the number of tariffs and the value of goods they are imposed on, with the Trump administration threatening to impose border-crossing levies on half a trillion dollars' worth of Chinese-made goods, and China's government strategically targeting US agricultural and raw materials sectors, seeking to specifically punish states and constituencies that voted heavily for Trump in the 2016 US federal election.
Monday's continuation of trade angst sees Japan's Nikkei 225 index down around 1.3% so far, while the Tokyo Topix index is relatively unharmed at -0.14%; Shanghai's CSI 300 index is in the red for -0.15%, and Hong Kong's Hang Seng index is down -0.2% for Monday. Australia's ASX 200 is also down for the day, currently down -0.83%, but the MSCI broad Asia-Pacific index, which doesn't count Japanese equities, is seeing a bump on the day, currently sitting at 0.76%.
Nikkei 225 levels to watch
Japan's leading Nikkei 225 index has already slumped below last week's lows, marking into a continued decline into 22,370.00, and currently finding support at the 38.2% Fibo retracement level. A bullish turnaround will be seeing resistance from last week's high at 22,950.00, while a bearish continuation will be faced with the 61.8% Fibo retracement level, current sitting near the major 22,000.00 key level.
The US President Trump took to Twitter to tell the Iranian President Rouhani to 'never ever threaten' US again.
“To Iranian President Rouhani: NEVER, EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE. WE ARE NO LONGER A COUNTRY THAT WILL STAND FOR YOUR DEMENTED WORDS OF VIOLENCE & DEATH. BE CAUTIOUS!”
This comes in response to Rouhani’s warning to Trump that war with Iran is the mother of all wars.
Also, the US Secretary of State Pompeo came on the wires last hour, stating that Iran's leaders have enriched themselves from corruption.
The People's bank of China (PBOC) said on Monday that it lent CNY 500 billion to financial institutions through one-year medium-termlending facility (MLF) at 3.30 percent interest rate (unchanged from previous), accordng to Reuters.
The moce has caught markets offguard as no MLF lonas were due today and the central bank usually injects liqudiity through MFL lonas on the day the existing loans are scheduled to mature.
Analysts at Australia and New Zealand Banking Group (ANZ) offer their insights on the Australian Q2 CPI report due out this Wednesday at 0130 GMT.
“We expect Q2 inflation data to show that any acceleration in inflationary pressures remains very gradual. Headline inflation will likely tick up to 0.5% q/q, due to a rise in petrol prices, the seasonal increase in health insurance premiums and the regular tobacco indexation.
Core inflation is expected to be steady at 0.5% q/q and 1.9% y/y, just below the RBA's target band. Weak wage pressures and retail competition continue to weigh on core inflation.”
The oversold Chinese Yuan extended Friday’s gains in early trade, but the resulting dip in the USD/CNY to 6.74 was short-lived.
At press time, the currency pair is trading at 6.7639 - down 0.68 percent from the 12-month high of 6.8106 hit on Friday.
A close today below 6.7650 (Friday’s low) would add credence to Friday’s inverted bearish hammer candle and would confirm a short-term bullish-to-bearish trend change.
Meanwhile, a close above 6.7832 (July 19 high) would open doors for a re-test of Friday’s high of 6.8106.
USD/CNY Technical Levels
Resistance: 6.7832 (July 19 high), 6.8106 (Friday’s high)
Support: 6.7401 (session low), 6.7168 (July 3 high)
Following the Bank of Japan’s (BoJ) announcement of a special JGB buying operation earlier, the Japanese central bank came out with a statement, citing that no bids are tendered for Monday’s fixed-rate operation.
BoJ offered to buy JGBs at a fixed rate unlimited amount in the 5 - 10 years at 0.11% yield.
The USD/JPY pair fell to a three-week low of 110.75 as USD sell-off gathered pace on rising fears of Sino-US currency war and on speculation that BOJ might make changes to its stimulus program.
Trump bemoaned FX manipulation, stronger USD
The US President Trump criticized the Fed’s rate hike plans and accused China and the EU of currency manipulation on Friday, triggering a broad based pullback in the USD. Moreover, a significant majority in the market now fears the Sino-US trade war could turn into a full-blown currency war.
Further, Trump upped the ante on trade war front by stating he is ready to impose tariffs on all $505 billion worth of Chinese goods imported to the US.
Meanwhile, sources told Reuters that Bank of Japan (BOJ) is considering making adjustments to its stimulus program to make it more sustainable, meaning the central bank might slowdown the pace of bond/ETF purchases. After all, the central bank already owns more than 50 percent of the ETF market and hence may have to announce a “slower for longer” policy.
As a result, the oversold JPY may have picked up a bid.
However, it is worth noting that the market still expects the Fed to hike rates 1.5 times more this year. Further, the 10-year treasury yield is holding around the three-week high of 2.89 percent, which indicates the markets do not expect the Fed to veer from its gradual tightening path, despite Trump’s criticism.
Hence, the current sell-off could be short-lived. At press time, the currency pair is trading at 110.95.
The hourly chart shows oversold conditions, hence we could be in for a bout of consolidation.
