Sentiment Softens on Virus Concerns, RBA Stands Pat, NZ Jobs Under the Radar

EU shares rose yesterday, but the picture later in the US and today in Asia was different, with market participants reducing their risk exposure, perhaps due to concerns over the fast-spreading Delta variant of the coronavirus. Overnight, the RBA kept all its policy settings unchanged, but the Aussie gained, perhaps due to expectations of a more dovish outcome. As for tonight, during the Asian session Wednesday, focus is likely to turn to New Zealand’s employment report.

EU SHARES GAIN, BUT US AND ASIAN ONES SLIDE ON DELTA VARIANT ANXIETY

The US dollar traded lower against most of the other major currencies on Monday and during the Asian session Tuesday. It gained only versus CAD and GBP, while it lost the most ground versus AUD, NZD, and JPY.

The weakening of the US dollar, combined with the strengthening of the risk-linked Aussie and Kiwi, suggests that markets traded in a risk-on fashion yesterday. However, the strengthening of the yen and the weakening of the Loonie point otherwise. Thus, in order to get a clear picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, most major EU indices finished higher, with the only exception being Italy’s FTSE MIB, which closed nearly unchanged. That said, appetite deteriorated during the US session and continued on a soft note in Asia today. Only Nasdaq and South Korea’s KOSPI traded in positive territory.

European shares may have climbed higher due to increasing deal-striking activity and several strong earnings from financial firms. For example, British aero-engineer Meggitt skyrocketed 56.7% after US industrial firm Parker Hannifin announced it would buy Meggitt in a nearly USD 8.8bn deal. With regards to earnings, 67% of the Stoxx 600 firms that reported Q2 results so far, managed to beat their estimates, which may have allowed European investors to put aside concerns about the Delta coronavirus variant and a major regulatory crackdown in China.

However, that was not the case in the US and later in Asia. Wall Street may have closed lower due to the ISM manufacturing PMI revealing that manufacturing activity grew again in July, but at a slower pace than in June. Specifically, the index slid to 59.5 from 60.6, instead of rising to 60.9 as the forecast suggested. This may have triggered fears that the spreading of the Delta covid variant may have already started leaving marks on the economy, which would derail the so-far recovery. Equities in Asia may have also fell due to virus concerns, as infections are now soaring in the continent. The tightening of regulations in China is an extra burden for Asian indices, most of which are still in a downtrend, as opposed to their EU and US counterparts, which even if they correct lower during some sessions, they are holding to their broader upside paths.

As for our view, we would still consider the path of least resistance of Asian equities to be to the downside, but we prefer to take a neutral approach with regards to the EU and the US ahead of Friday’s US employment report. Remember that last week, Fed Chair Powell poured cold water on expectations of an earlier tightening by the Fed, by saying that the labor market has still a long way to go. With that in mind, we believe that Friday’s report will attract special attention. Expectations are for strong numbers, which if met, could refute Powell’s remarks, and may revive speculation over early tapering. The US dollar could rebound on a strong employment report, but equities could pull back, as earlier QE tapering could mean earlier rate hikes as well.

DAX — TECHNICAL OUTLOOK

The German DAX cash index traded higher yesterday, hit resistance near 15700, pulled back, hit support at 15510, and then it rebounded again. Today, it is trading in a consolidative manner slightly above that barrier. Looking at the daily and weekly charts, we see that the bigger path is still to the upside, but zooming in on the 4-hour chart, we see a sideways range being in play since July 21st, between 15435 and 15700. Thus, we will stay neutral for now.

In order to get confident on the upside again, we would like to see the index surpassing the upper end of the range, at around 15700. This may pave the way towards the all-time high of 15810, the break of which would take the index into the uncharted territory and perhaps see scope for extensions towards the psychological round figure of 16000.

On the downside, a dip below 15435 is likely to force the remaining buyers out of the game. The bears could take charge thereafter and perhaps dive towards the 15300 barrier, defined as a support by the low of July 8th and the inside swing high of July 20th. If that zone is not able to stop the slide, then we may experience extensions towards the low of July 21st, at around 15196.

RBA STANDS PAT, NEW ZEALAND RELEASES EMPLOYMENT DATA

Overnight, we had an RBA decision, with the Bank keeping its policy settings untouched and repeating that it will proceed with more bond purchases beyond September, but at a slower pace, at least until November. There was no new information for market participants to digest, but still, they pushed the Aussie higher. Perhaps, due to the latest soft employment report and the subdued underlying inflation, they were expecting a move dovish language. However, we don’t see the case for Aussie’s recovery to last for long. After all, officials stuck to their guns that interest rates are likely to stay at present levels at least until 2024. With that in mind, and also taking into account the hawkish stance of the RBNZ, we would expect the AUD/NZD pair to turn down again and continue its recent downtrend.

Speaking about the RBNZ and New Zealand, tonight, we get the nation’s employment report for Q2. The unemployment rate is forecast to have declined to 4.5% from 4.7%, while the employment change is forecast to reveal that new jobs accelerated to +0.7% qoq from +0.6%. As for the labor costs index, it is expected to have accelerated as well, to +0.7% qoq from +0.4%, something that will take the yoy rate up to +2.1% from +1.6%. The hawkish stance of the RBNZ at its latest meeting raised speculation that officials could push the hike button even as soon as this month. Thus, a strong employment report may increase speculation surrounding such an action.

AUD/NZD — TECHNICAL OUTLOOK

AUD/NZD traded higher overnight following the RBA decision. However, the recovery stayed limited below the 1.0568 barrier. Overall, the pair continues to trade below the downside resistance line drawn from the high of June 18th, and thus, even if we see some more recovery, we will stick to our bearish view.

Yes, the pair could overcome the 1.0568 barrier, but we see decent chances for the bears to take charge again from near the 1.0607 or 1.0618 barriers, marked by the high of July 28th and the inside swing low of July 14th respectively. They could push the action back to the 1.0515 barrier, near the low of July 30th, the break of which would confirm a forthcoming lower low and could pave the way towards the low of December 3rd, at around 1.0475.

No, in order to abandon the bearish case and start examining a bullish reversal, we would like to see a recovery above 1.0685, marked by the inside swing low of July 12th. This will confirm the break above the aforementioned downside line and may open the path towards the high of July 13th, at 1.0740, or the peak of June 29th, at 1.0765. Another break, above 1.0765, could carry larger bullish implications, perhaps setting the stage for advances towards the 1.0810 key hurdle, which acted as a ceiling between June 11th and 18th.

AS FOR THE REST OF TODAY’S EVENTS

The only releases on today’s calendar worth mentioning are the US factory orders for June, which are expected to have slowed to +1.0% mom from +1.7%, and the API (American Petroleum Institute) report on crude oil inventories for last week, for which no forecast is available.

As for the speakers, we have two Fed officials on the agenda and those are Vice Chair Richard Clarida and Board Governor Michelle Bowman. Following the FOMC meeting last week, where we got an optimistic statement, but a dovish Chief, it would be interesting to see what those two officials believe in terms of monetary policy.

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