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STOCKS

Almost all major indices except Shanghai have seen a sharp up move yesterday, contrary to our expectation that the corrective phase may continue for some more time.

Dow (21479.27, +0.61%) rose sharply yesterday coming up almost 130points to test the crucial resistance near 21500-22000. We need a confirmed break above 22000 to further continue the rally upwards; else the current rise could be considered as an initiation of false hope for the near term and the index may come off again in the next few sessions.

Dax (12475.31, +1.22%) bounced back to levels above 12400 and while it remains above 12400, we may expect a rise back towards 12600 levels. But in case it fails to sustain above 12400 just now, we would have to consider a fall towards 12000 in the medium term.

Shanghai (3182.16, -0.43%) came off yesterday to close at lower levels. A test of 3160 on the downside still seems possible in the near term but could be delayed if the index remains sideways for a few more sessions.

Nikkei (20141.21, +0.43%) opened with a gap up but is trading low. A rise towards 20300 is possible in the next couple of sessions. .

Nifty (9615.00, +0.99%)closed at important levels yesterday. Only if it manages to rise past 9615-9625 zone and sustains, can we consider that the immediate correction might be over and target levels near 9700-9800 for the near term. A fall back from 9615-9625 region, if seen (less preferred) could see a fall back towards 9500. Today’s movement could decide the further course of direction.

COMMODITIES

Crucial support of 1230 had been broken and Gold (1222) is trading within the range of 1190-1230. In the smaller time frame, Gold is oversold and needs a pause before attempting sub 1193 levels. But we will remain bearish while Gold is trading below 1250 levels.As we had mentioned yesterday" A failure to rise above 16.70 levels may trigger a sharp fall towards 16.20 regions", we have seen that Silver (15.98) had collapsed. The scrip is also oversold in near term time frame with an immediate trading range of 15.50-16.20 and the overall bias will remain bearish while it is trading below 16.50 levels.

Copper (2.66) failed to move higher due to its overbought condition and trading within the range of 2.66-2.78. It could fall further towards 2.55 levels, which is a strong area of support.

There is 30-35% probability that Brent (47.92) and WTI (46.25) could rise a bit more towards 50 and 48 regions respectively but this recent bounce hasn’t affected their midterm bearishness much. We think that the immediate resistances of 50 (Brent) and 48 (WTI) are expected to hold as the they are in overbought territory and may see range trade between 46-50 in Brent and 44-48 in WTI, but a failure to hold above 46 and 44 may push them towards 43 and 40 levels respectively. We have U.S weekly crude oil inventory data tomorrow, which could be a decisive factor to determine the future course of action.

FOREX

We expect Dollar to stage a turnaround to the upside soon but we are still waiting for confirmation. Till now, most of the majors are in a normal correction and further break of major supports are required before the downtrend can be confirmed.

With Euro (1.1367) weakening after failing to rally above 1.1450-70, the expected bounce in Dollar Index (96.15) has materialized but the major weakness of Euro still needs a confirmation in the form of a break below the support area of 1.1320-1.1290 and the confirmation of Dollar strength comes on a break above the resistance of 96.50-65. Please note, as long as the support of 95.50 holds, the chances of Dollar rising further remains strong.

Dollar Yen (113.22) has not only met our upside target of 113.00 but rallied above it. If it can sustain above 113.00-112.60 for a couple of sessions, then the rally may extend to 114.30-115.00.

Pound (1.2943) has corrected from 1.3029, very close to the 10-month high of 1.3047 but the larger uptrend may weaken only below 1.2880. Till then, the current decline remains just a normal correction.

Aussie (0.7670) has registered a low at 0.7641, close to our downside target of 0.7630. It remains in a normal correction and if it manages to stay above 0.7630-20, then it may retest the long term resistance band of 0.7700-0.7800 which is expected to hold. The RBA policy announcement today may determine the near term path.

Contrary to expectations, Dollar Rupee (64.88) rallied and closed above the resistance of 64.80. if 64.80 holds in the next couple of sessions, then 65.00-20 may be tested in the next few sessions. Immediate support at 64.60-55.

INTEREST RATES

The US yields have risen sharply. The 5Yr (1.93%), 10Yr (2.35%) and the 30YR (2.87%) are all up from previous levels near 1.89%, 2.30% and 2.84% respectively. The 30Yr is heading towards resistance near 2.9% while the 10YR could rise to 2.4% before coming off again by the end of the week.