Spot Rate: 110.95
Daily High: 111.50
Daily Low: 110.75
Trend: Consolidation likely
R1: 111.15 (rising trendline resistance)
R2: 111.40 (May 21 high)
R3: 111.50 (session high)
S1: 110.52 (50-day MA support)
S2: 110.29 (July 5 low)
S3: 110.00 (psychological support)
Japanese Finance Minister Taro Aso was out on the wires earlier today, commenting following his meeting with the US Treasury Secretary Mnuchin on the trade issue at the G20 meeting held over the weekend.
Says he is not supposed to reveal what Mnuchin said.
Asked Mnuchin to dispel Japan's concerns.
He will refrain from making comments on currencies.
Issues starting to calm down as show in short communique.
Trade friction is a bigger issue than it was 10 years ago.
Spot Rate: 145.80
Daily High: 146.42
Daily Low: 145.70
Trend: Intraday bullish
R1: 145.97 (resistance as per the hourly chart)
R2: 146.52 (50-hour moving average)
R3: 146.87 (July 18 low resistance on the hourly chart)
S1: 144.99 (March 2 low)
S2: 143.77 (June 28 low)
S3: 143.20 (May 29 low)
Analysts at Nomura explained that trade tensions remained elevated this week as the Commerce Department held an open hearing on the Trump administration’s Section 232 investigation into imports of autos and auto parts.
"Industry representatives and foreign government officials overwhelmingly argued that autos do not pose a national security threat to the United States and that tariffs on those products would cause disproportionate harm to the US economy. We expect the Commerce Department to release their final Section 232 report within the coming weeks, consistent with statements by Secretary Ross and President Trump. Despite the pushback during the hearing, we believe it likely that Commerce will rule affirmatively that imports of autos and auto parts threaten to impair the national security, providing President Trump with options including tariffs and quotas to restrict auto imports. In this context, the Washington visit by EC President Juncker next week to discuss USEU trade will be important. Various news reports indicated that Juncker is prepared to discuss a potential deal between the US and EU to lower auto tariffs in an effort to reduce the likelihood of President Trump imposing new tariffs under Section 232 authority."
"Note that President Trump began this week by describing the EU as a “foe” of the US because of its trade policies. In addition, today he accused the EU, and China, of manipulating its currency to undermine US competitiveness. The result of Junker’s visit to Washington next week should provide additional clarity as to the final outcome of the autos investigation. While a deal next week appears unlikely, due to the complexity of WTO rules among other things, a positive statement from President Trump acknowledging progress could offer markets some reassurance as to the next steps in the investigation."
"With respect to the US-China trade dispute, President Trump emphasized on Friday his preparedness to impose tariffs on all imports from China as progress on diffusing trade tensions between the two countries stalls. With China offering a more restrained response to the USTR list of 10% tariffs on an additional $200bn in imports, tensions will likely remain elevated as the USTR process unfolds. Finally, NAFTA talks will resume in some form next week as Mexico’s economy minister Ildefonso Guajardo travels to Washington. While Trump administration officials have recently touted progress with Mexico in terms of trade negotiations, we remain skeptical that a renegotiated NAFTA will emerge from the chief negotiators before end-2018."
Analysts at Westpac argue that the markets are now broadly pricing in Westpac’s view on the outlook for the RBA cash rate with only around a 50% chance of a rate hike by the end of 2019.
"That is in stark contrast to a year ago when our call that rates would remain on hold in 2018 and 2019 was well out of market with markets anticipating around 75 basis points of tightening by the end of 2019."
"A weakening housing market; soft inflation and wages growth; an uncertain consumer and pressures on funding have all conspired to cool markets’ expectations. That key dynamic around an uncertain consumer facing constraints on income growth with a falling savings rate always stood out as a key constraint on the ability of the household sector to lift spending in the way anticipated by the markets."
The Bank of Japan (BOJ) is seen debating ways this month to make its massive stimulus program sustainable.
The central bank has been flooding the system with cash via JGB, ETF purchases and negative intereste rates since 2013, but the 2 percent inflation target still remains elusive.
Further, BOJ is seen pushing its inflation forecasts out to the fiscal year ending March 2021, and if anything, the risks are to the downside, meaning the bank could take too long to hit the 2 percent inflation target and hence is reportedly considering steps to make its policy more sustainable.
EUR/USD rallied to 1.1738 the high, closing at 1.1719 on Friday as the pair traded through the 10, 21 & 55-DMAs last week and is now en route for a test of the July high at this rate, which is located at 1.1790.
Market adjusting and suspecting a full-blown currency war
The market is making further adjustments to the overall positioning in the US dollar, suspecting that the Trump administration is about to ignite a full-on currency war after Trump tweeted his displeasures over the EU and China, calling them out as currency manipulators.
Trump has retaliated by threatening sanctions on $500bln in Chinese exports to the US last year. However, it is worth noting that a full retracement of the USD/CNY’s 2016-18 fall, which is well underway and worth 11.5%, should offset the effect of those tariffs - hence Trump's frustration with rising US rates and USD.
