Financial market research and analysis

The trading week started with a strong risk appetite, after the weak jobs report in the US boosted the expectations of a Federal Reserve (Fed) rate cut in July, the Japan’s GDP growth met analyst expectations and the Chinese exports surprisingly rose 1.1% in May despite the escalating trade war. The Chinese trade balance significantly improved from $13.84 to $41.65 billion in May on the back of an unexpected rise in exports and a sharp decline of 8.5% in imports.

Asian equities traded in the green, as the Hang Seng rallied past 2%. Safe haven currencies and gold (-0.92%) cheapened.


Weak NFP figures boosted Fed doves

The US economy added 75’000 non-farm jobs in May, far below the 175’000 expected by analysts and 263’000 printed a month earlier; the average hourly earnings stagnated at 0.2% month-on-month versus 0.3% expected. The soft data came after the Fed Governor Jerome Powell said that the Fed could cut rates, if necessary, to give support to the US economy. Today, the markets clearly believe that a rate cut is necessary; the probability of a July rate cut surged to 80% according to the activity on US sovereign bonds. The US 10-year yield is testing the 2% level for the first time since September 2017.

Hence, bad economic news has been good news for the markets. The S&P500 recorded its best week since November. The S&P500 (+1.05%), the Dow Jones (+1.02%) and Nasdaq’s Composite index (+1.66%) closed higher on Friday; the US equity futures extended gains in Asia.

The US dollar rebounded at the start of the week, after the dollar index tested the 200-day moving average support (96.54) on Friday. The greenback is stronger against its G10 peers on Monday and although the actual sentiment remains negatively biased, a further USD correction is not off the table given that the Fed dovishness will likely mark the beginning of a new low-rate festival for major central banks in the coming quarters.

As such, the European Central Bank (ECB) revised its forward guidance at its monetary meeting last week, saying that it would not raise the interest rates before mid-2020, rather than spring 2020 as discussed in the previous meetings. The EURUSD cleared the down-trending channel top and hit the 200-day moving average (1.1320) on the back of a softer US dollar. Trend and momentum indicators remain comfortably positive for the euro, yet the RSI (64%) hints that the market is approaching the overbought territory and the short positions could soon come back to challenge. The EURUSD could see resistance near 1.1395, the 61.8% retracement on January – May decline.

European markets will be closed on Monday due to bank holiday.


FTSE set for a strong positive open

Across the Channel, the pound remains offered below 1.2751 (minor 23.6% retracement on March – May depreciation) against the US dollar on the back of a hectic political environment after Theresa May’s forced step down. The FTSE is expected to open 30 points higher at 7361p on the back of a softer pound.

The UK has a busy economic calendar on Monday and the market expectations are on the soft side. The UK’s GDP may have contracted by 0.1% month-on-month in April, while the industrial and manufacturing production may have fallen 1.0% and 1.4% on month respectively. The trade deficit, on the other hand, may have improved along with the index of services in April. The data will likely set the mood for the pound markets this Monday. Any disappointment in data could further weigh on Cable, while a positive surprise may not be enough to boost the sentiment among the GBP-bulls and to reverse the negative trend. Cable will remain in the bearish consolidation zone below 1.2872, the major 38.2% retracement.


USDJPY tests the 108-support

In Japan, the Nikkei (+1.09%) and Topix (+1.03%) gained as the first quarter GDP growth improved from 2.1% to 2.2% (annualized) as analysts expected. The Japanese yen was one of the biggest losers against the greenback, as safe haven currencies were exchanged for better-yielding assets.

Data-wise, the preliminary trade data hinted at a 98.2-billion-yen deficit in April, versus 5-billion surplus penciled in by analysts. This being said, the data showed that the deterioration in the current account may be softer, from 2847.9 billion yen to 1707.4 billion versus 1514.5 billion expected, despite the disappointing trade figures. The USDJPY traded near the 108.50 mark in Tokyo. Resistance is eyed at 109.55 (major 38.2% retracement on April – June decline).