Financial market research and analysis

Cable surrendered itself to the US dollar during the first two sessions of the week. The GBPUSD remains rangebound between 1.2920 and 1.3124 (major 38.2% retracement on June – July rise / July peak).

The UK’s second quarter preliminary GDP data did little to shake the pound market. The Britain’s economy grew by 0.3% in the second quarter. The expansion in services sector was the main locomotive of the second quarter growth, while the production and the construction were a drag.

The FTSE 100 (+0.50%) is upbeat in London. Homebuilders lead gains, whereas the IT stocks (-1.91%) are again on the chopping block. The UK’s mining stocks (+0.38%) are better bid on jumping copper prices.

Copper futures (4%) rallied to a two-year high as hedge funds boosted their bullish bets on easing worries regarding the Chinese economy. The world’s biggest commodity buyer also announced to ban imports of machinery waste, which would reduce the supply and further support the price recovery.


WTI crude to run into $50 offers

The WTI crude oil pulled out the $48 offers and advanced to $48.60. The daily MACD (Moving Average Convergence Divergence) turned positive, suggesting that the correction could gain further momentum.

The EIA’s weekly data is due today and could reveal a fourth straight week decline in the US oil inventories. Analyst expect 3.3 million barrel contraction in last week’s figures versus -4.7 million printed a week before.

A soft read could give an additional boost to the energy markets, yet the skepticism due to the global supply/demand imbalance will likely wet the short appetite approaching the $50 per barrel.


Will the Fed announce a portfolio normalisation start date?

The Federal Reserve (Fed) will deliver its policy verdict today and is expected to maintain the interest rates unchanged. Markets are fixated to details regarding the Fed’s balance sheet normalisation plans. Majority of investors consented that September would be a suitable time for the Fed to start unwinding its portfolio by letting assets mature without rolling them over. The latter option would allow the Fed to gradually reduce the size of its $4.47 billion balance sheet and would be equal to an approximately 25 basis points tightening on rates.

According to FOMC Chair Janet Yellen, the 75 basis point interest rate hike since December has not resulted in the anticipated effect on rates. Therefore, the Fed could still proceed with a final rate hike before the end of this year. The probability of a December hike stands at 45.4%.

The Fed risks are two-sided.


US stocks' one directional move

The US dollar is better bid on unexpectedly higher consumer confidence in May and two times stronger-than-expected Richmond manufacturing index.

The US 10-year yield bounced higher to 2.32% as capital left the sovereign bonds and flew into the stock markets. The S&P500 traded at a fresh all-time high of $2’481.24 in New York; the Dow Jones consolidated near its record high level.

The strong second quarter earnings explain a part of the bull market. So far, 143 of the S&P500 companies announced their 2Q results and the earnings were 5.33% better-than-expected. All sectors outperformed estimates, except oil and gas companies.

Yet on the other hand, the US political environment raises doubts on Trump administration’s ability to concretize the ‘phenomenal’ fiscal reforms, another major explanatory factor when it comes to the rally across the US stock markets. The fading hope in Trump policies could ease the hawkish pressures on the Fed and allow the Fed to adopt a relatively softer tone regarding its monetary policy.

If this is the case, how would the stocks react?

Based on our observation posterior to the hectic market behaviour following Donald Trump’s election as President of the US, both a dovish and a hawkish Fed could give a boost to the current stock rally.

A dovish Fed would suggest a prolonged period of cheap borrowing rates and encourage new buyers to join the market.

A hawkish Fed would direct the attention towards Donald Trump’s fiscal reforms and keep the appetite intact across the US stock markets regardless of how hard they seem to be achieved.

So far, there has been no plausible explanation regarding why the Trump-induced reflation and de-reflation environment caused a similar bullish reaction in the US stocks. Interestingly, the bearish scenario has been fully omitted since the election of the drama-full President Donald Trump. On top, investors do not appear to be hedging against the risk of an eventual unwind. The VIX index fell to 9.04% this week, the lowest levels on the record.


Gold softens on higher US yields

Gold cleared support near its 100-day moving average ($1’247).

The Fed decision should give a better swing to the yellow metal. A positive breakout above $1’260 (major 61.8% retrace on June – July decline) could underpin a further rise toward $1’275 (minor 76.4% retrace). A negative breakout below $1’240 (major 38.2% retrace) could develop into a deeper negative move and target $1’230 (200-day moving average).


AUD pulled lower by inflation, RBA Lowe

The AUDUSD edged lower on softer than expected second quarter inflation read. Australia’s headline inflation retreated to 1.9% year-on-year from 2.1% printed a quarter earlier and less than 2.2% expected by analysts.

A hawkish Fed environment could give a plausible foundation for the retracement of the July rally, even more so after the Reserve Bank of Australia (RBA) Governor Philip Lowe repeated that it would be ‘better if the AUD is a bit lower’. Support to the July bullish formation is seen at 0.7890 (minor 23.6% retrace on July rise) and 0.7830 (major 38.2% retrace).


USDJPY on the brink of bullish reversal

The USDJPY rebounded to 112.09 in Tokyo. In an effort to avoid confusion, the Bank of Japan (BoJ) members reiterated that it may be too early to debate over the stimulus exit plans.

The divergence between the Fed and the BoJ remains supportive of a further USDJPY recovery, regardless of how hawkish or dovish the Fed sounds at this week’s meeting. Price pullbacks could be an opportunity for dip-buyers to strengthen their position.

Surpassing the 112.10 (major 38.2% retracement on July decline) would indicate a short-term bullish reversal and could encourage a further rise to 112.82 (200-day moving average) and 113.01 (major 61.8% retrace).