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Bond Yields rise on upbeat Inflation talk from ECB's Draghi

Notes/Observations

European Equity markets fall and Bond yields rise following ECBs Draghi upbeat remarks on the economic recovery and inflation.

German 2 year Schatz yields post 11 month highs

Schaeffler shares fall sharply following profit warnings

Overnight

Asia:

China Premier Li spoke at World Economic Forum, pleding to maintain policy settings amid steady growth expectations in Q2; Unemployment seen at 4.9% - China profit growth accelerates to 16.7% from 14.0%, while Liabilities growth slows to 6.5% from 6.7% in May.

New Zealand posts 3rd straight trade surplus; Exports in line with estimates and Imports higher than expected; Shipments of Dairy spike over 40% y/y to NZ$1.2

Brazil Prosecutor confirms proceeding with corruption charges against Pres Temer.

Europe:

Bond Yields and the Euro rise after ECBs Draghi comments on inflation noting that temporary factors are impacting inflation which the ECB can look through. Efforts slowed by a combination of external price shocks, more slack in labor market.

Schaeffler shares dive after announcing a profit warning weighing on industrial names

Neilsen reported UK Supermarkets saw strong sales growth in the past month rising 4% buoyed by the hot summer

UK PM May offers to protect benefits of EU citizens living in the UK

Americas:

White House spokesman Spicer noted that Pres Trump is 'very pleased' with healthcare bill developments; continues to support ways to strengthen it

Fed's Williams reiterates it sees inflation to hit 2% in next year or so

Economic Data

(IT) ITALY JUN CONSUMER CONFIDENCE INDEX: 106.4 V 105.8E; MANUFACTURING CONFIDENCE: 107.3 V 106.7E

Sweden May Trade Balance (SEK): +2.8B v -2.5Be

Sweden May PPI M/M: 0.0% v -0.3% prior; Y/Y: 7.2% v 7.2% prior

(FI) Finland Jun Consumer Confidence: 23.9 v 24.1 prior; Business Confidence: 9 v 8 prior

Fixed Income Issuance:

Non seen

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx50 -0.5% at 3,547, FTSE -0.2% at 7,432, DAX -0.6% at 12,700, CAC-40 -0.5% at 5,267, IBEX-35 +0.1% at 10,705, FTSE MIB flat at 21,000, SMI -0.4% at 9,081, S&P 500 Futures -0.1%]]

Market Focal Points/Key Themes: European stocks opened down and continued losses following comments by ECB Chief Draghi; Markets waiting on comments from Fed Chair Yellen later in the day; Automakers underperforming; Gold continued to recover from yesterday's unusual trade, supporting materials stocks; oil continued to support energy stocks; German materials under pressure following outlook cut by Schaeffler (SHA.DE); Stada Arzneimitte (SAZ.DE) under pressure following takeover bid from Bain Capital failing to garner enough shares; upcoming US earnings include Darden Restaurants and KB Home

Equities

Consumer discretionary [Carpetright CPR.UK +11.1% (earnings), Debenhams DEB.UK -2.8% (earnings)]

Energy [Petrofac PFC.UK -2.4% (trading update)]

Financials [Bankia BKIA.ES +4.0% (merger agreement)]

Healthcare [Stada Arzneimittel SAZ.DE +2.0% (takeover fails)]

Industrials [Schaeffler SHA.DE-12% (cuts outlook), GKN GKN.UK -2.6% (cuts outlook)]

Telecom [Deutsche Telekom DTE.DE -2.2% (media speculation regarding T-mobile deal)]

Technology [Playtech PTEC.UK -3.2% (secondary share placing)]

Speakers

(EU) ECB Chief Draghi: Sees Factors impacting inflation being temporary and typically ones which the central bank can look through

Efforts slowed by a combination of external price shocks, more slack in labor market

Considerable degree of stimulus still needed, and ECB needs persistence in monetary policy

May change policy to keep stance unchanged, but not to tighten

(US) Fed's Williams (moderate, non-voter): Sees US wage growth picking up to 3-3.5%

Growth outlook for the U.S. is likely to stand at around 1.5%

Reiterates it sees inflation to hit 2% in next year or so

Currencies

EUR/USD takes at two week highs following comments from ECB Draghi which helped the Euro spike 70 pips. A break of 1.1294 would mark 8 month highs. GBP/USD rises being dragged higher by the Euro with the pair approaching yesterdays high.

