Global Markets Mixed Over Conflicting Signals Over the US-China Saga
At around midday in Europe, European equity markets and futures of US indices rallied after US President Trump said that he will enhance the authority of the Committee on Foreign Investment in the United States (CFIUS) with a new legislation in Congress, in order to prevent acquisition of sensitive American technologies, a move that was interpreted as a softer approach than imposing investment restrictions specifically to China.
Speaking to CNBC, US Treasury Secretary Steven Mnuchin said, “We’re going to treat China the way we’re going to treat other people, and to the extent that we’re worried about transactions, we will block them”. “But we are not going to, on a wholesale basis, discriminate against China as part of a negotiation”, he added.
Having said all these though, and although European indices ended their sessions in positive territory, US indices came under selling interest and closed the day in the red after White House economic advisor Larry Kudlow said that the decision does not represent a softer approach against China. Both the S&P 500 and the Dow Jones ended their trading 0.86% and 0.67% down respectivly, while Nasdaq 100, which largely consists of tech firms, dropped around 1.4%.
As for our view, we expect the markets to stay very responsive to developments regarding the global trade arena. Any headlines suggesting further escalation are likely to trigger risk-off reactions, with investors seeking shelter to safe havens, and riskier assets coming under pressure, while any news that the tensions are easing are likely to provide periods of some calmness and thereby result in the opposite market reactions. Gold is likely to continue being the exception, as it has taken the down road recently, even in periods of heightened fears, not honoring its safe-haven status.
DJIA – Technical Outlook
Following an attempt to make its way higher after the US opening bell, the buying was short-lived, and the index bowed to the bears at the end of the trading day. But this is no surprise, considering the fact that Dow has been on a slide down from the 12th of June already. Yesterday’s down-day just confirms that the index is weak. But one bright spot is that the Dow Jones is still above the mid-term upwards moving trendline, drawn from the low of the 6th of February, which could slow down the selling.
For now, we remain sceptical of a possible short-term trend reversal back to the upside, as the bears continue dictating the way. The DJIA found support yesterday at around 24080 mark, which acted as strong support on Monday as well. If the bears will be strong enough to break that barrier, then this could lead the index towards the next good area of support at 23850, which sits on the aforementioned upwards moving trendline. The trendline could act as an important zone, which could stall the DJIA for a while, until the bulls and the bears battle it out over the future direction of the index.
On the upside, a move back higher and a close above the 200 EMA could give hope for the bulls that not all is lost. A break above the 24400 level could open the path towards the 24600 area again. If the bulls decide to continue pushing higher, the last-mentioned area could be seen as a good barrier to overcome, if the bulls really want to take that driver’s seat and aim for higher levels again. The other strong area of support could be the 24855 zone.
RBNZ Keeps Rates on Hold; Appears Concerned on Global and Domestic Outlooks
Overnight, the Reserve Bank of New Zealand decided to keep interest rates at +1.75% as was widely anticipated. However, the statement accompanying the decision was slightly more dovish than the previous one.
In the statement, Governor Adrian Orr said that officials remain well positioned to manage rate changes “in either direction – up or down – as necessary”. In our view, this is more or less a reiteration that interest rates could equally move up or down and keeps the prospect of a rate cut on the table. That said, the Bank appeared somewhat more concerned with regards to the global and domestic outlooks. With regards to the global outlook, the Governor noted that it “has been tempered slightly by trade tensions in some major economies”, while as far as the domestic economy is concerned, he noted that “the recent weaker GDP outturn implies marginally more spare capacity in the economy than we anticipated.”
The New Zealand dollar dropped slightly at the time of the decision but recovered the lost ground and gained even more within the following minutes. It came under pressure again a couple of hours thereafter to finish the Asian session on the back foot against its US counterpart. In our view, NZD/USD is likely to continue drifting lower in the foreseeable future. On the one hand we have the RBNZ which keeps the door open for a rate cut if necessary, while it anticipates to begin raising rates in September 2019, and, on the other hand, we have the Fed signaling that it could hike two more times this year and three times in 2019. What’s more, bearing in mind the commodity-export-oriented economy of New Zealand, global trade tensions are likely to keep weighing on the Kiwi.
