Financial market research and analysis

The services sector expanded faster in July according to Chinese official PMI data. Hang Seng equities rallied 1.75%, Tokyo and Topix gained 0.68% and 0.69% respectively. Nevertheless, the appetite remained limited in the FX markets as deflation in Japan deepened in June. The consumer prices ex-fresh food in Japan fell 0.5% year-on-year, despite the negative interest rate policy (NIRP) in place since the beginning of the year. It is a certainty that the market does not react to the Bank of Japan’s ultra-expansionist monetary policy. This being said, the rising expectations of further monetary stimulus should sustain the USDJPY for a rise towards the 105 mark. Of course, the trend in USDJPY is also contingent on the evolution of the US dollar. The focus will shift to the US next week, with the FOMC meeting minutes and the US jobs data on traders’ agenda. The market gives less than a 10% probability for the Federal Reserve (Fed) to hike the interest rate this year. The softening in the US dollar is of course an unfortunate caveat for the yen bears. Japan’s opposition chief called Abenomics a ‘wasted opportunity’ as the BoJ couldn’t surf on ‘favourable’ market conditions to boost inflation. Nowadays, the environment is clearly more challenging. The yen strengthened 0.48% against the US dollar, gold added 0.80%.

The pound is downbeat as the Bank of England (BoE) Governor Mark Carney said that a looser monetary policy could be necessary to prevent the UK from slipping into recession. Given the low inflation environment in the UK, the BoE could lower the interest rates to fresh historical lows. UK investors could now be prepared for a soft landing towards the zero per cent level. Nevertheless, inflation should be monitored carefully as the sharp depreciation in the pound following the ‘Leave’ vote could cause certain acceleration in consumer prices. The recent activity in the Gilts market suggests a considerable 85% chance for the BoE to cut the bank rate by November. The GBPUSD traded in the tight range of 1.3262 – 1.3350 in Asia. Stops are presumed below 1.33. Large option expiries trail below the 1.33 strike for today’s expiry. On the euro leg, support at 0.82/0.80 is light given the little appetite in the euro.

The FTSE opened on a positive note in London. The UK’s 100 leading stocks hit a 10-month high, all sectors gained at the open. Financials (+1.27%) lead gains on encouraging news that Barclays will stay in the UK despite the Brexit. HSBC (+1.21%), Lloyds (+3.22%), Barclays (+2.53%), Standard Chartered (+2.29%).

BP (+0.50) and Royal Dutch Shell (+0.39%) as WTI is gaining strength to take over the $50.