Sample Category Title

Markets

Global core bonds treaded water in today’s eco/event thin opening session to a jampacked week. The only noteworthy exception was disappointing June Empire Manufacturing business sentiment which fell from 17.8 to -8.6, the lowest since 2016. Details showed weakness in employment and new orders. This evening’s opening remarks from ECB president Draghi at the central bank’s Sintra conference remain a wildcard. However, we expect the ECB’s number one to hold close to the dovish guidance set out at the previous meeting. The US yield curve currently bear flattens with yields 2 bps (2-yr) to 0.2 bps (30-yr) higher. The German yield curve bear steepens with yields rising up to 2.3 bps (30-yr). The Belgian debt agency successfully tapped 4 OLO’s (€0.8bn 0.50% Oct2024, €0.987bn 0.9% Jun2029, €0.525bn 1.9% Jun2038 & 0.89bn 2.15% Jun2066) for a combined €3.2bn, the maximum on offer. The total auction bid cover was a very healthy 1.99, with especially strong interest for the very long OLO on offer (2.07x) in another sign that investors are buying into the ECB’s dovish guidance early this month. The Belgian debt agency now raised over 76% of this year’s stated OLO funding need (€21.5bn from €28bn).

EUR/USD was looking for direction this morning in the wake of Friday’s steep decline. That move was in the first place driven by the solid US data on Friday. However, investors considering a rising probability of further ECB easing probably was also in play and reinforced the EUR/USD decline. The euro remained in the defensive this morning with EUR/USD hovering in low 1.12 area. Potential guidance from the ECB forum in Sintra probably was an additional reason for euro caution. Even so, the 1.12 support held and EUR/USD regained a few ticks in the run-up to the US trading session. The US empire manufacturing survey posted a big miss (decline from 17.8 to -8.6, 11 was expected). Normally one wouldn’t expect a big market reaction to this indicator just two days before a Fed decision. However, given current uncertainty on the new Fed guidance and on the reaction function of markets (the gap between market expectations and Fed guidance will remain huge), the dollar ceded some further ground. EUR/USD is trading in the 1.1240 area. USD/JPY dropped from the 108.70 area to trade again in the mid 108 area. One can expect more erratic USD trading in the run-up to  Wednesday’s Fed meeting.

Sterling trading was mostly technical in nature and followed the broader moves of the euro and the dollar as markets await the next vote in the contest for the leadership of the Conservative party, scheduled for tomorrow. EUR/GBP gained a few ticks further north of 0.89 in line with the overall euro rebound. The decline of the dollar post the Empire manufacturing release prevented a further decline cable. The pair is again trading in the 1.26 area. Still, the picture for the UK currency remains fragile. The GBP/USD 1.2560 support remains within reach.

News Headlines

The US Empire Manufacturing index (June) plunged into negative territory (-8.6) for the first time since September 2016, meaning the majority of respondents expect general business conditions to worsen. New orders and employment slipped to -12 and -3.5 respectively. NY manufacturing business conditions 6m ahead also deteriorated compared last month but are still considered favourable (25.7 vs. 30.6).

Iran said that it would breach some of the nuclear limits agreed under the 2015 Joint Comprehensive Plan of Action in 10 days if Europe does not take action to alleviate US pressure on the country. Iran wants Europe to throw an economic life as US sanctions start to take their toll.

Daily Pivots: (S1) 1.1180; (P) 1.1234; (R1) 1.1266; More......

EUR/USD recovers mildly today but stays below 1.1268 minor resistance. Intraday bias stays on the downside and further fall could be seen to 1.1107 low. We'd be cautious on strong support from there to bring rebound. On the upside, above 1.1268 minor resistance will turn bias back to the upside for 1.1347 again.

In the bigger picture, considering bullish convergence condition in daily and weekly MACD, a medium term bottom could be in place at 1.1107 after hitting 61.8% retracement of 1.0339 (2016 low) to 1.2555 (2018 high) at 1.1186. Hence, for now, risk will stay on the upside as long as 1.1107 low holds. Break of 1.12347 will extend the rebound towards 38.2% retracement of 1.2555 to 1.1107 at 1.1660. However, sustained break of 1.1107 will confirm resumption of down trend from 1.2555.

