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Mixed start to the week ahead of Fed meeting

We're seeing mixed trade at the start of the week and gains may continue to be limited by events over the coming days.

The most obvious of these is of course the Fed meeting on Wednesday. Expectations may still be low when it comes to a rate cut but that by no means is a given. The timing of the meeting, coming just before Trump and Xi's meeting at the G20, is clearly a good reason to hold off with the outcome of that potentially strongly influencing the path to come.

That said, the central bank has favored these quarterly meetings in the past for monetary policy changes as they're accompanied by new economic projections which can justify the moves. Either way, this weeks meeting will be interesting.

Even in the absence of a rate cut, the Fed will release new economic projections and the dot plot of interest rate expectations at a time of considerable uncertainty.

Fed Interest Rate Probabilities

If the markets are correct and they're planning to cut in July – currently 82% priced in vs only 18% this week – we should expect a clear signal of such this week, one which policy makers may be forced to act on regardless of the outcome of next weeks talks at the G20 in Japan.

The outcome of the meeting this week though is far from certain, which may feed into the feeling of wariness at the start of the week.

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."

Notes/Observations

• Quiet start to trading week with participant prepare for Fed meeting mid-week
• Risk that a new UK Conservative leader could pursues a hard Brexit
• Analysts note that potential ECB action was at risk of being triggered

Asia:

• Hong Kong Chief Executive Carrie Lam announced delay extradition bill indefinitely (didn't withdraw it); protests continuing for Lam's resignation
• China NDRC spokesperson stated to study and roll out relevant policies on rare earth as soon as possible

Europe/Mideast:

• ECB De Guindos (Spain): ECB will act if inflation expectations are de-anchored
• ECB Nowotny (Austria): Reiterates that ECB still had instruments to support euro zone economy in case of a recession or deflation risk, additional instruments were not needed in foreseeable future
• Italy said to have about a week to reply to the EU regarding its public finances. PM' Conte letter to the EU Commission will ask that the EU reviews a rule that requires member states to keep the budget deficit within 3% of GDP
• UK Conservative leadership candidates for PM debate Sunday night but none seem to agree on how to deal with Brexit and to reach a deal with EU (Note: Boris Johnson was absent from the debate)

Americas:

• US Commerce Sec Ross downplayed the chances of a major trade deal being announced if President Trump/Xi meet at the G20; thinks the most that will come out of it might be agreement to actively resume talks

Energy:

• Saudi Energy Min Al-Falih stated that he hoped to get oil market into balance before 2020 and hoped that OPEC agreed to extend production cut at expected meeting in early July

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 +0.1% at 379.2, FTSE +0.2% at 7357, DAX +0.2% at 12115, CAC-40 +0.2% at 5376, IBEX-35 -0.2% at 9171, FTSE MIB +0.3% at 20668, SMI +0.1% at 9859, S&P 500 Futures +0.1%]
• Market Focal Points/Key Themes: European Indices trade mixed trading within a narrow range following a mixed session in Asia and slightly higher US futures. Shares of Lufthansa is a notable decliner weighing on the Dax falling over 10% as the company cut its full year guidance due to falling prices and challenging environment; Kier Group also continues to fall following job cuts and suspending dividend, with Staffline another notable decline falling almost 30% on a potential capital raise and dividend suspension. H&M shares reverse earlier gains after prelim Q2 Rev came ahead of forecasts, while NeuroSearch declines on a profit warnings. Meanwhile Babcock International gains on a rejected combination offer from Serco; Deutsche Bank gains on reports of moving €30-50B in assets into a bad bank, while WPP gains on talks to sell a majority take in The Farm to Picture shop.

Equities

• Consumer discretionary: H&M [HMB.SE] -1.9% (Q2 sales), WPP Group [WPP.UK] +1.3% (to announce sale of majority stake in The Farm to Picture Shop), Lufthansa [LHA.DE]: -12% (lowers FY19 Rev guidance), Staffline Group (STAF.UK) -29% (Group update, suspends dividend, potential placing)
• Financials: Deutsche Bank AG [DBK.DE] +1.8% (to create €30-50B in assets into "bad bank")
• Healthcare: Novozymes [NZYMB.DK] -0.6% (strategy update for 2020-2022)
• Industrials: Babcock International [BAB.UK] +4% (confirms merger with Serco), Kier Group [KIE.UK] -10% (cuts 1.2K jobs, suspends dividend), Continental [CON.DE] -1.3% (Analyst downgrade)

Speakers

• ECB's Coeure (France): Global indicators on inflation seem bleak. Markets were sending quite an alarming message that was at odds with benign economic data. Central banks should never ignore market signals , nor follow them blindly either
• ECB's Cos (Spain): Spain should focus on resolving structural reforms
• India Central Bank (RBI) Gov Das: End of political uncertainty to reverse economic weakness
• China Foreign Ministry spokesperson Lu Kang: Central govt to continue support Hong Kong Chief Executive Lam. To release news on President Xi's visit to G20 when we have some
• Iran nuclear spokesperson: Country to surpass level for low-enriched uranium in Jun. Still time for European countries to help protect Iran from US sanctions but needed action not words

