Summary:

• Non-Voting Fed member issues market warning
• “I think you have to respect the signalling… of the yield curve”
• US 10-year yield hits 2 week low

There’s been some noteworthy comments from James Bullard on CNBC today, with the non-voting member of the Fed essentially saying that investors and traders shouldn’t ignore what the yield curve is saying. Bullard said that changes in the bond market are the main focus point for investors at the moment, and that they should specifically looking at the gradient and be wary of a possible inversion in the not too distant future. An inversion of the yield curve has previously pre-empted economic recessions and is currently not too far from displaying this phenomenon.

 The US 10-year yield has been falling in recent sessions, as shown by the TNOTE which looks set to post its 3rd consecutive day of gains. Price could be set to test the prior breakout level around 119.95. Source: xStation

“I think the state of affairs is good for today, the question is how to play things going forward over the next two years. If the Fed raises rates 50 basis points and the 10-year (Treasury bond) does not cooperate, you could see an inverted yield curve in the U.S.,” Bullard told CBNC’s “Squawk Box Europe” Monday.

 Given the previous strong correlation between the TNOTE and USDIDX, any further gains for the TNOTE could start to cap the upside for the USD. Note USDIDX axis is inverted. Source: xStation

The reason why an inverted yield curve is in keeping with a forthcoming recession is what it tells us intuitively from an economic standpoint. Short term rates are typically sensitive to monetary policy, while further out along the curve (10-year plus) is seen as more of a reflection of the long-term prospects for the economy. If the Fed continue to hike rates, then there’s a good chance that near term yields will continue to rise, but unless future economic prospects are deemed to also increase, then the further dated bonds won’t move – and this can lead to an inversion. When the economy is performing well (EG 2006) then it is common for the Fed to hike rates, and there becomes a point when future expectations for the economy are so high (as they arguably are at present) that there’s a high bar for them to be raised further. 

 TNOTE and Gold have also exhibited a correlation previously and the recent gains in the former could be seen to support the latter. Note that the drop in the Tnote which began in April led Gold lower in the months that followed (and the USD higher). Source: xStation

 

 

Summary:

• US indices at similar levels to Friday’s close
• Goldman increases buyback estimates
• Buffet indicator flashing potentially big warning sign

US stock markets are expected to begin their session around where they ended on Friday with the US500 hovering around 2840 ahead of the open. The European morning has brought some interesting moves in stocks with a sharp move higher in the DE30 which saw the index soar almost 200 points in less than 2 hours on no real positive news. The rally has since reversed in large part, and the move now looks like a typical summer push that occurs on low traded volumes and was likely exacerbated by algos. 

 

 The DE30 rallied sharply higher from around 12530 to 12710 in less than 2 hours on no real news this morning. This move has since faded and price fallen back lower. Source: xStation

Returning our attention to the US and an interesting chart from Goldman Sachs, shows that the bank have increased their estimate of 2018 stock buybacks to a record $1.0T. Stock buybacks have no doubt played a key role in some of the latest moves higher, with Apple probably the most obvious example. As you can see from the chart below the forecasted buybacks this year are the highest on record and look set to eclipse those seen in 2007. Large amounts of buybacks can be seen as a contrarian signal, with 2007 obviously just preceding the global financial crisis.  

 Goldman expected a record amount of stock buybacks from US firms this year, eclipsing the 2007 record. This could be seen as a positive, with it clearly representing buying pressure for stocks, but on the other hand it may be viewed as a contrarian signal. Note that 2007 preceded the large stock market drop due to the global financial crisis. Source: Birinyi Associates, Goldman Sachs Global Investment Research. 