The US-Japan 10YR (2.26%) has risen sharply and could pull up Dollar Yen to higher levels in the near term if the yield spread continues to rise towards 2.3% and higher.

The German-US 2Yr (-2.01%) and the 10Yr (-1.87%) have come off as expected bringing down Euro with itself. The yield spreads look bearish for the coming sessions.

We had been looking to trade around this SPI200 top, that has since been chopped through.

What has caught my eye today however is the way that price has tucked back underneath the level as resistance once again. This has essentially reactivated the old level and even though it has been broken in between, becomes just as significant as if it was a cleanly tested level.

SPI 200 Daily:

As you can see, price has once again held here at the green 'x', giving us an opportunity to try to build a short position. Zoom into the intraday charts and try to identify pullbacks into previous short term support that could be used as resistance. If that doesn't do it for you, then take a step back and I'm sure you can find a head and shoulders pattern of a four armed man.

The US came back from the dead as Tuesday's independence day celebrations came a day early for the US dollar bulls

After yesterday's innocuous Asia session the USD turned bid en masse as the Pound gave way on the weaker UK manufacturing PMI. The weaker print makes a case for the data not supporting the Bank of England hawkish tilt.

And USDJPY bounced after a stronger than expected Tankan survey attenuated any lingering fallout from the LDB trouncing in the July 2 Tokyo metropolitan assembly election.But it was the robust US ISM data which propelled USDJPY above the critical 113 level fueled by rising US Treasury yields all but supporting the current Fed narrative to look through the recent US economic soft patch

In US equity markets, the Dow posted a new record backed by energy stocks while the Nasdaq fell as sector rotation out of tech -stock lingers. The tech sector has reaped the benefits of the low-interest rate low volatility environment, and with the real prospects of rising US interest rates, tech investors are feeling the pain

On commodity markets, Oil prices had a buoyant overnight session as WTI prices didn't look back from the opening bell on US futures. Some dated headlines in circulation but I suspect the primary catalyst is the US rig count posted its first weekly fall since January fuelling speculation that the rigorous supply of oil from US shale oil producers is not sustainable below $45.00 per barrel

The lustre came off gold overnight in a big way on the stronger US dollar narrative driven by the expectancy of higher US interest rates.

However, the big story on currency markets remains the shifting central bank policy narrative. We've seen an aggressive pullback from last week's speculative bets fuelled by the hawkish chorus of central bankers. The USD recovered in part due to the ISM manufacturing report which surprised with the highest print since August 2014. But concerns that central banks may temper the hawkish lean for fear of creating unwanted volatility remain in the back of traders minds. Overnight the mystery sources from the ECB were back at it again hitting the airwaves stating ECB officials were “unnerved” by the market's reaction to Draghi's speech. I think it's safe to say the ECB members are scared of their hawkish shadow and may try to reel in the markets overzealous reaction to Draghi's Sintra comments. But headlines aside, the ECB has opened the door to tightening it's a matter of how wide they're willing to leave it ajar.

There will be no rest for the weary on the central bank narrative as the RBA, the Riksbank warrant considerable attention and are likely to keep traders hoping despite the US holiday-thinned trading conditions

Gold has started the week with considerable losses. Spot gold is trading at $1222.08 per ounce, down 1.56% on the day. On the release front, today’s key event is ISM Manufacturing PMI. The index climbed to 57.8 in June, beating the estimate of 55.0. On Tuesday, US markets are closed for the Fourth of July holiday.

Gold prices continue to sag, and the metal dropped to $1220 earlier in the day, its lowest level since May 11. Gold is down 4.4% since Thursday, when the metal appeared headed to break above the symbolic $1300 level. The week started with good news from the manufacturing sector, as ISM Manufacturing PMI improved to 57.8, its highest level since November 2014. Global economic conditions have improved, and a stronger demand for US exports has boosted the manufacturing sector.

The US economy did indeed slow down in the first quarter, but the downturn was not as bad as feared. On Thursday, revised GDP reading was raised to 1.4%, better than the initial estimate of 1.2% in May. The improvement was attributed to stronger consumer spending and an increase in exports. Earlier in the year, the markets were braced for a very poor quarter, with the first estimate in April projecting a gain of only 0.7%. Inflation remains stubbornly low, and consumer spending is also soft, despite high consumer confidence levels. In May, Personal Spending softened to 0.1%, down from 0.4% a month earlier. If inflation levels don’t show some improvement, the Federal Reserve may have second thoughts about a December rate hike.