Fixed Income

Bund futures trade at 164.65 falling sharply testing 164.63 support with yields rising to a one week high following comments from ECB's Draghi. Schatz yields rose to -0.58% marking an 11 month high.

Tuesday's liquidity report showed Monday's excess liquidity rose to €1.621T a rise of €9B from €1.612T prior. Use of the marginal lending facility jumped to €486M from €339M prior.

Corporate issuance saw $3.7B come to market via 7 deals, bringing month to date issuance to $73B.

Looking Ahead

05:30 (ZA) South Africa Q1 Non-Farm Payrolls Q/Q: No est v 0.2% prior; Y/Y: No est v 0.9% prior

06:00 (UK) Jun CBI Retailing Reported Sales: 5e v 2 prior, Total Distribution: 15e v 18 prior

07:00 (BR) Brazil Jun FGV Construction Costs M/M: 1.4%e v 0.1% prior

09:00 (US) Apr S&P / Case-Shiller 20-City M/M: 0.50%e v 0. 87% prior; Y/Y: 5.90%e v 5.89% prior; House Price Index (HPI): No est v 195.39 prior

09:00 (US) Apr S&P / Case-Shiller (overall) HPI Y/Y: No est v 5.75% prior, House Price Index (HPI): No est v 186.95 prior

09:00 (MX) Mexico May Trade Balance: $0.3Be v $0.6B prior

09:30 (BR) Brazil May Current Account: $1.9Be v $1.2B prior; Foreign Direct Investment (FDI): $3.0Be v $5.6B prior

10:00 (US) Jun Consumer Confidence: 116.0e v 117.9 prior

10:00 (US) Jun Richmond Fed Manufacturing Index: 7e v 1 prior

The CAC index has reversed directions and lost ground in the Tuesday session. Currently, the index is down 0.50% and trading at 5268.80. For a second straight day, with no eurozone or French numbers on the schedule. ECB President Mario Draghi addressed the ECB Forum on Central Banking in Sintra, Portugal, and will speak again on Wednesday.

ECB President Mario Draghi sent out a familiar message on Tuesday, as he addressed a gathering of central bankers at an ECB forum in Portugal. Draghi acknowledged that economic indicators were pointing to a broad recovery in the eurozone. Draghi even had something positive to say about inflation, noting that 'deflationary forces have been replaced by reflationary ones'. Draghi defended the bank's loose accommodative policy, saying that it had pushed inflation higher, but stimulus was needed until inflation becomes 'durable and self-sustaining'. Draghi's message to the markets and his critics is that 'we're on the right path, but please show some patience'. The ECB has maintained its loose monetary policy for quite some time, and not everyone is pleased with Brussels. Germany, the eurozone's largest economy, has called for tighter monetary policy, which is a better fit for the robust German economy. Clearly, however, the ECB under Draghi's stewardship has no intentions of altering current policy until inflation moves closer to the ECB's target of 2 percent.

On Monday, European stock markets reacted positively to news that the Italian government would wind down two banks, Banca Popolare di Vicenza and Veneto Banca. This deal will cost the Italian taxpayer 5.2 billion euros, and the government provided additional guarantees of 12 billion euros. Italy has already agreed to bail out another Italian bank, Monte dei Pashci di Siena, for up to 6.6 billion euros. The Italian government has set aside 20 billion euros to bail out struggling banks, and potentially may have used up the entire amount for these bailouts, depending on how the actual size of the bailouts. These moves remove a major headache for European regulators and should strengthen the fragile Italian banking sector, which has been a sore spot in the eurozone banking sector. Financial stocks on the CAC moved higher, as Credit Agricole and BNP Paribas posted gains.

