US equity markets opened the week off last week’s all-time highs, with the USD slumping with crude oil as risk trades took a back seat and markets opened a week full of events on a cautious tone. This week will be dominated by 3 main events all occurring on Thursday, the UK election (we should know the outcome by Friday midday), the European Central Bank (ECB) meeting and the former head of the FBI James Comey is scheduled to testify before the Senate Intelligence Committee on Thursday morning in the US. Hopefully in the UK the Conservatives will win with an increased majority, giving some certainty to Brexit negotiations. The ECB will continue with a “steady-as-she goes” policy statement (expected by the market) and Comey’s testimony will not have a “smoking gun” that destabilises (further) the Trump administration.
As any one of these events have potential to add a large dose of volatility to financial markets. The US Non-farm payroll data on Friday was a major disappointment well below expectations of 180-185K coming in at 138K jobs created in May, although the unemployment rate dropped to 4.3% from the previous 4.4%. However consensus remains that the Fed will go ahead with a 0.25% rate hike next week, although the probability for another hike in September is now much more data dependent.
After Friday’s lacklustre US jobs report the Australian dollar staged a comeback rising to a high of 0.7497, it opens this morning around 0.7486 in a consolidative mode ahead of this afternoon’s RBA statement. Also helping the Aussie dollar were better Chinese PMI results yesterday that allowed the AUD to consolidate the moves higher made on Friday. Market expectations are for the RBA to keep rates unchanged at 1.50% as reports since the RBA’s last meeting show strong employment gains and a surprise rebound in retail sales. However the counter to this has seen construction has being softer and wage growth remaining stagnant. Also the first signs in 18 months in May of a cooling off in house prices make a rate cut more likely in the September quarter as the RBA has more time to gather further data over the intervening period. Given the moves over the last two days 0.7500 is the immediate resistance level which if broken would likely see some short covering which should push the AUD into the 0.7540/50 region with next resistance level up at 0.7485. On the downside a pullback below 0.7460 would target support around 0.7430/35 which if broken could extend down to the 0.7400/0.7390 mark. Just released is news that the Aussie current balance is much worse than expected at -3.1bln against an expected -0.5bln, net exports were also substantially lower suggesting a potential downgrade of around 0.7% for tomorrow’s March quarter GDP. The AUD has sold off around 35 pips to 0.7455 on this news.
The New Zealand dollar pushed back through 0.7130 during early morning trading back in favour with investors again after weaker US data was published. We need to go back to early February to view NZD interest at these levels, the bullish channel from the low of 0.6815 still remains in place. Non-Farm Payroll and Manufacturing numbers were both weaker than expected Friday. The main focus over the next few days will be on the Fed Rate announcement, with good gains in employment and wage growth this supports a June 15th hike but hardly gives them any long term excitement and urgency with inflation lower than the targeted 2%. Global Dairy Trade Auctions are held overnight with expectations of continuing recent momentum in prices to the 9 dairy products. NZD remains solid over 0.7100 with view of possibly returning to 0.7250 resistance in the short term..
The disappointing NFP jobs data on Friday was slightly tempered by the small drop in the unemployment rate from 4.4% to 4.3%, however this could not prevent the US dollar dropping against all its major trading partners. Although significantly below market expectations the payrolls report has not derailed expectations of a 0.25% Fed rate hike next week but it has cast doubt over the extent of any further tightening going into the 3rd and 4th quarters of this year.
The testimony by ex FBI Director Comey will hopefully for the Trump administration, not contain any major revelations as this would continue to further divert attention away from the administrations next policy thrust of increased infrastructure spend which has been one of the pillars of the “Trump bump” equity rally over the last few months. Other US data releases for ISM non-manufacturing, factory and durable goods orders were also softer but had little immediate effect on the market. The USD opens at lower levels against both the JPY and EUR and we would expect little major movement ahead of Thursday as markets await results of the UK election, ECB meeting and the Comey testimony. Look for the EUR/USD to trade around 1.1250 over the day with risk towards the upside, a break beyond 1.1300 is still required to confirm a new leg higher, while a break below 1.1180 will probably see a downward corrective extension to the 1.1120 region.