EU’s Moscovici: G20 meeting was not tense, but still trade differences persisted
Analysts at Commerzbank argue that a recovery above 1.1790 will target 1.1855. "Above 1.1855 we look for a deeper retracement to the 1.1930 55 week ma, with scope for the 1.1986 200 day ma, where we suspect that it will fail," the analysts added. Indeed, the daily technicals have shifted in the bulls favour, but only slightly as the longer term outlook is bearish and fundamentally where gains should be tempered by the FED and ECB divergence. Therefore, to the downside, the 200-week moving average is at 1.1390 while 1.1186/1.0814 comes as the 61.8% and 78.6% retracement.
The US Secretary of State Pompeo is out with some comments, via Reuters, responding to the Iranian President Rouhani’s warning issued earlier today.
Iran leaders' wealth, corruption show Iran "is run by something that resembles the mafia more than a government".
Iran President Rouhani and Foreign Minister Zarif "are merely polished front men for the Ayatollahs' international con artistry".
NZD/USD Chart, 15-Minute
|Trend:||Potential bearish pullback|
|Support 1:||0.6783 (current day low)|
|Support 2:||0.6755 (61.8% Fibo retracement level)|
|Support 3:||0.6712 (previous week low)|
|Resistance 1:||0.6839 (previous week high)|
|Resistance 2:||0.6858 (July high)|
|Resistance 3:||0.6920 (June 25th peak)|
Reuters reports comments delivered by the European Commissioner for Economic and Financial Affairs Pierre Moscovici following the G20 Finance Ministers in Argentina on Sunday.
Global trade tensions were high and threatened to escalate further, placing the multilateral system under significant pressure.
The economic impact had been limited so far.
“The meeting has not been tense and we were in mutual listening mode and I hope that this is the beginning of something.”
“But still the positions are not similar.”
The Bank of Japan (BOJ) offered to buy an unlimited amount of 10-year Japanese Government Bonds (JGBs) at a yield of 0.11 percent, the same level at which it intervened in the past, according to Reuters. JGB futures have reportedly trimmed losses after BOJ's special operation.
AUD/USD Chart, 15-Minute
|Trend:||Flat to bullish|
|Support 1:||0.7391 (38.2% Fibo retracement level)|
|Support 2:||0.7353 (common constraint level)|
|Support 3:||0.7317 (previous week low)|
|Resistance 1:||0.7440 (July 19th swing high)|
|Resistance 2:||0.7483 (July high)|
|Resistance 3:||0.7504 (R2 daily pivot)|
The EUR/JPY is testing past Friday's lows, clunking into 130.30 as the new week opens on the risk-averse side, with traders favoring the Japanese Yen on the market open as trade risks return to the forefront of market concerns.
The Euro saw rough action against the safe-haven Yen last week, peaking just beneath the 132.00 critical level early on before slumping back to a low of 130.50 in Friday's trading, and the bearish action is set to continue following revelations that European Union leaders in Brussels have flat-out rejected the latest Brexit proposal from the UK, keeping risk appetite muted as trade concerns across the globe continue to grind higher, chewing up traders' willingness to bid up riskier assets.
The early week sees quiet action across the board on the economic calendar, and the only event slated for the EUR/JPY is a low-tier German Buba Monthly Report, being released by Germany's Deutsche Bundesbank, but the specific release time is not known, and the report is unlikely to deliver any news that traders have not already digested.
EUR/JPY levels to watch
With the EUR/JPY pairing looking to continue last week's bearish movement, support is sitting at the last swing low on H4 candles near 129.90, with late June's peaks near 129.25, while bulls will be looking to surmount last week's highs near the 132.00 critical level before they can challenge April's highs far above at the 133.00 major level.
Following complaints by a Chinese steel business about foreign dumping in Chinese markets, China's Commerce Ministry will be launching an anti-dumping probe against Japan, the European Union, and South Korea.
The Commerce Ministry for China says that it will be launching an anti-dumping investigation into imports of stainless steel billet and hot-rolled stainless steel plate products from the EU, Japan, South Korea, as well as Indonesia. Imports into China of underpriced metals products has been on the rise, and may have been exacerbated by the US' recent imposition of broad-based steel and aluminum tariffs, jarring global metals markets.
By launching an anti-dumping investigation, China is paving the way to begin enacting their own sets of targeted metals tariffs on justified evidence, allowing them to further restrict the movement of metals products across their borders and further hampering the flow of cheap products to the US, squeezing already-choked supply lines into the US materials-based industries.
The People's Bank of China (PBOC) set the Yuan reference rate at 6.7593 vs Friday's fix of 6.7671.
Barclay's analysts are highlighting a potential short scenario unfolding on the USD/JPY, and according to the investment bank, fundamental support for the Japanese Yen are going to time well with potential shortfalls on the US Dollar.
Yen short positions have largely been unwound according to Commitment of Traders reports.
JPY is being supported on trade war issues.
The Bank of Japan (BoJ) will be having a key meeting next week, expected to be Yen-positive.
US-Japan trade discussions expected to weigh on risk sentiment, bolstering the Yen.
Barclays is short the USD/JPY targeting 108.10, with a stop limit at 113.40.
