Fundamental Analysis. 16 August 2018

I. Market focus

The U.S.-China trade tension has returned into the focus of markets. This time, however, the reports on this issue are encouraging. At the beginning of Thursday’s session, the main topic in the financial markets was the news that the Chinese delegation headed by Vice Minister of Commerce Wang Shouwen would visit the United States in late August. The U.S. representatives will be led by Under Secretary of Treasury for International Affairs David Malpass. Major currency pairs that involve the U.S. dollar reacted to this announcement with noticeable declines in the U.S. currency. The dollar rose only against the yen, due to a decrease in the demand for the safe-haven assets. Meanwhile, the stock market’s reaction was limited enough. A moderate response of the markets to the reports about a new round of the talks between the U.S. and China reflects the skepticism about the possible improvement of trade relations between the two countries. The representatives of the U.S. and China held the similar meeting in May, but all the agreements reached during this meeting were leveled by the actions of U.S. President Donald Trump, which led to an aggravation of the trade war. Nevertheless, the desire for dialogue is a good signal, so it is likely that optimistic sentiment in the markets will predominate in the markets during today's session.

The main macroeconomic report of the morning session was the statistics on the Australian labor market. The report was mixed: the unemployment rate was better than expected, while the number of employed persons missed forecast. But the weakening of the U.S. dollar and the focus on unemployment figures had a positive influence on the Australian dollar.

The UK’s retail sales data (08:30 GMT) will be the next important release, which can cause strong movements in the foreign exchange market. In the second half of the day, investors will receive the U.S. housing market data (housing starts and building permits, 12:30 GMT). At the end of the day, attention should be paid to the New Zealand statistics on the producer price index (22:45 GMT) and comments of the Reserve Bank of Australia (RBA) governor Philip Lowe (23:30 GMT).


II. The market highlights are:

  • The Federal Reserve reported on Wednesday that the U.S. industrial production edged up 0.1 percent m-o-m in July after a revised 1.0 percent m-o-m increase in June (originally a gain of 0.6 percent m-o-m). Economists had forecast industrial production would rise 0.3 percent m-o-m in July. According to the report, manufacturing output rose 0.3 percent m-o-m in July, while mining production fell 0.3 percent m-o-m, and the output of utilities reduced 0.5 percent m-o-m. Capacity utilization for the industrial sector was unchanged m-o-m in July at 78.1 percent. That was 0.1 percentage point below economists’ forecast and 1.7 percentage points below its long-run (1972–2017) average. In y-o-y terms, the industrial production surged 4.2 percent in July, following a revised 4.0 percent increase in the prior month (originally a 3.8 percent advance). That was the strongest annual gain in industrial production since February 2012.

  • The Commerce Department announced on Wednesday that sales at U.S. retailers rose 0.5 percent m-o-m in July after a revised 0.2 percent m-o-m gain in June (originally a 0.5 percent m-o-m advance). Economists had expected total sales would increase 0.1 percent m-o-m in July. The July advance was mainly attributable to the higher purchases of motor vehicles and clothing. Excluding auto, retail sales rose 0.6 percent m-o-m after a downwardly revised 0.2 percent m-o-m increase in the previous month (originally a 0.4 percent m-o-m advance), beating economists’ forecast for a 0.3 percent m-o-m gain. Meanwhile, closely watched core retail sales, which exclude automobiles, gasoline, building materials and food services, and are used in GDP calculations, advanced 0.5 percent last month, following a downwardly revised 0.1 percent m-o-m drop in June (originally a flat m-o-m performance).  In y-o-y terms, the U.S. retail sales climbed 6.4 percent in July, accelerating growth pace from June’s revised increase of 6.1 percent (originally a 6.6 percent surge).

  • Another report from the Commerce Department revealed that business inventories rose 0.1 percent m-o-m in June, following a downwardly revised 0.3 percent m-o-m gain in May (originally a 0.4 percent m-o-m advance). That was in line with economists’ forecast. According to the report, manufacturing, retail, and wholesale inventories all edged up by 0.1 percent m-o-m in June. Motor vehicle inventories went down 0.1 percent m-o-m in June, while retail inventories excluding autos, used in the calculation of GDP, rose 0.2 percent m-o-m.

  • The National Association of Homebuilders (NAHB) reported on Wednesday its housing market index (HMI) dropped one point to 67 in August. That was in-line with economists’ expectations. A reading over 50 indicates more builders view conditions as good than poor. All three HMI components were lower this month. The indicator measuring buyer traffic dropped two points to 49, while the current sales measure inched down one point to 74 and the index charting expectations in the next six months fell a single point to 72. NAHB Chairman Randy Noel said that “The good news is that builders continue to report strong demand for new housing, fueled by steady job and income growth along with rising household formations. However, they are increasingly focused on growing affordability concerns, stemming from rising construction costs, shortages of skilled labor and a dearth of buildable lots.” At the same time, NAHB Chief Economist Robert Dietz noted that “The solid economic expansion and firm job market should spur demand for new single-family homes in the months ahead. Meanwhile, builders continue to monitor how tariffs and the growing threat of a trade war are affecting key building material prices, including lumber.”

