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Crucial week ahead

The next week could be hugely influential for the rest of the year so it's hardly surprising to see markets trading a little flat to kick things off.

Investors are heading into this period in a buoyant mood, with US markets back in record territory and global stocks having enjoyed a very good week. Central banks have done their part in supporting the rally, with both the ECB and Fed last week clearly indicating that stimulus is just around the corner, much to the relief of investors that had assumed so much. Whether they'll both follow through on these suggestions though may well depend on how this week goes.

The G20 at the end of the week is what everyone will be focused on in the coming days, with the trade war between the world's two largest economies representing the greatest risk to the global outlook. While both sides appear keen to give the impression that they will take or leave a deal, I think it's quite clear that it's in both their interest - and everyone else's for that matter - to find common ground and end this now. More tariffs will only hurt growth more and increase the need for central banks to play a more active role.

Expectations at this moment are relatively balanced. If both sides can agree to restart talks and work towards a deal while not implementing any further tariffs, I think investors will be relieved. In fact, from a markets perspective, you could even argue that this is the favourable outcome as the Fed and others would likely then follow through on cutting rates, which may not necessarily be the case in the near-term if the meeting goes better than expected.

More reason to be bullish on oil?

Oil prices have been given a lift over the last week following the escalation in the Gulf, as Iran shot down a US drone and Trump reportedly came extremely close to retaliating and escalating the conflict considerably. The importance of the Strait of Hormuz for global oil markets has been heavily reported, which has strongly contributed to it finally breaking higher having remained under pressure for weeks.

There were many positive influences that enabled oil to finally break free from the shackles of the bears, including the stock market rally, surprise inventory drawdown and positive comments ahead of this week's Trump/Xi meeting. Whether this will be sustained this week will depend on a number of factors, most notably that meeting and the prospect of further escalation in the Gulf. The key levels above now are $59-60 in WTI and $67-68 in Brent.

Gold pauses for breath

Gold has done very well out of the plunge in the dollar last week. In meeting market expectations, the Fed pulled the rug from under the dollar and sent it tumbling to a three month low. While investors were confident that they were right on rates, they clearly didn't have the same confidence in the Fed to live up to expectations. This has propelled gold back above $1,400 for the first time since September 2013, a reminder back to when we were previously in full easing mode and heavily reliant on central banks.

Having broken through $1,400, gold quickly ran into resistance around $1,410 but it doesn't seem to be lacking any real momentum. We have to go back a long way to look for past indications of support and resistance but it isn't too surprising to see that last time we were trading around these levels, this was found around $1,420 and $1,440. After such a strong rally, it will be interesting to see if momentum can be in any way maintained heading into these levels.

Facebook's Libra excites cryptocurrency bulls

The aftermath of the early 2018 cryptocurrency crash last longer than many enthusiasts may have hoped but it would appear that bitcoin has finally burst back to life, soaring back above $10,000 for the first time since March last year. Bitcoin has slowly - by its own standards - been rising in recent months but the launch of Facebook's Libra has clearly been a catalyst for the recent surge.

The publicity that the launch has once again brought to the space combined with the legitimacy is offers has understandably excited the community and we've seen before that you don't get a normal response when this happens. Whether it actually endorses something like bitcoin or not is perhaps not that important right now, particularly to those that have never lost the faith. It late 2017 is anything to go by, the coming weeks could be a wild ride.

General Trend:

• Chinese high-performance computer maker Dawning Information addressed press speculation about US restrictions on supercomputing technology
• Chinese telecom equipment firms underperform on concerns about possible US 5G restrictions; ZTE -2.7%
• Aussie outperforms as RBA Gov Lowe spoke and USD trades generally weaker; Traders focused on expected G20 meeting between Trump and Xi
• Gold Futures extend gain in the face of US dollar weakness and Iran concerns
• The G20 leaders meeting is due to be held in Osaka from June 28-29th (Friday-Saturday)
• China and US negotiating teams could meet as soon as Tues (June 25th) - Chinese press
• The Reserve Bank of New Zealand (RBNZ) is due to hold its official cash rate (OCR) decision on June 26th (Wed)

