weekly outlook jul 06 2015

Weekly Outlook

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6th July 2015 by Richard Perry, Market Analyst

Macro Commentary

This week the markets will still be feeling the legacy of the disappointing Non-farm Payrolls report. The fact that earnings

growth was flat for the month (meaning year-on-year data was once more around the 2.0% mark) will not have been lost

on the FOMC. This is a blow to the hawks that have been pushing for a rate hike in September and possibly even a second

in December. Going into the payrolls report, the market was around 50/50 on a rate hike by December (according to the

Fed Funds interest rate futures). This has now been pushed out with just a 47% chance. This means that it will more than

likely be into 2016 for the first rate hike. Furthermore, the market is now only pricing a 12% chance of a rate hike by

September. However, markets are rather volatile around these data points and there is a tendency to over-react. I still

have an expectation that the Fed will hike in December. There are plenty of reasons for the Fed not to hike in September,

first of all the lack of clarity over the impact of Greece on the Eurozone and potential contagion, the lack of wage growth,

and also the dovish tendency of the composition of Yellen and the FOMC. However I also think the committee will take a

view towards the end of the year that indicators may never be perfect and that it may be a case of its now or never.

WHEN: Wed, 8th July, 1900BST

LAST: n/a

FORECAST: n/a

Impact: Deciphering the timing of the Fed rate

hike is going to be a favourite game of speculators

in the second half of the year. In her meeting press

conference, Fed chair Yellen suggested the

committee remained dependent on the economic

data, but the minutes will add more meat to the

bones. This comes especially as members continue

to provide comments that suggest a hawkish tilt,

even though the “dot plot” suggests otherwise.

The US dollar will be reactive to the minutes with

any hawkish hints providing support. Treasuries

will also react, whilst Wall Street is still taking

hawkishness as a negative recently.

Must watch for: FOMC meeting minutes

Key Economic Releases

Date Time Country Indicator Consensus Last

Mon 6th Jul 15:00 US ISM Non-Manufacturing PMI 56.3 55.7

Tue 7th Jul 05:30 Australia RBA Monetary Policy + statement 2.00% 2.00%

Tue 7th Jul 13:30 US Trade Balance -$42.3bn -$40.9bn

Tue 7th Jul 15:00 US JOLTS job openings 5.35m 5.38m

Wed 8th Jul 13:15 UK Annual Budget n/a n/a

Wed 8th Jul 15:30 US Crude Oil inventories 2.4m

Wed 8th Jul 19:00 US FOMC meeting minutes n/a n/a

Thu 9th Jul 13:30 Australia Unemployment 6.1% 6.0%

Thu 9th Jul 12:00 UK BoE Monetary Policy 0.50% 0.50%

Fri 10th Jul 09:30 Canada Unemployment 6.8% 6.8%

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1

US 10 year Treasury yield

N.B. Please note all times are BST (GMT+1), data source Reuters

Weekly Outlook 6th July 2015

by Richard Perry, Market Analyst

Foreign Exchange

Volatility around the dollar remains elevated due to the data dependent FOMC (not to mention Greece). However the

fallout from the last week’s disappointing Non-farm Payrolls report is yet to be fully played out due to the Independence

Day holiday last Friday. The dollar has been strengthening since the latest Fed meeting in mid-June however, the Payrolls

data seriously questions the viability of a September rate hike. However, quite how much weighting the market gives the

report remains to be seen, but we will find out this week with further key data points in the form of ISM Non-

manufacturing ad the Fed minutes. The stronger dollar has really impacted across the forex majors, with both the Aussie

and Kiwi continuing to suffer at multi-year lows, a corrective outlook on Cable, whilst consolidation resistances have

been breached on Dollar/CAD and Dollar/Swiss. The pivot level around $1.1050 against the euro remains a key

near/medium term barometer. The Greek referendum “No” victory has heightened volatility early on Monday but

nothing too significant yet, although the dust is yet to properly settle.

WATCH FOR: The dollar could receive a further boost on Monday if ISM Non-manufacturing is strong,

whilst the minutes of the FOMC meeting will be key as well. The breakdown on the Aussie suggests the

market is looking for a dovish RBA on Tuesday, whilst the Bank of England is likely to again stand pat.

EUR/USD

Watch for: The pivot level around $1.1050

remains key this week

Outlook: Aside from day to day volatility,

the euro has actually been holding up

remarkably well considering the uncertainty

surrounding the Greek referendum. The

pivot level around $1.1050 remains the key

medium term gauge of sentiment for me as

the momentum indicators have drifted back

but for now suggest the euro remains

rangebound (albeit near term corrective).

Preventing a retest of the range low this

week is support at $1.0820, with resistance

at $1.1280 holding back the bulls.