  • The U.S. Energy Information Administration (EIA) revealed on Wednesday that crude inventories rose by 6.805 million barrels in the week ended August 10. Economists had forecast a decrease of 2.499 million barrels. That was the largest build since March of 2017. At the same time, gasoline stocks increased by 3.566 million barrels last week, while analysts had expected a gain of 1.000 million barrels. Distillate stocks fell by 0.740 million barrels, while analysts had forecast a drop of 0.250 million barrels. Meanwhile, oil production in the U.S. rose to 10.900 million barrels per day from 10.800 million barrels per day in the previous week. U.S. crude oil imports averaged 7.9 million barrels per day last week, up by 182,000 barrels per day from the previous week.

  • The Ministry of Finance of Japan announced on Wednesday that the country’s trade balance came in at a deficit of a JPY231 bln in July, compared to an unrevised surplus of JPY721 billion in June and a surplus of JPY407 billion in July of 2017. Economists had projected a JPY50 billion gap for July. The report showed Japan’s imports rose much more than exports. Imports surged 14.6 percent y-o-y in July, following a 2.5 percent y-o-y increase in the prior month. Meanwhile, exports rose 3.9 percent y-o-y last month after a climb of 6.7 percent y-o-y in June.

  • The Australian Bureau of Statistics (ABS) reported on Thursday that the country’s seasonally adjusted unemployment rate decreased to 5.3 percent in July from 5.4 percent in May. That was the lowest jobless rate since November 2012. Economists had expected Australia’s unemployment rate to stay at 5.4 percent in July. According to the report, the seasonally adjusted labour force participation rate dropped to 65.5 percent in July from 65.7 percent in the prior month, while the number of unemployed persons decreased by 5,700 to 706,000. In the meantime, employment fell by 3,900 to 12,575,200 in July versus economists’ expectations of a gain of 15,000 following an advance of 58,300 jobs in the prior month (revised down from originally announced gain of 50,900).


III. Market Situation
Currency Market
The currency pair EUR/USD rose moderately, approaching the psychological level of $1.1400, due to the downward correction in the U.S. currency after the recent rally. In addition, the euro was supported by reports Qatar pledged to invest $15 billion in Turkey. The single currency saw pressure earlier this week due to contagion fear from Turkey's financial crisis. Today, investors will continue to monitor the situation in Turkey, as well as will pay attention to the U.S. housing market data for July. Resistance level - $1.1433 (high of August 13). Support level - $1.1291 (low of June 28, 2017).

The currency pair GBP/USD traded higher, near the peak of the previous session. The pair’s performance was supported by the broad weakness in the U.S. currency and a revival in investor risk appetite. However, the pound's growth was limited by worries that Britain's economic performance could deteriorate after Brexit. Market participants are also preparing for the release of the UK’s data on retail sales. According to economists’ forecasts,  retail sales rose 0.2 percent m-o-m and 3.0 percent y-o-y in July. In June, retail sales fell by 0.5 percent m-o-m but increased 2.9 percent y-o-y. Resistance level - $1.2827 (high of August 14). Support level - $1.2652 (low of June 22, 2017).

The currency pair AUD/USD rose significantly, hitting the high of  August 14, helped by the weakening of the U.S. dollar and Australia’s labor market data. The Australian Bureau of Statistics (ABS) reported that the country’s seasonally adjusted unemployment rate decreased to 5.3 percent in July from 5.4 percent in May. That was the lowest jobless rate since November 2012. Economists had expected Australia’s unemployment rate to stay at 5.4 percent in July. According to the report, the seasonally adjusted labour force participation rate dropped to 65.5 percent in July from 65.7 percent in the prior month, while the number of unemployed persons decreased by 5,700 to 706,000. In the meantime, employment fell by 3,900 to 12,575,200 in July versus economists’ expectations of a gain of 15,000 following an advance of 58,300 jobs in the prior month (revised down from originally announced gain of 50,900). Resistance level - AUD0.7453 (high of August 9). Support level - AUD0.7202 (low of August 15).

The currency pair USD/JPY demonstrated a moderate increase, due to lower demand for safe-haven assets. The pair’s performance was also impacted by Japan’s trade data. The Ministry of Finance of Japan announced that the country’s trade balance came in at a deficit of a JPY231 bln in July, compared to an unrevised surplus of JPY721 billion in June and a surplus of JPY407 billion in July of 2017. Economists had projected a JPY50 billion gap for July. The report showed Japan’s imports rose much more than exports. Imports surged 14.6 percent y-o-y in July, following a 2.5 percent y-o-y increase in the prior month. Meanwhile, exports rose 3.9 percent y-o-y last month after a climb of 6.7 percent y-o-y in June. Resistance level - Y111.43 (high of August 15). Support level - Y110.10 (low of August 13).

