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Daily Pivots: (S1) 111.98; (P) 112.78; (R1) 113.30; More...

Intraday bias in USD//JPY remains on the downside for 55 day EMA (now at 112.03). The rejection from 114.36 resistance suggests that whole correction from 118.65 is possibly still in progress. Sustained break of 55 day EMA will pave the way to 108.12 and below. On the upside, above 113.57 minor resistance will turn focus back to 114.49 resistance instead.

In the bigger picture, the corrective structure of the fall from 118.65 suggests that rise from 98.97 is not completed yet. Break of 118.65 will target a test on 125.85 high. At this point, it's uncertain whether rise from 98.97 is resuming the long term up trend from 75.56, or it's a leg in the consolidation from 125.85. Hence, we'll be cautious on topping as it approaches 125.85. If fall from 118.65 extends lower, down side should be contained by 61.8% retracement of 98.97 to 118.65 at 106.48 and bring rebound.

China, the world's second largest economy and a driver of the emerging markets, has overperformed in terms of growth in the second quarter of the year, proving relief to policymakers who are currently engaged in efforts to limit financial risks from soaring debt levels and a brewing property bubble. Following the statistics, the Australian dollar bounced higher, reaching a more than one-a year high.

According to the National Bureau of Statistics of China, the Chinese economy grew at 6.9% year-on-year in the second quarter, beating the target of 6.5% set by the government and surprising analysts who anticipated that GDP will expand by 6.8%. Quarter-on-quarter, GDP growth was in line with expectations at 1.7% but was higher than the 1.3% estimated in the previous quarter.

Part of the expansion was attributed to the manufacturing sector, where the industrial output rose by 7.6% in June year-on-year, restoring the two-year high level reached in March. The figure was far above the forecast of 6.5% which was set at May's reading.

Other data out of China involved fixed asset investments and retail sales. The former was above the forecast but remained stable at the previous level of 8.6%, while the latter increased by 11%, higher than the 10.6% anticipated and the rate of 10.7% observed in May.

Although the above numbers are evidence of a stabilizing and sustainable economic growth, concerns remain around the high-leveraged housing market, where prices are also rising rapidly. Based on OECD calculations, the debt of non-financial entrepreneurs in China was the highest among major economies at 170% of GDP in 2016. To cool the overheated property market, the People's Bank of China (PBOC) has recently decided to restrict liquidity by tightening monetary policy, following the Fed's rate hike in March. Particularly, the PBOC has mainly targeted the short-term rates, increasing the seven-day repo rate (repurchase agreement rate) to a two-year high of 3.18% in the beginning of May.

In the forex markets, the release of the data lifted the Australian dollar against its US counterpart. The aussie surged immediately by 0.73%, hitting a near 15-month high of $0.7833.

Daily Pivots: (S1) 0.7755; (P) 0.7794; (R1) 0.7864; More...

AUD/USD's rally is still in progress and edges higher to 0.7838. Intraday bias remains on the upside at this point. Firm break of 0.7833 resistance will confirm resumption of whole rebound from 0.6826 bottom. In such case, AUD/USD would target 61.8% projection of 0.6826 to 0.7833 from 0.7328 at 0.7950 next. On the downside, below 0.7801 minor support will turn intraday bias neutral first. But near term outlook will stay cautiously bullish as long as 0.7570 support holds.

In the bigger picture, current development suggests that rebound from 0.6826 is developing into a medium term rise. There is no confirmation of trend reversal yet and we'll continue to treat such rebound as a corrective pattern. But in any case, further rise is now expected to 55 month EMA (now at 0.8100) or even further to 38.2% retracement of 1.1079 to 0.6826 at 0.8451. Break of 0.7328 support is needed to confirm completion of the rebound. Otherwise, further rise is now in favor.

