Is reduced political uncertainty driving just a near term bounce?


  • Market sentiment has settled for now as political uncertainty has been eased in the UK with the accession of Prime Minister May, whilst there is also an expectation of a significant stimulus package in Japan. This is all helping to improve risk appetite, with the safe haven plays that had been performing so well in the past few weeks now beginning to retrace. The big question though is whether this reduced political uncertainty and improvement in sentiment is a near term bounce, or something more sustainable?

PM May

  • Around two and a half weeks after the Brexit decision the UK has a new Prime Minister. This has helped to settle the nerves of markets that had been rocked by the political uncertainty and this means that markets can start to look forward on how the UK can deal with its Brexit issues. This may help to support sterling near term but the economic shocks of Brexit will not go away and subsequently there could be further pressure on sterling in due course. The incredible volatility on UK equities continues with the FTSE 250 now beginning to rebound.
  • In Japan there is the prospect of maybe 10 trillion or even 20 trillion yen ($100bn to $200bn) of government spending and that is even before the Bank of Japan which is expected to also ease monetary policy (the BoJ will announce its latest monetary policy on 29th July). The issue is whether this huge fiscal spending takes the pressure off the BoJ to act decisively. This could mean that there is a renewed bout of strength on the yen.


  • Across European equities the rally is coming through on the improvement in risk appetite. However having seen the FTSE 100 outperform (and strongly too) due to the weakness of sterling, will a sterling rebound now mean that the FTSE 100 starts to underperform? That is certainly the implication of the moves in the last couple of days. The DAX will be pulled higher by the prospect of massive stimulus in Japan helping to stoke the fires of the Japanese economy.
  • Will the Bank of England raise monetary policy on Thursday? It seems to be in the balance. Carney originally talked about easing monetary policy in the summer months, but he has form with the Bank of Canada (during the global financial crisis) with trying to get ahead of the data. This may mean that the Bank of England may want to act before the inflation report is announced in August. This could involve a rate cut of 25 basis points from +0.50% to +0.25%. However there are some suggestions that the BoE could act in a series of steps, with extra QE next month. It could be that the Bank of England cuts this month then. Another interesting point to ponder is would this then start a sequence of rate cuts with other central banks such as the ECB also with a decision to make.
  • China will also be driving risk appetite in the coming days with the trade balance announced on Wednesday morning and on Friday we get GDP, Industrial Production and Retail Sales. Effectively this is much of the key China data to see how the economy is performing and this could have a say in the direction of risk appetite. Imports and exports are expected to both continue to decline and the trade balance is expected to decline, which is not a great sign for global demand. The continued decline in GDP, with a fall in industrial output could also impact on commodities. Watch the Aussie on the China news, whilst the oil price is also going to be watched.
  • In forex, an improvement in risk sentiment would be dollar negative, with the dollar having performed so strongly as the safe havens we in favour in the wake of Brexit. However, the euro does seem to have been dragged higher with the improved risk appetite, but again the question wold be how far can this go before once more the outlook is seen to be a selling opportunity again.
  • In commodities, the gold bull run has been driven by two factors: the safe haven bid, and the expectation that there will be another lurch to loosen global monetary policy. The safe haven bid may be questioned near term and this could induce a correction, but nothing has changed on the outlook for looser monetary policy. Oil has been suffering as the impact of Brexit on global growth has been brought into question. Little has really changed in this regard and this could mean continued questions over demand.
  • Economic data is relatively light until the end of the wee, with US CPI and Retail Sales on Friday. Inflation is expected to pick up marginally on both headline and core basis, whilst the Retail Sales are expected to stabilise at around 2.5% for the adjusted year on year basis. Hitting consensus is unlikely to do much to shift markets.
  • Watch for: China Trade, BoE monetary policy, China GDP/Industrial Production, US CPI



EUR/USD – Still looking to sell rallies

  • If the BoE is going to ease monetary policy then the market will look to the ECB to follow suit. The dollar will also be an outperformer in this environment. .
  • I still view the resistance band $1.1100/$1.1215 as a sell zone and that rallies will be a chance to sell for a retest of $1.0909 (the post Brexit low). Momentum may have ticked up near term but medium term corrective configuration suggests downside pressure.
  • Watch for: BoE monetary policy, US CPI

