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Japanese data showed on Tuesday that the labor market continued strengthening in July in line with expectations, remaining near full employment conditions. However, other data on household spending indicated that better labor conditions did not support consumption in the aforementioned period. The yen overall experienced substantial demand today, hitting a 4 ½ – month high as heightened geopolitical tensions in the Korean peninsula came into the spotlight.

During early Asian trading hours, the Japan Institute for Labour Policy and Training released figures on the jobs to application ratio and the unemployment rate for the month of July. According to the numbers, each applicant was assigned to 1.52 available positions as expected, compared to 1.51 positions in the previous month. This was the highest jobs to application ratio recorded since February 1974, when the Japanese economy was booming.

Regarding the unemployment rate, this matched expectations, remaining steady at June’s mark of 2.8% in July and indicating that the Japanese labor market was operating near full employment conditions. Note that, this level was last seen back at the end of the 1980s and early 1990s when the unemployment rate was fluctuating around 2.0%.

While the labor environment seems to be improving, consumers surprisingly held back from purchases. Based on Statistics Bureau, household spending turned negative after three months of rising, falling by 1.90% month-on-month. Analysts anticipated that consumers’ spending would decline moderately by 0.50% following 1.50% growth in June. On a yearly basis, household spending dropped by 0.20% compared to a rise of 0.70% forecasted and a 2.30% growth seen in June.

Even though core inflation showed signs of building momentum, rising slowly for four consecutive months to 0.40% in August, the recent downturn in household spending is less likely to provide support to inflation in the upcoming months. Moreover, most companies’ attitude of refusing to increase prices in order to avoid losing clients, as wage growth remains subdued, restricts inflation from approaching the BOJ’s target of 2.0% anytime soon. Nevertheless, the Japanese government expressed yesterday its persistent optimism on the economy’s outlook, stating that that business spending, exports, and output were “picking up” while it also said that private consumption was growing moderately, signaling a solid recovery.

Turning to the reaction in the forex markets, dollar/yen reacted little to the data as geopolitical risks heightened substantially on Tuesday after Japan announced earlier today that a ballistic missile weapon, launched by North Korea, flew across the Japanese island of Hokkaido before it fell into the Pacific Ocean. The pair dipped by 0.55% to a 4 ½ -month low of 108.32 as investors were selling riskier assets to buy safe haven ones including the yen. However, the pair managed to climb to a session high of 108.93 immediately after the data release but its gains were short-lived as it pulled back to 108.39 afterwards.

WTI oil futures are giving a bearish picture on the 4-hour chart. Prices are on a downwards trajectory as they have been making lower highs since the August 10 peak of 50.19. The 20-period moving average (MA) crossed below the 50-period MA earlier today giving a bearish signal.

Following a neutral phase between August 21 until 28, prices came under severe pressure after breaking below the key 47.00 level. This is now expected to act as strong resistance to the upside. Downward momentum has clearly picked up based on the falling MACD. But the flat RSI suggests some consolidation in the near term. A move below 46.13 would open the way to target the next major low at 45.38 (July 24 low). Such a move would strengthen the bearish scenario.

Only a sustained move above 47.00 would indicate that the near-term downward pressure has eased. Trading above this support level brings the market back to neutral until prices rise towards the next major top at 48.87 (August 18 high). From here, a push higher to reclaim the key 50.00 level cannot be ruled out.

For now, the bias is tilted to the downside based on the bearish technicals, which are diminishing the odds for a sustained rebound in the short-term.

EUR/USD has posted considerable gains in the Tuesday session. Currently the pair is trading at 1.2046, up 0.57% on the day. On the release front, French Consumer Spending came in at 0.7%, matching the forecast. French Preliminary GDP improved to 0.5%, also matching the forecast. In the US, today’s key event is CB Consumer Confidence, which is expected to dip to 120.9 points. On Wednesday, Germany releases Preliminary CPI, and the US publishes ADP Nonfarm Payrolls and Preliminary GDP.