The forex markets remain generally range-bound except that Swiss is attempting for a recovery. Meanwhile Aussie is extending last week's rally ahead of RBA minutes. Gold rides on Dollar's weakness and is extending last week rebound to 1234.7 so far. On ther other hand WTI crude oil is losing momentum again as it's struggling around 55 day EMA. Economic data released today triggered little reactions. Empire State manufacturing in US dropped to 9.8 in July, down from 19.8, below expectation of 9.8. Canada international securities transactions came in at CAD 29.5, above expectation of CAD 9.78b. Eurozone CPI was confirmed at 1.3% yoy in June while core CPI was unrevised at 1.1% yoy. Trading could remain subdued in US session. But events in upcoming Asian session from Australia and New Zealand might trigger some volatility.

RBA minutes, New Zealand CPI to be released

Minutes of RBA July meeting will be a main focus in the upcoming Asian session. The central bank disaapointed the markets at the meeting by not turning hawkish like other major central banks. Aussie tumbled sharply but the weakness was very brief. Instead Aussie jumped last week on strong iron ore prices as well as dovish Fed messages. The upbeat Chinese dataflow should also give Aussie a boost as China is the world's biggest consumer of iron ore and the largest importer of Australia's iron ores. The strength in the exchange rate could now give RBA some headache. The central bank repeatedly noted that "appreciating exchange rate would complicate" the economic transition from the mining investment boom

New Zealand CPI will be another main focus. CPI is expected to rise a mere 0.2% qoq in Q2, dragging down annual rate from 2.2% yoy to 1.9% yoy. Just when inflation hit the higest level in five years in Q1, there were expectation that RBNZ could turn hawkish. But the central bank disappointed by maintaining that policy would stay accommodative for a "considerable period" of time. The slowdown in inflation would affirm RBNZ's neutral stance.

AUD/NZD's strong rebound last week indcaites that fall from 1.1017 has compelted with a head and shoudler bottom pattern. Further rise could now be seen back to 1.1017 resistance. But after all, larger outlook is neutral as the cross is staying in side range of 1.0234/1.1017. Below 1.0493 minor support will extend the fall from 1.1017 to 1.0234 key supprot.

China GDP grew 6.9% in Q2.

Released from China, GDP expanded 6.9% yoy in Q2, same pace as the prior quarter but above consensus of 6.8%. Economic activities in June continued to improve. Industrial production growth accelerated to 7.6% yoy in June, beating consensus of and May's 6.5%. Retail sales expanded 11% yoy in June, up from 10.7% a month ago. The market had anticipated mild deceleration to 10.6%. Fixed asset investment in urban areas grew 8.6% yoy in the first half of the year, same pace as in the first five months of the year. The government acknowledged that the country's economy continued to improve. It appears that the country's growth is on track to meet the government target of "around 6.5%".

In his first address at the National Financial Work Conference, which is held once every five years, over the weekend, Chinese President Xi Jinping affirmed that the PBOC would play a stronger role in defending against risks, calling for more work on safeguarding the financial system and modernizing its regulatory framework. Interestingly, the word "risk" appeared 31 times in the meeting note, followed by "regulation", which appeared 28 times, signaling that implementation of "regulations" to prevent financial system "risks" is the key direction of the government's policy.

More in China Watch - 2017 Growth Target On Track, Xi Commands To Prevent Risks And Tighten Regulations

Brexit negotiation round 2

The second round of Brexit negotiation starts today in Brussels. UK Brexit Secretary David Davis said ahead of the week long meeting that "we made a good start last month, and this week we'll be getting into the real substance." He noted that "protecting the rights of all our citizens is the priority for me going into this round and I'm clear that it's something we must make real progress on." EU's chief negotiator Michel Barnier said that "we will now delve into the heart of the matter. We need to examine and compare our respective positions in order to make good progress."

There will be working groups focusing on three areas, including citizen's rights, the divorce bill and other loose ends. Another group will focus on the border of Ireland. Three more weeks of talks will be held till early October. By that time, Barnier would hope to show "significant" progress to EU leaders to approve moving the negotiations to trade agreements.