With Aussie CPI coming up, where the headline CPI is expected at +0.5% (TDS forecast +0.6%) and underlying CPI expected at +0.5%, (TDS +0.55%) the analysts at TD Securities (TDS) argued that as the RBA is glued to the sidelines, even our firmer CPI take is unlikely to boost the AUD for long.
"Negative rate differentials and ongoing tension on global trade remain significant headwinds. Fading rallies remains prudent."
"The OIS strip is flat to 1.5% cash and no trading opportunities just now. With a patient and gradual RBA, as long as core inflation tracks 2%/y there is no little need for rates to respond. The Aug 15 wages report is the next policy hurdle for the rates market."
Analysts at Nomura offered their model's projection for today's fix in USD/CNY.
"Our model1 projects the fix to be 111 pips lower than the previous fix (6.7560 from 6.7671) and 235 pips lower than the previous official spot USD/CNY close of 6.7795. The basket implied change is 329 pips lower than the previous official spot USD/CNY close (6.7466 from 6.7795)."
USD/JPY is on the move in Asia and Tokyo has pushed it higher to test the 111 psychological level with a low of 110.85 so far from a high of 111.51.
USD/JPY has been dropping, following the move that started last week following Trump's comments on CNBC that have sparked an unwinding in the dollar. The DXY has dropped all the way back to 94.2810 from close to 95.31 earlier in the month.
However, there is a decoupling of US yields and the dollar where 10yr treasury yields rose from 2.84% to 2.89% on Friday -to the highest in a month and the 2yr yields also climbed and from 2.59% to 2.60% while the Fed fund futures yields continued to price 1 ½ more hikes in 2018.
Trump going to currency wars?
It would appear that while Trump is unable to demand the Fed to keep rates on hold, the rhetoric has heightened the trade war risk and put the dollar into question, raising the suspicion that the Trump administration will spark a full on currency war. However, in this weekend's G20, there was a clear motion between delegates that reaffirmed exchange rate commitments made in the March statement to avoid competitive devaluations and refrain from targeting exchange rates for competitive advantage
Meanwhile, the week ahead will get interesting in the US with Q2 GDP as the highlight on Friday. "July existing home sales have been soft of late, with the NAR attributing it to a lack of supply," analysts at Westpac explained.
From a technical perspective, Valeria Bednarik, chief analyst at FXStreet explained that the pair settled at the 61.8% retracement of its latest daily advance between 110.34 and the mentioned 113.17, and is technically poised to extend its decline, as in the daily chart, technical indicators retreated from overbought readings, heading south almost vertically and nearing their midlines:
"The 100 DMA in the mentioned chart advances below the 200 DMA, both in the 109.50/60 region. In the 4 hours chart, the pair closed a few pips below the 100 SMA, the first time below it in almost a month, while technical indicators pared their declines in oversold territory, with the RSI still heading lower at 26, suggesting that buyers remain sidelined despite the latest 200 pips' slump."
The AUD/USD is peeking into recent highs near 0.7430 after a rough previous week that saw the Aussie testing into July's lows in choppy swings, but hopeful bulls are keeping the pair tentatively flat near last week's highs as they await further developments in global trade.
A shortfall in US Dollar bidders saw the AUD manage to stage a late-week recovery from recent lows, and the Aussie is being helped into a balanced stance by bouncing metals prices, which continue to surge and fall at the behest of trade headlines focusing on the US-China trade spat which still has the potential to deliver further trade-damaging tariffs on the horizon.
It's going to be a quiet week for the AUD, and trade headlines will be the deciding factor for the AUD/USD's directional bias moving forward, though Consumer Price Index figures for 2018's second quarter will be dropping early Wednesday at 01:30 GMT, with the q/q CPI for Q2 forecast to grind upwards from 0.4% to 0.5%.
AUD/USD levels to watch
The Aussie is geared to move sideways against the Greenback on a flattening technical outlook, and according to FXStreet's own Valeria Bednarik: "the daily chart offers a neutral technical stance, as the pair has been moving for almost three weeks around a flat 20 DMA, while technical indicators lack clear directional strength, stuck around their midlines. Shorter term, and according to the 4 hours chart, the pair is developing below a mild bearish 200 SMA and above directionless 20 and 100 SMA, while technical indicators eased, but hold in positive territory. The pair has an immediate resistance in the 0.7440/50 region but would need to clearly break July's high at 0.7483 to gain further upward traction."
Support levels: 0.7370 0.7330 0.7300
Resistance levels: 0.7445 0.7490 0.7520
NZD/USD has started out the week by closing the opening bearish gap down at 0.6791 and has climbed back to score a high of 0.6820.
NZD/USD has been recovering from the descending support line at 0.6713 and has added a full cent since the recent remarks from Trump in both the CNBC interview on Thursday in NY trade and again on Friday when he tweeted a series of comments that have stoked the trade war fire.
Analysts at ANZ noted that President Trump doubled down on his critical comments of the Fed and the USD subsequently suffered, sending kiwi back over 68 cents. "Domestic developments have taken a back seat for now, with the NZD at the whims of global forces, although it is not like that picture is overly clear at present," the analysts added.
