Investors have been in a cautious mood once more this morning. Trading has been characterised by just minor moves across forex, equities and gold. A slight bout of dollar strength, in addition to flat equity indices in Europe and little movement on the precious metals. With volatility and volumes again subdued investors appear to besitting on their hands ahead of some huge US economic data that start in earnest today.
It would seem as though the sanctions placed on Russia have not been deemed to be as stringent as they could have been. Despite a move to Stage 3 sanctions that target sectors of the economy (such as financials, defense and energy) the sanctions have not targeted the gas industry. Subsequently the Russian stock market is trading around 1.8% higher today. Furthermore, the price of gold which has been a big beneficiary of when tensions mount, is basically flat today.
The impact of US data this afternoon could be significant. After last month’s increase in the ADP employment data to 280,000 was mirrored almost exactly by Non-farm Payrolls, investors will be taking significant notice of how the data comes out today. A drop to 230,000 is expected at 13:15BST.
However more volatility could surround the announcement of US Advance GDP just 15 minutes later at 13:30BST. The first look at growth data for Q2 accounts for just around 40% of the economy and has a tendency to have a significant surprise. In fact according to Reuters, in the past 5 quarters Advance GDP has had an average surprise (both positive and negative) of 0.6% and last time out there was an overestimate by 1.1%. The market really tends to struggle with forecasting the first reading, so expect significant volatility this afternoon.
Finally today there is the little matter of the FOMC rates decision. The expectation is for another $10bn of tapering to $25bn of asset purchases per month (another $5bn reduction in Mortgage Backed Securities to $10bn per month and another $5bn reduction in Treasuries to $15bn per month). In the absence of a press conference there is unlikely to be anything significantly ground breaking to come out of the meeting, but there is always volatility around the FOMC announcement.
The continued climb of the dollar is now approaching some key levels. One key level is that the Dollar Index has now hit 81.3 which is a historic pivot level (see below). The fact that this is coming just as the dollar is at $1.3400 support against the euro, $1.6900 against sterling and 102.30 against the yen could be significant. It would suggest that perhaps the dollar is at a key junction now. This could encourage some profit-taking (at least for the near term).
Other than that, the major markets are in wait and see mode in front of the key US data. Gold and silver have barely moved, whilst the DAX Xetra and FTSE 100 are playing around flat. The Wall Street indices are called slightly higher with the S&P 500 expected to open around 4 points higher. There is little reason to suggest that this dip in the S&P will not once again be bought into.
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