Global Market Analysis August 5, 2016 – Weekly Outlook
Jody Samuels, FX Trader’s EDGE
This week was filled with some key economic data as well as statements from major central banks to further assist investors’ global financial outlook. Equities had a rough start to the week but reversed nicely to close the week up 5 points to 2,181.60. Oil closed the week above the $40 threshold at $41.54, but remains roughly 16% lower from the start of July. The British Pound traded lower following the BoE’s monetary policy decision to close at a two-week low at $1.3082. Meanwhile, demand for safe haven assets declined as gold closed the week down almost $11/ounce, and the US Dollar strengthened with EUR/USD dropping by 0.56% for the week. The Yen also strengthened coming off of a fresh stimulus program with USD/JPY increasing by 0.57% this week, and 10-year Treasury yields rising 9 basis points to 1.58%.
Economic data out of the US was kicked off with the ISM manufacturing index which declined slightly by 0.6 points for the month of July to 52.6. Manufacturing activity has now expanded for five straight months despite coming in lower than the expected reading of 52.9, while the ISM non-manufacturing index dropped a point to 55.5 in July after reaching the highest level since December just last month. Headwinds resulting from sluggish foreign demand and a stronger USD seemed to have had a larger impact on the economy than initially perceived leading to the weaker reading. Personal income on the other hand increased 0.2% for the month of June versus expectations for a 0.3% increase, whereas personal spending jumped 0.4% beating expectations for a 0.3% increase. It is no doubt that the consumers have done all the heavy lifting as they remain the lone bright spot in the US economy. Given that earnings and capex growth has been fairly lackluster, a healthy consumer should propel more confidence among businesses to increase production and investment going forward.
The highly anticipated July non-farm payrolls was released on Friday to provide the market some much needed information on the health of the US economy. Fortunately the labour market had delivered once again with another strong reading adding 255,000 jobs in July, beating expectations for an increase of 180,000. The unemployment rate held steady at 4.9% while average hourly earnings beat consensus estimates rising by 0.3% m-o-m, suggesting that consumer spending will continue to perform well for the latter half of the year. Moreover, the labour force participation rate edged higher to 62.8% from 62.7% indicating that the outlook for job prospects are becoming more favorable.
Last week, the Federal Reserve maintained interest rates at current levels and decided to wait for further confirmation of progressive economic data. Fed officials had acknowledged that short-term risks had eased considerably from the Brexit vote, and are seeing positive developments within the labour market. In addition, policy makers are also growing more comfortable with a possible rate hike at the September meeting contingent on further improvement in economic data. Given that GDP numbers last week were disappointing to say the least, an improving labour market alongside increasing wages in a low interest rate environment should fare well for consumers to accelerate the economy during the second half. All in all, fed funds futures are now implying an 18% chance of a rate hike by September, as well as a 42.7% probability of a move by the end of the year – up from 34.4% prior to the data release. EUR/USD traded as high as $1.1154 prior to the NFP release, and traded as low as $1.1046 following the report before retracing slightly to close the week at $1.1094.
All eyes were on Mark Carney this week as investors were looking to see if the UK central bank would deliver upon the highly expected monetary easing due to the effects from the June 23rd Brexit vote. The BoE without a doubt exceeded all expectations by slashing rates by 25 basis points to 0.25%, as well as purchase an additional £60b in UK government bonds and £10b in UK corporate bonds. The market was fairly surprised by the moves and indicated their readiness to assist businesses and consumers. Following the statement, bonds around the world rallied higher as yields tumbled to record lows. On top of that, Governor Mark Carney also stated that further stimulus including another rate cut remains a possibility but will evaluate the current actions before implementing additional easing. With that said, the moves made by the BoE should provide relief in terms of the transitioning process out of the Eurozone.
Over the Pacific, the Japanese Yen saw strong gains this week following the Bank of Japan’s monetary policy decision last Friday. The BoJ announced that they would implement further easing actions into the economy by doubling its yearly purchases of ETFs to 6 trilling yen, and doubling its US Dollar lending program to foreign companies. Nonetheless, the market felt that the Japanese central bank could have done more as they were expecting even more easing including a rate cut into further negative territory. Investors also felt that the program could have included more government spending to accelerate growth even faster. Policy makers still seem to be evaluating the consequences resulting from Brexit on its international trade with many of its exporting partners having unclear economic outlooks. Similar to Carney, Kuroda also suggested that further monetary policy is very much a possibility. However, the central bank will first proceed in assessing their current policies and whether it can reach its inflation target before any further implementations.
China’s economy continues to battle headwinds as the outlook remains uncertain. This can be seen within China’s manufacturing sector as the government manufacturing PMI came in at 49.9 into contractionary territory. On the other hand, Caixin’s manufacturing reading which looks at smaller private companies rose into expansionary territory for the first time since early 2015. Fortunately, the services sector shows a more positive story as the official survey showed that growth accelerated to 53.9 in July to 53.7.
The Reserve Bank of Australia was another central bank to ease monetary policy as they cut rates by 25bp to 1.50% – a record low. Policy makers in Australia were growing more anxious of slowing global economic growth and low inflation.
Crude oil had a choppy five days of trading following last week’s steep selloff. After getting hammered ever since reports that Saudi Arabia would be cutting prices to their Asian customers, oil prices managed to get a small breather in by closing near its weekly highs. Moreover, the US oil rig count increased for the fifth straight week causing more concern of a larger surplus. However, the rate at which the rig counts had risen last week slowed considerably providing some slight upward momentum in prices. The EIA on Wednesday reported an increase in crude stock piles of 1.4 million barrels for the prior week. The biggest surprise came from gasoline inventories as it dropped by 3.3 million barrels versus expectations for a fall of only 300,000 barrels leading to the strong rally. Prices had broken below $40 prior to the EIA report to trade at $39.20, but has since bounced back nicely to close the week at $41.54.
After last week’s sideways price action, equity prices declined early on due to falling oil prices and a weaker than expected easing program implemented by the Bank of Japan. The S&P 500 continues to follow the price of oil closely as the bearish sentiment in the energy markets to start off the week caused equities to trade lower. Following the EIA report, a rise in crude prices resulted in a rally for the S&P. Furthermore, the majority of the investors waited on the sidelines until after the job numbers on Friday which beat expectations. The S&P was trading at 2,165.3 prior to the announcement, and had rallied by about 16 points to close the week near its weekly highs at 2,181.6.