The euro continues to push higher, and has climbed an impressive 2.1% since Friday. Earlier on Tuesday, the euro punched above the 1.20 line, for the first time since January 2015. On Friday, ECB President Mario Draghi took a page out of Janet Yellen’s page book, opting to steer away from any discussion about ECB monetary policy in a speech at a meeting of central bankers in Jackson Hole. Draghi seems to have learned a lesson from a meeting of central bankers in Portugal in June, when the markets seized on his comments that the euro zone was undergoing a broad recovery, and the euro soared. With the euro zone enjoying solid growth in 2017, analysts expect the ECB to address its plans for its asset purchases program (QE), which is expected to terminate in December. The ECB is widely expected to taper its QE program early next year, and the euro has jumped 14% against the dollar in 2017.

At the Jackson Hole meeting, Yellen did not discuss interest rate policy, choosing instead to emphasize that the financial regulations put in place since the financial crisis in 2008 should not be undermined. Her message appeared aim at Donald Trump, who has expressed his intention to relax banking and financial regulations which he has argued are hampering business. The markets remain skeptical about a third and final rate hike this year, as the odds of an increase in December have been falling – currently, the odds a December hike are at 35%, down from 42% a month ago.

Notes/Observations

Risk aversion sentiment was the theme in the session after the latest North Korean missile threat revived geopolitical tensions

British and EU negotiators resumed Brexit talks but officials played down the prospect of breakthroughs

Tropical Storm Harvey poised to re-enter the Gulf of Mexico and make another landfall closer to Houston

Overnight

Asia:

North Korea launched missile that passed over Northern Japan and landed into the sea

Japan PM Abe: North Korea missile is an unprecedented serious and grave threat to Japan. Spoke with President Trump for 40 minutes, agreed to strengthen pressure on North Korea, Trump gave "strong commitment" to Japanese security

Japan Chief Cabinet Sec Suga:Missile flying over Japan is a new and serious development, no objects did fall on Japan territory. Will take appropriate steps as needed regarding North Korea missile

Japan Foreign Min Kono: Discussed further sanctions on North Korea with US

South Korea President Moon orders show of force in response with 4 f-15k fighters conducting bomb dropping exercise

Japan July Jobless Rate matched its lowest rate since Jun 1994 ( 2.8% v 2.8%e)

Europe:

EU Chief Brexit Negotiator Barnier said to have expressed concern about progress so far in Brexit talks. UK needs positions on all issues and must start negotiating seriously

Germany Fin Min Schaeuble reiterates debt cut for Greece not currently on the agenda. Greece must press ahead with reform-for-aid program

Americas:

President Trump: Mexico has been very difficult in NAFTA talks, why wouldn't they, they had a sweetheart deal for so long. One way or another Mexico will pay for the border wal

Energy:

Saudi Arabia and Russia are pushing to extend their deal to limit crude oil production for another three months

Economic data

(DE) Germany Sept GfK Consumer Confidence: 10.9 v 10.8e (highest since Oct 2001)

(UK) Aug Nationwide House Price Index M/M: -0.1% v 0.0%e ; Y/Y: 2.1% v 2.5%e

(NO) Norway Q2 Manufacturing Wage Index Q/Q: 0.4% v 0.7% prior

(FR) France Q2 Preliminary GDP Q/Q: 0.5% v 0.5%e; Y/Y: 1.7% v 1.8%e

(FR) France July Consumer Spending M/M: 0.7% v 0.7%e; Y/Y: 2.1% v 1.8%e

(TR) Turkey Aug Economic Confidence: 106.0 v 103.4 prior

(TR) Turkey July Trade Balance: -$8.8B v -$8.8Be

Fixed Income Issuance:

(ID) Indonesia sold total IDR7.0T in 6-month Bills & 2-year,4-year,7-year and 15-Year Project-based Sukuk (PBS)