Another indicator, that is a long time favourite of legendary investor Warren Buffet, is unambiguous in its latest signal – suggesting that stocks are clearly overvalued. The rate of the Wilshire 5000 to GDP has been so regularly quoted by Buffet that some have chosen to name the indicator after him. The indicator attempts to correlate the relationship between all US stocks and the country’s GDP, with the view being that extreme readings should mean revert towards 100%. The previous highest reading of 136.9% came back in 200 at the height of the .com bubble but as of today, the reading is above that level at 138.0%. Now, while this is obviously taking a very long term approach and therefore shouldn’t be used to think stock will drop imminently, it does indicate just how expensive stocks are at present.   

 The ratio of US stocks to GDP is close to its highest ever level and could be seen to suggest that they are expensive. Source: Advisor Perspectives

 US500 remains not far from its record high at 2880. Possible resistance may be found at recent highs around 2848. As long as the market remains above the breakout level around 2790-2795 then the outlook remains favourable for longs. Source: xStation

Summary:

• European equities push higher at the beginning of the new trading week

• A crypto-related company has been listed on the LSE

• USD shines while GBP deepens decline

• A stream of data from the Chinese economy scheduled for this week

As it is usual the case on Mondays the economic calendar is empty. However, we will get some crucial readings from the Chinese economy this week therefore we encourage you to take a look at our weekly calendar review that is available here. Equities from the Western Europe trade generally higher but weakness can be spotted on the Italian and Spanish stock markets. The US dollar and the Swiss franc are advancing against other majors while the British pound is deepening its decline being the worst performing G10 currency. On the commodity front we are observing declines among precious metals amid strengthening of the US currency. Apart from that, oil trades noticeably higher, just as heating oil. Investors should be aware that trading on the CAD tied FX pairs may be a bit more sluggish today as the Canadian investors are taking a day off for the Civic holiday.

At the beginning of July we have pointed that the declines on the oil market are probably just temporary and will lead to WTI testing $65 handle. Key technical levels have not been disturbed and prices have begun to increase once again. Nevertheless, we are encountering range trading that reflects the uncertainty concerning the future of the market.

Let’s move to London where the first crypto company has gone public on the London Stock Exchange. The firm is called Argo Blockchain, and it has raised £25 million through an IPO. The company’s IPO unveiled an overwhelming interest in firms connected to the digital assets as it has raised around a quarter more than it initially planned.

While data flowing from the European economy begin showing some worrisome signals, there are more and more ECB policymakers opting for rate rises. Over the weekend we had a speech from Lautenschlaeger who backed gradual interest rate rises. Although, she said that she is very much in favour of normalising monetary policy, she notice that it would be wrong to rise borrowing costs too quickly.

Over the weekend we were also offered some interesting tweets from the US President Donald Trump. In these tweets he hailed effects of implemented tariffs saying that they “have had a tremendous positive impact on our steel industry” adding that they “are working far better than anyone ever anticipated”.

 

Summary:

• The first mining company went public on the London Stock Exchange

• Jimmy Wales, the founder of Wikipedia, criticizes cryptocurrencies

• Bitcoin (BITCOIN on xStation5) has broken below the $7000 handle

The cryptocurrency market starts the week quite calmly. Over the weekend major virtual currencies were trading mixed. However, we are observing some weakness on Monday morning. The capitalization of the cryptocurrency market sits a notch below the $260 billion mark while the Bitcoin market capitalization stands above $120 billion. Today’s major topics concern the first crypto-related firm’s IPO in the UK and the founder of Wikipedia’s remarks on virtual assets.

Firstly, let’s mention New York Stock Exchange owner’s plan. On Friday, Intercontinental Exchange (ICE), the mentioned NYSE’s parent company, announced its plans to launch a virtual assets platform. Apart from that, ICE also plans to list a physically-settled Bitcoin futures contracts. 