RBNZ will remain on hold, Fed will continue to raise rates
Meanwhile, on the domestic front, the recent tick-up in core inflation provides some assurance that inflation is on the rise, but the analysts at ANZ expect the RBNZ will remain cautious, particularly in light of uncertainty around the persistence of inflation pressures - leaving the bias and advantage towards the dollar on the central bank theme - regardless of what Trump says about the Fed and interest rates.
Support is located at 0.6720 and resistance remains located at 0.6860. Bullishly, the price has overcome 0.6760, where it was previously resisted by the 21-hr SMA. The price then managed to get above the 10-hr SMA and took RSI into overbought conditions. There could be some consolidation and profit taking here. However, on a break of 0.6920, the bulls will be well back in control and could target the June highs. The 200-month moving average resistance at 0.7007 is next key level.
Iran's President, Hassan Rouhani, cautioned US President Donald Trump about pursuing hostile policies against Iran, but didn't go so far as to rule the possibility for peace talks between the two nations.
"Addressing a gathering of Iranian diplomats, Rouhani said: “Mr Trump, don’t play with the lion’s tail, this would only lead to regret,” the state new agency IRNA reported. “America should know that peace with Iran is the mother of all peace, and war with Iran is the mother of all wars,” Rouhani said, leaving open the possibility of peace between the two countries, at odds since the 1979 Islamic Revolution. “You are not in a position to incite the Iranian nation against Iran’s security and interests,” Rouhani said, in an apparent reference to reported efforts by Washington to destabilize Iran’s Islamic government.
In Washington, U.S. officials familiar with the matter told Reuters that the Trump administration had launched an offensive of speeches and online communications meant to foment unrest and help pressure Iran to end its nuclear program and its support of militant groups.
Rouhani scoffed at Trump’s threat to halt Iranian oil exports and said Iran has a dominant position in the Gulf and the Strait of Hormuz, a major oil shipping waterway. “Anyone who understands the rudiments of politics doesn’t say ‘we will stop Iran’s oil exports’...we have been the guarantor of the regional waterway’s security throughout history,” Rouhani said, cited by the semi-official ISNA news agency.
Iran’s Supreme Leader Ayatollah Ali Khamenei on Saturday backed Rouhani’s suggestion that Iran may block Gulf oil exports if its own exports are halted. Rouhani’s apparent threat earlier this month to disrupt oil shipments from neighboring countries came in reaction to efforts by Washington to force all countries to stop buying Iranian oil.
On Sunday, Iran’s ground forces commander became the latest military figure to back Rouhani’s apparent threat, the semi-official news agency Tasnim reported. Separately, a top Iranian military commander warned that the Trump government might be preparing to invade Iran.
“The enemy’s behavior is unpredictable,” Tasnim quoted military chief of staff General Mohammad Baqeri as saying. “Although the current American government does not seem to speak of a military threat, according to precise information it has been trying to persuade the U.S. military to launch a military invasion (of Iran),” Baqeri said.
Iran’s oil exports could fall by as much as two-thirds by the end of the year because of new U.S. sanctions, putting oil markets under huge strain amid supply outages elsewhere."
Analysts at Nomura offered their outlook for the week ahead.
"United States | Data preview
The week ahead: We expect robust Q2 real GDP growth of 4.6% q-o-q saar
Existing home sales (Monday): We forecast a 0.1% m-o-m increase in existing home sales to 5435k saar in June from 5430k in May. Pending home sales were weak in May and April. In addition, structural factors such as rising mortgage rates and shortage of units for sales likely prevailed. Thus, we expect only a modest improvement in existing single-family home sales in June. In addition, volatile existing condo and co-op sales rose 1.6% m-o-m in May. This increase may have reverted in June, lowering total sales.
New home sales (Wednesday): New home sales likely declined 3.0% m-o-m to 668k saar in June. While month-to-month changes tend to be volatile, we continue to expect gradual improvement in new home sales. For June, consumer demand likely remained steady but supply-related factors may have continued to weigh on sales. In particular, much of the newly-built housing stock has been concentrated on more expensive units, exacerbating the supply shortage in the lower-end segment of the market.
Advanced goods trade balance (Thursday): Based on incoming container data at US ports, goods exports growth likely slowed in June after a strong jump in May, which was driven by a transitory surge in soybean exports. Soybean exports will likely decline in coming months, slowing overall exports growth. Moreover, container data suggest that nominal imports likely rose sluggishly in June. All in all, we expect the advance estimate of goods trade balance for June to register $65.3bn deficit following $64.8bn in May.
Durable goods orders (Thursday): We expect a modest 0.3% m-o-m increase in extransportation durable goods orders in June. The ISM new orders index edged down slightly but remained high at 63.5 in June. The industrial production report for June indicated healthy growth in ex-transportation durable goods output. These data appear consistent with the solid momentum in the industrial sector and a pickup in business equipment investment in Q2. Among transportation equipment, orders for motor vehicle and parts likely rose sharply. The industrial production report indicated that truck assemblies picked up in June following significant disruptions in May. Further, civilian aircraft orders likely boosted transportation orders considering industry data. Altogether, we expect a 3.0% m-o-m increase in total durable goods orders in June.