Daily Pivots: (S1) 1.2551; (P) 1.2619; (R1) 1.2660; More....

Intraday bias in GBP/USD remains on the downside at this point. Break of 1.2559 support should confirm resumption of whole fall from 1.3381 and target 1.2391 low next. On the upside, above 1.2653 minor resistance will delay the bearish case and bring more consolidations first. But in case of another recovery, upside should be limited by by 1.2865 support turned resistance to bring fall resumption eventually.

In the bigger picture, medium term decline from 1.4376 (2018 high) is possibly ready to resume. Decisive break of 1.2391 would target a test on 1.1946 long term bottom (2016 low). For now, we don't expect a firm break there yet. Hence, focus will be on bottoming signal as it approaches 1.1946. In any case, medium term outlook will stay bearish as long as 1.3381 resistance holds, in case of strong rebound.

Daily Pivots: (S1) 0.9943; (P) 0.9969; (R1) 1.0013; More...

Outlook in USD/CHF remains unchanged. Intraday bias stays neutral with focus on 1.0008 support turned resistance. As long as 1.0008 holds, further decline is still expected. Sustained break of 0.9836 fibonacci level should confirm medium term reversal. However, break of 1.0008 will indicate completion of fall from 1.0237 and turn bias to the upside.

In the bigger picture, USD/CHF's break of long term trend line support is the first indication of medium term reversal. That is, rise from 0.9186 (2018 low) could have completed at 1.0237 already). Sustained break of 38.2% retracement of 0.9186 to 1.0237 at 0.9836 will confirm and target 61.8% retracement at 0.9587. However, strong rebound from 0.9836 will revive medium term bullishness for 1.0237 and above.

Daily Pivots: (S1) 108.28; (P) 108.43; (R1) 108.72; More...

Outlook in USD/JPY remains unchanged as consolidation from 107.81 is extending. Intraday bias remains neutral first. Upside should be limited by 109.02 support turned resistance to bring fall resumption. On the downside, sustained break of 61.8% retracement of 104.69 to 112.40 at 107.63 will pave the way back to 104.62/9 key support. However, break of 109.02 support turned resistance will indicate short term bottoming and bring lengthier consolidations first.

In the bigger picture, decline from 118.65 (Dec 2016) is still in progress, with the pair staying inside long term falling channel. Break of 104.62 will target 100% projection of 118.65 to 104.62 from 114.54 at 100.51. For now, we'd expect strong support above 98.97 (2016 low) to contain downside to bring rebound.

Daily Pivots: (S1) 1.6266; (P) 1.6315; (R1) 1.6352; More...

EUR/AUD's break of 1.6363 temporary top suggests resumption of recent rally from 1.5683. Intraday bias is back on the upside for 61.8% projection of 1.5683 to 1.6262 from 1.6052 at 1.6410 first. Break will target 100% projection at 1.6631 next. On the downside, break of 1.6298 minor support will turn intraday bias neutral and bring consolidations again. But downside should be contained well above 1.6052 support to bring rise resumption.

In the bigger picture, as long as 1.5346 support holds, outlook will still remain bullish. Up trend from 1.1602 (2012 low) is expected to resume sooner or later. Break of 1.6765 will target 61.8% retracement of 2.1127 (2008 high) to 1.1602 at 1.7488 next. However, firm break of 1.5346 key support will indicate trend reversal, with bearish divergence condition in weekly MACD, and turn outlook bearish.

Euro strengthens broadly in mixed forex markets today. Record wage growth in Q1 is a factor under-pinning the common currency. Poor US economic data also helps. But at this point, strength mainly centers in crosses, against Aussie most notably. Meanwhile, New Zealand Dollar is the second strongest one for today so far. On the other hand, Australian Dollar is the weakest despite relatively steady risk sentiments, followed by Canadian.

