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Markets

On Friday, EMU and US PMI’s illustrated the ‘mixed feelings’ that investors have to cope with these days. The reopening of the economy propelled the EMU Markit PMI to the strongest growth pace in 21 years (composite 60.6) with demand outpacing supply, solid hiring, and rising prices. However, companies are growing more cautious about the future. US PMI’s reinforced those mixed feelings. The manufacturing PMI hit a record 63.1 from 62.1, but the services measure eased substantially (64.6 to 59.8) amongst others due to labour shortages. European yields initially tried a cautious rebound, but the move lacked conviction. US PMI’s pushed core bond markets back to square one. US yields declined less than 1 bp, with the 10-y closing at 1.27%. A rise in inflation expectations was counterbalanced by a new drop-in real yields. German yields closed narrowly mixed with the 2-y easing 0.6 bp and the 30-y rising 0.8%. Despite the mixed bond market reaction, equities rebounded further. Earnings apparently were strong enough to give some comfort. Low yields were no obstacle. Three major US indices (Dow, S&P, and Nasdaq) touched new records. European equities gained 1.0%+. The CRB commodity index is nearing the post-pandemic top. Brent oil closed north of $74 p/b. The USD held strong, but with limited further gains (DXY close 92.915; EUR/USD 1.1771).

This morning, most Asian equity indices are ceding ground with China as a big underperformer (losses of 3%-4%). Stricter regulatory measures from Chinese authorities on (Education) Tech firms (cf infra) are causing selling pressure. Japan is the exception to the rule, (Nikkei +1%) but the country has some catching up to do after a long weekend end last week. The yuan weakens to USD/CNY 6.484. US yields are ceding a few bp. The dollar tentatively declines (USD/JPY 110.30, DXY 92.85, EUR/USD 1.1780) despite this broader risk-off.

Today, the calendar contains Ifo German business climate and the US New home sales. In line with the PMI’s, headline German Ifo business confidence is expected to improve further but markets will keep a close eye at expectations. The US Treasury will sell 2-y notes, with 5-y and 7-y sales planned tomorrow and on Thursday. Further out this week, the eco calendar is well filled with US durable goods orders and consumer confidence (Tuesday), the US Q2 GDP (Thursday) and EMU Q2 GDP, and preliminary July CPI on Friday. Last but not least, the Fed on Wednesday will conclude its policy meeting with a press conference of chair Powell. On the data, the market recently was much more sensitive to negative surprises rather than to positive ones. Despite a better sentiment end last week, this probably won’t change anytime soon. The Fed will leave its policy unchanged, but markets will be keen to hear the Fed’s view, both on the economy and on recent market moves. Quid with the debate on tapering of bond purchases? Recent US inflation and labor data were higher/stronger than expected, but can the Fed afford to start the long road to normalization at the time markets turn uncertain on the pace of the recovery? Despite a return of calm end last week, interest rate markets don’t prepare for big tightening anytime soon. The picture on LT US, and even more, European yield graphs stays fragile. First support in the 10-y German yield (-0.44%/-0.47% area) is much closer compared to the first resistance that needs to be regained to call off the alert (-0.30% area). In FX, the USD stays strong but is struggling to extend gains. DXY 93.20/44 marks the next USD resistance with 1.1750/04 being a comparable reference in the EUR/USD cross rate. Will a soft tone from Fed’s Powell on Wednesday further erode potential USD interest rate support?

News headlines

China imposed a set of stricter rules on private education firms as appeared in a document that circulated on Friday. All Institutions providing schooling services will have to register as non-profit companies. No new licenses will be granted and foreign investment in the sector will be restricted. The measures are reported to aim to reduce financial pressures on families. The reform measures this morning trigger a sharp setback in shares of Chinese education tech firms which is hurting overall (regional) market sentiment.

General trend

• 10-yr government bond yields move generally lower [particularly NZ and China].
• US equity FUTs trade mixed, S&P 500 lags.
• Nikkei outperforms following 2 day holiday [TOPIX Iron & Steel index outperforms amid guidance from Tokyo Steel, news related to JFE; Electric Appliances, Transport and Banks indices also rise].
• Hang Seng has extended decline; Tech, Education and Property firms drop amid regulatory concerns.
• Shanghai Composite has also extended decline [Consumer Staples, Property and Financial indices are among the decliners].
• China CSI300 Real Estate index declines >3% (lowest since Sept 2015).
• S&P ASX 200 has traded fractionally higher [Resources index rises; Energy index lags]; GPT Group news weighs on REIT index.
• Companies due to report during the NY morning include Check Point Software, Hasbro, Lennox International, Lockheed Martin, Otis Worldwide, PetMed Express, RPM International.