Q2 GDP, first estimate (Friday): We forecast robust 4.6% q-o-q saar real GDP growth for Q2, mostly driven by solid contributions from personal consumption, nonresidential fixed investment, and government consumption. Consistent with the strong labor market, personal consumption expenditure likely rose solidly in Q2 after a lull in Q1. Investment in nonresidential structures likely continued to grow at a healthy pace, in line with the Q2.
Senior Loan Officer Opinion Survey, which implied that lending standards on nonfarm nonresidential commercial real estate loans eased in Q2. Moreover, elevated shale oil and gas extraction activity likely boosted oil-related structures investment. In addition, federal government spending likely rose solidly considering higher defense spending during Q2. Residential investment, however, likely remained as a drag as sales activity softened and outlay on home improvement and mobile homes weakened. Moreover, incoming data on net defense outlay and state and local public construction outlay point to a solid pickup in federal and state & local government spending in Q2. In addition, trade deficit narrowed significantly in April and May, pointing to significant boost from net exports to real GDP growth. Some of the narrowing in trade deficit, however, was led by a transitory surge in soybean exports ahead of retaliatory tariffs by US trading partners which will likely wane in coming months.
Note the BEA will release the “comprehensive revision” of the National Income and Product Accounts along with its advance estimate for Q2 GDP. Annual revisions for monthly Personal Income and Outlays tables will be released on 31 July with June data.
University of Michigan consumer sentiment (Friday): The headline index of the University of Michigan consumer survey fell 1.1pp to 97.1 in July. Inflation expectations at the one-year horizon ticked down 0.1pp to 2.9% while those at the 5-10 year horizon declined by 0.2pp to 2.4%. The preliminary survey results suggest that consumer sentiment may be sensitive to concerns about tariffs. The report indicated that “[the proportions of respondents citing] negative concerns about the impact of tariffs have recently accelerated, rising from 15% in May, to 21% in June, and 38% in July.” Respondents who expressed negative views of the tariffs expressed more bearish expectations on future conditions with a higher expected inflation rate. For the final estimate for July, we expect consumers to maintain increased concerns about tariffs.
Euro area | Data preview
The week ahead Euro area July flash PMIs data and UK CBI Survey will be in focus next week.
Euro area PMIs, July flash (Tuesday): We expect the euro area composite PMI for July to increase to 55.3 from 54.9 in June. At the sector level, we expect the regional manufacturing PMI to dip to 54.6 from 54.9 and the services PMI to increase to 55.9 from 55.2. While the escalation in world trade disputes should worsen sentiment, domestic demand is still appears buoyant. Overall levels of these indices are still high relative to their long-run averages, and our forecast for July’s flash reading would be consistent with euro area GDP growth of around 0.5% q-o-q in Q3 2018.
UK CBI industrial trends survey, July (Tuesday): Every quarter, the CBI publishes both its monthly survey (which contains only a limited number of indicators, of which total orders is probably the most widely watched) and its quarterly survey. In the latter, aside from the headline measure of optimism, look for indicators of capex, employment, spare capacity and factors limiting output, exports and investment.
Germany Ifo survey, July (Wednesday): We expect the Ifo Business Climate Survey to decline to 100.9 in July from 101.8 in June. We think this decline will be driven mainly by a further decline in business expectations (we forecast a drop in Ifo business expectations to 97.4 from 98.6 in June). With trade tensions intensifying between Germany and the US, we expect the deterioration in sentiment to continue in July. Crucial to this issue will be the meeting between Trump and Junker on 25 July, during which the main focus will be on possible tariffs on the auto sector in Europe.
UK Finance approvals for house purchase, June (Wednesday): While there is typically limited market reaction to this number, it is worth bearing in mind that it is closely correlated with the BoE’s official data published the following week.
UK CBI distributive trades survey, July (Wednesday): The reported balance of this survey rose to its highest since last September in June (32%), probably helped by the weather and the World Cup. The expected balance published last month suggests that it may not remain at such an elevated level although, with real wages recovering and the weather remaining supportive, we think the survey should remain reasonably solid.
ECB Governing Council meeting, July (Thursday): Policy announcements at June’s ECB meeting were surprising more in timing than in content. The ECB made some important changes to guidance on its Asset Purchase Programme (APP) and rates. With these announcements, a long period of inaction is likely; however, some uncertainty remains as to what the ECB actually meant by “through the summer” in the context of leaving rates on hold. A recent article citing “policymakers speaking to Reuters on condition of anonymity” suggested that the wording was sufficiently vague for some to argue it is consistent with no move until the 24 October 2019 meeting, while others believe it could be as soon as 25 July 2019. We continue to forecast the first 15bp hike in the deposit rate in September 2019, followed by a further 10bp hike in all policy rates in Q4 2019.
Japan | Data preview
The week ahead We expect Tokyo core CPI inflation to slow in July as boosts from highly volatile items drop out of the picture.