Technically, while EUR/USD recovers today, it's held well below 1.1268 minor resistance. Hence, more downside is still in favor towards 1.1107 low. Similarly, EUR/JPY is held below 122.17 minor resistance. And more decline is in favor to 120.78 support. Nevertheless, EUR/AUD's break of 1.6363 temporary top suggests rally resumption. EUR/GBP should also be on track to extend recent rally.

In Europe, currently, FTSE is down -0.17%. DAX is down -0.18%. CAC is up 0.16%. German 10-year yield is up 0.0083 to -0.243. Earlier in Asia, Nikkei rose 0.03%. Hong Kong HSI rose 0.40%. China Shanghai SSE rose 0.20%. Singapore Strait Times dropped -0.45%. Japan 10-year JGB yield dropped -0.029 to -0.127.

US Empire State Manufacturing dropped to -8.6, largest decline on record

US Empire State Manufacturing index dropped by a record -26 pts to -8.6 in June. That's much worse than expectation of 11. It's also the first negative reading in more than two years. Looking at some details, new orders receded, while shipments increased modestly. Unfilled orders fell, and delivery times and inventories moved slightly lower. Labor market indicators pointed to small declines in employment and hours worked.

Index for future business conditions dropped -5 pts to 25.7. capital expenditure index dropped -11 pts to 10.5, pointing to slower growth in capital spending. Firms expected solid increases in employment but no change in the average workweek in the months ahead.

Eurozone labor costs rose 2.4%, wages grew record 2.5%

Eurozone hourly labor costs rose 2.4% yoy in Q1, accelerated from 2.3% yoy in Q4, but missed expectation of 2.6% yoy. On of the main components, wages & salaries per hour rose 2.5% yoy, accelerated from 2.3%. That's also the highest rise since record started in 2010. Another one, no-wage component rose 2.2% yoy, slowed from 2.4% yoy.

Breaking down by economic activity, hourly labour costs rose by 2.5% in industry, by 2.3% in construction, by 2.4% in services and by 2.5% in the (mainly) non-business economy.

EU28 hourly costs rose 2.6% yoy, slowed down from 2.8% yoy. Among the member states, the highest annual increases in hourly labour costs for the whole economy were registered in Romania (16.3%) and Bulgaria (12.9%), while the only decrease was recorded in Greece (-0.2%).

ECB Coeure: Tiering system may be needed if rate cuts is the way to go

In a Financial Times interview, ECB Executive Board member Benoit Coeure said the Eurozone economy is not performing too badly for now, as supported by services and construction. However, signals from the financial markets, in particular from bonds, were "quite alarming".

He added ECB have different tools to use if outlook worsened. If cutting interest rates is the beat option, ECB would have to "consider the impact of negative rates on financial intermediation, especially for banks". In that case, policymakers "would have to consider whether a tiering system is needed." But he also emphasized that "today the prevailing view in the Governing Council is that it is not, but we also agree that it deserves further reflection."

On reviewing ECB's inflation target, Coeure said "we have more urgent issues to face right now, but I'm pretty sure that we'll do it at some point nevertheless."

Bundesbank: Dichotomy in German economy will continue, GDP may shrink slightly in Q2

Bundesbank said in the monthly report that "the German economy should shrink slightly in the spring", referring to Q2. That's because "special effects that contributed to a noticeable rise in gross domestic product in the first quarter are either expiring or being reversed."

The report added that Germany is facing headwinds from trade tensions, Brexit and slowdown in the global economy. These factors are weighing down on the export-led manufacturing sector. Nevertheless, "the buoyant forces underpinning the strong domestic-oriented sectors of the economy remain fundamentally intact". Overall, "the dichotomy in the economy will continue."

BCC: Contraction in business investment to drag UK growth in 2020 and 2021

The British Chambers of Commerce revised up 2019 UK growth forecast to 1.3% (from 1.2%), driven by the "exceptionally rapid stock-building" early in the year. However, 2020 growth forecast was downgraded notably to 1.0% (from 1.3%), 2021 downgraded to 1.2% (from 1.4%). In particular, business investment is forecast to contract -1.3% in 2019 before recovering slightly by 0.4% 2020.