(IT) Italy Debt Agency (Tesoro) sold €6.0B vs. €6.0B indicated in 6-month Bills; Avg Yield: -0.356% v -0.362% prior; Bid-to-cover: 1.72x v 1.62x prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx50 -1.7% at 3,365, FTSE -1.5% at 7,292, DAX -2.0% at 11,877, CAC-40 -1.6% at 5,000, IBEX-35 -1.4% at 10,146, FTSE MIB -1.5% at 21,397, SMI -1.2% at 8,759, S&P 500 Futures -0.7%]

Market Focal Points/Key Themes: European indices opened down and continued lower; geopolitical concerns driving negative risk sentiment; all sectors move lower; Prosiebensat cuts outlook, dragging on broadcasters; insurers still under pressure pending evaluation of impact from Hurricane Harvey;commodity strength did not translate into support for materials stocks; upcoming earnings in US session include Best Buy and H&R Block

Equities

Consumer discretionary: Prosiebensat PSM.DE -10.0% (cuts outlook, analyst action), Mitie MTO.UK -0.4% (FCA opens investigation)

Materials: Avocet Mining AVM.UK 11.4% (standstill extension agreement)

Industrials: Hapag-Lloyd HLAG.DE % (earnings)

Financials: Wendel MF.FR +2.8% (analyst action), Sydbank SYDB.DK -3.8% (earnings), Van Lanschot LANS.NL +1.7% (results), Banca Generali BGN.IT 2.9% (analyst action)

Technology: Adva Optical ADV.DE -22.3% (cuts outlook)

Utilities: Findel FDL.UK +9.6% (trading update)

Energy: CGG CGG.FR -10.8% (analyst action), Statoil STL.NO -1.7% (Korpfjell exploration doesn't find oil), Lundin Petroleum LUPE.SE -6.7% (Korpfjell exploration doesn't find oil)

Speakers

German Chancellor Merkel: Seeing positive economic data in Europe; improving employment a good sign

South Africa Central Bank (SARB): Rate cut cycle likely to be modest

Denmark Finance Ministry presented its tax proposal; to cut taxes by DKK23B on cars, income and pensions. Cuts to be phased in through 2025 and apply to all income groups

Greece PM Tsipras: Conditions were appearing for a steady return to growth. 2017 GDP growth seen near 2.0%

Italy Business industry lobby Confindustria: Strong EUR currency to significantly affect the Italian economy

Poland Central Bank's Kokoszczynski: Interest rate hike unlikely ahead of 2019 Presidential election -

China Foreign Ministry spokesperson Chunying: Urged relevant countries from provoking each other. Threats and sanctions could not solve the North Korea issue

Currencies

Risk aversion sentiment was the theme in the session after the latest North Korean missile threat revived geopolitical tensions - USD Index remained at 2 1/2 lows and did not participate in any safe-haven flows,

EUR/USD tested above the 1.20 level for its highest reading since Jan 2015. The pair has been moving higher ever since ECB chief Draghi did not comment or show any concern over its recent appreciation.

USD/JPY hovering around the 108.50 as the JPY currency (yen) benefited from risk-aversion sentiment .

Fixed Income

Bund futures trades at 165.58 up 79 ticks as the latest North Korean missile threat revives geopolitical tensions. Downside targets 164.50 followed by 163.75. To the upside the 165.75 to 166.00 remains key resistance.

Gilt futures trades at 128.73 up 67 ticks following other haven assets on the broad risk-off move. A resumption to the upside could eye 129.25 then 130.10. A move back below 128.25 targets 126.51

Tuesday's liquidity report showed Monday's excess liquidity fell to €1.700T from €1.701T and use of the marginal lending facility rose to €634M from €310M.

