So, what do we know?
(A forex, index, and commodity market review)
Developed world stock markets were mixed last week, ahead of the key rate decision in the US, with one notable exception. The UK markets had their best week for many months as the office for national statistics finally reported better than expected inflation data last Wednesday. The reaction was immediate as traders pared back their expectations where interest would peak. As a result, the FTSE100 had its best week since the last week in October and FTSE250 its best weekly performance since early January.
Forex markets reversed previous US Dollar losses as traders prepare for three central bank policy meetings this week.
Weekly change (amount change and percentage change on the week)
The FTSE100 index climbed over 3% which its best performance for many months, reacting to the better-than-expected inflation data. The inflation data beat consensus on both the headline, 7.9% versus 8.2% consensus, and core reading at 6.9% versus 7.1%. The previous four monthly readings were worse than consensus, resulting in traders pricing in rate rises to as high as 6.25%.
The below consensus reading last week resulted in a reduction in forecasted peak UK rates to just below 6% in Q1 next year. The softer inflation reading also tilted the odds in favour of a 0.25% hike in rates in early Augusts whereas the odds favoured a half point rise in rates before the inflation data release.
Interest rate sensitive stocks such as UK property and house building stocks were the biggest beneficiaries with Persimmon rallying 8.3% and Barratt 7%. Big property heavyweights such as Land Securities rallied 7.6% whilst Segro tacked on 7%.
Whilst the fall in inflation is still worryingly high, economists now believe that the UK is falling more in line with other developed economies whose inflation rates have fallen steadily for the past few months. The yield on the sensitive two-year Gilt fell sharply to 4.94%, well below the previous week’s level of 5.26%. Over the weekend some lenders responded by lowering their 2- and 5-year fixed rated mortgages.
US markets were less exciting with indices pausing ahead of the next rate decision from the Federal Reserve due this week. Quarterly earnings data from Tesla and Netflix resulted in a sell-off in both stocks last Thursday.
The world’s largest chip maker TMSC, based in Taiwan, warned of a deepening semiconductor downturn that also weighed on stocks. Traders were also cautious ahead of more key tech-heavyweight earnings data due out this with week with Meta, Alphabet, and Microsoft all releasing.
The US dollar recovered much of the lost ground from the previous week as Sterling and the Japanese Yen gave back all their gains from the previous week.
Sterling, as discussed, reacted to the better-than-expected headline and core inflation readings as traders pared back rate expectations. Traders now expect the BoE to raise rates by 0.25% at their next meeting in early August.
Speculation mounted over the past 2 weeks that the BoJ would tilt away from the ultra-loose monetary policy but comments from the BoJ governor quashed those rumours. Governor Ueda repeated his view that there is still some distance to achieve the 2% inflation target sustainably and stably, signalling the bank’s determination to maintain the ultra-loose policy for now. The move in the Yen reflected the repositioning of bets by traders on an imminent shift in policy which is clearly not on the cards for the near future.
Gold +6 +0.31%
UK OIL +1.21 +1.52%
US OIL +1.76 +2.34%
Gold and oil markets were lacklustre ahead of the Federal Reserve monetary policy meeting this week, with trader anticipating a hike of 0.25%. The guidance and the dot plot results will help inform traders and investors about the likelihood of any further rate rises by year end. Currently the forward rate prices suggest that the Federal Reserve will maintain rates at the new level following this week’s rate decision. The outcome of this meeting will be keenly anticipated as traders will have to wait until 20th September when the rate setting meet again – as usual there is no meeting in August.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
A very busy calendar of events this week with three key central bank policy decisions and Q2 quarterly earnings from 3 of the big tech-heavy stocks that are in the main, responsible for much of the 32% of gains the NASDAQ racked up in the first half of this year.
Spain Result of closely fought general election. May herald the formation of a coalition involving the far-right VOX party but the Conservative People’s party failed to get the backing needed. Spain will now have to wait and see which parties could form a coalition government. This looks very uncertain with the most likely outcome, another election in a few months’ time.
UK, Eurozone & US Flash Manufacturing, and services PMI data. Still no recovery in manufacturing in both Eurozone and the US whilst service sector also remaining unchanged below the 50-level indicating contraction in services as well. UK service sector remains the standout at 53, if that’s where the data is reported, above that important 50 level. Relative assets in each zone sensitive to these releases.
Germany German IFO business Climate Survey. Survey of manufacturers, builders, wholesalers, services, and retailers. Well respected because of its large sample size. Confidence has been waning since a peak in April. Euro sensitive.
US Conference Board Consumer Confidence. Another modest pickup to 112.1 as interest rate and inflation expectations moderate. US assets sensitive.
US FOMC interest rate decision. Expect 0.25% hike to 5.25%-5.5% band. Another key policy decision that will set the tone for the summer recess. Guidance and what the Fed dot plot implies will either confirm or not what traders hope will be the last rate rise this year. Press conference could be lively 30 mins after the rate announcement. US assets and US Dollar plus global assets all extremely sensitive to this release.
Eurozone Interest rate policy decision from the ECB. The ECB remains tilted to the hawkish side with traders and investors expecting at least two further hikes of 0.25% this year and no planned cuts. For 2024 expectations are for rates to be cut by three 0.25% cuts to 3.75% by end of 2024.
ECB expected to raise Refi rate by 0.25% to 4.25% from 4%. Euro and Eurozone assets and global assets sensitive to this data release.
Japan Bank of Japan monetary policy meeting. Despite headline inflation hitting 3.3% last month, the BoJ is expected to stick to their ultra-loose monetary policy. Speculation had mounted a week ago that the BoJ would shift its policy, but traders have reversed bets on such a scenario. Despite this, there is a chance the BoJ could surprise. JPY, JGBs and Japanese assets very sensitive to this outcome.
Q2 earnings reports
Tuesday Alphabet, Microsoft
What should we be trading?
(Analysis of the popular markets and what we like) With July providing some excellent trades for the Trendsignal Plus programme, this week, we take a look at the trades identified for the past week and how they have progressed. A definite far-eastern bias, with several JPY forex pairs and the Japan and Hong Kong stock indices featuring. Overall, a 6.2% profit from the trades reviewed.
What’s the problem?
(Examining a problem many traders face and what to do about it) In this week’s problem, we look at how new traders often stick with the same Stake per pip regardless of their stop loss distance. We will review some examples of this and what it can mean.