By Dean Popplewell
It's difficult to get excited about a market after a long weekend, especially one where various asset classes have been on a tear of late. It seems that both Asian and Europe are happy to rely on taking market direction suggestions from North America, who are back to their desks after July 4th celebrations.
Last week saw global bourses advance thanks to better than anticipated economic data that outweighed geopolitical concerns. Positive data from China, Japan and the U.S. especially, relieved investors' worries about growth going forward. This week, there is a change of pace, and finally we are down to the final four in the World Cup.
Industrial output and merchandise trade data for May will dominate the releases in Europe. The Bank of England will hold its monetary policy meeting where investors will be looking for clues to future interest rate policy. It's nearly even odds that Governor Carney will be the first of the major central banks to tighten monetary policy. China will post its June inflation data while Australia's June labor force data will be intently studied to see if there will be any side effects to the crowded "carry" trade - long AUD funded by borrowing EURs.
German Industrial Production Plunges
Despite the forex market feeding off scraps so early this week, euro equities are on the back foot on the hand over to North America. Having gained just under +2% last week, euro bourses have edged lower as weaker than expected German industrial data is encouraging some profit taking. The DAX is down -0.2% after German IP fell -1.8% (seasonally adjusted) in May, the fastest pace in two years, which could suggest that Europe's economic workhorse is struggling to expand in spring after a healthy and relatively robust Q1. Certainly not encouraging is that the April headline was also lowered to a negative print from an initial positive (-0.3% vs. +0.2).
This morning's German data confirms that the economic recovery in the eurozone continues to remain relatively weak and fragile, which is unlikely to prompt many to question the ECB's relatively "dovish" stance. At last week's ECB meet the status quo dominated proceedings with euro policymakers requiring more data points before ever considering a different tact one month after cutting most major rates and promising to implement further credit streams.
Fed's Rate Timetable
The Germans believe that the disappointing IP print is temporary (maybe wishful thinking like beating the host country in Brazil - however, those odds look better). They are suggesting that the decline in output is primarily because of the timing of the first May holiday. Understandably, the single currency is struggling to gain any traction (€1.3590). Compounding the EUR's problems is the dollar's rise late last week against a whole basket of currencies, pushed higher after Thursday's NFP release (+288k seasonally adjusted), and perhaps more important was the US unemployment rate falling to +6.1% in June. This was the lowest level in six-years and has many reassessing and bringing forward the first hike by the Fed (mid-to late 2015). This Wednesday the Fed will publish its FOMC minutes, which could shed some light on timing for a rate rise.
Overall, there is strong evidence that the eurozone's economy has slowed considerably over the last few months, which would suggest that the ECB has still much work to do to tackle the risk of "deflation". Nonetheless, rate divergence is good for forex volatility and opportunity, certainly something that has been amiss since central banks have handcuffed the market with their "lower for longer" interest rate policy.
Gold Bulls Are Back?
The latest data from the CFTC (July 1st) reveals that gold net "longs" have increased to the highest level in seven-months ($1,314). It seems that gold spec positioning may have increased for a third consecutive week last week on a combination of fresh longs and persistent short covering. The yellow metal continues to stand its ground despite the rise of negative factors. Gold has recently climbed +3.3% to a six-week high on geo-political concerns, an accommodating Fed and on unwinding of Chinese commodity financing deals. The dealing desks are suggesting that the speed and magnitude of the build-up of net longs is becoming increasingly worrying. Like any market worries, a negative impact will quickly unnerve the weaker longs. However, the real problem is that the "short" positions are considered to be very light - which would suggest that reestablishing shorts on negative factors could squeeze the left-hand-side, considerably.
Now all we have to do is wait for North America to open!