Factories indicate that production was strong in June, and the orders pipeline suggests that production will remain solid in coming months. Cost pressures appear to have eased recently.

Subcomponents of Index Signal Strength in Coming Months

The ISM manufacturing index jumped from 54.9 in May to 57.8 in June (top chart). Not only was the headline index much stronger than expected - the consensus had centered on a reading of 55.3 - but the outturn marked the tenth consecutive month in which the index has been above the demarcation line separating expansion from contraction. It was also the highest reading in the index since August 2014.

Drilling down reveals broad based strength in the factory sector in the subcomponents that measure the current state of the sector. For starters, the production subcomponent rose to 62.4 from 57.1. Fourteen industries reported growth in production in June, while only two industries (apparel, leather & allied products and textile mills) indicated that production declined last month. In addition, the employment subcomponent of the overall index rose to a 3-month high of 57.2 in June. The outturns on these subcomponents mean that manufacturing production likely rebounded in June from the 0.4 percent monthly decline that it registered in May.

Moreover, the forward-looking indicators also were strong, suggesting that manufacturing production should continue to expand in coming months. The subcomponents measuring new orders rose from an already strong reading of 59.5 in May to 63.5 in June (middle chart). Foreign sources of demand contributed to the overall strength in orders as the new export orders subcomponent came in at 59.5 in June. Not only did factories report a strong stream of new orders, but their orders backlog is also quite robust. (The "backlog of orders" subcomponent increased from 55.0 in May to 57.0 in June.) The decline in the inventories subcomponent to 49.0 in June is also "good news" for production going forward. That is, factories may need to rebuild inventories in coming months.

Cost Pressures Appear to Have Eased

Rising commodity prices earlier this year had led to some cost pressures in the nation's factory sector. However, the "prices paid" subcomponent fell to a 7-month low of 55.0 in June (bottom chart) This drop in the index is consistent with recent behavior in many commodity prices, which have moved more or less sideways over the past few months. Petroleum prices moved significantly lower in June.

The only caveat we would note to the generally upbeat news from this morning's ISM report is that the index has tended to overstate strength in the factory sector in recent years. For example, manufacturing production was up 1.4 percent on a year-ago basis in May, a solid number to be sure but hardly a "boom." That said, the index generally does a good job of telegraphing the direction of change. Therefore, we would look for activity in the factory sector to pick up in coming months.

USD outperforms all currencies, while gold and silver were the biggest losers as real bond yields extended higher. US manufacturing ISM to 57.8, reaching its  highest since August 2014 from 54.9 in May, with the new orders index hitting 3-month highs. Further accelerating the metals selloff is the decline in the prices paid index of the ISM, which fell to 8-month lows of 55. The 2nd listed trade in the Premium Insights is Ashraf's highest confidence trade in this enviromnment of rising REAL bond yields.

Seasonally, July is the start of a three-month period where bonds strongly outperform while in terms of FX, yen crosses tend to struggle. Over the past 10 years, July has been the worst month for USD/JPY with an average decline of 1.26%.

Finally, oil tends to struggle late in the year but over the past 20 years that weakness has progressively been creeping earlier in the year. July is a soft month over 10 and 30-year periods but it's been severe more recently. In the past three years the average decline has been a whopping 13.8%.

On the fundamental side, the global theme of a hawkish shift from central banks remains new and fresh. The June comments from the BOE, BOC, RBA and ECB were surprises and led to a welcome dose of volatility.

The reason that central banks create trends in the market is that they rarely change course once they commit, especially when global central banks all move in the same direction. What remains incredible is that the near-universal belief in central banks that inflation is going to pick up contrasts to a skeptical market. The hopes is that clear answers are coming in months ahead but the story is rarely that simple. Expect markets to ebb and flow aggressively on conflicting signals and data.Those types of aggressive moves are clear in the last few weeks of positioning data as traders piled into Canadian dollar shorts only to scramble out.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

• EUR +59K vs +45K prior
• GBP -39K vs -38K prio
• JPY -61K vs -50K prior
• CHF -5K vs -3K prior
• CAD -49K vs -82K prior
• AUD +20K vs +15K prior
• NZD +25K vs +21K prior

Euro longs were +79K two weeks ago, then dropped to +45K and now have rebounded to +59K in a sign that the market is changing its mind on the fly.