AUD/USD Mid-Day Outlook

Daily Pivots: (S1) 0.7755; (P) 0.7794; (R1) 0.7864; More...

AUD/USD's rally is still in progress and edges higher to 0.7838. Intraday bias remains on the upside at this point. Firm break of 0.7833 resistance will confirm resumption of whole rebound from 0.6826 bottom. In such case, AUD/USD would target 61.8% projection of 0.6826 to 0.7833 from 0.7328 at 0.7950 next. On the downside, below 0.7801 minor support will turn intraday bias neutral first. But near term outlook will stay cautiously bullish as long as 0.7570 support holds.

In the bigger picture, current development suggests that rebound from 0.6826 is developing into a medium term rise. There is no confirmation of trend reversal yet and we'll continue to treat such rebound as a corrective pattern. But in any case, further rise is now expected to 55 month EMA (now at 0.8100) or even further to 38.2% retracement of 1.1079 to 0.6826 at 0.8451. Break of 0.7328 support is needed to confirm completion of the rebound. Otherwise, further rise is now in favor.

Economic Indicators Update

The CAC index has recorded small gains to start off the week. Currently, the index is currently trading at 5240.50 and is up 0.15% on the day. In economic news, it's a quiet day. On the release front, Eurozone Final CPI edged down to 1.3%, matching the forecast. On Tuesday, the eurozone releases ZEW Economic Sentiment, with the markets expecting a strong reading of 37.2 points.

After a break for Bastille Day on July 14, French markets are back in action. President Emmanuel Macron hosted US president Donald Trump during the holiday. Macron is eager to make France an important player on the global stage, and is taking advantage of political and economic developments. Given that Trump and German chancellor Angela Merkel have a frosty relationship, Macron could serve as a go-between, as he has good relations with both Trump and Merkel. As well, France is eyeing Brexit as a golden opportunity to expand its financial sector and attract lucrative financial sector jobs which are leaving London. Many European companies will be downsizing their London operations, and the French are actively courting companies to consider moving to Paris. The first full round of Brexit talks began on Monday in Brussels, with the sides having agreed to first discuss the rights of EU citizens in the UK and Britain's bill for leaving the EU, before talks on a new trade agreement begin. With significant gaps between the parties on both of these issues, the negotiations promise to be difficult.

Although the eurozone economy has shown improvement in 2017, inflation remains at low levels. Eurozone Final CPI edged down from 1.4% to 1.3% in June, marking its weakest gain in 2017. Germany may be the catalyst of the eurozone's economic recovery, but the bloc's largest economy has not been immune to low inflation. Final CPI improved to 0.2% in June, compared to -0.2% in May. The ECB has set an inflation target of 2%, but German and eurozone inflation numbers remain well below that threshold. The ECB has acknowledged that economic conditions have improved, but insists that it has no plans to taper its ultra-loose monetary policy unless inflation levels move higher. The current asset-purchase plan is scheduled to wind up in December, and we're unlikely to see any changes in monetary policy unless inflation moves considerably higher in the second half of the year.

With the US labor market close to capacity and the unemployment rate at just 4.4%, economists are puzzled why this hasn't pushed inflation to higher levels. The Federal Reserve is also at a loss to explain the lack of inflation, but Fed Chair Janet Yellen insists that it's only a matter of time before inflation moves higher. In testimony before a Senate committee last week, Yellen insisted that it was "premature to conclude that the underlying inflation trend is falling well short of 2 percent", and that with a strong labor market "the conditions are in place for inflation to move up". However, the markets remain skeptical that the Fed will make a move before the end of the year, with the odds of a December hike at just 43%, according to the CME Group.

GBP/USD Breakout Needs Confirmation

The GBP/USD is trading in the red right now after the failure to resume the upside momentum, a minor decrease is natural after the impressive rally. Failed to climb above the 1.3112 Friday's high, the bears have stepped in and have taken the lead on the short term. Remains to see how long this will be, could come down only to test and retest the broken resistance before will resume the upside movement.