Headlines/Economic data

Australia/New Zealand

• ASX 200 opened flat.
• GPT Group [GPT.AU]: Withdraws FY21 FFO and distribution guidance citing lockdowns in Melbourne and Sydney.
• (AU) New South Wales Premier: Denies reports that Sydney will be under lockdown until Sept - Press.
• (NZ) Markets are now pricing in ~70% chance of Reserve Bank of New Zealand (RBNZ) rate hike in Aug 2021 [down a few bps]; notes impact of Delta COVID variant - US financial press.
• (NZ) New Zealand Jun Trade Balance (NZD): 261M v 489M prior.

China/Hong Kong

• Seng opened -1.8%, Shanghai Composite -0.4%.
• (CN) China reportedly considering barring Foreign investment in after-school tutoring; Considering asking after-school tutors to go non-profit [from Jul 23rd].
• (US) Deputy Sec of State Sherman to meet with China's Wang Yi; the talks are expected to be held on Sun and Mon (Jul 25-26th) - financial press [from Jul 21st].
• (CN) China Vice Foreign Min Feng: Willing to deal with US on equal footing; Relationship with the US is in a 'stalemate', now faces difficulties.
• (CN) China issuing notice to regulate property market order.
• (CN) Shanghai (China) revised rule related to home donations, effective from Jul 24th; move seen as an attempt to lower property market speculation - press.
• (CN) PBOC Said to have asked Shanghai lenders to increase mortgage rates to 5.00% from 4.60% for first time home buyers.
• (CN) China Industry Ministry (MIIT): To begin a crackdown on illegal internet activities.
• (CN) China FX Regulator SAFE: Reiterates stance to keep CNY currency (Yuan) basically stable in 2021.
• (CN) China Foreign Ministry: China will counter sanction certain former US officials, including former Commerce Sec Ross.
• (CN) China said to have urged banks to not stop lending to 'high carbon' sectors of the economy - Press.
• (CN) China PBOC Open Market Operation (OMO): Injects CNY10B in 7-day reverse repos v CNY10B in 7-day reverse repos prior; Net CNY0B v Net CNY0B prior.
• (CN) China PBOC sets Yuan reference rate: 6.4763 v 6.4650 prior.

Japan

• (JP) Nikkei 225 opened +1.6% at 27,990 (Returned from 2 day holiday).
• (JP) JAPAN JUL PRELIMINARY PMI MANUFACTURING: 52.2 V 52.4 PRIOR (6th straight expansion); PMI Services: 46.4 v 48.0 prior (18th month of contraction).

Korea

• Kopsi opened +0.4%.
• (KR) Bank of Korea sells KRW840B v KRW700B indicated in 1-year Monetary Stabilization Bonds (MSB): Avg yield 0.88% v 0.88% prior.

Other Asia

• (SG) Singapore Jun Industrial Production M/M: -3.0% v +0.5%e; Y/Y: 27.5% v 27.2%e.

North America

• (US) Reportedly Democrats may remove $20B in funding for a new infrastructure bank after Republicans opposed a provision aimed at boosting workers' wages - press.

Europe

• (FR) Said that the UK may end quarantine imposition on France visitors - UK press.

Levels as of 01:20 ET

• Nikkei 225, +1%, ASX 200 flat , Hang Seng -3.1%; Shanghai Composite -2.7% ; Kospi -0.6%.
• Equity S&P500 Futures: -0.3%; Nasdaq100 -0.1%, Dax -0.4%; FTSE100 -0.4%.
• EUR 1.1779-1.1763 ; JPY 110.58-110.31 ; AUD 0.7372-0.7345 ;NZD 0.6986-0.6960.
• Gold +0.3% at $1,807/oz; Crude Oil -0.6% at $71.64/brl; Copper flat at $4.4555/lb.

Technical analysis

The daily time frame also shows that the RSI indicator is now above 50 and issuing a buy signal. The MACD signal line also shows more room for upside expansion.

The BTCUSD pair is trading towards the upper daily Bollinger Band, around the $35,250 level. A break above the upper Bolling Band would be hugely bullish.

What the possible outcomes are

In our most likely scenario, the BTCUSD pair breaks above the upper daily Bollinger Band and advances towards at least the $38,200 level.

