Equities traded mixed yesterday and during the Asian morning today, perhaps due to portfolio rebalancing in the last day of Q2, and/or due to the battle between those who believe that the global economy will recover faster than previously anticipated, and those who are afraid of another round of fast spreading of the coronavirus around the world. Today, the minutes from the latest FOMC gathering, and the ISM manufacturing PMI are coming out, while Sweden’s Riksbank decides on monetary policy.
Investors Await the Fed Minutes and the ISM PMI, Riksbank Decides on Policy
The dollar traded lower against all but two of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It underperformed the most versus CAD, NOK, and GBP in that order, while it lost the least ground versus JPY. The greenback eked out some gains only against EUR and SEK.
The slide in the dollar, combined with the relative weakness in the yen, suggests that risk appetite remained supported for another day. However, turning our gaze to the equity world, we see a more mixed picture. Most major EU bourses traded in negative territory, while later, in the US, all three of Wall Street’s main indices closed in the green. As for today’s Asian session, Japan’s Nikkei slid 0.75%, but China’s Shanghai Composite gained 1.35%.
The mixed picture may have been the result of portfolio-rebalancing in the last day of Q2, and/or maybe it is a reflection of the battle we’ve been highlighting recently, between those who believe that the global economy will recover faster than previously anticipated, and those who are afraid of another round of fast spreading of the coronavirus around the world. As we noted yesterday, with infected cases hitting a new record on Friday, and with several US states reversing their re-openings, we prefer to stay sidelined for now.
As for today, market participants may pay extra attention to the minutes from the latest FOMC gathering, when the Committee decided to keep interest rates unchanged and noted that they will continue to increase purchases of bonds and mortgage-backed securities “at least at the current pace”, something suggesting that purchases can accelerate again if deemed necessary.
Officials already announced tweaks to their bond purchases a few days after the meeting, widening the range of eligible assets to include all US corporate bonds. On top of that, when testifying before Congress, Fed Chair Powell himself said that there is a “reasonable probability” that more policy support would be needed. He reiterated that view yesterday, in another testimony before the House Financial Services Committee. Thus, we will dig into the minutes to see whether other policymakers were in favor of further easing in the foreseeable future. If so, equities may gain on hopes for more central-bank support, while the dollar and other safe havens may come under selling pressure. A potential increase in the ISM manufacturing PMI ahead of the minutes may allow investors to start the party earlier.
The oil-related Canadian dollar and Norwegian Krone were the main gainers yesterday, perhaps due to oil prices gaining on the back of a decline in US crude oil inventories. Yesterday, the API (American Petroleum Institute) reported that inventories tumbled 8.16mn barrels last week, after increasing 1.75mn the week before, suggesting that demand is improving despite signs over a new flare up in infected cases from the coronavirus around the globe. Today, we get the EIA (Energy information Administration) weekly report, where a confirmation of a strong slide in inventories may encourage some more oil buying, and thereby support further CAD and NOK.
Apart from the Fed minutes, the ISM PMI, and the EIA report, we also have a central bank deciding on interest rates today, and this is the Riksbank. When they last met, policymakers of this Bank decided to continue purchases of government and mortgage bonds up to the end of September 2020 and to leave the repo rate unchanged at 0.0%. They also said that the measures will be adjusted to economic developments. After the meeting, GDP data showed that economic activity slowed to +0.1% qoq in Q1 from +0.2%, but this was at a time when expectations where pointing to a 0.6% qoq contraction. The latest inflation data showed that both the CPI and CPIF rates rebounded to 0.0% yoy in May from -0.4%, while the core CPIF metric showed that underlying inflation rebounded to +1.2% yoy from +1.0%. Therefore, although we may not get any policy changes at this gathering, it would be interesting to see whether the better-than-expected GDP data and the rebound in inflation would trigger any discussion with regards to scaling back QE purchases.
DJIA — Technical Outlook
The sharp rebound on Monday helped the DJIA to stay within a descending triangle pattern. But yesterday, the upper side of that pattern got violated, which suggests that the bulls are eager to push the index higher. That said, looking at the technical picture this morning, we notice that the price is currently sitting very close to the upper side of the descending triangle again, what puts us slightly on the cautious side. We will take a neutral stance for now and wait for a clear breakout through one of our key support or resistance levels, before examining the next directional move.
If the DJIA moves a bit higher and climbs above the high of last week, at 26420, this may attract a few extra buyers into the game, allowing the index to move further north. The index could travel to the 26791 obstacle, a break of which might set the stage for a test of the highest point of June, at 27631.
In terms of the downside, in order to consider lower areas, we would prefer to wait for a drop below the psychological 25000 zone, or even the 24877 area, marked by the current lowest point of this week. This way, the index would confirm a forthcoming lower low, potentially increasing its chances of moving further south. We will then target the 24155 hurdle, which if fails to halt the slide and breaks, could open the door for a drift to the 23325 level, marked by the lows of May 4 thand 15 th.
USD/SEK — Technical Outlook
Overall, USD/SEK continues to trade below its medium-term downside resistance line drawn from the high of March 23 rd. Currently, the pair is trading very close to that line, which might get tested again. However, if the rate struggles to overcome the downside line, another round of selling could be possible. This is why we will stay cautiously bearish, at least with the near-term outlook.
As mentioned above, if the rate rises, but fails to move above the aforementioned downside line, the bears might wake up and take control again, forcing USD/SEK to drop to the 9.252 area, marked near the lows of June 23 rdand 24 th. The pair may stall there temporarily, but if selling pressure is still on the higher side, a break of that area would confirm a forthcoming lower low and could clear the path towards the 9.125 level, which is the lowest point of June.
Alternatively, if the previously-discussed downside line breaks and the rate rises above the highest point of June, at 9.480, such a move would confirm a forthcoming higher high and increase the pair’s chances of pushing for some higher areas. More bulls may find such a move attractive and join in the field, this way helping USD/SEK to move to the 9.555 obstacle, a break of which might clear the way to the 9.700 zone. That zone is marked near the low of May 12 th, and by the highs of May 22 ndand 25 th.
As for the Rest of Today’s Events
We also have the final Markit manufacturing PMIs from the Eurozone, the UK, and the US, but as it is always the case, they are expected to confirm their preliminary estimates.
Later in the day, from the US, ahead of the Fed minutes, we get the ADP employment report for June. Expectations are for the private sector to have gained 3mn jobs, after losing 2.76mn in May. This would raise speculation that the NFP print, due out on Thursday, may also come close to that number. Indeed, the forecast for the NFP is currently at 3.07mn. However, although the ADP is the only major gauge we have for the NFPs, it is far from a reliable predictor. Even last month, when the ADP revealed 2.76mn job losses, the official employment report showed that NFPs increased 2.51mn.
Tonight, during the Asian session Thursday, we have New Zealand’s NZIER business confidence index for Q2 and Australia’s trade balance for May. However, there is no forecast available for neither of those releases.
As for the speakers, we have five on today’s agenda: BoE MPC member Jonathan Haskel, ECB Executive Board member Fabio Panetta, Chicago Fed President Charles Evans, and Deutsche Bundesbank Executive Board members Sabine Mauderer and Joachim Wuermeling.
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Originally published at https://www.jfdbank.com on July 1, 2020.