The perspective remains bullish on the Daily chart, personally I'm waiting for a fresh trading signal, that could come in the upcoming days if the broken resistance will hold.

We have a poor economic calendar today, the rate is driven by the technical factors, so the minor decrease is understandable. The US is to release only the Empire State Manufacturing Index, which could decrease from 19.8 to 15.2 points in July.

Price drops after the failure to reach and retest the upside line of the ascending channel, is pressuring the 150% Fibonacci line (ascending dotted line), could come down to test and retest the broken upper median line (UML) of the major descending pitchfork.

Is also approaching the 1.3000 psychological level, we may have a buying opportunity if will stay above the upper median line (UML) and above the first warning line (wl1) of the minor ascending pitchfork.

Personally, I'm still waiting for a confirmation that will increase further, you can see that we had another false breakout above the UML in the past. The sentiment will change drastically on the GBP/USD if the rate will stabilize above the UML, a major rebound will come if this scenario will happen.

Is very important to see what will happen on the USDX these days because is under massive selling pressure on the short term and could approach the 95.00 psychological level in the upcoming days.

USD/CHF Turned to the Downside Again

The currency pair has dropped aggressively since Friday and is targeting new lows on the Daily chart, is strongly bearish as the USDX stay in the seller's territory. Technically should drop further after a false breakout.

USD/CHF goes down after the false breakout above the 50% Fibonacci line (descending dotted line), also failed to stay above the 0.9634 static resistance and now looks determined to approach the 0.9551 previous low.

Support could be found at the lower median line of the descending pitchfork and at the lower median line (lml) of the minor ascending pitchfork, a breakdown below these levels will send the rate towards the second warning line (WL2) of the major ascending pitchfork.

EUR/JPY Eyeing a Crucial Breakdown

EUR/JPY is into a corrective phase on the Daily chart, this is natural after the amazing rally, has come back to test and retest the upper median line (UML) on the major ascending pitchfork, the median line (ml) of the minor ascending pitchfork and the 38.2% retracement level, a valid breakdown below these levels will open the door for more declines. However, we'll have a buying opportunity if will climb above the 129.30 level again.

• Dollar Doldrums
• ECB May Hold Fire
• New Opening For Pound

Investors over in Europe are sanguine after a more inspiring Chinese GDP reading. The Q2 GDP data came in at 6.9% ahead of the forecast of 6.58%. China is the second biggest economy of the world and the chief concerns were that we may be heading towards more than a soft landing but the recent economic readings have eased off those fears.

Dollar Doldrums

This week is primarily about the currency market. Firstly, investors are going to pick up the momentum where they left off when it comes to the dollar. Factors such as underwhelming US economic data, cautious testimony by the Fed Chairwomen, Janet Yellen and meagre inflation got the dollar bulls worried. We do think that the mighty dollar may be well oversold here and this is due to the fact that traders are questioning the Fed's ability to increase the interest rate one more time this year. They do expect the Fed to reduce the size of their balance sheet rather than to increase the interest rate this year and for many, that has become more significant. Scaling down the size of the balance sheet would make the dollar stronger and we do think that the market is not pricing this at all.

ECB May Hold Fire

The second most vital affair for the markets is the upcoming ECB meeting on Thursday. The speculations are high on both sides of the argument. Some say that the ECB will use this meeting to quench the fire about any rumours that the ECB is going to reduce its monetary stimulus. While the other side is making their argument that it is about time to scale back from the ultra-loose monetary policy. The president of the European central bank would have another opportunity if he thinks that he is not going to utilise this meeting to set the tone for reducing the size of its monetary policy before the next meeting. The central banker's symposium could be just the place where the ECB president lays out his agenda for tapering. A number of various members of the ECB committee do concur with the view that there may be no need for the ECB to keep its patient in the hospital given the recovery we have experienced. Therefore, Draghi may not feel that much pressure to set the foundation for tapering during the upcoming meeting but the market would certainly take its own interpretation

New Opening For Pound

As for the British pound, we broke a major level of 1.31 last week and closed above the 1.30 mark confirming that we are going to start a new trend in a new territory which we have not seen for a while. The inflation data that is due this week remains an important focal point for the economy, and Mark Carney would also add his own colours. If the inflation data confirms further improvement, the bank would find it more difficult to defend its current monetary policy.

