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It has certainly been rewarding to hold long equity positions over the first half, although better performance has been seen in both Italian and Spanish bond markets, with German bunds and US treasuries following on behind. Whether this trend continues over the second half I am personally quite sceptical, however the trend in prices for both developed market fixed income and equities is higher and that should be respected, for now.
The question around extremely low volatility still remains one that is of most importance to short-term and medium-term traders, and that is unlikely to change in the immediate future. I feel we learnt a lot last week and my gut tells me that around September or October we could see a period of more intense adjustment. Last week we saw further signs of inflation in the US (and Canada), with Fed members James Bullard and Jeffery Lacker talking more openly about inflation and wage pressures. Naturally now it’s the core of the Fed (Janet Yellen, Bill Dudley and Stanley Fischer) which need to talk more predominately about price rises, but as things stand these key members seem happy to see inflation move higher, even letting levels surpass the official 2% target in the hope of keeping the economy ticking along.
The prospect that Janet Yellen removes the ‘noise’ label given to the recent spike in inflation in its September 17 FOMC meeting (and subsequent press conference) is real and this continues to be a potential trigger for much greater volatility. The Fed could use the meeting as a platform to really prepare the capital markets for future rate hikes. From here we may see stress on selective emerging markets, while this could also be a good time to look at the USD in a much more attractive light, with US treasuries likely to push through 2.80% and even towards 3% again.
Signs of capital expenditure in focus
As I detailed last week, we are also seeing clearer signs of capital expenditure and this could therefore be a key focus when US Q2 earnings kick into gear next week. Better top growth is expected as well, but it’s what we see in sectors like technology and industrials that could inspire the bulls, with capex growth likely to be seen. Last week we saw new capital goods orders running at a 15% seasonal adjusted annualised rate, however you can also look at the Philly Fed capex index which is running at the hottest pace since 2000. As I mentioned last week this is positive not just for the economy, but also for those expecting higher yields in the US bond market.
US data takes centre stage this week, with the football world cup also getting into the business end of proceedings. The payrolls report will naturally take centre stage; however for me it’s the inflationary aspects of the employment data that is most important, with hourly earnings a focal point. The US trade balance, manufacturing and services ISM will also be important as a lead indicator into Q2 GDP on July 30 and clearly the market is keen to see a better quarter after an extremely poor Q1.
In Asia the focus will be on tomorrow’s Japanese TANKAN report and China PMI, with economists expecting a slight uptick to 51.0 on the index. A number of the China hard landing callers have pushed back on these bearish calls of late, given the strong May releases seen in June, with good numbers seen in retail sales, industrial production, exports and financing numbers, as well as last week’s HSBC PMI print. The risks around housing naturally still remain, however growth concerns have certainly stabilised for now.
Traders looking to fade the AUD/USD towards 0.9450
On the stock side, we’ve actually seen better selling of resource names, despite upbeat expectations around tomorrow’s China PMI print, while AUD/USD has been fairly subdued. The RBA statement will be closely followed tomorrow as well, and while we may see tweaks to the wording, I doubt we’ll see anything too dramatic. Most feel any big changes could come in the August meeting. For now topside resistance is seen at 0.9446 to 0.9461 (which includes the rising trend drawn from the May 13 high, top Bollinger band and April 10 high) and this could be a level to work offers off, especially if you sit in the camp that we get a dovish turn in the RBA statement.
NZD/USD is also being closely watched this week for a break of the 2011 high of 0.8843, potentially taking the pair to the highest level since the early 1980s.
European markets will start the week on a strong note and should close off what’s been a good quarter for all indices bar the Italian MIB (-1.7%).
In trade today we get UK mortgage approvals and consumer credit, while in Europe CPI is expected to remain at 0.5%, although there are upside risks here given the stronger German print seen on Friday. In the US we get Chicago and Milwaukee manufacturing, while in Canada we get the GDP print, with the CAD also looking extremely strong, with USD/CAD eyeing a move to the ABC target of 1.0632. San Francisco Fed president also speaks to The Montana and Utah Bankers Association.