NZD/USD – Technical Outlook
Looking at the short-term picture, NZD/USD is still trading below its downside resistance line drawn from the 13th of April. The pair is currently testing the important area of support at around 0.6780, marked by the low of the 17th of November last year and the 2nd of June 2016. The sentiment is more to the downside and we could eventually see another slide lower.
As mentioned above, the 0.6780 is a very strong level of support, which if clearly broken could send NZD/USD to the lows that were last seen in the beginning of 2016. The next potential support zone to watch could be the area between 0.6705 and 0.6675. The latter is marked by the lows of 30th of May 2016. If the area is not able to withhold the rate from dropping lower, then we could aim for the 0.6575 level, which was the low of the 16th of March 2016.
That said, there is a possibility of a bounce before the pair reverses back down again. The first area of resistance to watch out for is the 0.6825 level. If this is not enough for NZD/USD, then it could go about 25 pips higher to reach the other good resistance hurdle at 0.6850, from which the pair could reverse back down.
The RSI is currently at the 24 mark and continues to point lower. Similar story with the MACD, where the indicator has moved well below the zero barrier without showing any signs for a potential reversal for now. It also continues to lie below its trigger line. At this point, both are pointing to some more weakness.
Alternatively, a break above the previously mentioned 0.6850 resistance level could interest some bulls to take NZD/USD a bit higher towards the 0.6920 zone. A break of that zone could push the pair slightly more to the upside to test the 0.6955 mark or even the aforementioned downside resistance line.
EU Leaders Summit Begins; Focus Falls on Migration
As for today, the EU leaders’ two-day summit begins. Following the clash over migration between German Chancellor Angela Merkel and Horst Seehofer, her Minister of the Interior and also the leader of CSU, one of her coalition partners, the topic is likely to take center stage at this summit.
Seehofer wants to turn back migrants who seek asylum in Germany and who have already registered in other EU nations. On the other hand, Merkel wants the matter to be solved on a European level and hopes that this summit will result a concrete solution. With her partner parties losing patience, a failure for Leaders to find common ground could intensify the standoff in Germany and could put Merkel’s position as Chancellor into more danger.
The meeting also comes after US President Trump’s threat to impose 20% tariffs on EU cars, with the EU saying that they will hit back if the threat materializes. Thus, trade is likely to take a spot at the top of the agenda as well, with headlines having the potential to well impact the broader market sentiment.
With regards to Brexit, there is little expected from this summit. As other matters demand their attention, leaders may devote less time on Brexit this time.
As for the Rest of Today’s Events
During the European morning, we have Germany’s preliminary CPI data for June. Expectations are for inflation in Eurozone’s economic powerhouse to have slowed somewhat. Specifically, both the CPI and HICP rates are forecast to have ticked down to +2.1% yoy from +2.2% in May. Something like that could raise speculation that Eurozone’s headline inflation, due out on Friday, may move in a similar manner.
Later in the day, from the US, we get final GDP data for Q1. Expectations are for the final print to confirm the second estimate and show that the US economy grew +2.2% qoq SAAR in the first three months of 2018. However, even if we get a minor deviation from the 2nd estimate, we don’t expect a major market reaction. We are approaching the end of the 2nd quarter and thus, market participants are now likely to be more eager to find out how the economy performed during this quarter. There are models already hinting at how the economy performed in Q2. The Atlanta Fed GDPNow Model suggests that the economy accelerated to 4.7% qoq SAAR, while the New York Fed Nowcast points to a 2.9% qoq SAAR growth rate.
Tonight, during the Asian morning Friday, we get Japan’s Tokyo CPIs for June. Both the headline and core rates are expected to have ticked up to +0.5% yoy and +0.6% yoy, from +0.4% and +0.5% in May respectively. The nation’s unemployment rate and preliminary industrial production, both for May are also coming out.
As for the speakers, we have three on the agenda: BoE Chief Economist Andy Haldane, St. Luis Fed President James Bullard, and Atlanta Fed President Raphael Bostic.
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