The DAX index has started the week with slight losses. In Monday's European session, the DAX is trading at 12,611.50, down 0.18%. On the release front, Eurozone Final CPI edged down to 1.3%, matching the forecast. On Tuesday, Germany and the eurozone release ZEW Economic Sentiment.

One of the key stocks on the DAX, Deutsche Bank, is under pressure, and dropped 0.91% on Friday. Germany's largest bank started off the Monday session with losses as well, after the ECB said it was considering implementing ownership-control procedures against the bank's two largest shareholders, Qatar's royal family and HNA, a Chinese conglomerate. The aim of the review is to ensure that an investor is financially stable and untainted by money-laundering or other crimes. If either shareholder fails the test, Deutsche Bank shares would likely fall.

Eurozone inflation levels have been softening in the second quarter. Eurozone Final CPI edged down from 1.4% to 1.3% in June, marking its weakest gain in 2017. Germany may be the catalyst of the eurozone's economic recovery, but the bloc's largest economy has not been immune to low inflation. Final CPI improved to 0.2% in June, compared to -0.2% in May. The ECB has set an inflation target of 2%, but German and eurozone inflation numbers remain well below that threshold. The ECB has acknowledged that economic conditions have improved, but insists that it has no plans to taper its ultra-loose monetary policy unless inflation levels move higher. The current asset-purchase plan is scheduled to wind up in December, and we're unlikely to see any changes in monetary policy unless inflation moves considerably higher in the second half of the year.

With the US labor market close to capacity and the unemployment rate at just 4.4%, economists are puzzled why this hasn't pushed inflation to higher levels. The Federal Reserve is also at a loss to explain the lack of inflation, but Fed Chair Janet Yellen insists that it's only a matter of time before inflation moves higher. In testimony before a Senate committee last week, Yellen insisted that it was “premature to conclude that the underlying inflation trend is falling well short of 2 percent”, and that with a strong labor market “the conditions are in place for inflation to move up”. However, the markets remain skeptical that the Fed will make a move before the end of the year, with the odds of a December hike at just 43%, according to the CME Group.

Fed policymakers weren't smiling after Friday's consumer inflation and spending numbers. CPI edged up to 0.0%, short of the forecast of 0.1%. There was no relief from Retail Sales, which declined 0.2%, missing the estimate of 0.1%. This marked the third decline in the past four months. Consumer spending accounts for 2/3 of US economic activity, so it's no surprise that weak spending has also meant weak inflation, despite Yellen's claim that low inflation is a temporary phenomenon. The economy had a weak first quarter, with growth of just 1.4%. If the second quarter follows suit, investors could sour on the US dollar in favor of other assets, and the euro could take advantage.

Notes/Observations

UK and EU begin first full round of Brexit talks

Euro Zone Jun Final CPI unrevised and below the target for the 3rd straight month ahead of Thursday's ECB meeting

China Q2 GDP growth tops forecasts on strong investment, consumption

Overnight

Asia:

China Q2 GDP growth beats expectations (YoY: 6.9% v 6.8%e and compares to 6.5% 2017 target); Also Jun Industrial Production and Retail sales beat consensus

China President Xi: PBOC will play a stronger role in defending against risks. Prudent monetary policy should be firmly implemented and the PBOC should take a stronger macro-prudential policy role (prudent policy was tweaked back in Dec 2016 to be more neutral)

