Saturday, 6 July 2019

Week to Jul 5th

Week of two halves, Initial G20 euphoria, NFP beat threatens rate cut

Mon Jul 01
A new week, month, quarter and half year. The weekend ‘truce’ between Presidents Trump and Xi at the G20 Summit, where Trump said he would not impose any further tariffs whilst negotiations were ongoing was enough to produce a strong gap up in markets, and a new all-time high for SPX, closing up 0.8% at 2964.33. The critical ISM Manufacturing PMI beat at 1400 also helped.

A similar story was seen in non-US markets, although all pulled back from intraday peaks into the close. It was a similar story with USD, which added 0.58%, its best day for nearly four months (since Mar 7), with all currencies down on the stronger dollar.

Yields were of course up and Gold down on both the risk-on mood and the stronger dollar. Oil was up 1.74%, which would have been more save the dollar move, following both equities and the OPEC/Russia weekend agreement to continue production cuts.

Tuesday July 02
Today US 10-year bond yields fell 5.6bp (to close below 2% for the first time in a year and half), Italian yields went negative for the first time in a year, JPY and Gold added 0.5% and 1.2% respectively, and Oil gave up 4.8%, as the USTR announced proposed new EU tariffs, particularly on aviation. A risk-off day, no?

Surprisingly, that was not the story in equities. AIR.P only fell 0.3%, SPX added 0.3% to make another ATH, DAX and FTSE also rose (NKY was red in line with the JPY move). Clearly China matters more than Europe for now (despite the fact that China’s exports are 20% of its GDP, with Germany it’s nearly 50%).

The yen strength was matched by sterling weakness, and so with a flat euro (despite the big news of IMF President Christine Lagarde getting ECB President Draghi's job), the dollar basket hardly moved (DXY -0.08%). The Canadian Manufacturing PMI beat at 1330 meant CAD outperformed (despite Oil), as did AUD (despite Gold) after the priced in and expected cut was nevertheless accompanied by an optimistic report from RBA Gov Lowe. A day of contradictions indeed.

Wednesday July 03
Yesterday’s conflicting intermarket action was resolved by the ADP miss (102k vs 150k) at 1230. We are clearly in a ‘bad news is good news’ scenario, a rate cut on Jul 31st is not just a cut, it’s a policy change, and poor jobs data makes a cut more likely. DAX had already been moving after the Eurozone PMI beat at 0800, but the momentum continued with SPX rallying 0.8%, closing at its highs, only five points off the psychological 3000 level when the US market closed early at 1700. Clearly, as we said last week, positioning for NFP.

Other assets were much more muted, with a totally flat dollar and hardly any currency movement. Gold and Oil reversed slightly. The only notable move was in US10Y which touched a new Trump-era low of 1.938%, and closed 2bp lower.

Thursday July 04
All US markets were closed as the republic celebrated its 243rd birthday, and as you would expect markets were flat everywhere, even in currencies which are traded globally. The very thin markets did however produce two notable highs, with the September futures contracts for ES (SPX) and YM (DJIA) briefly touching 3000 and 27000 respectively. Otherwise a 9 pip gain after a 42 pip range in CAD was about the most action of the day.

Friday July 05
Everyone was expecting and positioned for an NFP miss, ready to blow through the psychological SPX 3k barrier, and then the unexpected result came in at 224k (versus the 158k estimate, and 102k ADP print). Bad news is good, and good news is bad when markets have already priced in a rate cut. Yields immediately soared, at one point 13bp up, and ending up 9.1bp on the day. (the bond down 0.61%), the most since Jan 4th, the blowout NFP and Powell ‘patient’ day. The CME Fedwatch tool moved its likelihood of a 50bp cut down from 25% to 5%.

Similarly DXY had its best day since April 24th, and at one point was 0.76% up, a move not seen since the Sep 2018 rate hike. All currencies and Gold moved south in short order. Of course the move was bad for equities, although certainly not a disaster, and after an opening selloff, SPX closed a modest 0.2% down, and in fact the NFP fade was wholly recovered before a final slide in the last hour. VIX was only up 2.15%, and still down 12% on the week.

Oil, unusually, spiked up over 2% on the jobs report, which was very odd as not only should it move with equities or inversely to the dollar, but also CAD fell sharply on the simultaneous miss in the Canadian NFP. This can probably be put down to the recovery from an over-reaction on Tuesday, and the normal inter market relationship returned later in the day. Note that only CAD recovered from the NFP spike.

Unusual to see all the US indices down and the non-US ones up. The weakest was NDX, a marker for risk. It’s a while since we’ve seen a move over 2.5% in a currency pair, but that’s what happened with NZDJPY (+2.51%) this week. Another strong rally in BTC saw it  add 22% on Wednesday alone, and even after pullback book another strong gain. We seem to be getting a pattern on FAANG where one stock has much more volatility than the rest. This week it was GOOGL’s turn.