The euro climbed to its highest in nearly two weeks following remarks by European Central Bank President, Mario Draghi, who expressed confidence in the Eurozone economy's recovery and the threat of deflation receding.

At the ECB's annual policy forum in Sintra, Portugal, Draghi specifically stated that 'Deflationary forces have been replaced by reflationary ones', signaling his optimism for the euro area economy's outlook. In addition, he didn't appear to be worried about recent weak inflation data, partly attributing them to global factors. He did communicate, however, that 'considerable' central bank support is still needed as inflationary pressures are 'not yet durable'.

Turning to reaction in the forex markets, euro/dollar jumped to reach the near two-week high of 1.1236 within a ten-minute time frame of Draghi starting to give his speech. The pair managed to maintain positive momentum to hit a fresh high of 1.1264 later in the day. It was trading at 1.1186 before the speech.

The positive comments by Draghi will add to speculation that the ECB is soon to start discussing its plan to normalize policy as it exits its monetary stimulus program. The central bank currently props up markets by engaging in monthly asset purchases to the tune of 60 billion euros. In its monetary policy meeting earlier in the month, the Bank maintained its accommodative stance but dropped its promise to cut interest rates should conditions worsen. The Bank will hold its next policy meeting on July 20.

Spot Gold extended bounce from six-week low at $1236, posted after sharp fall on Monday and peaked at $1253 on Tuesday.

Fall was contained by 200SMA and subsequent reversal and close above former low at $1240, partially offset strong negative impact on Monday's strong bearish acceleration.

Immediate downside risk has been sidelined as bounce broke above 100SMA ($1247) and 10SMA (1251) barriers, retracing so far 76.4% of Monday's $1258/$1236 fall.

Recovery may extend for possible attack at pivotal $1258 barrier (double upside rejection / 55SMA), while the price holds above 100SMA.

However, bearish daily studies keep the downside under pressure, as daily Tenkan-sen in steep descend capped so far recovery action and maintains bearish pressure, along with descending thick 4-hr cloud.

Thin daily cloud (spanned between $1245/48) marks pivotal support, close below which would generate negative signal.

Res: 1253, 1255, 1258, 1261
Sup: 1247, 1244, 1240, 1236

GBP/USD – 1.2741

Recent wave: Wave V of larger degree wave (III) has ended at 1.1986 and major correction has commenced from there for gain to 1.3000 and 1.3140-50

Trend: Near term down

Original strategy :

Buy at 1.2660, Target: 1.2810, Stop: 1.2600

Position: -
Target:  -
Stop: -

New strategy :

Buy at 1.2660, Target: 1.2810, Stop: 1.2600

Position: -
Target:  -
Stop:-

As sterling has continued trading with a firm undertone after staging a strong rebound from 1.2589 (last week’s low), suggesting low has been formed there and consolidation with mild upside bias is seen for gain towards resistance at 1.2818, however, a sustained breach above there is needed to add credence to this view and suggest recent decline from 1.3048 has ended at 1.2589, then headway to 1.2850-60 would follow.

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 ended at 1.7192, the subsequent selloff is the larger degree wave (C) which is still unfolding with minor wave (III) of larger degree wave 3 ended at 1.1986, hence wave (IV) correction is in progress which could either be a triangle wave (IV) of a complex formation but upside should be limited to 1.3500 and price should falter well below 1.4000, bring another decline in wave (V) of 3 for weakness to 1.1500, then 1.1200.

On the downside, expect pullback to be limited to 1.2660-70 and support at 1.2640 should hold, bring another rebound later. Only a drop below 1.2640 would suggest the rebound from 1.2589 has ended, bring retest of this level, break of this support would revive bearishness and signal recent decline from 1.3048 top has resumed for retracement of early upmove to 1.2550, then towards previous support at 1.2515.

GBP/JPY - 142.45

Recent wave: Medium term low formed at 120.50 and (A)-(B)-(C) major correction has commenced with (A) leg ended at 148.45, hence wave (B) is unfolding for retreat to 131.00-10.

