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I. Market focus:
Since there was no new information about the U.S.-China trade relations, the main theme in the financial markets at the beginning of the Tuesday session continued to be the UK’s political drama. Yesterday, two senior Cabinet ministers resigned - the Brexit minister David Davis and Foreign minister Boris Johnson. Both ex-officials did not support the Prime Minister Theresa May’s plan and demanded a harder scenario for the country's withdrawal from the European Union (EU). The head of the UK’s government stands for the "soft" exit of the country from the EU. After the resignation of Boris Johnson, Jeremy Hunt, the former Minister of health and social care, was named Britain's new foreign minister.
A silence of Donald Trump, who has not commented on trade policy for a week, has a positive impact on market sentiment, lifting the investors’ risk appetite. Against this backdrop, the main world stock indices grow and the yen falls, but it is unlikely that such a silence will last long.
Rather neutral data on business confidence in Australia and inflation in China, which were released in the morning, had no significant influence on the markets’ dynamics. The next important report will be the UK’s GDP data (preliminary estimate for the second quarter) at 08:30 GMT. The British data on industrial production will be also published at the same time, but the GDP report will have more significance.
Other important events will include the release of the European indices of economic sentiment from ZEW (09:00 GMT) and the U.S. statistics on job openings and labor turnover (the JOLTs report; 14:00 GMT).
II. The market highlights are:
The National Australia Bank (NAB) reported on Tuesday its business confidence index fell by one point to +6 index points in June from a revised +7 last month (originally +6). That was the lowest reading since December 2016 and remained around its long-run average level. A reading above zero signals an improvement in business confidence, and a reading below zero indicates a deterioration. At the same time, the NAB’s business conditions index rose by 1 point to +15 index points in June, after easing in the previous month. By component, sales (+3 points to +23 in June) and profitability (+5 points to +17) indexes rose in June after a decline in the prior month. Meanwhile, the employment index (-4 points to +5) decreased for the second consecutive month but remains above average. Conditions improved in manufacturing, construction, wholesale and financial, property & business services in June. However, these advances were offset by a sharp drop in the mining industry, while transport & utilities and recreational & personal services also fell. Commenting on the June Business Survey, Alan Oster, the NAB’s Chief economist, noted “The survey continues to suggest relatively robust growth in the economy but also suggests that broader inflationary pressures remain weak with slow rates of both purchase price and final products price inflation. Labour cost growth remains weak, though there is some evidence of a pickup in specific industries.”
The National Bureau of Statistics (NBS) revealed on Tuesday that China’s producer price index (PPI) rose 4.7 percent y-o-y in June, after gaining 4.1 percent y-o-y in the prior month. That was the highest producer inflation since December of 2017. Economists had expected PPI would increase by 4.5 percent y-o-y in June. Compared with a month ago, costs increased at a faster pace for both production materials (+6.1 percent y-o-y in June versus +5.4 percent y-o-y in May) and consumer goods (+0.4 percent y-o-y in June versus +0.3 percent y-o-y in May). The PPI rose 0.3 percent m-o-m in June, following a 0.4 percent advance in May. At the same time, the consumer price index (CPI) increased 1.9 percent y-o-y in June, following a 1.8 percent y-o-y gain in May. That was the highest rate since March and in line with economists’ expectations. The food prices increased 0.3 percent y-o-y in June after rising 0.1 percent in May, while non-food costs surged 2.2 percent y-o-y, the same as a month ago. On a monthly basis, consumer prices declined 0.1 percent in June, following a 0.2 percent decrease in May.
III. Market Situation
The currency pair EUR/USD traded slightly lower, due to a new wave of the U.S. currency strengthening after declines in the previous days. Investors also continued to digest yesterday's statements of ECB president Mario Draghi. In his speech to the European parliament, the ECB chief reiterated that the regulator would not raise interest rates in the next twelve months. He also added that the ECB expected to end quantitative easing (QE) at the end of the year. In addition, Draghi warned that the "increased protectionism" and the ongoing trade tensions pose the biggest risk to the outlook. Today, market participants will pay attention to the release of the European indices of economic sentiment from ZEW and the U.S. statistics on job openings and labor turnover (the JOLTs report). According to economists’ forecasts, ZEW’s indicator of economic sentiment for the Eurozone fell to -13.2 in July from -12.6 in June, and the measure for Germany dropped to -18.0 from -16.1. Meanwhile, the U.S. job openings probably fell to 6.583 million in May from 6.698 million in April. Resistance level - $1.1789 (high of June 9). Support level - $1.1591 (low of July 2).