China Stats Bureau (NBS): Prudent and neutral monetary policy will provide necessary liquidity in the economy, but also prevent rise in debt levels. Saw no problem for 2017 CPI growth to be below 3%; expected China CPI to remain benign

Europe:

UK Chancellor of Exchequer Hammond (Fin Min): Brexit transition period likely to need a couple of years; crucial to get deal that protects jobs and prosperity

UK Trade Min Fox: Happy to have a time-limited transition period with EU as long as we leave the EU in March 2019

UK July Rightmove Housing Prices improve (M/M: +0.1% v -0.4% prior; Y/Y: 2.8% v 1.8% prior)

Germany Chancellor Merkel: intends to serve full 4-yearterm if re-elected. Germany has already increased investment and has put aside additional money for more investment on roads, digitization and education in med-term budget plans

Germany Social Democrats (SPD) leader Schultz 10-point plan for a modern Germany noted that the country must be prepared to do more in Europe, possibly contribute more money to EU budget

Italy Finance Ministry said to be planning to revise growth estimates higher in coming weeks

Canadian ratings agency DBRS affirmed Italy sovereign ratings at BBB (high), Stable trend

Greece Debt Agency (PDMA) could be ready to tap bond markets as early as this month (**Note: Poised to borrow money from investors for the first time since 2014)

Americas:

US Senate said to consider delay consideration of healthcare legislation by Senator McCain recovers from eye surgery

Energy:

(US) Weekly Baker Hughes US Rig Count: 952 v 952 w/w (unchanged w/w)

Economic Data

(EU) Euro Zone Jun CPI M/M: 0.0% v 0.0%e; Y/Y (Final): 1.3% v 1.3%e, Core CPI Y/Y (Final) 1.1% v 1.1%e

Fixed Income Issuance:

None seen

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx50 flat at 3,527, FTSE -0.3% at 7,388, DAX -0.1% at 12,637, CAC-40 -0.1% at 5,240, IBEX-35 +0.2% at 10,677, FTSE MIB flat at 21.531, SMI %+0.2 at 9.026, S&P futures -0.1%]

Market Focal Points/Key Themes: European Indices have reversed earlier gains trading largely lower across the board with the exception of the FTSE 100 which trades higher. Earnings were the dominant theme this morning with Scandinavian names Getinge, Atlas Copco and Telenor reported results, elsewhere ITV names former Easyjet CEO as its new Chief Exec. GEA Group trades sharply lower after its prelim numbers and lowering of guidance. Looking to the US morning, notable earners include Blackrock

Equities

Consumer discretionary [ ITV [ITV.UK] +3.3% (New CEO)]

Financials [LSL Property Services [LSL.UK] +11% (Trading update)]

Healthcare [Getinge [GETIB.SE] -7% (Earnings) ]

Industrials [Carillion [CLLN.UK] +20% (Contract), Balfour Beaty [BBY.UK] +2.7% (Contract win), SGS [SGS.UK] -3.0% (Earnings), GEA Group [G1A.DE] -6.6% (Earnings), Atlas Copco [ATCOA.SE] -3.5% (Earnings), Weir Grp [WEIR..UK] +8% (Raises outlook) ]

Telecom [Telenor [TEL.NO] +7% (Earnings, buyback)]

Speakers

UK's Davis: Had a good start in June with talks; now entering substance; important to make progress

EU's Barnier: Need to examine and compare positions to make progress

Poland Central Bank's Zubelewicz said to oppose waiting for rate hike until CPI hits 2.5%. Wanted a rate hike soon then keep policy steady until mid-201. Believed that 2.5% inflation target was too high and weakens the PLN currency (Zloty)

Currencies

USD consolidated its recent spat of softness against the major pairs as rate hike expectations have been pared after the recent US inflation data. The USD Index moved off 10-month lows in the session.