Headlines/Economic Data

Australia/New Zealand

• ASX 200 opened -0.2%
• (AU) RBA Gov Lowe: Risks to global economy are tilted to the downside; legitimate to ask how effective monetary easing would be globally; if everyone is easing, the impact on exchange rates is offset
• (NZ) Reserve Bank of New Zealand (RBNZ) rate cut is fully priced in for the Aug 2019 meeting - US financial press

China/Hong Kong

• Shanghai Composite opened +0.1%, Hang Seng -0.3%
• (CN) China confirmed President Xi to attend G20 summit in Osaka from June 27th to June 29th – Xinhua
• (CN) China Vice Commerce Min: Confirms US and China trade teams are having discussions; both China and US should make compromises in trade talks
• (CN) China Assistant Foreign Min: Confirms China and US teams are making preparations for Xi, Trump [G20] meeting
• (US) VP Pence said to postpone China policy address indefinitely amid "positive signs" of progress ahead of Trump/Xi meeting - press
• (US) US said to consider requiring 5G equipment for domestic use to be made outside of China - US financial press
• (CN) US Commerce Dept to issue new export restrictions on China supercomputing technology - press
• (CN) China PBoC Dep Gov Gousheng: Policy room for countries to deal with economic slowdown is limited
• (CN) China PBoC sets yuan reference rate: 6.8503 v 6.8472 prior
• (CN) China PBoC Open Market Operation (OMO): Skips OMO v CNY30B prior; Net Nil v CNY30B injected prior
• (CN) China volume-weighted avg benchmark overnight repo rate declines below 1.00% (10-year low); 7-day repo rate declines to 1.10% (over 4-year low)
• HSBC: Raises HK$ denominated 3-month, 6-month, and 12-month time deposit interest rates; Lowers USD$ denominated 12-month and 18-months time deposit interest rates

Japan

• Nikkei 225 opened -0.2%

Korea

• Kospi opened +0.2%
• (KR) South Korea sells KRW506B v KRW500B indicated in 20-year bonds: avg yield: 1.605% v 1.83% prior

Other

• (IN) Reserve Bank of India (RBI) Deputy Gov Acharya said to resign 6 months before his term ends- Indian Press

North America

• (US) Markets are pricing in a 28% chance of 50bps US Fed rate cut in July – US financial press
• (US) Fed's Harker (hawk, non-voter) did not comment on economic nor monetary policy outlook at event in Colorado
• (IR) Pres Trump: moving ahead with additional sanctions on Iran aimed at preventing it from getting a nuclear weapon; military action is still on the table
• Fedex [FDX]: Said an operational error prevented one of Huawei's packages from being delivered to the US; China Global Times said Fedex is likely to be added to China's 'unreliable entities' list

Europe

• (IT) EU expected to pause budget crackdown on Italy, EU to this week hold off on launching disciplinary process against Italy – FT
• (TU) Turkey opposition CHP party won the Istanbul mayoral election, CHP candidate Imamoglu is leading by a 54% to 45% margin over the ruling AKP (99% of the ballots counted) - FT
• Daimler [DAI.DE]: Cuts Mercedes-Benz Vans FY19 outlook: Now sees FY19 Group EBIT to be in the magnitude of the prior year; Guides Mercedes-Benz Vans FY19 return on sales -4% to
• 2% (vs 0 to +2% prior) ; Notes increase in provisions

Levels as of 1:20 ET

• Nikkei 225, +0.2%, ASX 200 flat, Hang Seng +0.1%; Shanghai Composite -0.1%%; Kospi flat
• Equity Futures: S&P500 +0.3%; Nasdaq100 +0.4%, Dax +0.3%; FTSE100 +0.3%
• EUR 1.1387-1.1367 ; JPY 107.45-107.26 ; AUD 0.6962-0.6926 ;NZD 0.6602-0.6587
• Gold +0.4% at $1,405/oz; Crude Oil +0.7% at $57.84/brl; Copper +0.1% at $2.704/lb

Timing of the next RBA rate cut moved from August to July.