Alternatively, the BTCUSD pair may correct towards the mid-line of the daily Bollinger Band, and then rally above the upper daily Bollinger Band.

Key levels

Support $32,600 $32,000

Resistance $36,600 $38,200

Daily Pivots: (S1) 0.9182; (P) 0.9202; (R1) 0.9217; More....

USD/CHF drops slightly today but stays in range of 0.9116/9273 and intraday bias remains neutral first. On the downside, break of 0.9116 support will affirm the case that rebound from 0.8925 has completed at 0.9273. Deeper fall would then be seen back to retest 0.8925 low. On the upside, however, break of 0.9273 and sustained trading above 61.8% retracement of 0.9471 to 0.8925 at 0.9262 will target 0.9471 resistance next.

In the bigger picture, medium term outlook is currently neutral with focus on 0.9471 resistance. Sustained break there will indicate completion of whole decline from 1.0342 (2016 high). Medium term outlook will be turned bullish for a test on 1.0342 high. But, rejection by 0.9471 again will revive bearishness for another fall through 0.8756 low.

Yen and Swiss Franc are trading mildly higher as the week starts. Heavy selling is seen in stock markets in Hong Kong and China. Yet, Japan came back from holiday with mild gains. Commodity currencies are generally soft, with Aussie leading the way down. Dollar and Euro are mixed for the moment. A focus today is whether the selloff in Hong Kong would spillover to European and US markets later in the day.

Technically, USD/JPY's recovery form 109.05 is losing some upside momentum. But further rise is still likely as long as 110.00 minor support holds. However, break of 110.00 could be an indication of risk-aversion, which could be reflected in selling in other Yen crosses. We'll keep an eye on it if happens.

In Asia, Nikkei closed up 0.95%. Hong Kong HSI is down -3.22%. China Shanghai SSE is down -2.34%. Singapore Strait Times is down -0.57%. Japan 10-year JGB yield is down -0.0031 at 0.013.

New Zealand goods exports rose 17% yoy in June, imports rose 24% yoy

New Zealand goods exports rose 17% yoy to NZD 6.0B in June. Goods imports rose 24% yoy to NZD 5.7B. Monthly trade balance reported NZD 261m surplus, slightly below expectation of NZD 297m.

Exports to all top trading partners were up, including China (40%), EU (21%), Australia (9.5%), Japan (13%) and US (2.9%). Imports from all top trading partners were up too, including EU (51%), China (17%), Japan (69%), USA (52%) and AU (18%).

Japan PMI manufacturing dropped to 52.2, services dropped to 46.4

Japan PMI Manufacturing dropped slightly from 52.4 to 52.2 in July, below expectation of 53.1. PMI Services dropped from 48.0 to 46.4. PMI Composite dropped from 48.9 to 47.7.

Usamah Bhatti, Economist at IHS Markit, said: "Flash PMI data indicated that Japanese private sector businesses saw a faster reduction in activity during July. Output fell at the quickest pace for six months, while the contraction in new business inflows was the fastest since February. Survey members attributed the deterioration in business conditions to persistent rises in COVID-19 cases and state of emergency measures which dampened activity and demand."

Fed unlikely to hint on tapering schedule, lots of data to watch

FOMC meeting is a major highlight of the week. Just less than two week ago, Chair Jerome Powell told Congress that the economy is still "ways off" the substantial progress to start tapering asset purchases. Calls for stimulus withdrawal has somewhat eased too with fall in treasury yields and surge in delta variant infections. Powell could wait for the annual Jackson Hole symposium on August 26-28 to give more hints on Fed's schedule. Or, that could be pushed even further to September meeting when new economic projections are available.

While Fed might turn out to be a non-mover to the markets, economic calendars are likely not. US GDP is another focus while durable goods orders, consumer confidence and PCE inflation could also trigger some volatility. Elsewhere, Japan PMI manufacturing and industrial production, Germany Ifo, Eurozone inflation and GDP, Canada GDP and CPI, Australia CPI, and New Zealand business confidence could also prompt some movements in respective currencies.