Brexit Min Davis met EU's Barnier in Brussels for first full round of Brexit talks. GBP/USD holding below the 1.31 level. GBP was firmer in recent sessions as UK govt was seen as more seen flexible on immigration aspects in talks

EUR/USD was fractionally lower at 1.1450 as Euro Zone data keeps argument for steady ECB policy this week.

Fixed Income

Bund futures trade at 161.33 up 26 ticks as European government bonds are supported with cash flows for the month remaining very supportive. The focus will be on ECB this week. Resistance lies near the 161.50 level followed by 162.10. A break of the 160.00 support level could see lows target 159.25 followed by 157.50.

Gilt futures trade at 125.27 higher by 16 ticks as economic pessimism in the UK grows in comparison to the euro area. Price finds key support at the 124.42 support level. An acceleration lower could test the 122.88 region. Resistance remains the noted 126.00 region, followed by 126.72.

Monday's liquidity report showed Friday's excess liquidity rose to €1.669T a gain of €32B from €1.637T prior. Use of the marginal lending facility fell to €230M from €192M prior.

Corporate issuance saw $26B issued last week. Next week's forecast is $30B

Looking Ahead

05:30 (NL) Netherlands Debt Agency (DSTA) to sell up to €2B in 3-month bills

06:00 (IE) Ireland May Trade Balance: No est v €3.4B prior

06:45 (US) Daily Libor Fixing

07:00 (BR) Brazil July FGV Inflation IGP-10 M/M: No est v -0.6% prior

07:00 (IN) India announces details of upcoming bond sale (held on Fridays)

07:25 (BR) Brazil Central Bank Weekly Economists Survey

07:30 (TR) Turkey TCMB Survey of Expectations

08:00 (ES) Spain Debt Agency (Tesoro) announces size of upcoming actions in week (if any)

08:15 (UK) Baltic Dry Bulk Index

08:30 (US) July Empire Manufacturing 15.0e v 19.8 prior

08:30 (CA) Canada May Int'l Securities Transactions: No est v C$10.6B prior

09:00 (CA) Canada Jun Existing Home Sales M/M: No est v -6.2% prior

09:00 (FR) France Debt Agency (AFT) to sell combined €4.8-6.0B in 3-month, 6-month and 12-month Bills

09:30 (EU) ECB announces Covered-Bond Purchases

09:35 (EU) ECB calls for bids in 7-Day Main Refinancing Tender

16:00 (US) Weekly Crop Progress Report

Monday July 17: Five things the markets are talking about

The markets focus this week shift away from Yellen's testimony and disappointing U.S data to the ECB meeting (Thursday, July 21), which is expected to result in a further modest adjustment in its risk assessment.

Last week, the Fed chief seemed to hint that she was starting to second-guess whether the recent softness in inflation was just due to 'transitory' factors.

Friday's disappointing U.S CPI and retail sales prints again provides the Fed a mixed picture that is likely to leave the Fed cautious, and it is little wonder markets have lowered the odds of further rate hikes this year (40% for a Dec. hike). Will it delay the start of the Fed's balance sheet normalization as well?

The market will be looking for signs that the ECB (July 20, 07:45 am EDT) will follow the Fed and begin to curtail its stimulus. No change is expected from the Bank of Japan either early Thursday (July 19).

Elsewhere this week, in Canada, traders will be looking for strength from the consumer in May retail sales data Friday. Australia's RBA on Tuesday will release minutes of its July 4 gathering and labor market data is due Thursday. In the U.K, round two of Brexit talks get underway in Brussels today.

1. Stocks mixed results

Fed Chair Yellen's remarks were interpreted as evidence of continued accommodative monetary policy, and from there, global stocks have record multi-month highs.

Note: Japan was closed for a National holiday.

In Hong Kong, stocks rallied for the sixth consecutive session, closing at fresh two-year highs, with sentiment aided by robust China economic growth data (see below) and signs Chinese money inflows are accelerating. The Hang Seng index rose +0.3%, while the China Enterprises Index gained +0.5%.