Currencies/Fixed Income

• USD: The greenback maintained its recent gains it mustered from late last week on the back of better data. Focus on the mid-week Fed rate decision. Lots of analysts have turned dovish in recent months with a potential of 75bps in cuts from the Fed possible. However, Goldman Sachs saw only a 10% chance that any such move would occur this week. Also focus remains on mid-east situation as tension between the US and Iran heat up following the recent attacks on the oil tankers. EUR: Session saw no fundamental catalysts for the Euro to find any legs to move higher. Dealers note that Friday's June Euro Zone PMIs were expected to remain consistent with sluggish economic activity. Analysts note that potential ECB action was at risk of being triggered

Economic Data

• (DK) Denmark May PPI M/M: -0.4% v +0.7% prior; Y/Y: -0.4% v +1.2% prior
• (NO) Norway May Trade Balance (NOK): 11.3B v 17.3B prior
• (CZ) Czech May PPI Industrial M/M: 0.5% v 0.2%e; Y/Y: 3.8% v 3.5%e
• (TR) Turkey Mar Unemployment Rate: 14.1%v 14.7% prior
• (CH) Swiss Weekly Total Sight Deposits (CHF): 578.5B v 578.1B prior; Domestic Sight Deposits: 467.6B v 469.1B prior
• (IT) Italy Apr General Government Debt: €2.373T (record level) v €2.359T prior
• (EU) Euro Zone Q2 Labour Costs Y/Y: 2.4% v 2.3% prior

Fixed Income Issuance

• (NO) Norway sold NOK6.0B vs. NOK6.0B indicated in 12-month Bills; Avg Yield: 1.20% v 1.14% prior; Bid-to-cover: 2.01x v 2.48x prior
• (SK) Slovakia Debt Agency (Ardal) sold total €227M in 2028 and 2030 bonds

Looking Ahead

• (UR) Ukraine Central Bank Jun Minutes
• US public hearing on $300B in additional tariffs on China starts Monday
• 05:30 (NL) Netherlands Debt Agency (DSTA) to sell bills
• 05:30 (DE) Germany to sell €3.0B in 6-month BuBills
• 05:30 (BE) Belgium Debt Agency (BDA) to sell €3.2B in 2024, 2038, and 2066 OLO Bonds
• 05:30 (ZA) South Africa announces details of upcoming I/L bond sale (held on Fridays)
• 06:45 (US) Daily Libor Fixing
• 07:00 (IN) India announces details of upcoming bond sale (held on Fridays)
• 07:25 (BR) Brazil Central Bank Weekly Economists Survey
• 08:00 (PL) Poland May CPI Core M/M: -0.3%e v +1.0% prior; Y/Y: 1.6%e v 1.7% prior
• 08:00 (UK) Daily Baltic Dry Bulk Index
• 08:00 (ES) Spain Debt Agency (Tesoro) announces size of upcoming issuance; to sell €B in 2021, 2024 and 2035 bonds on Thursday, Jun 20th
• 08:30 (US) Jun Empire Manufacturing: 12.0e v 17.8 prior
• 08:30 (CA) Canada Apr Int'l Securities Transactions (CAD): No est v -1.5B prior
• 09:00 (FR) France Debt Agency (AFT) to sell combined €3.7-4.9B in 3-month, 6-month and 12-month Bills
• 10:00 (US) Jun NAHB Housing Market Index: 67e v 66 prior
• 11:30 (US) Treasury to sell 3-Month and 6-Month Bills
• 13:00 (EU) ECB's Draghi in Portugal
• 16:00 (US) Apr Net Long-term TIC Flows: No est v -$28.4B prior; Total Net TIC Flows: No est v -$8.1B prior

All eyes on the Fed

Safe to say, it's been a slow start to the trading week, not altogether too surprising given what we have to come.

It is often the case that when we have a big central bank meeting, traders can take a more cautious approach and it seems that this week is shaping up to be no different. Given that expectations for a rate cut are so low - around 20% at the time of writing - and so high in July - 81% - you'd be forgiven for wondering why we're seeing such caution but the reason is quite straightforward.

There remains a huge element of uncertainty about how and when the Fed will cut interest rates because of the meeting between Trump and Xi at the G20 meeting next week. The trade war between the world's two largest economies has created enormous uncertainty for both economies and weighed on the outlook, forcing the Fed to pause the tightening cycle and consider easing conditions instead. Should Trump and Xi overcome the impasse next week, it's likely that interest rate expectations will change and the Fed may hold off a little longer. With that in mind, it would make little sense to cut rates this week.

