- The Hilsenrath Impact continued on Friday for the US dollar which continues on the back foot against the Euro (1.3285), Sterling (1.5381), Yen (98.09) and the Aussie (0.9250). Key driver is the expectation that the Fed will be dovish again this week but I reckon they will continue to nuance the message about the difference between the taper and interest rates. This is a difficult task and will be extremely important over the week because the market is heavily long USD and short Aussie, Yen and GBP in particular.
- There was no really important data on Friday although I’d note Singapore IP down 3.1% MoM in June is a bit of an Asian canary in the coal mine. But this week is very different with so many important releases in the next 5 days. I’ll spend some time discussing these releases below and how traders might approach them (cautiously) through the week.
- US markets were under real pressure early but pulled themselves back from the bring to close just in positive territory – the actual catalyst for the recovery is probably the big jump in consumer confidence (Michigan +3, 82) although the S&P 500 did recover strongly from the old support line it broke down through and then back up in May and June this year. At the Close the Dow (+3 pts 15,559), the S&P 500 (+2 pts 1692) and Nasdaq (+8pts 3613) snuck into the black although Europe was more mixed with the FTSE (-0.5%), DAX (-0.65%) and FTSEMIB (-0.06%) were all down while the CAC managed to rally 0.33% and Spain was 0.89% higher.
- Rates didn’t move too much but they will this week with the Big 3 central banks meeting. 10 Yr UST’s were at 2.57%, German Bunds 1.67% and UK Gilts 2.15%.
- Gold also recovered from early losses ($1333.35 oz.) but like the S&P it too is dancing around at the waiting on the next catalyst higher. A break back below $1308 could get ugly this week while a break above $1345 should kick it to the next level. Crude retested the line it broke up and through and has held for the past couple of weeks and a fall below $103. 89 opens up a big fall. Our friends Corn and Soybeans were a bit quieter than recently only falling 0.81% and 0.41%.
- Dr copper was 2.49% lower as fears continue to grow about the outlook for Chinese growth and particularly because the Chinese Investment Corporation has, in the words of the FT, ” switched emphasis away from commodities to financial stocks in its overseas equity holdings over the past year”.
On the data front today we see the release of Japanese retail sales which after the CPI data last week will be important to see if the CPI uptick had any underlying support with increased domestic demand. We also hear from BoJ Governor Kuroda while in Europe Consumer Credit is out and in Italy before Pending Home Sales, Dallas Fed survey and Lending Officers survey are released.
Also worth contemplating today and specifically for Aussie interest rate and dollar traders is the story in which former HSBC Australia Chief Economist and now RBA Board member John Edwards say the Government needs to be careful not to cut to hard fiscally. It looks like they are going to have to to pay for the PNG immigration solution at the very least and Edwards says, “The stance of fiscal policy is always a consideration for monetary policy. Indeed it is – the RBA needs to cut not once but at least twice.
The eye of the storm
This week is a huge week for global markets. We have the Bank of England, ECB and the Fed all having their meetings and announcing the results of same. We get the preliminary read on US Q2 GDP and then at the end of the week we get non-farm payrolls in the US.
The first couple of days of the week are likely to be thin and whippy as we truly are in the eye of the storm. Since Mid May we have seen expectations that the Fed is going to taper hit stocks and buoy the US dollar only to have the Fed and Jon Hilsenrath’s efforts as explaining the nuance of Taper and interest rates reverse the Dollars’ run and push the stock market to new highs.
It is a critical time for the Fed – they are likely to want to reinforce the clear distinction between taper and interest rates but i strongly believe that they are also likely to reinforce that the taper is a prudent step to begin soon. Certainly Hilsenrath’s article last Thursday suggested a certain dovishness from the Fed but he got it wrong just before the last FOMC meeting so he is possibly as much the Oracle of nowhere as much as he is the Oracle of Liberty Street.
We’ll know later this week but complicating things just a few hours before the Fed announcement is the US GDP for Q2 which is expected to slow to an annualised 1.2%.
Equally important now that Mark Carney has had time to get his feet under the desk is the message we get from the ECB about rates. Many expected he would hit the ground running at his first meeting but this belies the very nature of central bankers even ones as forward looking as Carney. But his second meeting is a very different kettle of fish. GBP has been gently gaining against the USD recently and Carney may want to be rid of that trend and it is clear that outside London the UK economy still needs considerable stimulus.
Likewise in Europe the ECB will be concerned that the Chinese slowdown is going to have material impacts on them even if the PMI’s have been a little better lately. So we’d expect some dovishness there too. That’s not to say it’s all bad in Europe because the data has been beating expectations but a weaker China means a weaker Germany.
Then of course at the end of the week we get non-farm payrolls with the market expecting +184k according to FX Street.
It is a big week of announcements of data – the single biggest week on this basis probably all year because of both the convergence of data and where we are in the debate about the Fed.
For traders there is chance of great reward but also great risk – knowing your sytem and your stops will be a must to end this week in the black.
A time of reckoning for the S&P 500
Based on my usual discretionary system, as opposed to my modified Turtle system that got me long Friday week back, the S&P (and the DAX et al) looks like it has topped out.
Clearly last week was one of tooing and froing as you can see on the long tails on the daily bars above. My stop on the modified turtle is 1663 now and if this breaks it would trigger me into a discretionary short.
Have a great day and retain your focus this week – it’s more important than ever.