July Tokyo core CPI (all items, ex fresh food) (Friday): We expect Tokyo core CPI inflation to come in at 0.6% y-o-y for July, lower than the 0.7% recorded in June. We also think that the BOJ version of the core core CPI, which excludes fresh food and energy, will slow in July relative to June, coming in at 0.3%. The higher rates of inflation seen for accommodation and overseas package tours made substantial contributions to the Tokyo core inflation rate in June, but these are relatively volatile items, and we think that their positive impact on inflation will drop out of the picture in July. Household durables, which have mostly tended to depress the core inflation rate recently, boosted it in June. In the corporate goods price index (CGPI), prices of household durables fell 1.3% y-o-y in June, representing a small improvement from the 1.6% y-o-y decline in May. However, the CGPI usually leads the CPI to some extent, and we think it is still too early for wholesale prices to be reflected in retail prices. Prices of household durables tend to be relatively volatile, and it is possible that their boost to the Tokyo CPI in June was merely temporary. In view of the weakness of consumer spending, we do not think that prices have embarked on an upward trend as yet. Meanwhile, energy prices, including pump prices for gasoline, have not risen much recently, and we expect overall core inflation to be lower in July than in June.
Asia | Data preview
Australia: We forecast a 0.5% q-o-q rise in headline CPI inflation and a 0.4% q-o-q rise in the underlying or trimmed mean inflation, which translates into a 0.3pp increase in y-o-y inflation in Q2 from Q1. Higher global oil and local fuel prices in Q2 should boost headline CPI inflation in Q2, but underlying price pressures appear more subdued. Our core inflation forecast looks to be one-tenth below the current Bloomberg consensus. We note that AUD fell in Q2, although we expect any consequent inflation impulse to be quite subdued, particularly given spare capacity and fierce retail competitive pressures."
As reported by Reuters, the European Council sees no need for the US to remove steel and aluminum tariffs before trade talks can proceed, continuing to keep the door open to the US to engage in bilateral talks on trade.
"The United States’ removal of tariffs on steel and aluminum imports is not a necessary precondition for trade talks between the United States and the European Union to begin, the European Council representative to the G20 Hubert Fuchs said on Sunday. That ran against French Finance Minister Bruno Le Maire’s comments on the sidelines of the G20 meeting of finance ministers and central bankers in Buenos Aires on Saturday that the United States must drop the tariffs before talks can start.
“We are representing 28 member states of the European Union, not only Germany and France. We shouldn’t have any preconditions for the talks,” Fuchs, also Austria’s state secretary for finance, said in an interview. “It’s not a precondition because preconditions are never good, but it would be a great wish.” "
Major industrial companies in the S&P 500 will be reporting in large groups over the coming week, and tariffs are expected to begin taking chunks out of profit shares across the board.
"Investors are worried about the impact on earnings should the United States’ trade war with China and other major trading partners escalate. Deutsche Bank in June estimated that an escalation of the dispute to include $200 billion of imports would hit earnings growth by 1-1.5 percent. “If today’s political rhetoric intensifies and translates into actual protectionist policies, it will be a negative for all businesses in the U.S. and abroad, including ours,” Hamid Moghadam, chief executive of supply chain management company Prologis, warned on a conference call on Tuesday.
Manufacturers across the country are concerned about Washington’s recent trade policies, with some saying that uncertainty related to tariffs was already hitting them, according to anecdotes collected by the U.S. Federal Reserve in its Beige Book, released on Wednesday.
Since March 1, S&P 500 industrials .SPLRCI have fallen nearly 3 percent, reflecting the sector’s dependence on international commerce. The S&P 1500 steel index .SPCOMSTEEL has lost 1 percent since March 1, as investors worry that a slowdown in global demand could offset U.S. steelmakers’ benefits from tariffs against their foreign competitors.
Many of the roughly 180 S&P 500 companies reporting their results next week are not directly exposed to China, but they may still have reasons for concern. “There are companies that might not be significantly impacted by tariffs from a cost perspective, but from the uncertainty around it,” said Kurt Brunner, a portfolio manager at Swarthmore Group in Philadelphia, Pennsylvania. “They could see customers holding off on spending because they don’t know what is going to happen.”
That is starting to show up in early reports by companies. Earnings from Honeywell International, General Electric and Stanley Black & Decker show companies facing higher costs due to already enacted tariffs, and uncertainty about tariffs on as much as $500 billion in Chinese goods threatened by Trump.
Second-quarter corporate earnings seasons kicks into gear starting on Monday, with results on tap from companies including Corning, Ford Motor, 3M Co and Boeing, which has fallen nearly 2 percent since the start of March.
The GBP/JPY saw some hesitation at the week's open, knocking into 146.08 on the market open before recovering to 146.36 as GBP traders await further reactions from the upcoming London market session for Monday after weekend headlines broke that the leaders of the European Union have rejected the lastest Brexit proposal to come out of the UK.
Leadership from the EU has finally weighed in on UK Prime Minister Theresa May's latest Brexit proposal, and the "third option" exit deal appears to be dead in the water, with EU leaders in Brussels unwilling to allow the city of London to have an exemption from the EU's autonomous right to withdraw access to financial markets and services, and PM May and Brexiteers within the UK's parliament are back to the drawing board as pro-leavers struggle to develop a successful negotiating strategy or develop any headway with Europe.
Monday is devoid of any meaningful data on the economic calendar for either the Sterling or the Japanese Yen, and market sentiment is set to hesitate once again as Brexit fears and trade spat headlines return to the surface.