BITCOIN has broken below the $7000 handle, and now, it is trading in the vicinity of this level. The most popular cryptocurrency experienced the significant drop over the week as Bitcoin moved from around $8000 to below $7000. Source: xStation5

RIPPLE struggles to deep below the support zone around $0.425 mark with the 33-period moving average on the H4 interval (a purple line on the chart) seeming to limit potential upside. Last week, the cryptocurrency was trying to break below the mentioned area, but it failed to do so. Source: xStation5

Let’s move to London as the first crypto company has  gone public on the London Stock Exchange. The firm is called Argo Mining, and it has raised £25 million through an IPO. The company’s IPO unveiled an overwhelming interest in firms connected to the digital assets as it has raised around a quarter more than it initially planned . Moreover, reports say that more crypto companies are interested in going public therefore we may see some more news of this kind in the upcoming future.

ETHEREUM has struggled for direction following heavy losses accounted in the previous week. The virtual currency tradess a notch above $400 at press time. This level partially coincides with the late-June’s low. Will bears have enough power to break below this technical hurdle? Source: xStation5

LITECOIN has trade mixed over the weekend. The digital currency has suffered greatly on Saturday, but managed to recoup some losses on Sunday. The coin is testing the $73 handle at press time. Source: xStation5

Wikipedia probably will not be involved in cryptocurrencies or IPO. Jimmy Wales, the founder of Wikipedia, ruled out such an eventuality in interview with Business Insider. The platform has zero interest in cryptocurrencies or ICOs. What’s more, Wales said that blockchain is “super-interesting, but it is a bubble with a lot of mania and hype around this technology”. This is not the first Wikipedia founder’s statement criticizing cryptocurrencies. Nevertheless, Wikipedia has been accepting bitcoin donations for nearly four years.

 

Summary:

• Chinese data are among the most important ones to watch this week
• Canadian investors await the jobs report
• US CPI for July is the most crucial print for the dollar and US indices

Donald Trump made sure that investors do not forget about Trade Wars. His initiative to consider higher tariffs on the Chinese imports scared traders as it shows he could go far to fight for trade concessions. As data from China start deteriorating, investors could ask themselves: are we on a verge of a global slowdown?

Data from China: trade (Wednesday), inflation (Thursday), new loans (Friday): Is China a risk for the global markets again? A present depreciation of the yuan is different from that of 2015 that led to “August shock” on the markets but there are warning signs. All 4 PMIs deteriorated in July – the last such situation occurred in April 2017. The biggest bombshell (of 25% tariffs on $200 billion of imports) may still be ahead so traders will investigate if there is already a damage to the economy.

CPI inflation in the US (Friday, 1:30 pm BST): Inflation in the US increased to a 6-year high of 2.9% in June but that could have been a peak – at least for some time. Oil prices stabilized, the dollar gained and higher base effects could start taking inflation to lower levels. That will not deter the Fed from increasing rates again in September but at least could be an argument that this USD-positive story has been already consumed by the markets.

The NFP report in Canada (Friday, 1:30 pm BST): The US NFP report is already behind us but for the CAD traders emotions will run high this Friday too as the Canadian report is about to be released. Strong labour market, rising wages and higher inflation prompted the Bank of Canada to follow the Fed on the path of higher interest rates and a solid report would fit that trend.

The EURAUD has declined to the notable support which could lead to a pullback. Source: xStation5

Summary:

• Saudi Arabia informs that it is going to freeze all trade and investment ties with Canada
• Donald Trump hails tariffs’ effects, China’s state media says it will not accept the US trade blackmail
• US dollar slightly higher, Asian stocks mixed as a new week gets started

The Canadian dollar is delicately poised this morning as investors are digesting the news concerning a trade and investment relationship between Saudi Arabia and Canada. The former country has said that it is freezing all trade and investment ties with Canada in retaliation for its “interference” in the Gulf Kingdom’s internal affairs. This response came after Canada had said that it was “gravely concerned” about the arrest of several human rights activists. The country also urged the Saudi authorities to immediately release them. In response to this the Saudi Arabian foreign ministry said it “will not accept any form of interfering” in its internal affairs. As a result it presented some steps it has undertaken including freeze of all new trade and investment transactions between countries, a consideration of ordering the Canadian ambassador to leave within 24 hours, recalling the Saudi envoy in Canada. In addition to these, the country said it reserved the right to take further action if needed.