Corporateissuance no deals price in high grade primary

Looking Ahead

(BR) Brazil July Central Govt Budget Balance (BRL): No est v -19.8B prior

05:30 (HU) Hungary Debt Agency (AKK) to sell in 3-month Bills

05:30 (EU) ECB alotment in 7-day Main Financing Tender (MRO) vs. €7.0Be

05:30 (DE) Germany to sell €5.0B in new 0% coupon Sept 2019 Schatz

06:45 (US) Daily Libor Fixing

07:00 (BR) Brazil Aug FGV Inflation IGPM M/M: +0.1%e v -0.7% prior; Y/Y: -1.7%e v -1.7% prior

07:45 (US) Weekly Goldman Economist Chain Store Sales

08:00 (BR) Brazil July PPI Manufacturing M/M: No est v 0.0% prior; Y/Y: No est v 1.5% prior

08:05 (UK) Baltic Dry Bulk Index

08:30 (CA) Canada July Industrial Product Price M/M: -0.5%e v -1.0% prior; Raw Materials Price Index M/M: -0.3%e v -3.7% prior

08:55 (US) Weekly Redbook Sales

09:00 (US) Jun S&P/Case-Shiller 20-City M/M: 0.10%e v 0.1% prior; Y/Y: 5.60%e v 5.7% prior; House Price Index (HPI): No est v 198.97 prior

09:00 (US) Jun S&P/Shiller Case-Shiller (overall) HPI Y/Y: No est v 5.6% prior, House Price Index (HPI): No est v 190.61 prior

09:00 (IL) Israel Central Bank (BOI) Interest Rate Decision: Expected to leave Base Rate unchanged at 0.10%

09:00 (EU) Weekly ECB Forex Reserves

09:00 (RU) Russia announces weekly OFZ bond auction

10:00 (US) Aug Consumer Confidence: 120.4e v 121.1 prior

11:00 (US) Fed Evans (dove, voter)

11:30 (US) Treasury to sell 4-Week Bills

13:00 (US) Treasury to sell 7-Year Notes

16:30 (US) Weekly API Oil Inventories

Crude oil is trading lower. Hourly support is given at 45.40 (17/08/2017 high). Strong resistance can be found at 50.41 (31/07/2017). Expected to show continued short-term bearish move.

In the long-term, crude oil has recovered after its sharp decline last year. However, we consider that further weakness are very likely. Strong support lies at 35.24 (05/04/2016) while resistance can now be found at 55.24 (03/01/2017 high).

Silver's bullish pressures are strong. Hourly resistance is given at 17.32 (18/08/2017 high) while support can be found at 16.58 (15/08/2017 high). The commodity lies in a short-term uptrend channel. Expected to show another leg higher.

In the long-term, the death cross indicates that further downsides are very likely. Resistance is located at 25.11 (28/08/2013 high). Strong support can be found at 11.75 (20/04/2009).

Gold is surging. Hourly support is given at a distance 1251 (08/08/2017 low). Stronger support lies at 1204 (10/07/2017 high). Expected to show continued increase.

In the long-term, the technical structure suggests that there is a growing upside momentum. A break of 1392 (17/03/2014) is necessary ton confirm it, A major support can be found at 1045 (05/02/2010 low)

GBP/USD – 1.2955

 
Despite falling to 1.2774 (exactly 38.2% Fibonacci retracement of 1.1986-1.3269), the subsequent stronger-than-expected rebound suggests first leg of decline from 1.3269 has ended there and consolidation with initial upside bias would be seen for further gain to 1.3020-25 (50% Fibonacci retracement of 1.3269-1.2774), however, reckon upside would be limited to 1.3080 (61.8% Fibonacci retracement) and price should falter below 1.3165, bring another decline in late Q3. 

Our preferred count on the daily chart is that cable's rebound from 1.3500 (wave (A) trough) is unfolding as a wave (B) with A ended at 1.7043, followed by triangle wave B and wave C as well as wave (B) has possibly ended at 1.7192, below support at 1.4232 would add credence to this count, then further fall to 1.4000 level would follow but reckon downside would be limited to 1.3655 support and price should stay above previous support at 1.3500.

On the downside, whilst initial pullback to 1.2900-10 and possibly 1.2870-75 is likely, if our view that a temporary low formed at 1.2774 is correct, downside should be limited to 1.2810-20 and bring another rebound later to aforesaid upside target. Below 1.2800 would risk test of 1.2774, however, break there is needed to extend the fall from 1.3269 top to 1.2700 and later towards 1.2620-30 (50% Fibonacci retracement), however, price should stay well above previous chart support at 1.2589, bring rebound later.

