Fundamental Analysis. 18 July 2018

I. Market focus:

While the U.S. continues to adopt protectionist measures, restricting access to its market, other developed countries act otherwise. Yesterday, the European Union (EU) and Japan signed an agreement on free trade, which will eliminate nearly all tariffs starting from next year. The deal has reduced fears of an escalation of global trade wars, increasing investor risk appetite. On this backdrop, stock markets have risen, and gold prices and the yen have fallen. The signed agreement should be ratified by the parliaments of both countries, and no problems are expected at this stage.

The U.S. dollar remained supported against other currencies at the beginning of Wednesday's session. The dollar continues to be buoyed by expectations of further monetary-policy tightening by the Fed and markets’ confidence in the strength of the U.S. economy, which was underpinned by the latest comments of the U.S. Federal Reserve’s officials. Yesterday, the Fed Chairman Jerome Powell appeared before the Senate Banking Committee to deliver his semi-annual monetary policy report. In his speech, he noted an improvement in the U.S. economic expansion in the second quarter, adding that “financial conditions remain favorable to growth”. Kansas City Federal Reserve Bank President Esther George said that she thought a further gradual tightening of the Fed’s monetary policy is needed. Ahead, the U.S. currency, most likely, will continue its upward movement.

The main scheduled events of today’s session will be the release of the UK’s inflation statistics (08:30 GMT), as well as the U.S. data on housing market (building permits and housing starts, 12:30 GMT), crude oil inventories (14:30 GMT) and the Fed’s Beige Book (18:00 GMT).

The stock market participants continue to assess the quarterly reports of companies, as the second-quarter earnings season rolls. Today, their quarterly results will post International Business Machines Corp. (IBM), American Express Co. (AXP), Morgan Stanley (MS) and eBay Inc. (EBAY).


II. The market highlights are:

  • Statistics Canada released its Monthly Survey of Manufacturing on Tuesday, which showed that the Canadian manufacturing sales rose 1.4 percent m-o-m in May to CAD57.12 billion, following a revised 1.1 percent m-o-m drop in April (originally a 1.3 percent m-o-m decline). Economists had anticipated an increase of 0.5 percent m-o-m for May. According to the survey, the chemical (+6.2 percent m-o-m), machinery (+8.9 percent m-o-m), and wood product (+6.1 percent m-o-m) industries accounted for most of the gains in May. Overall, sales went up in 14 of 21 industries, representing 64 percent of total manufacturing sales. Both durable goods and nondurable goods sales increased 1.4 percent m-o-m. In y-o-y terms, manufacturing sales surged 3.7 percent in May.

  • The Federal Reserve announced on Tuesday that the U.S. industrial production rose 0.6 percent m-o-m in June after a revised 0.5 percent m-o-m decline in May (originally a drop of 0.1 percent m-o-m). Economists had forecast industrial production would increase 0.6 percent m-o-m. According to the report, manufacturing output surged 0.8 percent m-o-m in June, as the production of motor vehicles and parts rebounded after truck assemblies fell sharply in May due to a disruption at a parts supplier. Excluding motor vehicles and parts, factory output increased 0.3 percent m-o-m. Meanwhile, mining production jumped 1.2 percent m-o-m, while the output of utilities reduced 1.5 percent m-o-m. Capacity utilization for the industrial sector increased 0.3 percentage point m-o-m in June to 78.0 percent. That was 0.3 percentage point below economists’ forecast and 1.8 percentage points below its long-run (1972–2017) average. In y-o-y terms, the industrial production rose 3.8 percent in June, following a revised 3.2 percent increase in the prior month (originally a 3.5 percent advance). That was the strongest annual gain in industrial production since July of 2014.

