So, what do we know?
(A forex, index, and commodity market review)
A tough week for equity markets, especially in Europe with the FTSE100 breaking through the 7430 support and the German Dax registering its biggest fall last week since mid-March. Non-farm employment change was not as bad as some feared following the very strong ADP reading mid-week.
Weekly change (amount change and percentage change on the week)
European and UK stock markets closed the week out with significant losses. The FTSE100 which has several unloved stocks and sectors fell 3.65%, marking its worst since Mid-March when the regional banking crisis was hitting global markets. Meanwhile the FTSE250, more representative of UK Plc, fell to levels last seen at the end of October 2022 as the prospect of even higher interest rates takes its toll. Forward interest rate contracts imply interest rates will hit 6.5% by next March, which would be the highest interest rate in the UK since 1998. Contrast this with the view just 4 months ago when interest rates were expected to peak at 4.7% by year end and start to decline in Q1 next year. This rapid change in expectations reflects the ongoing battle that the Bank of England has with core inflation which is affecting the UK more than any other western developed economy. The Bank of England raised rates by 0.5% to 5% at its last meeting as core inflation increased to 7.1% in May, higher than the market was expecting, and the highest core inflation reading since March 1992.
US markets were braced for a strong non-Farm employment reading last Friday, following the very strong Non-farm reading from ADP last Wednesday. The actual NFP reading was not as strong as some feared with a total number of new jobs at 209K, and the previous month’s data revised lower by 110K jobs. A slight spoiler was the average earnings which came in at +0.4% versus +0.3% which puts annual wage inflation at 4.4% rather than 4.2% expected.
A large number of new jobs created would almost certainly have been received badly – implying the Fed would have to raise rates at least twice by year end. However, that was not the case, and the initial reaction was take the broad market higher as the report indicated a slowdown in the jobs market, but analysts still expect the FED to raise rates in July with the probability of a further 0.25% hike by December still at around 35% probability.
The USD was overstretched coming into the key Non-farm employment data last Friday. Despite little movement on forward interest rate expectations, the US Dollar fell on the employment data as traders unwound some of their more aggressive US Dollar longs. The US Dollar’s fortunes depend on what action the Fed might take at the end of the month and what action other central banks are likely considering as well. One of the main reasons why sterling has gained ground versus both the US Dollar and especially versus the Euro over the past two months,
Gold +5 +0.26%
UK OIL +3.09 +4.12%
US OIL +3.21 +4.56%
Gold remains trapped below $2,000 per ounce with retail investors nursing losses following some central banks desire to de-dollarise the global economy. That story has run its path and now Gold is at the mercy of the US Dollar’s fortunes.
Oil markets were strong last week, following OPEC’s month policy meeting. Despite hedge funds giving up on higher prices, the oil market touched a six-week high on tighter supplies. We have the Opec and IEA monthly oil market reports out this week which will help inform opinions.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
Another important week for Fed watchers with US CPI inflation data out midweek. We also have inflation data from China and key employment data out of the UK and the Bank of Canada and RBNZ policy meetings.
We also have Q2 results from the big US banks where analysts are keen to understand the extent of their commercial loan losses. According to the FT, banks are expected to set aside $7.6 Bln to cover bad and doubtful commercial loans. IU expect that figure will increase over the coming months as property companies co9nti9nue to suffer from reduced office space demand.
China Inflation . Data released overnight Sunday. Lower CPI with an uptick in PPI which could imply inflationary pressure building. Little reaction in the markets.
UK Andrew Bailey speaking at the Financial and Professional Services Dinner at the Mansion House.
UK Claimant count. Unemployment data and average hourly earnings. Cracking? GBP & UK assets sensitive.
Germany ZEW Economic Sentiment. Index based on surveyed German institutional investors and analysts. Still expected to remain negative. Euro sensitive.
New Zealand RBNZ rate decision. No change expected. NZD sensitive.
UK Andrew Bailey speaking again. Press conference about the Financial Stability Report
US US CPI Inflation report. Key report of the week. Expect headline at 3.1% but focus will be on Core reading. Expected at +0.3% m/m which equates to 5% from 5.3% reported for May last month. USD all US assets.
Canada BoC monthly policy meeting. Expect a hike in rates by 0.25% to 5%. CAD sensitive. The last meeting the BoC surprised which affected US and global markets as investors fretted about still more rate rises to come.
UK GDP – Monthly reading for May. Backward looking.
US PPI. Producer price Index – Core PPI expected at +0.2% as the costs of goods and services going into production follows CPI lower, which bodes well for future inflationary pressures. USD may be sensitive if the number is higher than expected.
US Prelim University of Michigan Consumer Sentiment. A modest improvement in consumer sentiment over the past 6 months. Slight improvement from June’s reading. 65.5 expected. US assets sensitive.
What should we be trading?
(Analysis of the popular markets and what we like)
In this week’s market review, Adrian takes us through some of the latest trades on the Forex, Index and Commodity markets including 3 fascinating charts which are showing the starting warning signs of a major trend reversal.
What’s the problem?
(Examining a problem many traders face and what to do about it)
In this week’s problem, we look at correlation risk. Whilst we might trade different currency pairs, there is an element of correlation in all that we trade. The questions are, how does that correlation work, what are the risks and what can you do about it. We will tackle this in today’s Podcast.