So far the USDCAD has not responded too sharply and it’s basically trading a bit lower due to the widespread USD strength. Technically one may identify a local short-term resistance at around 1.3075 which could prevent bulls from pushing higher. Source: xStation5

Over the weekend we were also offered some interesting tweets from the US President Donald Trump. In these tweets he hailed effects of implemented tariffs saying that they “have had a tremendous positive impact on our steel industry” adding that they “are working far better than anyone ever anticipated”. He also added that thanks to tariffs the US will be able to start paying down large amounts of the $21 trillion debt. Taking into account that borrowing needs of the world’s largest economy will be rising due to tax cuts (the Treasury already announced larger bond issuances in the third quarter) one may arrive at a conclusion that the US could be unlikely to back down. In turn, a Chinese state media said over the weekend that its country would not accept the US blackmail therefore resorting to threatening would not bear fruit.

In a series of tweets Trump hailed tariffs’ effects on the US steel industry. Source: Twitter

In the morning we cant notice that the US dollar is gaining clearly the most with the euro trading close to 1.1550 – well below its lower bound of the last range of 1.1590/1.1750. Notice that this strength came following the July’s jobs report which produced another solid numbers when it comes employment. On the other hand, the report did not bring any shocking numbers in terms of wage growth with annual dynamic hovering far below 3%. As far as Asian stocks are concerned one may see a mixed picture with the Shanghai Composite falling 0.9% and the Hang Seng rising 0.2% as of 7:52 am BST.

The US dollar index is trying to break its crucial resistance, but it may find it hard to do durably. Notice that it already had several failed attempts to move through 95 but none of them succeeded. Source: xStation5

Summary:

• ISM non-manufacturing PMI 55.7 vs 58.6
• Kudlow: “China shouldn’t underestimate Trump on trade”
• US stocks remains near their highs

The final data release of the week has shown another lower than expected reading for the US with the ISM non-manufacturing PMI missing forecasts. A print of 55.7 was well below the 58.6 consensus forecast and marks a substantial decline from the 59.1 seen last time out. The reading is the lowest since August last year and while it is still a long way above the 50 level, it is clearly a disappointment. 

 

 This week’s ISM releases have been disappointing with both the manufacturing and non-manufacturing showing pretty sizable drops. Source: XTB Macrobond

Perhaps of greater concern is that today’s release supports the manufacturing equivalent that we saw on Wednesday in missing forecasts. The ISM manufacturing wasn’t as sharp a decline, but still a chart of their past prints does appear indicate that these metrics may be topping out. 

 The US100 is back around the 61.8% fib after making a strong push to the upside once the 38.2% fib at 7304 was broken with conviction yesterday. Source: xStation

Yesterday marked a pretty strong recovery in US stocks, with the tech heavy US100 leading the move higher. Apple added to its recent gains during Thursday’s session, making a new all time high and in reaching 207 the stock became the first ever to reach the $1T market cap level. The US500 and US100 are both near their highest levels of the week and bulls will be hoping that they can get another push higher going into the weekend.  

Summary:

• Non-farm employment change: 157k vs 191k exp; prior 248k (up from 213k)
• Average earnings M/M: +0.3% vs 0.3% exp; prior 0.1% (down from 0.2%)
• Gold bounces from prior support; Stocks and USD mixed

The US jobs report for July has come in a little softer than expected, but the edge was taken off the bad news due to some favourable revisions to the previous release. Let’s look at the numbers now in more detail. The headline non-farm employment change fell to 157k from 248k previously, with this prior reading being revised higher from 213k originally. Against the expected 191k, this print does seem low, but once the revision is taken into account it is actually pretty much inline. 