We have decided to bring forward the timing of the next RBA rate cut from August to July. We are surprised that we have to do this, given that a pause between cuts might have allowed for a smoother transmission process but cannot deny the explicit signals provided in the Governor’s more recent speech. This includes: that it would “… be unrealistic to expect that lowering interest rates by ¼ of a percentage point will materially shift the path we look to be on”; that “the possibility of lower rates remains on the table”; and that it “is not unrealistic to expect a further reduction in the cash rate.” These are early days for interpreting this Governor’s language at a time when policy is active. However based on our experience with other central bankers, this language is direct. As such, we now expect a cut in July that will substitute for the move we had originally expected in August. This will complete the two cuts we originally forecast on February 21 when markets were priced for only one cut by March 2020. The timing however is somewhat earlier than we anticipated back in February.

It was reasonable to expect that the Bank would lower its growth and inflation forecasts in the August Statement on Monetary Policy and acknowledge that decision by cutting in August. However it now appears that, based on the Governor’s speech, he may decide to hold steady on the May growth and inflation forecasts. In particular, the Governor stressed that the decision to cut in June “was not in response to a deterioration in the economic outlook since the previous update was published in early May”. Note that the May forecasts were conditioned on market pricing which included two rate cuts by the end of 2019. With those cuts set to be delivered the August forecast update will also benefit from markets pricing in a further rate cut to 0.75% by the end of 2019. The wording in the Statement in August will probably include something along the lines of “having already cut rates twice”.

Readers will recall that on May 24 Westpac forecast a terminal rate in November of 0.75%. This was ahead of all major forecasters (Bloomberg survey May 24) and market pricing. Although the Bank may decide to hold its growth and inflation forecasts steady in the August Statement on Monetary Policy we do not expect it to be possible to sustain this view through to November. Westpac expects growth of 2.2% in 2019 and underlying inflation of 1.4%. Official forecasts more in line with those estimates are likely by November meaning it will not be possible to credibly lower the Bank’s unemployment rate forecast, which currently stands at 5%, well above the 4.5% level now assessed as full employment. That combination means a further rate cut would be appropriate.

When we released the May 24 forecast we noted that the risk to the rate view was to the downside with a potential terminal rate of 0.5% possible. We remain comfortable with the 0.75% target but recognise that given the current official intense focus on lowering the unemployment rate these downside risks have increased. The focus on the unemployment rate also raises prospects for less predictable timing of the rate cut decision. In previous cycles growth and inflation and changes to associated forecasts have dominated the timing of decisions with most rate cuts timed for February, May, August and November. As we expect to see in July, that timing has changed because updates on the labour market are available monthly rather than quarterly. Accordingly it is possible that our November target date for the rate cut after July is more flexible than in previous cycles.

For the 24 hours to 23:00 GMT, the EUR rose 0.67% against the USD and closed at 1.1368 on Friday.

On the macro front, the Euro-zone's preliminary manufacturing PMI rose to a level of 47.8 in June, undershooting market consensus for a gain to a level of 48.0. In the prior month, the PMI had recorded a level of 47.7. Moreover, the region's flash services PMI advanced to a level of 53.4 in June, more than market expectations for a rise to a level of 53.0. The PMI had recorded a level of 52.9 in the previous month.

Separately, in Germany, the Markit preliminary manufacturing PMI climbed to a level of 45.4 in June, surpassing market anticipations for a rise to a level of 44.6. In the previous month, the PMI had registered a level of 44.3. Further, the nation's preliminary services PMI unexpectedly jumped to a level of 55.6 in June, defying market consensus for a fall to a level of 55.2. The PMI had registered a level of 55.4 in the previous month.

In the US data showed that the flash manufacturing PMI unexpectedly fell to a level of 50.1 in June, marking its lowest level since September 2009, amid prolonged weakness in the manufacturing and services sector. In the preceding month, the PMI had recorded a level of 50.5, while market participants had envisaged for a steady reading. Meanwhile, the nation's flash Markit services PMI surprisingly declined to a level of 50.7 in June, defying market expectations for a gain to a level of 51.0. The PMI had registered a reading of 50.9 in the previous month. Meanwhile, the US existing home sales advanced 2.5% on monthly basis, to a level of 5.3 million in May, compared to a revised level of 5.2 million in the prior month.

In the Asian session, at GMT0300, the pair is trading at 1.1385, with the EUR trading 0.15% higher against the USD from Friday's close.

The pair is expected to find support at 1.1317, and a fall through could take it to the next support level of 1.1248. The pair is expected to find its first resistance at 1.1420, and a rise through could take it to the next resistance level of 1.1454.