Trend: Near term down

Original strategy:

Buy at 141.45, Target: 143.45, Stop: 140.85

Position: -
Target: -
Stop: -

New strategy :

Buy at 141.30, Target: 143.30, Stop: 140.70

Position: -
Target:  -
Stop:-

As sterling has maintained a firm undertone and indicated resistance at 142.50 was penetrated, adding credence to our bullish view that the erratic rise from 138.70 is still in progress for test of indicated previous resistance at 142.75, above there would signal recent decline has ended and encourage for at least a strong retracement of recent selloff to 143.05-10, then 143.50 but price should falter below previous resistance at 143.95.

In view of this, we are looking to buy sterling on subsequent pullback as support at 141.35 should limit downside and bring another rise. Below 140.95 would risk weakness to 140.45-50 but only break there would signal the rebound from 139.85  has ended bring another test of this level first. Looking ahead, only break there would suggest the aforesaid erratic rise fro 138.70 is over, bring further fall to 139.15 support first. 

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.


The Aussie dollar is in strong rally for the third consecutive day and establishes above 0.7600 handle after recovery peaked at 0.7624 on Tuesday.

The pair is on track to fully retrace 0.7635/0.7535 pullback which was contained by top of thick daily cloud, where a higher base was left.

Slow stochastic in steep ascend on daily chart shows enough room at the upside for stretch towards key near-term barrier at 0.7635 (14 June high), break of which is needed to signal bullish continuation of broader uptrend from 0.7328 (09 May low).

Daily studies in firm bullish configuration continue to underpin advance. Broken Fibo 61.8% of 0.7635/0.7535 now acts as initial support at 0.7597, followed by 10SMA at 0.7581, which is expected to contain extended dips.

Res: 0.7624, 0.7635, 0.7662, 0.7679
Sup: 0.7597, 0.7581, 0.7553, 0.7535

EUR/JPY - 125.71

Recent wave: wave v of (C) ended at 94.12 and major correction in wave A has ended at 149.79

Trend: Near term up

Original strategy:

Bought art 123.80, met target at 125.30

Position: - Long at 123.80
Target: - 125.30
Stop: -

New strategy :

Buy at 125.00, Target: 127.00, Stop: 124.40

Position: -
Target:  -
Stop:-

Current anticipated rally confirms our bullish view (our long position entered at 123.80 met target at 125.30 with 150 points profit), this move adds credence to our view that early upmove has resumed and may extend headway to 126.40-50, then towards 127.00, however, near term overbought condition should prevent sharp move beyond latter level and reckon 127.50-60 would hold from here, bring retreat later. 

In view of this, we are looking to reinstate long on pullback as 125.00 should limit downside. Below previous resistance at 124.65 would defer and risk correction towards 124.00-10 but only break of indicated support at 123.66 would signal top is formed instead, bring correction to 123.00 later.

Our latest preferred count is that wave (ii) is ABC-X-ABC which ended at 123.33 and wave (iii) is unfolding with wave iii ended at 100.77, followed by wave iv at 111.57 and wave v as well as the wave (iii) has ended at 97.04, followed by wave (iv) at 111.43 and wave (v) has ended at 94.12 which is also the end of the larger degree v, this also implied the major wave (C) has also ended there, hence major correction has commenced from there with (A) leg unfolding in its lower degree wave c which has possibly ended at 145.69. Under this count, A-B-C wave (B) has commenced with A leg ended at 136.23, wave B at 143.79 and wave C has possibly ended at 149.79.

Our larger degree count is that the decline from 139.26 is wave (C) and is sub-divided into a diagonal triangle i-ii-iii-iv-v with wave i - 105.44, wave ii- 123.33, wave iii - 97.03, wave iv - 111.43, followed by the final wave v as well as the end of wave (C) at 94.12, this also mark the bottom of larger degree wave B. Under this count, major rise in wave C has commenced as an impulsive wave with minor wave III ended at 145.69, wave V is still in progress for further gain to 150.00. Having said that, this so-called wave V could well be the first leg of larger degree 5-waver wave C and this wave C should bring at least a retest of wave A top at 169.97 (July 2008).