GBP/JPY levels to watch
Friday saw a much-needed hesitation after the previous week's steady decline from an early high of 149.30, and bulls will have their work cut out for them if they decide to make a push for resistance sitting at the last two swing highs on H4 candles, near 146.65 and 147.65, while bears see support nearby at last week's low of 145.96 and early July's swing low of 145.18.
In a market wrap, analysts at Westpac explained that US President Trump launched fresh salvos in the US-China trade war and again criticised the Fed, and the G20 summit highlighted trade tensions - noting that the US dollar fell and US bond yields rose.
"Trump’s comments that he was “ready to go to 500” of tariffs in imports from China; that he was “not thrilled” about the prospects of Fed hikes and that “China, the European Union and others have been manipulating their currencies” saw a volatile close to the week."
"His comments on the Fed hikes and Trade concerns were the key issue into the weekend’s G-20 finance ministers’ summit. Merkel and EU officials joined China in stating that they would resist and retaliate against US tariffs."
People’s Bank of China released supplementary guideline changes with respect to wealth management products operated by banks in an effective loosening of current tight controls.
Japanese media suggested that Bank of Japan will debate policy changes and may modify its yield curve targeting, whilst insisting that it would not be tightening but would be to mitigate market distortions.
Bank of England MPC member Tenreyro’s interview in London’s Evening Standard indicated her shift towards voting for a hike, though not explicitly, in August.
Canadian June CPI headlined at 2.5%y/y (exp 2.3%) and the average of core measures lifted to 2.0% (exp. 1.9%).
Fed non-voter Bullard spoke with a dovish tone when he stated that US rates were high by global standards, that Fed forecasts indicate further gradual tightening but that curve inversion may be imminent and would be a bearish signal.
The GBP/USD pairing kicks off the new trading week with a bearish twist to Monday, testing near 1.3120 and halting Friday's bullish stance, as European leadership in Brussels have flat-out rejected British Prime Minister Theresa May's latest Brexit proposal, stating that the 'third option' proposal would rob the European Union of "decision-making autonomy", by preventing the EU from retaining the right to withdraw access to European trade markets if the deal were to be accepted.
The EU has rejected the UK's latest proposal on how to govern the city of London's access to European financial markets after Brexit, and PM May and her cohort within the UK parliament are once again back to the drawing board on how to negotiate a smooth Brexit, with hard-line Brexiteers on one side steadily gearing up to begin making moves to outright oust Theresa May, and staunch European leaders in Brussels unwilling to make sacrifices on their part so that the UK can cherry-pick EU laws to follow or abandon.
After last week's dismal showing for economic data from the UK, the Sterling heads into a trading week that is decidedly thin on the macro calendar, and Monday will bring fresh bearish action as Brexit once again returns to headlines, and the only slated event for Monday is a speech from the Bank of England's (BoE) MPC Member Haldane due later in the day at 17:00 GMT.
GBP/USD Levels to watch
Friday's late bullish move looks to have already run out of gas now that Brexit is back to the forefront, and as FXStreet's Valeria Bednarik noted, "the daily chart indicates that bears are still in control of the pair, as the latest recovery stalled below its 20 DMA, while technical indicators have managed to recover some ground, but remain in negative territory. In the 4 hours chart, the pair settled above a sharply bearish 20 SMA, still some 150 pips below the 200 EMA, while technical indicators stand well above their midlines, but lost their upward strength. The pair could continue advancing on a break above 1.3155, the immediate resistance, although the first line of sellers should appear around the 1.3200 figure. Renewed selling pressure below the 1.3100 level, on the other hand, will likely favor additional declines for this Monday, toward the key 1.3000 psychological threshold."
Support levels: 1.3100 1.3065 1.3030
Resistance levels: 1.3155 1.3195 1.3240
The weekend news starts with Brussels rejecting the UK’s proposals on how to govern the City of London’s access to the European market after Brexit - as reported in the last few hours by Jim Brunsden, Editor at FT in Brussels.
"Theresa May’s latest financial services plan would rob the EU of its “decision-making autonomy”, Michel Barnier, the EU’s chief Brexit negotiator said.
"European affairs ministers on Friday that the British prime minister’s vision for the City’s future relationship with the EU would violate the principle that access rights to the bloc’s financial services market are a gift from Brussels that can be freely withdrawn.
His remarks were a rebuff to the UK government — which published its white paper this month on Britain’s future relations with the EU — and highlight the many conflicts between the two sides despite a more conciliatory tone over the Northern Ireland border issue at the same meeting,"
- Jim Brunsden at the FT wrote earlier today.
Trae war risk will remain a theme for time to come
Elsewhere, the finance ministers and central bankers from the G20 met over the weekend and while there were not any takeaways that might affect opening prices this week, TEU's Pierre Moscovici said there are still differences of position on trade and tensions remain, even after the G20 finance ministers and central banker talks over the weekend:
The final communique headlines say that "short- and medium-term risks to growth have increased, including heightened trade and geopolitical tensions". Also, "Exchange rate commitments made in the March statement to avoid competitive devaluations and refrain from targeting exchange rates for competitive advantage".
Data source: FX Street
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