  • The National Association of Homebuilders (NAHB) reported on Tuesday its housing market index (HMI) remained unchanged at 68 in July. Economists forecast the HMI to stay at 68. A reading over 50 indicates more builders view conditions as good than poor. Three HMI components were mixed this month. The indicator measuring buyer traffic rose two points to 52, while the current sales measure remained unchanged at 74 and the index charting expectations in the next six months dropped two points to 73. NAHB Chairman Randy Noel said that “Consumer demand for single-family homes is holding strong this summer, buoyed by steady job growth, income gains and low unemployment in many parts of the country.” At the same time, NAHB Chief Economist Robert Dietz noted that “Builders are encouraged by growing housing demand, but they continue to be burdened by rising construction material costs. Builders need to manage these cost increases as they strive to provide competitively priced homes, especially as more first-time home buyers enter the housing market.”

  • The U.S. Federal Reserve Chairman Jerome Powell appeared before the Senate Banking Committee on Tuesday to deliver his semi-annual monetary policy report. In his speech, Mr. Powell said that improving economic conditions should allow the Fed to continue gradual interest rates hikes. At the same time, Powell did not hint at the need to accelerate the pace of monetary policy tightening, but noted that the risks of a weaker or stronger economy are “roughly balanced”. “We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses,” he said. “On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective.”


III. Market Situation
Currency Market
The currency pair EUR/USD declined moderately, continuing yesterday's trend. The U.S. dollar continues to be supported by the latest statements by the Fed’s Chair Jerome Powell and Kansas City Fed President Esther George. Powell, who testified before the Senate Banking Committee yesterday, expressed an optimistic view on the U.S. economy and said that gradual rate hikes are seen by the Fed’s policymakers as the best path “for now”. Meanwhile, George said that she thought a further gradual tightening of the Fed’s monetary policy is needed. Today, investors will pay attention to the Eurozone’s inflation data, the U.S. housing market report, and the Fed's Beige Book. Resistance level - $1.1744 (high of July 17). Support level - $1.1613 (low of July 13).

The currency pair GBP/USD traded slightly lower, following a significant drop the day before, which was triggered by concerns over the prospects of British Prime Minister Theresa May's plan for Brexit, which was narrowly passed in the UK’s parliament on Tuesday. This fact raised doubts whether she would be able to reach a withdrawal agreement with the EU, which would satisfy the British legislators. Overall, the recent developments reduce the likelihood of a smooth and orderly Brexit, which, according to business representatives, is necessary to avoid severe damage to the country's economy. Today, investors will continue to monitor the Brexit-related news, as well as pay attention to the UK’s data on consumer prices. According to economists forecasts, the CPI  in June rose by 2.6 percent y-o-y after an increase of 2.4 percent y-o-y in May. Tomorrow, the focus will be on the UK’s retail sales for June. Resistance level - $1.3301 (high of July 10). Support level - $1.3049 (low of June 28).

The currency pair AUD/USD traded moderately lower, nearing its low of July 12. The pair’s performance reflected a broad strengthening of the U.S. currency, helped by the Fed Chair Jerome Powell’s optimistic statement about the U.S. economic conditions. Market participants’ attention is gradually shifting to the Australian data on the labor market, set to be published tomorrow. According to economists’ forecasts, Australia’s unemployment rate remained at 5.4 percent in June, while the number of employed persons increased by 17,000, following a gain of 12,000 in May. Resistance level - AUD0.7442 (high of July 16). Support level - AUD0.7310 (low of July 2).

The currency pair USD/JPY rose slightly, approaching close to its high of January 9, as the U.S. dollar demonstrated the broad strengthening. Market participants are now awaiting the release of the U.S. data on housing starts and building permits for June and the Fed's Beige Book, as well as the second part of Powell’s Congressional hearing. It is not expected that today’s statement will differ from yesterday's one. Powell will probably reiterate his view that improving economic conditions should allow the Fed to continue gradual interest rates hikes. Resistance level - Y113.17 (high of January 9). Support level - Y112.22 (low of July 16-17).