AUD/USD

Watch for: Closing below $0.7530 has ended

the consolidation range and opens downside

Outlook: For several months the Aussie has

been trading in a broad sideways range

above the key April low at $0.7530. However

on Friday on the announcement of weaker

than expected retail sales and an apparent

slowdown in the Chinese services sector, the

Aussie broke sharply below the key technical

support to take it to levels not seen since

May 2009. There is little major support now

until $0.7265 and with the momentum

indicators showing further downside

potential rallies will now be seen as a chance

to sell.


FX Outlook

2



Indices

The Greek referendum result has heightened near term volatility, but it is interesting how the major global indices are

reacting around their key support levels, which are being tested and breached. The rally days are just not cutting the

mustard as the bears are increasingly in control and the outlook is under pressure. However, Alcoa announces Q2 results

on 8th July which unofficially kicks off earnings season for Wall Street and this could be crucial for equity markets. For

weeks, with little real domestic news to drive sentiment, the headlines have been filled with negativity surrounding

Greece and investors have subsequently taken a glass half empty view on the market. However, this week marks what

could be a significant change of emphasis for Wall Street. The US still needs to see proper earnings growth to catch up

with the valuation expansion. With recent economic data from the US suggesting a rebound in Q2, traders will want to

see evidence of this through earnings growth. Failure to do so could result in a continuation of the negative sentiment for

equities. Once any volatility surrounding the reaction to the Greek referendum subsides, the disappointing Non-farm

Payrolls report could give Wall Street a boost as it pushes back expectations of a rate hike. The FTSE 100 may begin to

focus more on Wall Street once more too, whilst the Eurozone indices remain driven by Greek developments near term.

WATCH FOR: Early selling pressure from the Greek referendum result but the ISM Non-manufacturing and

Fed minutes will also drive sentiment. Earnings season also unofficially begins with Alcoa on Wednesday

DAX Xetra

Watch for: The support at 10,800 remains

important

Outlook: Despite talk of opening several

percentage points lower in the wake of the

Greek referendum “No” result, the support

at 10,800 has remained intact. This remains

a key level technically being the June lows

and around the 38.2% Fibonacci level of the

big 8355/12339 bull run. Technically the

momentum indicators are corrective but not

excessively bearish and this does not point

towards imminent downside threat. A close

below 10,800 would be a key near/medium

term signal.

FTSE 100

Watch for: A close below 6520 would open

further downside

Outlook: With the rally falling over around

6650 last week, the breakdown of the key

support below 6700 was confirmed as FTSE

100 trades at a 6 month low. This makes the

outlook on the FTSE far more corrective

than other major indices such as the S&P

500 and even the DAX. The outlook for the

momentum indicators also suggests further

downside pressure is likely and that rallies

are now being sold into. The next key level

of support comes in around 6300.


INDEX Outlook

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Other Assets: Commodities & Bonds

The gold price may be volatile on a near term basis around the Greece uncertainty, however, since the middle of June,

the traditional negative correlation to the US dollar is back in play. The same can be said of the relationship between the

dollar and silver (but less so of platinum). With key dollar driving data (ISM Non-manufacturing and FOMC meeting

minutes) this week, this negative correlation between the precious metals is likely to continue. The oil price has also

begun to suffer as the dollar has strengthened, but also on news of a 2.4m barrel inventory build and a surprise increase

in the Baker Hughes US oil rig count (by 12 rigs to 640). The key range low at $56.50 is breaking down on WTI now.

The yield spread between core/peripheral Eurozone sovereign debt has been a key indicator of the market’s perception

of the risk of contagion during the Greek “crisis”. The spread of Spanish (denoting the periphery) over German (core) 10

year has been gradually increasing for the past few months and a pivot around 1.40% seems to be an interesting gauge

now. A move back above 1.4% today in the wake of the referendum result suggests the contagion fear is elevated.

WATCH FOR: ISM Non-Manufacturing and FOMC minutes to drive dollar positioning and the negative

correlation with precious metals but also increasingly the oil price.

Gold

Watch for: Continued downside pressure

for a decline towards $1143 support

Outlook: Selling into strength on gold

continues to be a profitable strategy. The

near term rebounds have been unable to

find enough buyers to support and the

subsequent result has been continued

dips to lower levels to breach the range

lows. Ultimately gold is likely to retreat

for a test of the March low at $1143 but it

will not be a clean move. Timing is

everything with this gold chart with the

key resistances coming in at $1186 and

$1205.

WTI Oil

Watch for: A closing break below $56.50

implies $54.24 will be tested this week

Outlook: WTI oil has been in a sideways

consolidation since late April however, with

the worst weekly decline since mid–March

(when the bear market was still going) the

negative pressure is ramping up once more.

Technical indicators are increasingly calling

for further weakness and theoretically a

closing break below the range support at

$56.50 implies a target of around $49.50.

The initial support of the neckline of the old

base pattern at $54.24 is first on the

horizon, but the outlook now seems to be

deteriorating.


COMMODITIES & BONDS Outlook

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weekly outlook jul 06 2015

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