Politics Down’s Dollar

Monday July 24: Five things the markets are talking about

Global equities trade mixed while the yen (¥110.78) climbs for a fifth consecutive session at the start of a week packed with more earnings results and a FOMC interest-rate decision. Oil prices remain under pressure ahead of todays OPEC and non-OPEC officials meeting in Russia amid concerns over the global supply.

The Fed meeting is midweek (Wednesday July 26, 2:00 pm EDT). No change in policy is expected. However, the market will be looking for guidance regarding the next fed funds interest rate increase and when the Fed will begin the long awaited reduction in its balance sheet.

Also this week, investors will get a first look at Q2 growth from the U.K, France and the U.S. They will also get a look at July data with the flash PMI’s in Japan and the Eurozone (see below).

On the political front, it’s expected to be a turbulent week stateside with the U.S administration having to continue to deal with the investigation into allegations regarding President Trump’s possible connections with Russia.

Today, the Senate Intelligence Committee will interview Jared Kushner, senior adviser to President Trump (closed door hearing), and Donald Trump Jr. and former Trump campaign Chairman Paul Manafort will go before Senate committees on Wednesday.

1. Stocks mixed results Monday

In Japan, stocks dropped to a two-week low overnight, pressured mostly by a stronger yen. The Nikkei share average declined -0.6%, the lowest closing level since July 7, while the broader Topix dropped -0.5% in thin trade, with turnover of only ¥1.9T – the lowest level in a month.

In Hong Kong, shares rallied to a two-year high, resuming their rally after a brief pause last week, helped by consumer and tech stocks. The Hang Seng Index ended up +0.5%, while the Hang Seng China Enterprises Index finished +0.3% higher.

In China, the blue-chip index hovers atop its 18-month high overnight, as institutional investors stepped up their buying into industry leading big caps. Small-cap shares continued to underperform as their earnings disappointed. The blue-chip CSI300 index ended up +0.4%, while the Shanghai Composite Index added +0.4%, closing at its highest in three-months.

In Europe, regional indices trade lower across the board with the strengthening EUR and weaker German prelim manufacturing PMI weighing. The FTSE 100 leads the decliners, pressured by Airline stocks.

U.S equities are set to open in the red (-0.2%).

Indices: Stoxx600 -0.4% at 379, FTSE -0.9% at 7388, DAX -0.5% at 12187, CAC-40 -0.3% at 5107, IBEX-35 -0.4% at 10385, FTSE MIB +0.1% at 21214, SMI -0.3% at 8913, S&P 500 Futures -0.2%

2. Oil prices dip as prospect of deeper OPEC output cut dims

Oil prices have slipped to one-week lows ahead of the U.S open, as several OPEC and non-OPEC ministers meet to discuss a pact to curb oil output.

The market has ruled out deeper production cuts, but on the agenda will be caps for exempted OPEC members Libya and Nigeria.

Note: Output cuts by Libya and Nigeria would be considered very difficult considering Libya is just emerging from a civil war.

Brent crude futures fell -18c to +$47.88 a barrel. It fell -2.5% on Friday after a consultancy forecast a rise in OPEC production for July. WTI September futures fell -20c to +$45.57 a barrel.

Note: The U.S is considering financial sanctions on Venezuela to halt dollar payments for the country’s oil, which could restrict the OPEC nation’s crude exports.

Gold prices trade atop of its four-week high (unchanged at +$1,254.11 per ounce), supported by political uncertainty stateside and as the dollar remains near its 13-month low. Investor doubts over President Trump’s stimulus and tax reform agendas continue to weigh on the ‘mighty’ dollar.

3. Yield curves flatten, focus turns to the Fed

With U.S inflation remaining muted and the job market robust, the Fed is expected to make no change to policy on Wednesday (2:00 pm EDT). The market will be searching the statement for clues on how officials plan to proceed in reducing their massive portfolio.

Note: No press conference by Fed Chair Yellen

The yield on the 10-year Treasury note is flat at +2.24%, while down-under, comments from Reserve Bank of Australia (RBA) Deputy Governor Debelle late last week stating that the central bank was far from tightening its policy (differs from recent minutes) has yields under pressure. Aussie 10-year yield have fallen another -2 bps to +2.68%.

Elsewhere, French (OAT’s) and German Bund 10-year yields were little changed, while U.K. Gilts have rallied +1 bps to +1.18%.

4. Dollar remains under a political cloud

The USD is maintaining if soft tone for a number of reasons. First, the IMF’s Economic Outlook highlights the recent divergence on growth (continental Europe is raised while the U.S was cut for both 2017 and 2018). Second, political situation stateside, the U.S administration continues to deal with the investigation into allegations regarding President Trump’s possible connections with Russia.

The EUR is down -0.13% at €1.1646, having earlier hit a fresh peak of €1.1684 overnight. For the ‘bulls,’ the single units next target is above the psychological €1.1700 handle at €1.1723, while the ‘bears are looking for a correction below €1.1600 on concerns that a stronger single unit will worry the ECB. The EUR’s next step will depend on what the Fed has to say on Wednesday.

Sterling is trading a tad higher, up +0.3% at £1.3035 – the ‘bears’ continue to look at upticks for potential sells – the pound is likely to rise if PM Theresa May accepts a longer-term transition for Brexit. But, concerns over the U.K economy heading for a sharp slowdown as investment and consumption both worsen will be negative for the pound. The IMF has downgraded its 2017 U.K economic growth to +1.7%, from a +2% forecast previously.

The AUD has rallied +0.5% overnight, trading at A$0.7946 ahead of a speech by Reserve Bank of Australia (RBA) Governor Philip Lowe on Wednesday. Deputy Governor Debelle last week appeared to tone down the RBA’s more hawkish tone recently.

5. Major European PMI manufacturing data misses expectations

Data this morning showed that Germany’s PMIs for July came in weaker than forecasted, as private-sector output growth slowed for the second straight month.

Germany’s manufacturing PMI hit a three-month low of 58.3; the services PMI drops to a six-month low of 53.5. As a consequence, the composite PMI fell to 55.1, a six-month low.

Output and new orders increased at the slowest rates since January, signaling a further easing in the pace of German economic expansion entering H2.

Note: The slowdown follows the strongest quarter in six years, and Germany’s manufacturing sector continuess to expand at a historically sharp rate.

The July composite PMI for the eurozone came in significantly weaker than expected, falling to 55.8 from June’s 56.3 to reach its lowest level in six months.

The decline, which was driven by manufacturing, could suggest that H2 may not be as strong as H1. The details on inflation reinforced that message of caution, with prices charged by businesses rising at the slowest pace in six-months.

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