But that doesn't make the meeting straight forward because while rate cut expectations may be low, the meeting presents the ideal opportunity for policy makers to lay the groundwork for the rest of the year and market-based expectations are very aggressive - more than 50% chance of 75 basis point of cuts by the end of December. The central bank will release new economic forecasts alongside the dot plot so their intentions will be made very clear and equity markets have only been sustained recently by the expectation of at least two rate cuts. If the Fed lowers expectations ahead of the G20, equity markets could be in for a shock.

Oil steady after last week's spike

The escalation in the Gulf of Oman last week understandably sent oil prices higher, with WTI up around 4% at one point. Since then though, it's been slowly paring gains in the absence of any further escalation. This probably tells us a lot about how traders are viewing oil markets at the moment, ahead of the Trump, Xi meeting next week given that the cloudy global economic outlook is a major factor weighing on them.

For one, this is clearly viewed as only a minor escalation at this moment. If this was viewed any more significantly, given that 20% of oil passes through the Strait of Hormuz each day, prices would not have stabilized so quickly and after such a relatively small spike. It also suggests that the market remains bearish ahead of the G20, driven by lower demand expectations and record US output. Even the prospect of an OPEC+ output cut extension next month and rapidly declining Iranian output don't seem to be lifting prices, against the backdrop of these other issues.

Gold off its highs as dollar strengthens

Gold is trading lower again on Monday after coming aggressively off its highs on Friday as the dollar ended the week on a strong note. The yellow metal peaked around $1,360 before profit taking kicked in, which is understandable given that this once again comes around multi-year resistance. It's going to take a big push to break these levels but if it does, it could be a very bullish catalyst.

We may instead see a bit of a correction in gold, with $1,320 being notable support to the downside. A break below here may indicate a sharper correction is on the cards after such a strong run to the upside.

The US dollar has opened the new trading weekly strongly against the Japanese yen currency, following an ongoing move higher in the U.S dollar index. USDJPY bulls may start to target the 109.00 level if price continues to hold above the pivotal 108.60 level. Weakness below the 108.60 level may see the USDJPY pair start to slip back under the important 108.44 support level.

The USDJPY pair is only bearish while trading below the 108.60 level, key support remains at the 108.44 and 108.00 levels.

If the USDJPY pair trades above the 108.60 level, key technical resistance is found at the 108.80 and 109.00 levels.

The British pound has remained weak against the US dollar during the European trading session, with the pair repeatedly struggling to overcome the 1.2600 level. A further bearish breakdown below the 1.2560 level is likely to trigger the next heavy sell-off in the GBPUSD pair. Overall, broad based US dollar strength continues to weigh on most major currencies in Monday trade.

The GBPUSD pair is only bullish while trading above the 1.2600 level, key resistance is located at the 1.2630 and 1.2655 levels.

The GBPUSD pair is heavily bearish while trading below the 1.2600 level, key support is found at the 1.2560 and 1.2480 levels.

Cable is holding in narrow consolidation above 31 May low at 1.2559 on Monday, following strong bearish acceleration on Friday, sparked by solid US data. Consolidation may extend on oversold conditions, but overall picture remains negative as pound remains weighed down by fears of no-deal Brexit. Weekly bearish engulfing adds to bearish outlook for final attack at key 1.2559 support, break of which would open way for extension towards 2019 spike low at 1.2397, posted on 3 Jan. Thick 4-hr cloud (1.2660/1.2702, with cloud base being reinforced by converged 10/20SMA’s) should limit upticks and keep bears intact.

Res: 1.2601, 1.2626, 1.2660, 1.2682
Sup: 1.2571, 1.2559, 1.2508, 1.2476

The single European currency depreciated about 61 base points against the Japanese Yen on Friday. A breakout occurred through the lower boundary of an ascending channel during Friday's trading session.

As for the near future, it is likely that the EUR/JPY currency pair will edge higher during the following trading session. Bullish traders could aim for a resistance level formed by the 200-hour SMA at 122.31.

However, the 50-hour simple moving average at 122.06 could prevent bulls from making some gains within this session.

A narrow descending channel pattern has continued to guide the Australian Dollar lower against the US Dollar. The currency pair tested the lower boundary of the channel pattern at 0.6860 during Friday's trading session.

Everything being equal, it is likely that the AUD/USD exchange rate will aim for a resistance cluster formed by the 50-hour simple moving average and the upper border of the narrow descending channel pattern at 0.6896 within this session.

If the resistance cluster holds, a decline towards the monthly pivot point at 0.6852 could occur during the following trading session.

The US Dollar appreciated about 88 base points against the Canadian Dollar on Friday. The currency pair tested the upper boundary of a junior ascending channel pattern at 1.3420 at the end of Friday's trading session.

By and large, most likely, the USD/CAD exchange rate could lose some of its Friday's gains during the following trading session. Bearish traders might target the weekly pivot point at 1.3360 today.

If the weekly PP and the 50-hour simple moving average support level holds, the currency exchange rate will continue its upside momentum during the following trading session.