In China, the Shanghai Composite Index was down -1.4% amid concerns over the implications of a weekend meeting where President Xi Jinping indicated that the PBoC would play a greater role in defending against risks.

Note: At one point the intraday losses were greater than -5%, but he loses were later reversed when Q2 GDP, June industrial production and retail sales came in strong.

Elsewhere, South Korea's Kospi rallied +0.4%, while Australia's S&P/ASX was down -0.2%.

In Europe, most indices have reversed earlier gains trading largely lower across the board with the exception of the FTSE 100. Earnings have been the dominant theme this morning and will be in the U.S all week.

U.S stocks are set to open in the red (-0.1%).

Indices: Stoxx50 flat at 3,527, FTSE -0.3% at 7,388, DAX -0.1% at 12,637, CAC-40 -0.1% at 5,240, IBEX-35 +0.2% at 10,677, FTSE MIB flat at 21.531, SMI %+0.2 at 9.026, S&P futures -0.1%

2. Oil higher on U.S drilling slowdown, gold little changed

Ahead of the U.S open, oil is better bid as a slowdown in the growth of U.S rigs drilling have eased concern that surging shale supplies will undermine OPEC-led cuts.

Note: Friday's Baker Hughes report showed that U.S drillers added two oilrigs in the week to July 14, bringing the total to 765 – rig additions over the past month averaged five, the lowest total in nine-months.

Brent crude is up +19c at +$49.10 a barrel, while U.S crude (WTI) is trading at +$46.71, up +17c.

Note: Oil prices continue to trade at half their mid-2014 level because of a persistent glut even after the OPEC, plus Russia started a supply-cutting pact seven months ago.

Also providing support is U.S crude oil inventories in the week to July 7 dropped the most in ten-months – is market rebalancing under way?

Gold prices (+0.2% to +$1,230.43 per ounce) inches up as prospects for slower U.S rate hikes weigh on the dollar.

3. Yields wait on Central Banks

What to expect from the European Central Bank (ECB) and Bank of Japan (BoJ)?

The market consensus does not believe that the ECB will provide any hints of policy tightening on Thursday.

Many believe that the ECB is still worried about the 'mini taper tantrum' following ECB President Draghi's speech in late June which resulted in a sharp move in yields (Bund 10-years went from -0.25% to +0.58%) and a rapid appreciation of the EUR (€1.1186-€1.1442).

Forward guidance of its exit strategy is expected at the September policy meeting.

The Bank of Japan (BoJ) is expected to stand pat, proceeding with yield control policy.

4. Dollar nurses losses

The 'mighty' dollar continues to flounder atop of its 10-month lows vs. G10 currency pairs as investors cheer upbeat Chinese data (see below) by piling into leveraged positions such as the AUD (A$0.7817), CAD (C$1.2662) and other high-yielding currencies.

U.K's Brexit Minister Davis is in Brussels for the first full round of Brexit talks. GBP/USD is holding below the psychological £1.31 level, down -0.3% at £1.3066. The pound had been firmer in recent sessions as U.K government was seen as being more seen flexible on immigration aspects in talks.
The EUR/USD is a tad lower ahead of the U.S open at €1.1450 as Euro Zone inflation data this morning (see below) keeps the argument for a steady ECB policy this week.

5. China data robust, Euro reports as expected

Data overnight saw China's Q2 GDP topping forecasts with a rise of +6.9% on the year (vs. +6.5% 2017 target), while retail sale (+11% vs. +10.6%) and industrial output (+7.6% vs. +6.5%) were both strong.

Also China's President Xi indicated that the PBoC would play a stronger role in defending against risks. Prudent monetary policy should be firmly implemented and the PBOC should take a stronger macro-prudential policy role.

In Europe, June's Final CPI (+1.3%, y/y) was unrevised and below the target for the third consecutive month ahead of Thursday's ECB meeting.