Here are some highlights for the week:

• Monday: New Zealand trade balance; Japan PMI manufacturing; Germany Ifo business climate; US new home sales.
• Tuesday: Japan corporate services prices; Eurozone M3 money supply; US durable goods orders, house price index, consumer confidence.
• Wednesday: BoJ summary of opinions; Australia CPI; Germany Gfk consumer confidence; Swiss ZEW expectations; US goods trade balance, FOMC rate decision; Canada CPI.
• Thursday: New Zealand ANZ business confidence; Australia import price; Germany unemployment, CPI flash; Eurozone economic sentiment; UK mortgage approvals, M4 money supply; US Q2 GDP, pending home sales.
• Friday: Japan unemployment rate, industrial production, retail sales, housing starts; Australia private sector credit, PPI; France consumer spending, GDP; Germany GDP; Italy GDP, CPI flash, unemployment rate; Swiss KOF economic barometer; Canada GDP, IPPI and RMPI; US personal income and spending, PCE inflation, employment cost index, Chicago PMI.

USD/CHF Daily Outlook

Daily Pivots: (S1) 0.9182; (P) 0.9202; (R1) 0.9217; More....

USD/CHF drops slightly today but stays in range of 0.9116/9273 and intraday bias remains neutral first. On the downside, break of 0.9116 support will affirm the case that rebound from 0.8925 has completed at 0.9273. Deeper fall would then be seen back to retest 0.8925 low. On the upside, however, break of 0.9273 and sustained trading above 61.8% retracement of 0.9471 to 0.8925 at 0.9262 will target 0.9471 resistance next.

In the bigger picture, medium term outlook is currently neutral with focus on 0.9471 resistance. Sustained break there will indicate completion of whole decline from 1.0342 (2016 high). Medium term outlook will be turned bullish for a test on 1.0342 high. But, rejection by 0.9471 again will revive bearishness for another fall through 0.8756 low.

Economic Indicators Update

Technical analysis

The EURUSD has FORMED bullish price divergence on the RSI indicator until the 1.1900 level. The daily time frame is still making lower lows to buying is still quite risky.

According to the daily time frame the EURUSD pair is trading inside a falling wedge pattern. Typically, falling wedge patterns are very reliable bullish reversal patterns.

What the possible outcomes are

In our most likely scenario, the EURUSD pair will eventually rise back towards the 1.1900 level in order for bullish RSI price divergence to be reversed.

Alternatively, the EURUSD could break under the falling wedge pattern and fall towards the yearly trading low, around 1.1700 level, or possibly even the 1.1600 level.

Key levels

Support 1.1700 1.1600

Resistance 1.1830 1.1900

Technical analysis

The XRPUSD pair has moved above the mid-line of the daily Bollinger Band indicator. Bulls may start to target the upper daily Bollinger Band during the course of this week.

The daily time frame shows that the RSI indicator has not turned bullish yet and remains below. This is a reason to be slightly cautious despite the overall bullish bias.

What the possible outcomes are

In our most likely scenario, the XRPUSD pair will continue to head higher, and eventually test towards its upper daily Bollinger Band, around the 0.6700 resistance area.

Alternatively, the XRPUSD pair struggles to rally further, and eventually tests back towards the pivotal $0.5500 support level this week.

Key levels

Support $0.5800 $0.5500

Resistance $0.6500 $0.6800

The NZDUSD pair was little changed in early trading as investors reacted to the latest New Zealand trade numbers. According to the country’s statistics agency, total exports rose from N$5.85 billion in May to N$5.95 billion in June. In the same period, the total imports rose from N$5.4 billion to more than N$5.69 billion. As a result, the total trade surplus narrowed from N$489 million to N$269 million. These numbers provide further evidence that the country’s economy is doing well, helped by strong external and internal demand. Meanwhile, the Reserve Bank of New Zealand (RBNZ) stopped its asset-purchase program on Friday, becoming the first major bank to exit its pandemic QE program.

The US dollar tilted upwards while American futures declined after worrying Covid numbers from the US. Data published by states showed that the total number of new infections has risen sharply in the past few weeks. Meanwhile, corporate earnings will continue this week. The top companies to watch will be Check Point Software, Lockheed Martin, Tesla, and Axalta Coating Systems.

The EURUSD pair was little changed ahead of the latest German business sentiment data. Economists expect that the German business expectations fell from 104 to 103.3 while the current assessment rose from 99.6 to 101.6. Business climate, on the other hand, is expected to fall from 101.8 to 102.1. The data will come as Germany considers more restrictions to curb the virus. The pair will react to the latest new home sales data from the US. Sales are expected to have risen from 769k to 800k.