Stock Market

Index

Value

Change

S&P

2,818.37

-0.76%

Dow

25,162.41

-0.54%

NASDAQ

7,774.12

-1.23%

Nikkei

22,192.04

-0.05%

Hang Seng

27,049.35

-1.00%

Shanghai

2,705.97

-0.63%

S&P/ASX

6,328.30

-0.01%


U.S. stock indexes closed lower on Wednesday, as investors assessed the impact of Turkey's financial crisis as well as the escalating tensions between the U.S. and its trading partners. The focus also was on a big batch of economic data. The Federal Reserve reported on Wednesday that the U.S. industrial production edged up 0.1 percent m-o-m in July after a revised 1.0 percent m-o-m increase in June (originally a gain of 0.6 percent m-o-m). Economists had forecast industrial production would rise 0.3 percent m-o-m in July. In y-o-y terms, the industrial production surged 4.2 percent in July, following a revised 4.0 percent increase in the prior month (originally a 3.8 percent advance). That was the strongest annual gain in industrial production since February 2012. Meanwhile, the Commerce Department announced that sales at U.S. retailers rose 0.5 percent m-o-m in July after a revised 0.2 percent m-o-m gain in June (originally a 0.5 percent m-o-m advance). Economists had expected total sales would increase 0.1 percent m-o-m in July. The July advance was mainly attributable to the higher purchases of motor vehicles and clothing. In y-o-y terms, the U.S. retail sales climbed 6.4 percent in July, accelerating growth pace from June’s revised increase of 6.1 percent (originally a 6.6 percent surge). Another report from the Commerce Department revealed that business inventories rose 0.1 percent m-o-m in June, following a downwardly revised 0.3 percent m-o-m gain in May (originally a 0.4 percent m-o-m advance). That was in line with economists’ forecast. The National Association of Homebuilders (NAHB) reported its housing market index (HMI) dropped one point to 67 in August. That was in-line with economists’ expectations. A reading over 50 indicates more builders view conditions as good than poor.

Asian stock indexes closed lower on Thursday, tracking Wall Street's overnight drop and amid lingering concerns of a financial crisis in Turkey and fears of an economic slowdown in China. The declines, however, were limited by the reports the next round of trade talks between China and the U.S. would be held in late August, which renewed hopes for a de-escalation of trade tensions. The Japanese market was flat, despite the fact the yen weakened somewhat against the U.S. dollar. Investors also assessed Japan’s trade data for July, which were worse than expected.

European stock indexes are expected to trade mixed in the morning trading session.


Bond Market
Yields of US 10-year notes hold at 2.88% (+2 basis points)
Yields of German 10-year bonds hold at 0.31% (0 basis points)
Yields of UK 10-year gilts hold at 1.23% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in September settled at $65.19 (+0.28%). The crude oil prices rose moderately, correcting after the previous day’s drop, which was triggered by the latest data from the U.S. Energy Information Administration (EIA). The oil prices were also supported by the weakness in the U.S. currency. The EIA reported yesterday that crude inventories rose by 6.805 million barrels in the week ended August 10. Economists had forecast a decrease of 2.499 million barrels. That was the largest build since March of 2017. At the same time, gasoline stocks increased by 3.566 million barrels last week, while analysts had expected a gain of 1.000 million barrels. Distillate stocks fell by 0.740 million barrels, while analysts had forecast a drop of 0.250 million barrels. Meanwhile, oil production in the U.S. rose to 10.900 million barrels per day from 10.800 million barrels per day in the previous week. U.S. crude oil imports averaged 7.9 million barrels per day last week, up by 182,000 barrels per day from the previous week.

Gold traded at $1,176.50 (+0.05%). Gold prices rose slightly on the back of a partial profit-taking and the resumed weakening of the U.S. currency. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell 0.25 percent to 96.45. Since gold prices are tied to the dollar, a weaker dollar makes the precious metal cheaper for holders of foreign currencies.

IV. The most important scheduled events (time GMT 0)


08:30

United Kingdom

Retail Sales

09:00

Eurozone

Trade balance unadjusted

12:30

Canada

Manufacturing Shipments

12:30

U.S.

Continuing Jobless Claims

12:30

U.S.

Philadelphia Fed Manufacturing Survey

12:30

U.S.

Initial Jobless Claims

12:30

U.S.

Building Permits

12:30

U.S.

Housing Starts

22:45

New Zealand

PPI Output

22:45

New Zealand

PPI Input

23:30

Australia

RBA's Governor Philip Lowe Speaks


16 August 2018
Market Focus
  • The number of job openings was little changed at 6.7 million on the last business day of June
  • UK house prices in the three months to July increased by 3.3% against the same period a year earlier
  • German industrial production declined more then expected in June
  • The average of household spending in Japan was down 1.2 percent on year
Quotes
Symbol Bid Ask Time
EURUSD
GBPUSD
XAUUSD
USDCHF
AUDUSD
NZDUSD
USDCAD
USDJPY
XAGUSD
XAGEUR

All posted material is a marketing communication solely for informational purposes and reliance on this may lead to loss. Past performance is not a reliable indicator of future results. Please read our full disclaimer.

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