• Yellen, Harker and Kashkari scheduled to appear;
• Euro climbs as Draghi appears open to gradual removal of stimulus;
• Sterling briefly pops as FPC raises counter-cyclical capital buffer.

Central bankers will be the centre of attention over the next couple of days, with a number of policy makers appearing, including Federal Reserve Chair Janet Yellen, ECB President Mario Draghi and the Bank of England Governor Mark Carney.

Already today, we've heard from Carney and Draghi – both of whom will appear again tomorrow – while Yellen is scheduled to appear later in the session, as well as fellow Fed policy makers Patrick Harker and Neel Kashkari – both of whom are voting members on the FOMC this year. Needless to say, this could prompt plenty of volatility throughout the session, as we've already seen in the euro and sterling.

The euro is climbing again on Tuesday, buoyed by comments from ECB President Mario Draghi who highlighted the strengthening and broadening recovery in the region. While Draghi is among the more dovish policy makers at the central bank, there has been persistent speculation that the ECB will announce further reductions in asset purchases later this year and a more positive assessment of the economy from the President may suggest he's willing to back it.

Draghi maintained his dovish stance though, warning that the central bank needs to be prudent in how it adjusts its parameters to improving economic conditions, calling for any adjustments to be gradual and only when improving dynamics that justify them appear significantly secure. This suggests to me that he will back a gradual tightening in monetary policy, which we have been seeing an increasing demand for.

The pound – which was already trading higher against the dollar on the day, albeit largely down to weakness in the latter – briefly popped higher after the release of the Financial Stability Report, in which the Bank of England raised the counter-cyclical capital buffer to 0.5%, from 0%, and laid out plans to raise it to 1% in November. While banks have one year to implement the change, it still represents a minor tightening in financial conditions which triggered the initial move in sterling, a move that was almost immediately fully reversed.

It will be interesting to see how sterling trades in the coming hours and whether markets perceive this to be an effective tightening or an alternative to a rate hike that some policy makers have been leaning towards in recent months. Should the latter be true then I would expect to see the pound coming under a little pressure. It is currently trading below the levels it was at prior to the release but the moves are so small that we can't read too much into them.

AUD/USD – 0.7603

Recent wave: Wave 5 ended at 1.1081 and major correction has commenced for fall to 0.7000 and then towards 0.6500-10

Trend: Near term up

Original strategy :

Bought at 0.7595, Target: 0.7745, Stop: 0.7535

Position: - Long at 0.7595
Target:  - 0.7745
Stop: - 0.7535

New strategy :

Hold long entered at 0.7595, Target: 0.7745, Stop: 0.7555

Position: - Long at 0.7595
Target:  - 0.7745
Stop:- 0.7555

As aussie found good support at 0.7535 and has staged a strong rebound, retaining our bullish view and consolidation with upside bias remains for a test of indicated resistance at 0.7636, break there would confirm recent upmove has resumed and extend the rise from 0.7329 towards previous resistance at 0.7680 but loss of momentum should limit upside to chart resistance at 0.7750 and price should falter below 0.7785-90.

In view of this, we are holding on to our long position entered at 0.7595. Only below said support at 0.7535 would defer and suggest top is possibly formed, bring correction to 0.7515-20, break there would provide confirmation, then correction to 0.7490-95 and possibly towards support at 0.7457 would be seen later. 

On the 4-hour chart, the move from 0.8066 is the wave 5 with i: 0.8860, ii: 0.8315, wave iii is an extended move ended at 1.0183, iv: 0.9706 and wave v has ended at 1.1081 (also the top of entire wave 5). The subsequent selloff is the major correction which is unfolding as ABC-X-ABC and 2nd A leg has ended at 0.8848, followed by a-b-c wave B which ended at 0.9758, hence, 2nd C wave is now in progress and indicated downside target at 0.7000 and 0.6950 had been met, so further fall to 0.6710-20 cannot be ruled out.