EURUSD

The EURUSD pair is little changed ahead of the German sentiment and US new home sales numbers. It is trading at 1.1775, where it has been in the past few weeks. On the four-hour chart, the pair has formed a falling wedge pattern, which is usually a bearish sign. Oscillators like the Relative Strength Index (RSI) and the MACD are at the neutral level. Therefore, the pair will likely remain in the current range as investors wait for the FOMC decision scheduled for Wednesday.

AUDNZD

The AUDNZD pair is hovering near the lowest level in several months after the latest New Zealand trade numbers. On the four-hour chart, the pair has formed a double-bottom pattern, which is usually a bullish sign. The neckline of this pattern is at 1.0610. On the four-hour chart, the pair moved below the 25-day moving average while the Relative Strength Index (RSI) has dropped to 38. The pair will likely bounce back later this week.

EURGBP

The EURGBP pair was also little changed today. It is trading at 0.8560, which is slightly above last week’s low of 0.8540. On the four-hour chart, the pair moved below the 25-day moving average and below the upper line of the descending channel. The Awesome Oscillator has also declined below the neutral line while the Relative Strength Index (RSI) has declined to 43. It has also formed a bearish flag pattern. Therefore, it will likely resume the downward trend as bears target the next key level at 0.8500.

Market movers today

• Today's main release is the German IFO survey. Besides that we get US new home sales, which will give us some insight into the current situation in the US housing market.
• This week's main event is the FOMC meeting on Wednesday. We do not expect the Fed to make significant changes, as the Fed still thinks that high inflation is transitory and the labour market has still not fully recovered. Also it is one of the interim meetings without updated projections.

The 60 second overview

US mask restrictions: Joe Biden's chief medical advisor, Anthony Fauci, said on Sunday that tightening mask restrictions were on the table as a way of curbing the latest increase in new (delta variant) covid-19 cases. New cases are especially on the rise in states with a low vaccine take-up. States with low rates of inoculation counts Arkansas, Mississippi and Alabama where less than 37% are fully vaccinated.

Closer to an infrastructure package: US president Joe Biden's USD 1tn bi-partisan infrastructure package is closer to seeing the light of day as a draft bill. Both republican and democratic senators said during the weekend that they expected a bill to be ready already today. If a bi-partisan deal is not able to be finalized the Biden administration is believed to include it as part of a larger legislative package later in the year including gross spending of up to USD 4tn. This package is set to go through without the support of republicans.

Debt limit: In relation to the above, republicans are hesitant to vote in favour of an increase to the statutory debt limit of USD 28.5tn. US secretary Janet Yellen said on Friday that if congress does not act to extend the debt limit within the coming week the treasury would need to take extraordinary measures. The treasury's cash balance stood at USD 616bn on Wednesday of last week, which is still a high level in a historical context, but could be exhausted at some point during October if no action is taken. Failure to increase the debt limit could lead to a federal government shut-down as has happened three times during the past decade.

Equities: After a weak start to last week, equity markets have rebounded strongly during the past three trading sessions with the S&P 500 rising 4% (1% on Friday) following still strong corporate earnings - 87% of companies having reported results for Q2 so far have beaten analysts' estimates. This morning Asian markets are mixed with Nikkei up 1% (Japan was closed Thursday and Friday last week) but both Hang Seng and Shanghai Shenzhen is down almost 3%. Futures indicates a sour opening as well in both US and European markets.

FI: USD rates and curves closed the Friday session almost unchanged. US 10 year yields closed at 1.27% and 2y around 0.20%, the latter still indicating a slightly more than 50% probability of a 25bp hike within the coming 12m.

FX: Friday proved a fairly quiet end to an otherwise eventful week for FX markets. EUR/USD still hovers below 1.18, EUR/GBP has stabilised around 0.8550 while both EUR/NOK and EUR/SEK have edged modestly higher after Thursday's drop. We remain strategically bullish USD and GBP and strategically bearish SEK and NOK.

Japan PMI Manufacturing dropped slightly from 52.4 to 52.2 in July, below expectation of 53.1. PMI Services dropped from 48.0 to 46.4. PMI Composite dropped from 48.9 to 47.7.

Usamah Bhatti, Economist at IHS Markit, said: "Flash PMI data indicated that Japanese private sector businesses saw a faster reduction in activity during July. Output fell at the quickest pace for six months, while the contraction in new business inflows was the fastest since February. Survey members attributed the deterioration in business conditions to persistent rises in COVID-19 cases and state of emergency measures which dampened activity and demand."

Full release here.