Stock Market

Index

Value

Change

S&P

2,809.55

+0.40%

Dow

25,119.89

+0.22%

NASDAQ

7,855.12

+0.63%

Nikkei

22,794.19

+0.43%

Hang Seng

28,117.42

-0.23%

Shanghai

2,788.44

-0.35%

S&P/ASX

6,245.10

+0.67%


U.S. stock indexes closed higher on Tuesday, supported by solid Q2 earnings reports and statements of the Fed’s Chairman Jerome Powell, who expressed an optimistic view on the U.S. economy and said that gradual rate increases are seen by the Fed’s policymakers as the best path “for now”. Investors also assessed the U.S. data on industrial production for June and the NAHB housing market index for July. The Federal Reserve reported that the U.S. industrial production rose 0.6 percent m-o-m in June after a revised 0.5 percent m-o-m decline in May (originally a drop of 0.1 percent m-o-m). Economists had forecast industrial production would increase 0.6 percent m-o-m. In y-o-y terms, the industrial production rose 3.8 percent in June, following a revised 3.2 percent increase in the prior month (originally a 3.5 percent advance). That was the strongest annual gain in industrial production since July of 2014. Meanwhile, the National Association of Homebuilders (NAHB) announced its housing market index (HMI) remained unchanged at 68 in July, matching the economists’ forecast.

Asian stock indexes closed mixed on Wednesday, as investors continued to digest the latest statements by the Federal Reserve Chairman Jerome Powell and earnings of the U.S. companies. Japan’s Nikkei rose, as the yen weakened against the U.S. dollar, supporting the Japanese export-oriented companies.

European stock indexes are expected to trade higher in the morning trading session.


Bond Market
Yields of US 10-year notes hold at 2.86% (0 basis points)
Yields of German 10-year bonds hold at 0.29% (+1 basis points)
Yields of UK 10-year gilts hold at 1.26% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in August settled at  $66.77 (-0.58%). The crude oil prices declined, reacting to the strengthening of the U.S. dollar and the latest data from American Petroleum Institute (API), which revealed an unexpected weekly build in the U.S. crude supply. The API reported U.S. crude supplies rose by 629,000 barrels for the week ended July 13. Analysts had forecast a decline of 3.6 million barrels. Meanwhile, supplies of gasoline increased by 425,000 barrels and distillate stockpiles grew by 1.7 million barrels. Market participants are now awaiting weekly data on U.S. crude inventories from the U.S. Energy Information Administration (EIA).

Gold traded at  $1,223.70 (-0.31%). Gold prices fell moderately, continuing yesterday's trend, as the U.S. currency demonstrated growth. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.26 percent to 95.20. Since gold prices are tied to the dollar, a stronger dollar makes the precious metal more expensive for holders of foreign currencies.

IV. The most important scheduled events (time GMT 0)


08:30

United Kingdom

Producer Price Index - Input

08:30

United Kingdom

Retail Price Index

08:30

United Kingdom

Producer Price Index - Output

08:30

United Kingdom

HICP ex EFAT

08:30

United Kingdom

HICP

09:00

Eurozone

Construction Output

09:00

Eurozone

Harmonized CPI

09:00

Eurozone

Harmonized CPI ex EFAT

12:30

U.S.

Housing Starts

12:30

U.S.

Building Permits

14:00

U.S.

Fed Chair Powell Speaks

14:30

U.S.

Crude Oil Inventories

18:00

U.S.

Fed's Beige Book

23:50

Japan

Trade Balance Total


18 July 2018
Market Focus
  • U.S consumer sentiment slipped in early July but remained nearly equal to the average in the prior twelve months
  • Earnings Season in U.S.: Major Reports of the Week
  • Fed's Kaplan: Could be convinced of need for fourth rate hike in 2018 depending on outlook
  • Fed: Prospective economic conditions call for further gradual removal of monpol accommodation
Quotes
Symbol Bid Ask Time
EURUSD
GBPUSD
XAUUSD
USDCHF
AUDUSD
NZDUSD
USDCAD
USDJPY
XAGUSD
XAGEUR

All posted material is a marketing communication solely for informational purposes and reliance on this may lead to loss. Past performance is not a reliable indicator of future results. Please read our full disclaimer.

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