The Euro is moving higher against the US Dollar after an extremely negative performance so far in July. The latest move is being prompted by comments from the German Chancellor (Merkel) and the President of France (Hollande), which suggested that the Eurozone is committed to taking measures that will be supportive for the value of the shared currency.
The US Dollar was higher, however, against the Japanese Yen (which equates to a higher EUR/JPY in forex markets) after macro data showed that the US economy grew at a faster rate than analysts had expected. Second quarter GDP numbers out of the US did slow from the first quarter but the surprise was positive enough for investors to move back into the greenback against most of the majors. This move is coming largely as a result of the fact that analysts will now begin to suggest that there are much lower possibilities that the US Federal Reserve will give any suggestion that additional rounds of economic will be stimulated as the group meets at its monetary policy meeting next week.
In Europe, the President of the ECB (Draghi) is scheduled to hold meetings with Bundesbank President (Weidmann) as the region looks to solidify strategy measures relating to possible bond purchases to be made by the ECB. Investors are beginning to watch trading activity in the Euro more closely, as any significant moves will be likely to have an effect on Spain’s ability to attract buyers at its bond auctions (any weakness here would be interpreted as a Euro negative).
Ahead next week, the main event will be the monetary policy meeting from the European Central Bank and any suggestion that the ECB will be unlikely to enact additional bond purchases will be negative for European equity markets. The Euro is higher by 1.2 percent so far this week, which is the biggest rise since the beginning of the year (February), and is currently trading just below 1.24 in the EUR/USD (which equates to a loss of nearly 3 percent for the month of July).
The EUR/USD continues to trend lower in its long term downtrend channel but prices are coming into a rally into resistance in the shorter term time frames. This area was seen at 1.2390 and there was a sharp reversal in that region when looking at the hourlies. Longer term, however, the momentum is unquestionably in the downward direction, so it is likely that we will continue to see rallies met with continued selling pressure. The first sell zone for bears will come in at 1.2460 (assuming we see an initial break of resistance) and stops can be placed above 1.2530. When prices start moving to the downside again, the target becomes a test of previous support at 1.2120 before any real bounces can be expected.
Gold is starting to look constructive once again albeit at lower levels) and a break of resistance at 1630 will confirm this and signal a test of much higher levels. We have not yet broken resistance, however, so any dips at this stage will give traders a new opportunity to enter into long positions. Stops for long trades can be placed below 1520 and this is appropriate for longer term positions with profit targets of 1780 before any major declines can be expected.
Equity markets in Asian are trading higher mid-week as investors continue to speculate on the possibility of additional rate cuts in China. The benchmark stock index in China is now trading at its highest levels in two weeks on the expectation that the Chinese government will be forced to take steps to support economic growth throughout the remainder of the year. With very weak corporate earnings coming from many Chinese companies, the country’s central bank is now finding itself in a position where action needs to be taken to stimulate the economy, according to most analysts.
Two of the best performing sectors could be seen in Insurance companies and auto makers as regional analysts have started to make comments suggesting that the Chinese government plans to take aim at certain industries (particularly health and life insurance), so one of the biggest single stock gainers was seen with China Life Insurance Co. Other central stories came with SAIC Motor Corp. and Petro China Co., which rose on forecasts for increases in lending and the latest rally in Oil, as it now trades at its highest levels in nearly 2 months.
According to Nomura Holdings (a Japanese invest Bank), consumer lending could rise to 1 trillion Yuan this month as lower interest rates stimulate borrowing with banks able to lend money at lower costs. With all of this speculation, the Shanghai Composite Index (SHCOMP) is climbing, now trading above 2,184 which is the highest level since July 6th.
Looking forward, whether or not these rallies can continue will depend heavily on the actions taken at China’s next monetary policy meeting. If the central bank decides to reduce the reserve ratio requirements for private banks (as a means for encouraging corporate lending), the latest market rally could see some extension. This is likely to filter into Asian market as a whole and this is important given the level of the MSCI Asia Pacific Index, which is currently seen at its highest levels of the month. The Shanghai Composite remains at low levels relative to its shorter term averages, now trading 11 percent below the yearly high posted on March 2nd. The Index is now valued at 9.7 times projected profits, which is well below the 17.5 average that has been seen the last half decade.
The USD/JPY is starting to look heavy once again as prices grind through support at 78.60, and an hourly close here will target an additional 100 point drop. We were starting to see a short term uptrend channel but that has since broken and we will need to see a break of 79.90 in order to reverse the bias. Longer term, the sequence of highs is pointing toward additional weakness, so longer term buyers should wait until at least a test of 77.60 before starting to build new long positions.
Oil is starting to rally after its latest drop and prices are now pressuring resistance that is seen at 90.15. This is also where the 100 day moving average starts coming into play, so a break here could be significant. The MACD on the hourlies is starting to cross into positive territory and the sequence of higher lows is suggestive of a major upside break in the coming sessions.
