Market Review – Fundamental Perspective

[PCMNewsdesk]

• Global equities closed higher yesterday
  
• EU Summit reached migration deal and caused risk recovery
  
• Month-end flows likely to dominate today

US equities rose yesterday and their Asian counterparts also traded higher after China eased foreign investment limits. An early morning agreement at the EU Summit prompted a recovery in risk, causing safe havens JPY, USD and US Treasuries to decline, and EUR to rally overnight
The EU Summit leaders reached an agreement whereby new migrant centers will be set up in EU countries on a “voluntary” basis and restrict the movement of asylum seekers between EU states
EURUSD rose by 0.8% overnight and EURJPY gained 1% to the highest level since 14th June
Our traders expect EURUSD to be driven by month-end flows today and remain in a range of 1.1720-1.1500
GBPUSD traded in a relatively tight range yesterday and the EURUSD rally overnight had only a limited impact on GBPUSD. Today’s price action is likely to be driven by month-end flows, and focus also lies on the Q1 Final GDP print at 9.30
Looking ahead, this weekend will see Germany’s coalition talks on Sunday to discuss the outcomes of the EU Summit and could provide important signals for Chancellor Merkel’s prospects
Elsewhere, Mexico’s Presidential elections are held on Sunday, where Barclays Research sees risk of a strong AMLO victory, which may be perceived as highly negative by markets in the absence of counterbalances

[PCMNewsdesk]

• The EU Summit delivers an agreement on migration
• Germany’s CSU party disagree with Chancellor Merkel on refugee policy
• Euro area and UK manufacturing PMIs in focus this morning

The EU Summit delivered an agreement on migration that may have enough ingredients to satisfy the demands of a majority of member states. The deal focuses on future migration flows (not the stock) coming from the Mediterranean route into the EU. The EU will rely on coordination with neighbouring Mediterranean states, with an explicit mention of the central Mediterranean route (Libya), East Mediterranean route (Turkey) and West Mediterranean route (Morocco)
Essentially, Member States agree to commit EU financial resources towards those neighbour countries in order to support border control and the establishment of migration centres
However, the proposals have been rejected by CSU Chairman and interior Minister Seehofer. Initial reports that Seehofer had resigned were followed up by him saying that he will stay in politics if Merkel’s CDU backs down. According to German news, Seehofer will meet Chancellor Merkel at 5pm CET today to explore a compromise, before making his final decision
GBPUSD bounced from the lows last week dragged up by EURUSD (following the EU summit deal on migration) and a weaker USD. UK PMI data will be closely watched today and Wednesday as the Bank of England remains data dependant. Strong data is likely to fuel further expectations for an August hike especially following Haldane’s recent hawkish tilt although with an August hike now ~65% priced, there is clear room for a move in either direction
Andrés Manuel López Obrador has won Mexico’s presidential election, and he sent a message for reconciliation. His party appears likely to control the lower house and, potentially, the Senate. The landslide victory has provided the AMLO with an important level of political capital and a clear mandate to improve several of the country’s challenges: fight corruption, alleviate poverty and improve security

[PCMNewsdesk]

• UK manufacturing PMIs stabilised in June but the quarterly picture for Q2 was fairly disappointing
• RBA keeps its cash rate unchanged as expected and continues its balanced approach
• Merkel and German interior minister Seehofer reach compromise on migration policy

Headline UK Manufacturing PMI was stable in June at 54.4, up a touch from a revised 54.3 in May. However, the trend over the quarter was weaker than in Q1, as the headline and most of the subcategories such as new orders and employment weakened in Q2 relative to Q1
Heading into the August MPC meeting, the next set of key hard data will be released on 10 July, when we see the combined publication of activity, services data as well as the new, output-based, monthly GDP series. Today’s sentiment survey doesn’t signal a significant boost for the IP side of Q2 GDP
As expected, the Reserve Bank of Australia (RBA) kept its cash rate unchanged at 1.50% overnight. Interest rates have now remained unchanged for 21 consecutive policy meetings. Once again, the central bank did not make any changes to its policy guidance in the statement. The RBA reiterated that it expects GDP growth to be above 3% growth in 2018-19, noting the strong growth in Q1, but it continues to flag that low inflation and weak wage growth will continue to weigh on policy decisions
The EUR pared back some of its losses yesterday afternoon on reports that Chancellor Merkel and German interior minister Seehofer have reached a compromise on migration policy, averting the immediate threat of a government breakup (Bloomberg)

[PCMNewsdesk]

• Chinese yuan recovers from 11-month lows after authorities took steps to calm financial markets
• Dollar declines ahead of US Independence Day holiday today
• Focus on Fed minutes tomorrow and non-farm payrolls on Friday

