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Market panorama. 3 July 2018

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I. Market focus:

On Tuesday morning, investors focused on the outcomes of the meeting of the Reserve Bank of Australia (04:30 GMT), which expectedly left its benchmark interest rate unchanged at 1.50 percent, adding that rates are consistent with sustainable economic growth and inflation. However, the regulator said that the U.S. international trade policy makes the global outlook uncertain, and noted strains in a few emerging market economies. As for the Australian economy, the RBA expects that both a decline in the unemployment rate and a pick-up in inflation will be gradual. The RBA noted that Australia’s nationwide housing prices were little changed over the past six months, and investor housing demand slowed noticeably. It also added that some further tightening of lending standards by banks was possible. The regulator forecasts that inflation will remain low for some time and will be a bit above 2 percent in 2018. The RBA also said that the labor market prospects remained positive and it expected a gradual decline in the unemployment rate, while the wages growth would remain low for some time.

The euro was supported by reports that Germany’s chancellor Angela Merkel reached an agreement with interior minister Horst Seehofer on immigration policy. On Monday, the euro came under pressure after German interior minister offered to resign, exacerbating the conflict over the migration issue with the chancellor and increasing political uncertainty.

Tuesday’s session will not be busy with macroeconomic reports. Investors will follow the PMIs for the UK’s construction sector (08:30 GMT), as well as the Eurozone’s retail sales and producer price index (09:00 GMT). In the U.S., data on factory orders (14:00 GMT) and vehicle sales (19:00 GMT) will be released. And at the end of the day, the AiG’s services index will be published (22:30 GMT).


II. The market highlights are:

  • A report from Institute for Supply Management (ISM) revealed on Monday the U.S. manufacturing sector expanded in June at a faster pace than in May. The ISM's index of manufacturing activity came in at 60.2 percent last month, up 1.5 percentage points from the unrevised May figure of 58.7 percent, exceeding economists' forecast for a 58.0 percent reading. A reading above 50 percent indicates expansion, while a reading below 50 percent indicates contraction. The monthly gain by the headline index was primarily attributable to faster growth in the production index (+0.8 percentage point m-o-m to 62.3 percent in June), the supplier deliveries index (+6.2 percentage point m-o-m to 68.2 percent) and the inventories index (+0.6 percentage points m-o-m to 50.8 percent). Meanwhile, the new orders index (-0.2 percentage points m-o-m to 63.5 percent) and the employment index (-0.3 percentage points m-o-m to 63.5 percent) rose at a slightly slower pace in June than in the previous month. Of the 18 manufacturing industries, 17 reported growth last month. Timothy R. Fiore, Chair of the ISM Manufacturing Business Survey Committee said, “The past relationship between the PMI and the overall economy indicates that the PMI for June (60.2 percent) corresponds to a 5.2 percent increase in real gross domestic product (GDP) on an annualized basis.”

  • The Australian Bureau of Statistics (ABS) announced on Tuesday the total number of building permits issued in the country dropped by 3.2 percent m-o-m in seasonally adjusted terms in May, following a revised 5.6 percent m-o-m increase in April (originally a 5.6 percent m-o-m drop). Economists had expected an increase of 1.0 percent m-o-m. According to the report, approvals for private sector dwellings excluding houses surged 4.3 percent m-o-m in May, while private sector houses approvals tumbled -8.6 percent m-o-m. In y-o-y terms, total approvals rose 3.1 percent.

  • The Reserve Bank of Australia (RBA) decided to leave the cash rate unchanged at 1.50 percent at its July monetary policy meeting. The move was widely expected by the markets. In the statement accompanying the decision, the Bank noted that the interest rates are consistent with sustainable economic growth and inflation. However, the regulator said that the U.S. international trade policy makes the global outlook uncertain, and noted strains in a few emerging market economies. As for the Australian economy, the RBA said it expected that both a decline in the unemployment rate and a pick-up in inflation would be gradual. The RBA also noted that Australia’s nationwide housing prices were little changed over the past six months, and investor housing demand slowed noticeably. It added that some further tightening of lending standards by banks was possible. The regulator forecasted that inflation would remain low for some time and would be a bit above 2 percent in 2018. The RBA also said that the labor market prospects remained positive and it expected a gradual decline in the unemployment rate, while the wages growth would remain low for some time.

III. Market Situation
Currency Market
The currency pair EUR/USD traded slightly lower. Experts note that the euro remains under pressure, despite the fact that German chancellor Merkel and interior minister Seehofer reached an agreement on immigration policy, averting government crisis.  After two days of negotiations, Germany's chancellor agreed with interior minister to tighten control over migration. Seehofer, who also heads the Christian Social Union (CSU), threatened to resign from Merkel’s cabinet if there was no agreement. Merkel called the reached deal "a really good compromise" that would allow regulating the movement of the refugees within the EU without creating problems with Germany's neighbors. Today, market participants will continue to follow the news from Germany, as well as pay attention to the Eurozone’s retail sales for May and the U.S. factory orders for May. Later this week, focus will be on the minutes from the Fed latest meeting (due on Thursday) and the U.S. employment data (due on Friday). The hawkish tone of the Fed’s minutes and strong U.S. jobs data are likely to strengthen the chances of another increase in interest rates in the U.S., which should support the U.S. dollar. Resistance level - $1.1720 (high of June 26). Support level - $1.1508 (low of June 21).