The currency pair GBP/USD traded moderately lower, following sharp fluctuations the day before. Yesterday, the pound fell more than 150 points against the U.S. dollar, and reached a low of July 4, hurt by the reports about Boris Johnson's resignation as the U.K. Foreign minister. Pressure on the pound also intensified due to speculation that the Conservative party could secure the backing of enough members to trigger a vote of no-confidence in May’s leadership. However, the pound recovered more than half of the previously lost positions after Conservative MP Jacob Rees Mogg stated that he had not filed a letter of no confidence in prime minister, and that a confidence vote was not “immediately in the offing.” Today, investors will continue to monitor the British political drama and will pay particular attention to the Office for National Statistics’ (ONS) first estimate of monthly GDP growth for May. According to experts, these data will be the last obstacle for the Bank of England (BoE) to raise the rates, since it is expected that economic data in the summer will be quite positive. Resistance level - $1.3363 (high of July 9). Support level - $1.3049 (low of June 28).
The currency pair AUD/USD rose moderately at the beginning of the session on the back of data from Australia and China but then lost all gained positions as the U.S. dollar resumed strengthening. The National Australia Bank (NAB) reported its business confidence index fell by one point to +6 index points in June from a revised +7 last month (originally +6). That was the lowest reading since December 2016 and remained around its long-run average level. A reading above zero signals an improvement in business confidence, and a reading below zero indicates a deterioration. At the same time, the NAB’s business conditions index rose by 1 point to +15 index points in June, after easing in the previous month. Meanwhile, the National Bureau of Statistics (NBS) revealed that China’s producer price index (PPI) rose 4.7 percent y-o-y in June, after gaining 4.1 percent y-o-y in the prior month. That was the highest producer inflation since December of 2017. Economists had expected PPI would increase by 4.5 percent y-o-y in June. At the same time, the consumer price index (CPI) increased 1.9 percent y-o-y in June, following a 1.8 percent y-o-y gain in May. That was the highest rate since March and in line with economists’ expectations. Resistance level - AUD0.7500 (psychological level). Support level - AUD0.7361 (low of July 5).
The currency pair USD/JPY rose solidly, continuing yesterday's rally, and reached its high of May 22, as investors’ risk appetite increased and the demand for the "safe" yen reduced. In addition, the pair’s performance reflected a new wave of the strengthening of the U.S. currency. Gradually, investors’ attention is shifting to the Japanese data on core machinery orders for May, set to be released at 23:50 GMT. According to the forecasts, the orders in May fell by 5.5 percent m-o-m and rose by 8.6 percent y-o-y. Resistance level - Y111.39 (high of May 21). Support level - Y110.27 (low of July 4).
U.S. stock indexes closed solidly higher on Monday, as concerns over escalating trade tensions took a back seat, while focus shifted to the Q2 earnings season, which will unofficially kick off on Friday.
Asian stock indexes closed mostly higher on Tuesday, tracking Wall Street's solid performance overnight. Investors also assessed the inflation data from China, which revealed an acceleration in both consumer and producer prices in June.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 2.86% (0 basis points)
Yields of German 10-year bonds hold at 0.30% (0 basis points)
Yields of UK 10-year gilts hold at 1.26% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in August settled at $74.22 (+0.50%). The crude oil prices rose moderately, on growing concerns about potential supply shortages due to oil workers strike in Norway later in the day. The strike is expected to affect the production of at least one field, adding to disruptions in other oil-producing regions. Market participants are also awaiting data on oil inventories in the U.S. Today, the American Petroleum Institute (API) will publish its weekly data on the U.S. crude oil stockpiles. Tomorrow, the focus will be on official report on crude inventories in the U.S. from the U.S. Energy Information Administration (EIA).
Gold traded at $1,256.40 (-0.49%). Gold prices fell moderately, responding to the resumed growth of the U.S. dollar and abated concerns over the U.S.-China trade dispute. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.12 percent to 94.19. 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)
Total Trade Balance
ZEW Economic Sentiment
ZEW Survey - Economic Sentiment
NIESR GDP Estimate
JOLTs Job Openings
Core Machinery Orders
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