GBP/USD – Wait for the near term rebound to find resistance then use as a chance to sell

  • The sterling bounce is on the reduced political uncertainty, however how long will this honeymoon period last until the Brexit issues return to dominate and the concern over sterling resurfaces?
  • Trends and medium term momentum are negative and with a resistance band $1.3200/$1.3535 this is a decent looking sell zone now. The near term rebound is stong and it would be prudent to wait for this to run out of steam before looking for the next selling opportunity.
  • Watch for: BoE monetary policy, US CPI

USD/JPY – Still looking at a selling opportunity between 103.60/106.80  

  • The yen weakness is on the suggestion that Abe will renew efforts to stimulate the economy. Will this take the pressure off the BoJ to expand into ever looser monetary policy?
  • However the rally is now into an old band of key resistance between 103.60/106.80 in the downtrend channel and this is where I am looking for the next chance to sell.
  • Watch for: US CPI, US Retail Sales

Gold – Look to use a near term correction as a chance to buy

  • The near term safe haven bid may have been removed, but looser monetary policy and negative real interest rates remain in place and this will help to support gold for the medium term.
  • The breakout above $1306 is a break buying area if a near term correction sets in. The bull run is stuttering and a move below $1350 and more importantly below $1335 would open the correction.
  • Watch for: China Trade, BoE monetary policy, China GDP/Industrial Production, US CPI

Oil – The top pattern suggests the bears are controlling for now

  • The EIA oil inventories drawdown continues to be supportive for oil, but demand issues are in question now following the impact of Brexit which could be a drag on oil.
  • A series of lower highs and lower lows on oil is heaping the pressure on now and the technical outlook is now negative with rallies seen as a chance to sell. Resistance is sitting at $48.25.
  • Watch for: China Trade, EIA oil inventories to drive volatility, China GDP/Industrial Production

Indices – Equities now seem to be performing strongly with looser monetary policy following Brexit   

  • S&P 500 – An all-time high on the S&P 500 reflects the enormous turnaround and the removal of political uncertainty along with highly accommodative monetary policy round the world means that equities are performing well. Support now 2109/2121.
  • DAX Xetra – The underperformance of the DAX since Brexit may now be ready to turn around with the sterling rally and improved risk appetite on looser monetary policy.
  • FTSE 100 – Sterling strength may mean that the FTSE 100 now begins to underperform and struggle to continue the recovery. Within this, the FTSE 250 could now turn the corner and become a much better performer once more. Key support is now in at 6427 and up towards 6612.

Economc Calendar


Tuesday 12th July

  • US – FOMC’s Tarullo speaks
  • US – FOMC’s Bullard speaks
  • US – JOLTS jobs openings

Wednesday 13th July

  • China – Trade Balance
  • Canada – Bank of Canada monetary policy
  • US – Crude Oil Inventories
  • US – Fed Beige Book

Thursday 14th July

  • Australia – Unemployment
  • UK – Bank of England monetary policy
  • US – PPI
  • US – Weekly Jobless Claims

Friday 15th July

  • China – GDP
  • China – Industrial Production
  • China – Retail Sales
  • Eurozone – CPI (final)
  • US – CPI
  • US – Retail Sales
  • US – Industrial Production & Capacity Utilization
  • US – Michigan Sentiment (prelim)



Monday 18th July

  • US – NAHB Housing Market Index

Tuesday 19th July

  • Australia – RBA monetary policy meeting minutes
  • UK – CPI
  • Eurozone – German ZEW Economic Sentiment
  • US – Building Permits & Housing Starts

Wednesday 20th July

  • UK – Unemployment & Average Weekly Earnings
  • US – Crude Oil Inventories

Thursday 21st July

  • UK – Retail Sales
  • Eurozone – European Central Bank monetary policy and press conference
  • US – Philly Fed Manufacturing
  • US – Weekly Jobless Claims
  • US – Existing Home Sales

Friday 22nd July

  • Eurozone – Flash Manufacturing PMIs
  • US – Flash Manufacturing PMI


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