Overnight, Asian stocks were mixed and the Chinese yuan recovered from 11-month lows after authorities took steps on Tuesday to calm financial markets rattled by trade war concerns (Reuters)
PBOC Governor Yi said in a statement on the POBC website that the central bank was closely watching foreign exchange fluctuations and would seek to keep the yuan at a stable and reasonable level
The dollar declined ahead of the US Independence Day holiday today. Investors now await the publication tomorrow of minutes from the Federal Reserve’s June meeting, when policy makers raised the benchmark rate for the second time this year and lifted the median forecast to four total increases in 2018. US payrolls are also due on Friday
The Riksbank kept its repo rate unchanged but surprised markets with an unchanged rate path. A rate hike by year-end seems predicated on a significant pick-up in CPIF inflation, which Barclays Research are sceptical about. Elsewhere, oil traded above $74 / barrel and copper rose. Next up is UK PMI data this morning

[PCMNewsdesk]

• Asian stocks mostly lower ahead of US deadline to impose tariffs on China
  
• FX traded fairly quiet during US Independence Day holiday
  
• Focus on Fed minutes tonight
  

Asian equities mostly fell overnight as investors await tomorrow’s US deadline to impose tariffs on $34bn worth of imports. Meanwhile, futures imply a mixed start to US stocks when US markets open later today after yesterday’s Independence Day holiday
Chinese officials announced that they may respond to the US tariffs with instant measures if necessary (Bloomberg)
At the same time, US President Trump warned that he is prepared to escalate the tariffs on up to $450bn goods in case China retaliates which raised concerns of a tit-for-tat trade war
In FX, most G10 pairs traded in tight ranges and in subdued volumes yesterday. The USD Bloomberg Spot Index closed the day almost unchanged as investors await today’s publication of minutes from the Fed’s June meeting
In data, UK Services PMI came in stronger than expected, with headline service data indicating a full retracement of the weather–related weakness in Q1 and offsetting the lackluster sentiment in manufacturing
While this supports chances of a BoE rate hike in August, upcoming data will be closely watched
Our traders currently see GBPUSD support at 1.3160 ahead of 1.3095 and resistance at 1.3320 and 1.3400. EURGBP support comes in at 0.8800 while resistance lies at 0.8875-0.8900

[PCMNewsdesk]

• US-China trade tariffs took effect overnight
• GBPUSD under pressure on negative Brexit headlines
• Focus on the US June employment report at 13.30 and Chequers Brexit summit today

US equities rose yesterday after the US returned from Independence day, shrugging off concerns of US-China trade hostilities ahead of the imposition of $34bn of tariffs on Chinese goods by the US which took effect overnight. Asian stocks also gained overnight, but CNY remained under pressure amid trade tensions
EUR was also driven by trade-related commentary and rallied after the US ambassador to Germany suggested that the vehicle-import tariffs may be eliminated
GBPUSD came under pressure yesterday on headlines that Germany called PM May’s Brexit plan ‘unworkable’, however the effect was marginal and suggests that the market expected some negativity. Meanwhile, BoE’s Governor Carney took a hawkish stance and expressed his comfort with a gradual hiking cycle
Markets will be closely watching the Chequers meeting today, though any information is unlikely to be released before the market close
Our traders currently see GBPUSD support at 1.3200 and 1.3165 in the short-term and resistance at 1.3320 ahead of 1.3400. EURGBP support comes in at 0.8800 while resistance lies at 0.8900
The minutes from the Fed’s June meeting affirmed the existing path of interest rates. The committee’s view of the economy remained positive though several members cited concerns over moderation in growth overseas, Italian politics and risks from EM slippage and also from trade tensions. While this may be considered slightly dovish, it did not have a significant effect on the USD
Today’s main focus is on the US June employment report at 13.30

[PCMNewsdesk]

• Global equities higher in the absence of any escalations of trade tensions
• GBPUSD saw a volatile session in the aftermath of Friday’s Chequers meeting
• US June employment report shows solid employment growth