Recommendation: Exit short entered at 1.2910 and stand aside for this week.

 
Longer term - Cable's rise from 1.0520 (Feb 1985) to 2.0100 (September 1992) is seen as [A], the decline to 1.3682 is labeled as (B) and (C) wave rally has ended at 2.1162 (9 Nov, 2007) which is also the top of larger degree wave B with circle. The selloff from there is a 5-waver with wave (A) ended at 1.3500 (23 Jan 2009), wave (B) itself is labeled as A: 1.6733, triangle wave B: 1.4813 and wave C as well as top of wave (B) ended at 1.7192 (2014), hence the selloff from there is an impulsive wave (C) with wave I : 1.4566, wave II 1.5930, an extended wave III is unfolding and already exceeded our downside target at 1.3500 and 1.3000, hence weakness to 1.2500 and possibly 1.2000 cannot be ruled out, however, price should stay well above psychological level at 1.0000.

GBP/JPY – 146.05



 

Sterling only recovered to 143.20 before dropping again, the pair exceeded all our downside targets (including 141.25, 140.00 and 139.85), however, as the British pound found support at 139.35 and has rebounded, suggesting consolidation above this level would be seen and another bounce to 141.40-45, then 142.00 cannot be ruled out, however, reckon said resistance at 143.20 would limit upside and bring another decline. A break of said support at 139.35 would signal the fall from 147.75 is still in progress and bring test of previous chart support at 138.70 which is likely to hold on first testing.  



Our preferred count is that larger degree wave V with circle is unfolding from 251.12 with wave (I) 219.34, (II): 241.38 and wave (III) is subdivided into 1: 192.60, 2: 215.89 (23 Jul 2008) and wave 3 ended at 118.87 earlier in 2009. The correction from there to 162.60 is wave 4 which itself is a double three and is labeled as first a-b-c ended at 151.53, followed by wave x at 139.03, 2nd a ended at 162.60, 2nd b at 146.75 and 2nd c leg of wave 4 ended at 163.00. Therefore, the decline from 163.00 to 116.85 is now treated as wave 5 which also marked the end of larger degree wave (III), hence wave (IV) major correction has commenced for retracement of the wave (III) from 241.38 and upside target at 183.95-00 (50% Fibonacci retracement of the wave (II) from 241.38) had been met, a drop below 160.00 would suggest wave (IV) has ended at 195.85, bring decline in wave (V) for initial weakness to 130 (already met) and 120.




On the upside, although current rebound from 139.35 may bring initial recovery to 142.00 and possibly 142.40-50, reckon upside would be limited and renewed selling interest should emerge around 143.20 resistance, bring another decline later. A daily close above 143.20 would defer and suggest the fall from 147.75 has formed a temporary low and bring a stronger rebound to 144.00 and possibly towards 144.50-60 before prospect of another decline next month. 



Recommendation: Sell again at 143.15 for 140.15 with stop above 145.50.




The long-term downtrend from 570.99 (29 Feb 1980) is labeled as an impulsive wave with III with circle ended at 129.77 (20 Apr 1995) and the corrective rebound to 251.12 (20 Jul 2007) is treated as wave IV with circle and the wave V with circle selloff from 251.12 has possibly ended at 116.80 (almost reached our indicated target at 116.00) and major correction has commenced from there and indicated upside target at 183.90-00 (50% Fibonacci retracement of 251.10-116.85) had been met, reckon upside would be limited to 199.80-90 (61.8% Fibonacci retracement) and bring wave (V) decline in later part of 2017.

Bitcoin bullish rise continues after short pause. Resistance is at all-time high at 4480 (17/08/2017 high) is within sight. Hourly support lies very far at 2403 (26/07/2017 low). The road is wide open for another bullish move.

In the long-term, the digital currency has had an exponential growth. There are decent likelihood that the asset will consolidate above $1500. Long-term support is given at $1464 (04/05/2017 low).