 

 An NFP print of 157k is the 2nd lowest of the year, but given the revision higher to the prior reading it isn’t as negative as it first appears. Source: Bloomberg

The headline attracts plenty of attention but the most important component of the release for some time has been wages, and here there wasn’t too much by the way of any surprises. The M/M reading matched forecasts at +0.3% with the prior reading being revised lower to +0.1% from +0.2% previously. In Y/Y terms it came in bang inline with projections at 2.7%. The reason why this is seen as carrying a higher level of importance is because with the labour market relatively tight (the unemployment rate today fell lower to 3.9%) a rise in wages is seen as potentially correlating more closely with higher inflation. Having said that, there still remains a bit of a gap between these two metrics as shown below. 

 Wages continue to run a fair bit above inflation as measured by CPI, but there were no upside shocks today. Source: XTB Macrobond

At the same time as the employment data was released there was also the latest trade figures from the US. The Trade balance came in a little higher than expected (-46.3B vs -46.5B exp), but still showed a fall from the prior of -43.1B. Trade remains on the radar of traders at the moment with news that China will levy fresh tariffs on US imports hitting the wires just a few minutes before the NFP release. 

 US trade balance fell lower in June, with this metric dropping back lower after rising recently. Source: XTB Macrobond

 In terms of market reaction to this batch of data, it remains a little unclear with the USD first dropping and then recouping some of those losses. Gold has moved up to its highest level of the day at 1214 after earlier respecting the prior support around the 1205 region. Stocks have pulled back a little with the major US indices moving higher ahead of the release on news that PBOC had raised their reserve requirement, before they reversed on the NFP miss and the latest tariff news. 

 Gold has respected the prior lows around 1205 and is now retesting the 1216 level that it broke down from, from below. Source: xStation

Summary:

• AUD surges on the back of good retail sales report

• European equities try to recover after yesterday’s sell-off

• NFP report in the spotlight

The first half of the European trading session can be named upbeat as we have witnessed gains across major stock indices from the region. Swedish and Italian stocks outperform other companies from the Old Continent while Portuguese and Russian shares post minor declines. On the FX market we are observing stellar performance of AUD as it was boosted by the strong retail sales report. On the other hand, USD is trading lower against all the other majors after PBoC decided to increase reserve requirements for FX forwards. Commodities trade broadly higher on the back of the greenback weakening. Industrial metals, especially zinc and copper, can be named the top performing commodity group. Investors stay focused and await the release of the NFP report (1:30 pm BST).

The Friday’s trading on cryptocurrencies has not been rosy so far as a majority of them is extending losses. Ethereum is fluctuating a notch above the key $400 level whereas Bitcoin has broken below $7300 for a while. The capitalization of the whole market stands above the $260 billion mark while the Bitcoin market cap sits a notch below $130 billion.

The pound was bruised on Thursday despite the interest rate hike delivered by the Bank of England as well as the widespread strength of the US dollar. After taking in a double whammy yesterday the British currency was hit again on Friday following the unexpectedly substantial decrease in services PMI.

The exceptionally hot summer season is rising concerns among European farmers, especially in Northern Europe. Due to drought the crops on the Old Continent are expected to be lowest in at least five years. To ease the pain of the region’s farmers European Union decided to relax some environmental rules in 8 countries two weeks ago.

The last trading day in Europe is beginning with the continued strength of the greenback, albeit taking into account the employment report scheduled for the afternoon one may suppose that USD bulls might decide to cash in on their recent positions at least to some extent.

 

The US dollar slumped across the board following the news that the Chinese central bank would increase a reserve requirement for trading foreign currency forwards to 20% from 0%. The move is aimed at helping the China’s currency erase some of its losses, and may also help equity markets. The decision will come into effect on 6 August. The bank has also pledged to keep the currency stable taking counter-cyclical measures. Let us notice that the PBoC decided to remove a reserve requirement in September last year when the yuan was strengthening substantially against the US dollar. The higher reserve requirement the smaller incentive to buy the US dollar in forward transactions.

The US dollar slumps across the board following the PBoC’s announcement. Source: xStation5