14 Jul 2012
Equity markets reversed losses that were seen earlier in the week on positive stories coming out of China and the US banking sector. The positive banking story came mainly with the stronger earnings results that were posted by JP Morgan Chase (JPM), and this is helping to bring a positive tone to the corporate earnings seasons which is still in its early stages. JPM rose by 6 percent to be the biggest gainer in the Dow Jones Industrials Index after comments from the bank’s CEO suggested that the company is likely to post a record high performance in earnings this year.
This was a surprise to markets, as the main story from the company this year so far has been the $4.4 billion trading loss that was seen during the second quarter. The news helped the banking sector as a whole, with Wells Fargo & Co. seeing a rise of more than 3 percent. Wells Fargo’s earnings performance was also one of the main stories from the sector, as profits rose by 17 percent in the quarter. The S&P 500 rose 1.7 percent on the session and 0.2 percent on the week, to close just below 1360 on Friday.
Prior to the positive news, markets had begun to price in the possibility of the weak corporate earnings season, and the benchmark US equity index had posted declines for 6 consecutive sessions before seeing a reversal. The Dow Jones was also higher, closing just below 12,780 on Friday but the rally is being viewed with some skepticism as trading volumes were seen at roughly 5.5 billion shares, which is nearly 20 percent below the 3 month average.
The story in China was also seen as supportive even though the country posted its lowest GDP growth rate in 3 years during the week. The poor performance, however, is seen as being reason for the country’s central bank to bring further interest rate reductions in order to help stimulate the rate of manufacturing and foreign investment. This speculation is following the latest rate reduction that was seen at the central bank’s previous monetary policy meeting and is in line with the prospects seen for many central banks globally.
The GBP/USD is starting to look heavy despite the earlier bounce off of critical double bottom support at 1.5240. This area is now a triple bottom and is the key area to the downside going forward. The latest daily close is moderately encouraging but we will need to see a break of resistance at 1.5720 before the bias turns to sideways. This area is also where the cluster of moving averages is seen, so prices are likely to have some difficulty grinding through here. With this in mind, expect any significant rallies to be sold into.
The S&P 500 is caught in a symmetrical triangle and this is starting to throw off some of the technical signals that were seen previously. On a shorter term perspective, the index is caught in an uptrend channel, so we will need to see a break and daily close above the daily downtrend line before we can start to view the longer term perspective as bullish.
Stock markets are coming off of their June highs despite interest rate cuts in Europe and China, as employment data out of the US takes most of the attention and focuses investor confidence on the downside. Financials and Industrials were the biggest losers, with the S&P 500 seeing declines of 1.2 percent in holiday-thinned trading volumes. Looking at the S&P as a whole, 8 out of the 10 industry sectors finishing lower on the week. In the Dow Jones, notable drops were seen coming from Bank of America, JP Morgan, and General Electric.
The S&P 500 closed Friday at 1355, which equates to a yearly gain of 7.7 percent with the Dow closing at 12,770 reversing gains made in the previous week. Earlier optimism with regard to the eased requirements for Spain and Italy to receive necessary bailout loans failed to generate much buying activity in stock markets this week.
This was due in part to the Independence day holiday restricting trading activity but this lack of follow through continued into the end of the week when US Non Farm Payrolls show that only 80,000 jobs were created for the month and this was not enough to bring down the elevated employment rate in the country. The US Unemployment Rate held steady at 8.2 percent in June.
Despite the holiday, investors still experienced a very active week as Central Bank responses to the economic weakness came in Europe and China, with the ECB reducing its benchmark interest rate to 0.75 percent (a record low). The ECB President made some relatively pessimistic comments following the rate cut which suggested that the rate reduction might have only a limited impact in propelling the Eurozone economy into recovery. Accommodative monetary policy measures were also enacted in China, where the PBoC lowered interest rates as a means for encouraging manufacturing productivity.
The EUR/USD is resuming its long term downtrend and prices have now broken the previous yearly lows that were seen at 1.2280. We did not see a daily close below this level, however, so there is some warning of a false break looking at the shorter term perspective. Overall, prices remain firmly entrenched in their long term down trend channel so anything resembling a significant rally is expected to meet selling pressure. Wait for some upside correction before getting into new short positions for a year end test of 1.20.
The DAX is rolling over on the shorter term time frames after breaking resistance at the previous 6410 double top. This break propelled prices to a new high at 6640 before buyers began to opt out, so this is the critical resistance area going forward. Prices are now coming into some support, as current levels are equal to the previous double top, but a daily close below 6410 will turn the focus back to a test of 6140. Expect some consolidation in this area though as prices will need to move back through moving averages in order to gain any real momentum.