Global equities rose across the board at the end of last week as concerns about an escalation in the US-China trade conflict have eased; US stocks were further supported by a solid US employment report. In FX, the USD Bloomberg Spot Index declined for 4 consecutive days and continued its downward path this morning
AUD and NZD gained on Friday in the absence of any escalating US-China trade headlines
GBP rallied after Friday’s Chequers meeting seemed to have led to a more united Cabinet on PM May’s soft Brexit plans which look to create a free trade area with a common rule book for goods and agricultural products. However, it pared its initial gains as Brexit Secretary David Davis, and his two junior Ministers, Steve Baker and Suella Braverman, resigned overnight
This gives room for further speculation on a formal vote of confidence in the PM, which would be triggered once 48 Tory MPs write a letter to the 1922 Committee
GBP will likely be exposed to significant headline risk on the back of domestic political issues and any EU responses in the coming week
In data, the US June employment report showed a steady and solid employment growth, with nonfarm payrolls rising by 213k on the month in line with expectations. Unemployment and wages were softer than expected, but Barclays Research thinks that “little in this report (…) suggests the Fed needs to go faster or slower” and keeps its view that there will be two additional hikes in 2018
In China, focus will be on economic data amid higher CNY volatility. Moderating credit and export growth will likely reinforce the PBoC’s easing bias, however Barclays Research continues “to think that ‘active’ exchange rate depreciation will not be used as a policy tool to support the economy”

[PCMNewsdesk]

• Risk-on sentiment continued to support global equities
• GBP dropped on Boris Johnson’s resignation
• TRY underperformed as Erdogan announced his new cabinet

Global equities continued to rise in the absence of any escalating trade rhetoric and a generally muted reaction to the US imposition of tariffs on imports from China. At the same time, the risk-on sentiment saw decreased demand for safe havens JPY and US Treasuries
GBP saw a volatile start to the week, initially strengthening as the Chequers agreement indicated a ‘softer’ Brexit. However, GBP dropped by more than 1% after Foreign Secretary Boris Johnson resigned in the London afternoon raising risks of a leadership challenge in the Conservative party
Besides political headlines, domestic data will be in focus today, with Industrial and Manufacturing output as well as estimated GDP released at 9.30 and 12.00, respectively
Looking ahead, the reaction from the EU to the UK’s White Paper, due on Thursday, is crucial in determining any Brexit progress and GBP remains vulnerable to headline risk
Our traders currently see GBPUSD support at 1.3190 ahead of 1.3095 and 1.3000, while resistance comes in at 1.3365 and 1.3450-75. EURGBP support at 0.8800 ahead of 0.8690 with resistance at 0.8900
TRY sold off after Turkey’s President Erdogan announced his new cabinet, which is due to start today with Erdogan’s inauguration. His changes in the rules for appointing central bank officials reinforced market concerns about future economic policy prompting USDTRY to rally more than 5% during yesterday’s trading session

[PCMNewsdesk]

• Escalating trade tensions caused Asian equities to drop
• GBP closed higher on stronger GDP growth
• Focus on the UK’s White Paper tomorrow

US equities continued to climb higher yesterday, however overnight news of US tariffs on an additional $200bn of Chinese goods saw Asian stocks and US equity futures decline. In FX, demand for safe havens rose and the Bloomberg USD Spot Index traded higher this morning
While the imposition of further US tariffs is not a surprise, the timing is earlier than expected. China has yet to formally respond in detail, but the Commerce Ministry implied that they will “strongly oppose” the tariffs (Bloomberg)
AUD and NZD came under pressure on the back of the escalating US-China trade tensions
UK data showed a mixed performance yesterday, with better-than-expected services data, but a soft print of industrial production. Monthly GDP growth recovered and could support policy makers to raise rates in August
Although Barclays Research’ forecast is for unchanged rates, they acknowledge upside risks to this call: the market is now pricing in an 80% likelihood of a hike
Focus is on tomorrow’s release of the UK White Paper which will outline details of the Government’s proposals for future relations with the EU

[PCMNewsdesk]

• US equities closed lower on escalating trade tensions yesterday
• Turkish assets and TRY continued to sell off heavily
• Focus on UK’s White Paper today

US equities closed lower yesterday amid concerns about the escalating US-China trade tensions, though later headlines that the countries may resume trade talks lifted Asian stocks overnight (Bloomberg). In FX, we saw broad USD strength across the board, with USDJPY rallying to the highest level in 6-months
Markets will watch any further trade-related headlines; Barclays Research thinks that China will be “moving from the current tit-for-tat approach towards more controlled and selective retaliation”
In data, US PPI data came in above expectations yesterday, providing support for the Greenback. Focus is on domestic CPI data at 13.30 this afternoon
In the UK, PM May will release the White paper later today which will outline proposals for a looser financial services arrangement with the EU and a free trade area with a common rule book for goods
Turkish assets and TRY continued to sell off heavily during yesterday’s session in the aftermath of Erdogan’s cabinet announcement. USDTRY printed a new historical high of 4.9743 overnight on headlines that Erdogan wants interest rates to be cut in the upcoming period (Bloomberg)
The Bank of Canada increased its policy rate 25bp. While it will monitor the economic effects of trade actions, it did not indicate that recent US protectionism will deter its data-dependent gradual tightening
Barclays Research expects the next hike for January 2019 barring any major negative trade developments