Originally published by IG Markets
Neither the lit bearish fuse on the dollar nor the record highs on US equities have translated to renewed vigor for global currencies and equities. When the sentiment tides are changing for the entire system – generally labeled ‘risk on’ or ‘risk off’ – correlation is one of the unmistakable hallmarks.
We are far from that with recent moves. When we ignore the celebrity of the US markets, the failure to launch is less of a surprise: there is nothing driving global speculation. Political risks, trade hurdles, uneven growth forecasts and the mixed implications of a slowly changing monetary policy-scape promote unease but certainly not conviction. This forthcoming session will offer a potential catalyst in the guides of the the European and Japanese central banks’ ruling on monetary policy. Yet, potential infrequently translates into probability in these cautious times.
Wall Street: The headlines of record highs in US indices increasingly falls on deaf ears for local and global investors. The frequent milestone was shared by many of the most popoular measures State-side including the S&P 500, Dow Jones Industrial Average, Nasdaq and Russell 2000 (AX:IRU). There is an element of self-fulfilling momentum to this progress which is a means for the lack of spillover to other markets. To fill some semblance of fundamental justification, the US docket included a robust 8.3 percent jump in housing starts which is hardly a strong endorsement of untapped growth in a world of housing bubbles. Moreover, the 2Q earnings season received a boost with forecast-beating figures from Morgan Stanley (NYSE:MS), Alcoa (NYSE:AA) and Qualcomm (NASDAQ:QCOM). The upcoming docket has 173 US companies reporting, led by tech giant Microsoft (NASDAQ:MSFT).
Dollar Stems the Bleeding: In contrast to the persistent but restrained advance in US equities, the region’s currency has drawn a greater sense of urgency in its recent dive. The ICE’s US Dollar Index extended its dive Tuesday to plumb lows last seen 11 months ago. The subsequent technical progress seen on EUR/USD (break above 1.1500) and AUD/USD (clearing 0.7850) sowed the seeds of an intensifying tumble that could turn into a full-blown trend. That would be a remarkable development given the general reticence in the financial system to commit to any market wholesale nowadays. Yet, that momentum hasn’t taken hold despite seven months of progress. The dollar’s stumble is the product of its counterparts gaining strength rather than the single currency bleeding value. That may seem the same outcome, but the implications for motivation are very different, as we are now experiencing.
BoJ and ECB Rate Decisions – Top event risk for the forthcoming session is arguably top listing for the entire week. The combination of the European Central Bank’s and Bank of Japan’s policy decisions will define the most accommodative end of the spectrum with global investors looking for a counterbalance to the Fed’s pursuit of balance sheet sales, the BoC’s recent rate hike and growing speculation of tightening in the proximate future for the BoE, RBA and RBNZ. There is more to the ECB’s and BoJ’s decisions than just the spark for the next euro or yen move. This will shape the pressure on the financial market to establish just how much dependency it has heaped on the shoulders of these global central banks. It is unlikely that Governor Kuroda will announce any retreat from his group’s aggressing easing agenda, but they have operated on surprise in the past. The ECB’s deliberation is seen as far more critical and fluid. President Draghi and company have tried to float the idea of ‘normalizing’ policy a number of times these past months – in both official and unofficial channels – only to backtrack when the markets showed indigestion. This is not a situation where they can remain vague for much longer.
Australian Employment Data: Outside of the pull of this sessions top two central bank rulings, the Australian dollar will pay close attention to the June employment data. Economists expect employers to have added a net 15,000 jobs this pat month, but the jobless rate is still seen as ticking up to 5.6 percent. This indicator has a history of generating significant ‘surprise’ (deviation from forecasts) and earning volatility for it. Another indicator to keep tabs on is the NAB 2Q business sentiment survey. The previous quarter’s figure leveled out at six and the general condition of the series has the sense of ‘eerie quiet.’
Australia Dollar: Once again, the Aussie dollar was the best performer across the majors this past session. Against the Greenback’s efforts to stabilize, AUD/USD squeezed out another 0.5 percent gain. While that is far more restrained than Tuesday’s explosive move to two-plus year highs, it lifts the count to 8 days of advance over the past 9 trading sessions. The best performance on the day was with EUR/AUD followed by GBP/AUD, showing remarkable strength against the most liquid counterparts.
ASX: While the Aussie and other global equity markets are not sporting the same robust technical pictures that the US indices have carved out, that doesn’t mean the speculative euphoria is completely lost in translation. Futures trading before the market open points to a strong open for the ASX, and the strong performance of financials and materials across the globe may offer foundation for a serious lift. That said, the index is still well-entrenched into a broad range (what could be a right shoulder in a head-and-shoulders pattern) over the past two months. Clearing this will be difficult.
Commodities: Commodities as an asset class had a productive day this past session, but the conviction was certainly not even. Oil prices rose 1.5 percent in New York while many of the softs were also steeped in green. The soft spot was precious metals as gold and silver slipped modestly. That said, when looking to some of the more popular commodity ETFs, there was some notable technical progress – like the bullish channel break on the Dow Jones – UBS index.
Market Watch:
S&P/ASX 200 up 44.733 points or +0.78% to 5763.252
AUD +0.50% to 0.7956 US cents
On Wall St, Dow +0.20%, S&P 500 +0.47%, Nasdaq +0.60%
In New York, BHP (AX:BHP) +1.05%, Rio (AX:RIO) -0.35%
In Europe, Stoxx 50 +0.62%, FTSE +0.55 %, CAC +0.83%, DAX +0.17%
Spot gold -0.06% at US$1241.60 an ounce
Brent crude +1.76 % to US$49.70 a barrel
Iron ore -0.57% to US$78.11 a tonne
Dalian iron ore at 530.5 yuan
LME aluminium (cash) +0.44% to $US1904.75 a tonne
LME copper (cash) +2.00% to US$5973.50 a tonne
10-year bond yield: US 2.27%, Germany 0.52%, Australia 2.72%