The currency pair GBP/USD traded near the opening level. The pair was supported by the downward correction in the U.S. dollar. Meanwhile, its growth was limited by concerns over the meeting of the UK’s Cabinet on the Brexit issues scheduled for this week. In addition, the focus will continue to be on the trade dispute between the U.S. and China. On Thursday, market participants will pay attention to the speech of the of the Bank of England (BoE) governor Mark Carney. At the moment, investors are awaiting the release of the UK’s construction PMI. According to forecasts, the indicator fell to 52.4 points in June from 52.5 points in May. Resistance level - $1.3314 (high of June 22). Support level - $1.3039 (low of November 3, 2017).

The currency pair AUD/USD rose moderately, recovering more than half of previous day's losses. The pair's rise was primarily attributable to the broad weakening of the U.S. currency. Investors also digested the results of the Reserve Bank of Australia’s (RBA) meeting, at which the policymakers the Bank’s benchmark interest rate unchanged at 1.50 percent and expressed concerns over global economic outlook and the escalation of trade tensions. “One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States. There have also been strains in a few emerging market economies, largely for country-specific reasons,” said the RBA’s governor Philip Lowe in the statement on a monetary policy decision. The regulator’s officials expect that both a decline in the unemployment rate and a pick-up in inflation will be gradual. Resistance level - AUD0.7443 (high of June 22). Support level - AUD0.7287 (low of January 6, 2017).

The currency pair USD/JPY rose sharply at the beginning of the session amid reports about a settlement of an agreement on migration issues in Germany, but then lost all of the gains on the back of partial profit-taking. The pair’s performance was also impacted by the Japanese data, which revealed that Japan's monetary base increased 7.4 percent y-o-y in June, to JPY493.4 trillion. That followed the May gain of 8.1 percent y-o-y. For the second quarter of 2018, Japan’s monetary base rose 7.8 percent y-o-y. Resistance level - Y111.39 (high of May 21). Support level - Y109.36 (low of June 25-26).

Stock Market

Index

Value

Change

S&P

2,726.71

+0.31%

Dow

24,307.18

+0.15%

NASDAQ

7,567.69

+0.76%

Nikkei

21,785.54

-0.12%

Hang Seng

28,547.06

-1.41%

Shanghai

2,786.35

+0.39%

S&P/ASX

6,210.20

+0.52%


U.S. stock indexes closed slightly higher on Monday, helped by gains in technology stocks and upbeat data on the ISM Manufacturing Index for June. A report from Institute for Supply Management (ISM) revealed the U.S. manufacturing sector expanded in June at a faster pace than in May. The ISM's index of manufacturing activity came in at 60.2 percent last month, up 1.5 percentage points from the unrevised May figure of 58.7 percent, exceeding economists' forecast for a 58.0 percent reading. A reading above 50 percent indicates expansion, while a reading below 50 percent indicates contraction.

Asian stock indexes closed mixed on Tuesday, as investors remained cautious ahead of the imposition of 25 percent tariffs on $34 billion worth of Chinese products on July 6. The U.S. President Donald Trump said he's not backing down on China tariffs. Japan’s Nikkei recorded a moderate drop, despite the fact the yen weakened against the U.S. dollar.

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


Bond Market
Yields of US 10-year notes hold at 2.87% (0 basis points)
Yields of German 10-year bonds hold at 0.32% (+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 higher. Crude oil for delivery in August settled at $74.78 (+1.14%). The crude oil prices rose solidly, due to the weakening of the US dollar and the news that Libya's National Oil Corp. (NOC) declared force majeure on crude exports at Hariga and Zuetina oil terminals. The company also warned that daily oil production in Libya could drop by 850,000 barrels per day if the blockade of the eastern oil export terminals continues. Experts note that supply interruptions in Libya outweigh the June increase in the OPEC countries’ supply, causing the growth of oil quotations.

Gold traded at $1,240.20 (-0.11%). Gold prices dropped slightly, despite the broad weakness in the U.S. dollar. Investors are gradually shifting their attention to the minutes of the Fed’s last meeting (due on Thursday) and the U.S. key data on employment (due on Friday). The aggressive tone of the Fed and strong performance in the workplace are likely to strengthen the chances of a further increase in interest rates in the US. The hawkish tone of the Fed’s minutes and strong U.S. jobs data are likely to strengthen the chances of another increase in interest rates in the U.S. And this may lead to a drop in gold prices, as higher interest rates can cause a rise in bond yields, making non-yielding bullion less attractive to investors, and could strengthen the dollar, making the precious metal more expensive for holders of foreign currencies.

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


08:30

United Kingdom

PMI Construction

09:00

Eurozone

Producer Price Index

09:00

Eurozone

Retail Sales

14:00

U.S.

Factory Orders

16:00

Eurozone

ECB's Peter Praet Speaks

19:30

U.S.

Total Vehicle Sales

23:30

Australia

AIG Services Index

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
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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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