USD/CHF - 0.9633

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9612

Kijun-Sen level                    : 0.9600

Ichimoku cloud top                 : 0.9600

Ichimoku cloud bottom              : 0.9576

Original strategy :

Sell at 0.9645, Target: 0.9545, Stop: 0.9680

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9600, Target: 0.9700, Stop: 0.9565

Position : -

Target :  -

Stop : -

As the greenback has continued moving higher after staging a strong rebound from 0.9552, suggesting a temporary low is possibly formed there and consolidation with upside bias is seen for further gain to 0.9645-47 (50% Fibonacci retracement of 0.9738-0.9552 and previous resistance), then 0.9676 (previous support turned resistance), however, break of latter level is needed to add credence to this view, bring further gain to 0.9700 but price should falter below resistance at 0.9738.

In view of this, we are looking to turn long on pullback as the Kijun-Sen (now at 0.9600) should limit downside and bring another rise later. Below the lower Kumo (now at 0.9576) would abort and signal intra-day top is formed, risk retest of 0.9552 first.

GBP/USD - 1.2941

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2978

Kijun-Sen level                    : 1.2981

Ichimoku cloud top              : 1.2985

Ichimoku cloud bottom        : 1.2923

Original strategy :

Buy at 1.2900, Target: 1.3020, Stop: 1.2865

Position : - 

Target :  -

Stop : -

New strategy  :

Buy at 1.2865, Target: 1.3000, Stop: 1.2830

Position : -

Target :  -

Stop : -

As cable has retreated after faltering below last week’s high of 1.3030, suggesting consolidation below this level would be seen, hence weakness to 1.2916 support cannot be ruled out, however, reckon downside would be limited to 1.2865-70 and bring another upmove later, above said resistance at 1.3030 would signal recent upmove is still in progress and may extend further gain towards recent high 1.3048 but loss of near term upward momentum should prevent sharp move beyond 1.3075-80 today and reckon 1.3100 would hold on first testing. 

In view of this, would not chase this rise here and we are looking to buy cable again on pullback as 1.2900 should limit downside and bring another rally. Below previous resistance at 1.2861 would suggest a temporary top is formed instead, risk weakness to 1.2830-35 but support at 1.2794 should remain intact.

EUR/USD - 1.1368

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 1.1385

Kijun-Sen level                  : 1.1393

Ichimoku cloud top             : 1.1418

Ichimoku cloud bottom      : 1.1369

Original strategy  :

Buy at 1.1330, Target: 1.1440, Stop: 1.1295

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.1325, Target: 1.1440, Stop: 1.1290

Position : -

Target :  -

Stop : -

As the single currency met resistance at 1.1446 late last week and has retreated, suggesting consolidation below this level would be seen and pullback to 1.1350 cannot be ruled out, however, reckon 1.1325-30 (38.2% Fibonacci retracement of 1.1139-1.1446) would limit downside and bring another rise later, above said resistance at 1.1446 would extend recent rise to 1.1455-60 (61.8% projection of 1.1119-1.1389 measuring from 1.1292), then 1.1480 but overbought condition should prevent sharp move beyond 1.1500, risk from there has increased for a retreat later.

In view of this, would not chase this rise here and would be prudent to buy euro on pullback as 1.1325-30 should limit upside. Below 1.1292 (previous support as well as 50% Fibonacci retracement of 1.1139-1.1446) would abort and signal a temporary top is formed, bring correction to 1.1255-60 later.

USD/JPY - 113.30

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 112.92

Kijun-Sen level                  : 112.63

Ichimoku cloud top             : 112.33

Ichimoku cloud bottom      : 112.21

New strategy  :

Stand aside

Position :  -

Target :  -

Stop : -

As the greenback has surged again after finding renewed buying interest just below 112.00, dampening our near term bearishness and near term upside risk remains for recent upmove to extend gain to 113.45-50, however, near term overbought condition should prevent sharp move beyond 113.75-80 and reckon 114.00-10 would hold from here, bring retreat later.

In view of this, would not chase this rise here and would be prudent to stand aside for now. Below the Kijun-Sen (now at 112.64) would bring test of the lower Kumo (now at 112.21) but break of 111.90-95 is needed to signal an intra-day top is formed, bring test of 111.73 support first.