Looking ahead, traders would await Germany's IFO survey indices for June, slated to release in a few hours. Later in the day, the US Chicago Fed National Activity Index for May and the Dallas Fed manufacturing activity for June, will garner significant amount of investor's attention.

The currency pair is trading above its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the GBP rose 0.28% against the USD and closed at 1.2741 on Friday.

Macroeconomic data showed that UK's public sector net borrowing deficit narrowed to £4.5 billion in May, from a revised deficit of £6.2 billion in the prior month. Market participants had envisaged the public sector net borrowing to post a deficit of £3.2 billion.

In the Asian session, at GMT0300, the pair is trading at 1.2753, with the GBP trading 0.09% higher against the USD from Friday's close.

The pair is expected to find support at 1.2678, and a fall through could take it to the next support level of 1.2604. The pair is expected to find its first resistance at 1.2792, and a rise through could take it to the next resistance level of 1.2832.

The currency pair is trading above its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the USD slightly rose against the JPY and closed at 107.34 on Friday.

In the Asian session, at GMT0300, the pair is trading at 107.37, with the USD trading marginally higher against the JPY from Friday’s close.

The pair is expected to find support at 107.03, and a fall through could take it to the next support level of 106.70. The pair is expected to find its first resistance at 107.72, and a rise through could take it to the next resistance level of 108.08.

Trading trend in the Japanese Yen today, is expected to be determined by the Bank of Japan’s monetary policy meeting minutes, set to release overnight.

The currency pair is showing convergence with its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the USD declined 0.43% against the CHF and closed at 0.9770 on Friday.

In economic news, Switzerland's M3 money supply rose 3.4% on a yearly basis in May, following a climb of 3.5% in the prior month.

In the Asian session, at GMT0300, the pair is trading at 0.9766, with the USD trading a tad lower against the CHF from Friday's close.

The pair is expected to find support at 0.9734, and a fall through could take it to the next support level of 0.9703. The pair is expected to find its first resistance at 0.9818, and a rise through could take it to the next resistance level of 0.9871.

With no macroeconomic releases in Switzerland today, investors would look forward to global macroeconomic releases for further direction.

The currency pair is trading below its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the USD rose 0.14% against the CAD and closed at 1.3210 on Friday.

Data showed that Canada's retail sales advanced 0.1% on a monthly basis in April, undershooting market consensus for a rise of 0.2%. In the prior month, retail sales had recorded a revised climb of 1.3%.

In the Asian session, at GMT0300, the pair is trading at 1.3192, with the USD trading 0.14% lower against the CAD from Friday's close.

The pair is expected to find support at 1.3162, and a fall through could take it to the next support level of 1.3132. The pair is expected to find its first resistance at 1.3226, and a rise through could take it to the next resistance level of 1.3260.

Amid lack of economic releases in Canada today, traders would focus on global macroeconomic events for further direction.

The currency pair is showing convergence with its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the AUD rose 0.10% against the USD and closed at 0.6927 on Friday.

LME Copper prices declined 0.4% or $21.0/MT to $5941.0/MT. Aluminium prices declined 1.9% or $34.5/MT to $1743.5/MT.

In the Asian session, at GMT0300, the pair is trading at 0.6957, with the AUD trading 0.43% higher against the USD from Friday’s close.

The pair is expected to find support at 0.6920, and a fall through could take it to the next support level of 0.6882. The pair is expected to find its first resistance at 0.6978, and a rise through could take it to the next resistance level of 0.6998.

In absence of key economic releases in Australia today, investor sentiment would be determined by global macroeconomic events.

The currency pair is trading above its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, Gold rose 0.67% against the USD and closed at USD1402.00 per ounce on Friday, amid expectations of an interest rate cut by the Federal Reserve and persistent geopolitical tensions in the Middle East.

In the Asian session, at GMT0300, the pair is trading at 1409.60, with gold trading 0.54% higher against the USD from Friday’s close.

The pair is expected to find support at 1392.00, and a fall through could take it to the next support level of 1374.40. The pair is expected to find its first resistance at 1421.30, and a rise through could take it to the next resistance level of 1433.00.

The yellow metal is trading above its 20 Hr and 50 Hr moving averages.