lobal Market Analysis September 8, 2016 – Weekly Outlook
Jody Samuels, FX Trader’s EDGE
It was a fairly quiet week in the financial markets as economic data was limited, and major central bank meetings were non-existent. As a result, equities were left mostly unchanged with the S&P 500 closing up by just a point to 2,182.60. Oil had a great week closing the week $2.9 higher at $47.54. The British Pound also closed the week roughly flat to close at $1.3301. Meanwhile, EUR/USD traded higher at 1.1259 while the Yen strengthened following weak US economic data with USD/JPY declining by 0.90% this week. 10-year Treasury yields gained 1 basis point to 1.61%.
The holiday shortened trading week got off to a rough start as the ISM non-manufacturing index fell by 4.1 points to 51.4 despite analysts expecting for a small dip to 55.0. This was the lowest reading since February 2010. The US dollar weakened quite considerably with EUR/USD trading at 1.1162 prior to the release, and traded higher for the rest of the week to close at 1.1259. Although Janet Yellen has stated that the September meeting remains well in play for a rate hike, the slowdown from the manufacturing and services sectors in August may result in a further delay. With that said, speeches from San Francisco President John Williams, Richmond Fed President Jeffrey Lacker, and Kansas City Fed President Esther George all reiterated that they would be in favor of raising rates sooner than later due to the strong labour market. The market is now pricing in a 21% chance of a rate hike during the September meeting, which is 13% lower prior to the release of NFPs.
Over to Europe, economic data this week once again showed that UK continues to remain resilient following its vote to leave the Eurozone. Markit’s Purchasing Managers Index for August jumped by the most on record to 52.9 after reaching a seven-year low of 47.4 the prior month. Although the Pound had originally started the week strong, it later sold off after comments from Mark Carney stating that the BoE will implement further easing if needed. The Pound reached a high of 1.3441 and traded lower for the rest of the week to close at 1.3284. On the other hand, GDP growth for the second quarter in the Eurozone increased by just 0.3%, meeting expectations but below the 0.5% growth seen from the first quarter. ECB President Mario Draghi took center stage once again on Thursday as investors were largely unsure of what to expect at the meeting. The ECB decided to leave the benchmark refinancing rate at 0% and left its QE program unchanged, noting that it will run until March 2017.
In Asia, China surprisingly showed robust trade data for the month of August as imports increased for the first time since mid-2014. Year-over-year, imports jumped 1.5% compared to a decline of 12.5% seen last month. Similarly, exports fell just 2.8% y-o-y after July’s decline of 4.4%. Meanwhile, Japan reported better-than-expected GDP numbers for the second quarter as the economy grew 0.7% despite consensus calling for an increase of 0.2%. The Yen saw sharp gains to start off the week as BOJ Deputy Governor Hiroshi Nakaso stated that the central bank still plans on having a 2% inflation target, and will unlikely implement any policies to affect its currency. USD/JPY traded lower for majority of the week to close at 102.48.
Crude oil started off the week on a strong note as a weaker dollar due to disappointing non-manufacturing numbers helped prices rise higher. Furthermore, Saudi Arabia’s Foreign Minister stated that the nation would cooperate with regards to freeze oil output. However, Iran remains a big threat for any agreement to take place. Crude prices got a big boost on Wednesday afternoon as the API reported that inventories dropped by more than 12m barrels the prior week due to the short-term impact of an Atlantic storm. Thereafter, prices jumped $0.71 following the API report, and once again soared another $1.36 higher following the EIA report on Thursday morning. The data showed stockpiles dropped a similar 14.5 million barrels last week, which was the second largest decline of all-time.
The S&P 500 had yet another choppy week as prices merely traded in a 16 point range. The index declined by 8 points on Tuesday following the disappointing non-manufacturing numbers, but quickly reversed those losses by creating the lows of the week at 2,174.60 to close the week ever so slightly higher at 2,182.60.