Adam Marshall, Director General of BCC noted: "Businesses are putting resources into contingency plans, such as stockpiling, rather than investing in ventures that would positively contribute to long-term economic growth. This is simply not sustainable",

Suren Thiru, Head of Economics at BCC said: "The deteriorating outlook for business investment is a key concern as it limits the UK's productivity potential and long-term growth prospects.... A messy and disorderly exit from the EU remains the main downside risk to the UK's economic outlook as the disruption caused would increase the likelihood of the UK's weak growth trajectory translating into a more pronounced deterioration in economic conditions."

EUR/AUD Mid-Day Outlook

Daily Pivots: (S1) 1.6266; (P) 1.6315; (R1) 1.6352; More...

EUR/AUD's break of 1.6363 temporary top suggests resumption of recent rally from 1.5683. Intraday bias is back on the upside for 61.8% projection of 1.5683 to 1.6262 from 1.6052 at 1.6410 first. Break will target 100% projection at 1.6631 next. On the downside, break of 1.6298 minor support will turn intraday bias neutral and bring consolidations again. But downside should be contained well above 1.6052 support to bring rise resumption.

In the bigger picture, as long as 1.5346 support holds, outlook will still remain bullish. Up trend from 1.1602 (2012 low) is expected to resume sooner or later. Break of 1.6765 will target 61.8% retracement of 2.1127 (2008 high) to 1.1602 at 1.7488 next. However, firm break of 1.5346 key support will indicate trend reversal, with bearish divergence condition in weekly MACD, and turn outlook bearish.

Economic Indicators Update

US Empire State Manufacturing index dropped by a record -26 pts to -8.6 in June. That's much worse than expectation of 11. It's also the first negative reading in more than two years. Looking at some details, new orders receded, while shipments increased modestly. Unfilled orders fell, and delivery times and inventories moved slightly lower. Labor market indicators pointed to small declines in employment and hours worked.

Index for future business conditions dropped -5 pts to 25.7. capital expenditure index dropped -11 pts to 10.5, pointing to slower growth in capital spending. Firms expected solid increases in employment but no change in the average workweek in the months ahead.

Full release here.

Entering into US session, the forex markets are a bit mixed for the moment as more important events, like FOMC meeting, lie in the week again. Euro is lifted mildly by record wage growth in Q1. Though, New Zealand Dollar is the strongest one for now. At the same time, Australian Dollar is the weakest for today so far, followed by Yen. Data from US and Canada are unlikely to trigger much reactions.

Nevertheless, Euro crosses are worth a watch in the rest of the day. In particular, EUR/AUD's strong rally in early US session suggests that recent rise might be extending after very brief consolidation since Thursday. 1.6363 temporary top is the level to watch. Also, EUR/GBP could also extend recent rally through last week's high at 0.8932.

In Europe, currently:

• FTSE is down -0.16%.
• DAX is down -0.03%.
• CAC is up 0.22%.
• German 10-year yield is up 0.0121 at -0.239.

Earlier in Asia:

• Nikkei rose 0.03%.
• Hong Kong HSI rose 0.40%.
• China Shanghai SSE rose 0.20%.
• Singapore Strait Times dropped -0.45%.
• Japan 10-year JGB yield dropped -0.029 to -0.127.

WTI oil price was a tad lower in Europe on Monday after advancing last Thu/Fri on rising tensions in the Middle East after two tankers were attacked in Gulf. Overall structure remains bearish as fears of lower global demand on persisting trade tensions that may escalate, keep oil price under pressure and offsetting for now attempts of OPEC+ to extend agreement for reduced production in order to stabilize oil market. Monday's price action remains below 10SMA (currently at $52.61) which tracks the price for almost one month and capped last week's recovery attempts, maintaining bearish bias. Weakening momentum adds to negative outlook, with repeated close below 10SMA expected to increase risk of revisiting base at $50.59/71, which marks key near-term support. Break here would signal continuation of two-month downtrend from $66.58 and test of psychological $50 support. On the other side, close above 10SMA would provide relief, but lift above 10June recovery high (54.79) is needed to signal reversal.

Res: 52.61, 52.96, 53.43, 54.02
Sup: 52.05, 51.61, 51.17, 50.71