- Gold has become the big story of the moment after a flash crash caused a $45 sell-off in just a few minutes. This is a function of a number of factors: firstly the lack of inflation still; the negative correlation with the US dollar; less need to hold safe haven plays now Greece is no longer imminently going to leave the Eurozone; and fourthly and perhaps most ominously, China is not the massive buyer in the market that some had previously thought. China gold reserves have increased by 57% since April 2009, which may sound a lot but considering the bulls would have been looking for a doubling or perhaps even tripling of holdings in that time, this has been taken with some disappointment.
- Greece is much less of an issue for the markets than it has been for several weeks. With the bridge financing in place, the IMF and ECB have been repaid and the immediate prospect of a Grexit is no longer there. However beware of the negotiations over the 3rd bailout package which looks to be the next big hurdle. There is no date yet for the negotiations but it should be in the coming weeks.
- This means that risk aversion is receding, and sentiment is still improving, with the yields on peripheral Eurozone bonds falling away. Also volatility is sharply lower. Implied volatility on EUR/USD is now at its lowest since February and a similar picture for the DAX options.
- In forex markets this all means that focus is returning to interest rate differentials this week. That means that the comments from Janet Yellen regarding a 2015 being appropriate if the economic recovery continues as it is going are driving a stronger dollar. This is impacting across the forex majors with any moves against the dollar seen as minor blips as the dollar should continue to strengthen. The BoC cut rates last week, and there is a potential for the RBNZ to follow course on Wednesday. Perhaps the only exception is Cable which will be on much more of a choppy path with the Bank of England Governor Mark Carney making a similarly hawkish hint as Yellen. FOMC members are currently in the “Blackout” period in front of next week’s Fed meeting, so with little US data on the economic calendar this week, the trend of the stronger dollar seems to be fairly well set.
- The stronger dollar is a big drag on commodity plays with gold taking the headlines. This is also impacting across the oil price but also base metals. Commodity ETFs are having significant withdrawals in recent weeks.
- In equity markets earnings season in the US is the main driver of Wall Street. The big banks have helped sentiment to pull markets back towards the peaks once more, whilst a strong showing from the tech giants (such as Apple today) should push them into new all-time high territory. The DAX is benefitting once more from the weaker Euro and settled bond markets. This should all allow the resumption of the bull control (although watch out for any bumps in the road around the Greek bailout negotiations). The significant weighting in commodity plays (both metals and oil) is a drag on FTSE 100 which will continue to underperform.
- There little really significant US data this week aside from some housing data (Existing Home Sales and Pending Home Sales) and the flash Manufacturing PMI. The China flash Manufacturing PMI could have a significant impact on the commodity plays that have been shot to pieces in the past few days. For the UK, , Bank of England meeting minutes will be interesting after Mark Carney’s hawkish hints, whilst UK Retail Sales will also be watched to see if the 5% year on year growth can continue. The monetary policy meeting from the RBNZ could throw in a rate cut on Wednesday. The Eurozone has to wait for the German Ifo Business Climate next Monday for the first major piece of data.
- Watch for: China and US flash Manufacturing PMI to drive risk appetite
EUR/USD – Support around $1.0820 remains key and should remain under threat
- Interest rate differentials (and the carry trade) are back to drive the euro lower following Janet Yellen’s comments. There is little economic data due that can dramatically change the course of this as US housing data has been positive recently. Maybe a disappointing flash Manufacturing PMI for the US could be a saviour near term but probably not for long.
- The support around $1.0820 has rebuffed an initial assault, however the deteriorating technical outlook suggests that this support will come under sustained attack in the coming days. Rallies are being sold into and there is initial resistance around $1.0900 that should contain any thoughts of a recovery. A confirmed move below $1.0820 re-opens the March/April lows $1.0456/$1.0520.
- Watch for: Eurozone and US flash Manufacturing PMIs
GBP/USD – Choppy trading to continue, technical indicators turning slightly corrective
- Cable remains a difficult call with both central banks seemingly on the path towards hiking rates. However, BoE meeting minutes and Retail Sales this week could drive the volatility.
- Technical indicators have been ranging, but there is a slightly negative tilt to the near term outlook. The medium term outlook remains choppy though and there is little reliable trend formation. There is support around $1.5450/70 and resistance around $1.5665.
- Watch for: Bank of England meeting minutes, UK Retail Sales, US flash Manufacturing PMIs
USD/JPY – Straining to break above 124.43 which would open the multi-year high again
- The lack of safe haven flow and a stronger dollar is driving Dollar/Yen higher.
- A trend is pulling the pair higher and the key near term resistance band 124.20/124.43 is under pressure. A closing breakout opens 125.85 which is the multi—year high. Perhaps aside from some near term consolidation or even profit taking, there is little really on to hold back the dollar run now. There is near term support 123.70/123.90.
- Watch for: US flash Manufacturing PMIs
Gold – Sell the bounce
- The lower demand than the market had been factoring in has caused a near term price shock for gold. The fundamental arguments for owning gold are really floundering now and with the US looking to hike rates, the zero yielding element to the asset is just another reason why the price is under pressure. Any upbeat showing in the China Manufacturing PMIs could help to support the price, but would only prove to be a near term blip as the bigger picture fundamentals are negative.
- Losing $1131.85 support was a significant breakdown and now re-opens the key 2010 low at $1043. As the price begins to settle down near term the bulls will need to break back above $1131.85 (old key support becomes new key resistance) for the outlook to improve in any way. Selling the dead cat bounce seems to be a likely strategy for the near term.
- Watch for: China and US flash Manufacturing PMIs
Indices – Wall Street to breakout on earnings, DAX still driven by negative correction with the euro
- S&P 500 – Focus is back on earnings season and the decent earnings are pulling the market higher. Apple is clearly a massive focus but other tech stocks could also help to pull Wall Street into all time high ground once more, for the S&P this means a move above 2135.
- DAX Xetra – The negative correlation to the euro has helped the DAX in the past week and this could provide a near term drag as the euro has rallied. However this is still likely to just be a temporary blip as I see the euro falling away and the DAX pulling higher once more. Above the resistance at 11920 and a test of the highs is on.
- FTSE 100 – The rally is stuttering as commodity plays are acting as s drag on the index. The initial support at 6700 needs to hold on a correction, whilst the bulls will be eying the key resistance at 6873 .
WATCH OUT FOR THIS WEEK
Wednesday 22nd July
- Australia – CPI
- UK – BoE meeting minutes
- US – Existing Home Sales
- US Crude Oil Inventories
- G8 meeting
- New Zealand – RBNZ monetary policy
Thursday 23rd July
- UK – Retail Sales
- US – Weekly Jobless Claims
Friday 24th July
- Japan – Flash Manufacturing PMI
- China – Flash Manufacturing PMI
- Eurozone – Flash Manufacturing PMI
- US – Flash Manufacturing PMI
- US – New Home Sales
Monday 27th Jul
- Eurozone – German Ifo Business Climate
Tuesday 28th July
- UK – GDP (Q2 prelim)
- US – Consumer Confidence
Wednesday 29th July
- US – Pending Home Sales
- US – Crude Oil Inventories
- US – FOMC monetary policy
Thursday 30th July
- US – GDP (Q2 Advance)
- US – Weekly Jobless Claims
Friday 31st July
- Japan – CPI
- Eurozone – Flash CPI
- Eurozone – Unemployment
- Canada – GDP
- US – University of Michigan Consumer Sentiment (revised)