A mixed start to the week with the FTSE equity index tracking lower yesterday ahead of a critical week in the UK, Eurozone and US. UK services sector growth was lower on Brexit fears and another significant poll was released alongside the disappointing PMI services figures. After strong manufacturing and construction PMI readings last week, yesterday’s sharp deterioration in the services reading highlights what could be the new norm as services firms shift their emphasis away from the UK in the wake of article 50. While firms may not be laying off workers, there is a feeling that we will see banks begin to build out their regional offices in response to the UK’s impending departure from the EU. Another poll result, this time YouGov, speculating that despite a likely Tory victory, they could fall short of the 326 required to for a majority government. Given the wide range of poll results, it is clear that the industry is coming under pressure once more in the wake of failures in both the EU referendum and US election. After the weekend’s attack around London Bridge, the main political parties are clearly seeing this renewed focus upon security as an opportunity to prove their mettle, with Corbyn calling out May’s policing record as home secretary. While Theresa May seems to have adopted a more steely resolve than before, this seems a like too little too late given her track record of cutting police numbers over the years…
Possible UK election scenarios;
• May wins ; if a majority over 125 seats this would be positive for Brexit negotiations and likely spur a rally of the GBP over the 1.30 against the USD….stock market would move lower as the higher GBP impacted UK corporate returns….majority 70-125 seats little change as already priced in….majority under 70 seats, drop in GBP .
• Corbyn wins; sharp sell-off in the GBP probably down to the 1.25 level, stock market would rise as corporate earnings would initially increase with a lower GBP.
The ECB meeting on Thursday is expected to have an outcome of rates staying on hold, but there are expectations that comments will feature around the projected time frame for tapering stimulus measures as the Eurozone economy gradually continues to improve. The EUR was the main benefactor of the weaker than forecast US NFP on Friday, trading up to multi-month highs at 1.1284. It is now sitting around 1.1268 but risk remains towards the upside, with a break above 1.1300 required to confirm a new leg higher, while a move below 1.1180 will probably see a downward corrective extension down to the 1.1120 region. There are retail sales data for May due tonight, but we expect consolidation at around current levels ahead of Thursday’s ECB meeting.
The Japanese yen charged ahead against the USD Dollar Friday on weaker than expected non-farm payroll data . Markets were expecting a solid figure but with numbers showing an increase of 131k jobs in May this was well short of expectations and dropped the US across the board. ISM Non- Manufacturing figures also pointed to a slowdown in the services sector falling to 56.9 points based on an estimated 57.1 The Yen rallied off the back into territory not seen since late April blowing aside resistance of 110.60 to post a low of 110.30 late during NY session. JPY should continue to strengthen this week with investors moving back into the safe-haven trade with US Trump political issues still to be settled with Russia. Support still around the 109.80 and 108.120 with resistance at 112.10 and 114.35
The Canadian dollar weakened last week against the Greenback closing the week just shy of the 1.35 area. Oil has not helped Canadian Dollar prospects coming from 49.50 late May to weaken off 2% to trade at 47.50 this morning. The CAD continues to trade in a tight range as it waits for testimony from James Comey this week around Russia/ Trump links. Toronto real-estate is cooling if you read into the latest figures which show less sales, Toronto growing at 14.9% year on year, further housing data is due this Friday with New Home Sales. This week could see a push for the late May low of 1.3400 a continuation of the bearish trend from the high of 1.3800 late April. Friday sees Bank of Canada Stephen Poloz speak about the Canadian Financial System.
• Canadian GDP 0.5% vs 0.3% expected
• Australian Private Capital Expenditure 0.3% vs 0.4% expected
• Australian Retail Sales 1.0% vs 0.3% expected
• UK Manufacturing PMI 56.7 vs 56.5
• US ISM Manufacturing PMI 54.9 vs 54.7 expected
• UK Construction PMI 56.0 vs 52.7 expected
• US Non-farm Payrolls 138k vs 181k expected
• US Unemployment rate 4.3% vs 4.4% expected
• UK Services PMI 53.8 vs 55.1 expected