Financial market research and analysis

Nothing much happened on Monday, except from the US imposing further sanctions on Iran, including the country’s supreme leader Ayatollah in what is seen as a ‘symbolic’ and even a ‘provocative’ action.

So, in one hand, we have the developing Iran story that moves the oil and gold markets. On the other hand, we have the Chinese trade war story, that weighs on the global growth expectations ahead of this week’s G20 summit in Osaka.

The US equities came off their all-time highs on Monday. The S&P500 eased 0.17%, Nasdaq’s Composite fell 0.32%, while the Dow closed flat. Energy stocks slid in New York and in Sydney, as oil bounced lower from three-week highs.

WTI crude is offered near the $58 a barrel, Brent consolidates around the $65 handle.

The US dollar index tanked to a three-month low, as the US 10-year yield remained a touch higher than the 2% mark.

As Iran worries are topped by the endless trade dispute between the US and China, it looks like only the Federal Reserve (Fed) Chair Jerome Powell’s speech could dissipate the negative market vibes this Tuesday. Powell is due to speak at the Council of Foreign Relations in New York, though he may not say much on top of what we already heard at last week’s FOMC meeting.

Stocks in the UK could lose the support of the energy stocks at the open, but gold mining stocks may be exempt of an eventual downside correction. Fresnillo shares tested the 900p handle on Monday. The persistently rising gold prices combined to the positive momentum could encourage a further recovery toward 940p, the February support.

The FTSE futures (-0.20%) hint at a softer start in London. The FTSE 100 is expected to open 21 points lower at 7395p. The market could run into stops below the 7400p mark and the stronger pound could call for a deeper downside correction.


Equities price in a slim US-China deal

The equity markets already price in a slim chance for a sudden resolution of trade tensions between the US and China at this week’s G20 meeting. Both Chinese and US officials give little signs of compromise to find a common ground to move forward. As such, a no-deal will likely see limited negative kneejerk reaction from equity traders, but any positive step could revive the bulls.

It goes without saying that the longer-term bearings of an escalating trade war will likely be felt increasingly on the global economy. Given the tiny hope on the geopolitical scene, investors now turn to the Fed. A more accommodative monetary policy could help them go through the hard times. Once again, the markets need an antidepressant move from the Fed to relieve the pain. The probability of a July rate cut stands at a solid 100%, according to the activity in the US sovereign bond markets. An overall dose of 50-to-75 basis point cut within the next nine-to-twelve months is what the market demands from the Fed.

The question is, what happens if the Fed delivers what the market expects. How reasonable is lowering interest rates in fury while the stock prices ramble at their all-time highs? History witnesses that sky is the limit for stock prices. If more cash is being pumped in, there is no reason to think further: the additional cash will somehow flow into the stock markets and push the asset prices higher.

But for now, money continues pouring into gold. An ounce of the precious metal is exchanged near $1425, the highest levels since 2013. The relative strength index (87%) points at a nearly saturated market, but investors are reluctant to move their capital elsewhere in the middle of a worsening US-Iran thunderstorm and ahead of the G20 summit.

Now, because the US’ geopolitical affairs is a global headache, everyone pays the price. The German IFO survey showed deterioration in business expectations in June and the preliminary data should hint at a stagnant, or even softer inflation in Eurozone’s growth engine this month. Inopportunely, the worsening climate within the Eurozone doesn’t even translate into a softer euro, as the debasement in the US dollar is far heavier. The European Central Bank’s (ECB) Draghi cannot rely on a weaker euro to lift the inflation expectations, because the single currency strengthens against the US dollar. The EURUSD trades past 1.1400 for the first time in three months and the 200-day moving average (1.1348) will likely give support to any short-term corrections. As a result, we will certainly hear more about the ECB’s intention of lowering its interest rates. Even then, the ECB has narrower maneuver margin compared to the Fed. The ECB’s deposit facility rate is already at -0.40%. The probability of a 10-basis-point cut in October is seen past 80% and is already factored in the euro’s value.