Last week was a V, this week an initial push then a lambda (inverted-V).The end result was that the markets generally retained their G20 push, and quite rightly discarded the ADP push when it was invalidated by the NFP print. NDX outperformed as the best index of the week. DXY added 0.96%, only giving ground to CAD. The moves on NZD, GBP and EUR were nearly identical, but shorting NZDCAD would have been the best trade yielding 1.41%. The crypto rally faltered after an impressive run, and all FANGs except FB outperformed the index. All very bullish overall.

Note we use Google Finance data for daily movements, listing UUP as a proxy for DXY. All references to ‘the dollar’ are based on UUP. The equity and index prices are now based on the cash close each day.

NEXT WEEK (all times are GMT)
(Calendar High volatility items are in bold)

  • Powell Humphrey-Hawkins testimony
  • Chinese, German & US inflation
  • CAD Rate Decision
  • FOMC Minutes

Monday July 08
The only news today is from Germany, and a quiet day is expected, probably driven by the US bond market. The 9.1bp move on Friday was exceptional and may well continue, as it did after the Jan 4th NFP, a similar circumstance. There is a rate decision on ILS. Markets are closed in Kazakhstan and Argentina. Note also that SPX touched the psychologically vital 3000 (and DJIA touched 27000) last week but only in the futures market.

06:00 EUR Germany Industrial Production s.a. (MoM)
06:00 EUR Germany Trade Balance s.a.

Tuesday July 09
Three Fed speakers today, including Chair Powell at a Stress Testing conference in Boston. Here is a table from ITC Markets on where each FOMC member stands, although it’s a little out of date, and Reuters for example have Quarles as more hawkish than Mester. Bullard is however, the lone voting dove now that Lael Brainard has moved to the centre. Not much economic news today, but somewhat ahead of the pack, as earnings season traditionally opens next week, consumer staple PEP (rival of KO and unusually, an NDX component) reports before the bell. There is a rate decision on MYR.

12:45 USD Fed Chair Powell speech
14:10 USD Fed Bullard speech
18:00 USD Fed Quarles speech
18:00 USD Fed Bostic speech
20:30 WTI API Oil Stock
21:00 NZD RBNZ Governor Orr speech

Wednesday July 10
Fed Chair Powell gives the first day of his twice-yearly Humphrey-Hawkins testimony today to the House Financial Services Committee. Market hopes of a rate cut were strongly tempered by last week’s strong NFP report, and the hopes of a 50bp cut on Jul 31 have already moved from 25% last week to 5%. Any hint of a hold would hit equities hard, even before earnings season starts. The Chinese inflation report is also important, the FOMC minutes less so coming after Powell’s ‘live’ opinion. Watch out for UK GDP, which may be affected by Brexit stockpile unwinding.

01:10 AUD RBA Debelle speech
01:30 CNY China CPI (YoY e2.7% p2.7%)
07:00 EUR ECB Non-MPC Meeting
08:30 GBP UK GDP (MoM)
09:40 EUR DE10Y Bond Auction (time approx)
14:00 USD Fed Chair Powell testifies
14:00 CAD BoC Rate Decision/Statement (e1.75% hold)
14:15 CAD BoC Press Conference
14:30 WTI EIA Oil Stock
17:10 GBP BoE Tenreyro speech
18:00 USD FOMC Minutes
22:45 NZD NZ Retail Sales

Thursday July 11
Today is the last piece in the jigsaw for the July 31st rate decision, with the inflation print, and the final day of Powell’s testimony, this time to the Senate Banking Committee. There are no more significant releases this month. Remember the Fed’s dual mandate is jobs and inflation, not GDP (Q2 preliminary), which is any event in on Jul 26, too late to affect their decision. There’s another raft of Fed speakers today, but their effect will be muted after their boss has spoken. There is a rate decision on EGP. Markets are closed in Mongolia.

00:00 AUD Aus Consumer Inflation Expectations
06:00 EUR Germany CPI (e1.3% p1.3%)
09:30 GBP UK Financial Stability Report
12:30 USD US Jobless Claims
12:30 USD US CPI (Core MoM e0.2% p0.1%)
14:00 USD Fed Chair Powell testifies
15:10 USD Fed Williams speech
16:15 USD Fed Bostic speech
18:00 USD US Monthly Budget Statement
21:00 USD Fed Kashkari speech
22:30 NZD NZ Business NZ PMI

Friday July 12
After two important days, Friday is quieter, and the mood will probably be set by the June Chinese trade figures. Traders will be looking for the impact of the extra tariffs on $200Bn of exports, which will be factored into this release. There is a rate decision on PEN. Look out next week for the start of earnings season, started as always by the banks. C report on Monday, followed by JPM, GS and WFC on Tuesday. 

02:00 CNY China Imports/Exports/TB
12:30 USD US PPI
14:00 USD Fed Evans speech
17:00 WTI Baker Hughes Rig Count

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