MAIN EVENTS THIS WEEK
Monday: Monday: Fed speakers Dudley, Duke, Bostic, Williams, ECB’s Draghi, The EU (Withdrawal) Bill returns to the House of Lords for consideration of Commons amendments, England vs Tunisia (World Cup)
Tuesday: Tuesday: RBA minutes, US Building Permits, Weekly API Inventories, Fed’s Bullard, ECB’s Draghi & Praet, Merkel & Macron meeting on final EU reform proposal
Wednesday: Wednesday: US Existing Homes Sales, BoJ’s Kuroda, RBA’s Lowe, Fed’s Powell, ECB’s Draghi, Lautenschlaeger & Coeure, Vienna oil conference day 1
Thursday: Thursday: SNB & BoE Interest Rate Decision, US Philadelphia Fed Manufacturing, Vienna oil conference day 2, Eurogroup meeting on Greece, South Korea President Moon meets Russia President Putin day 1
Friday: GE/EU/US Manufacturing & Service PMI’s, CA Core CPI & Retail Sales, OPEC ministerial meeting, US Baker Hughes Rig Count, South Korea President Moon meets Russia President Putin day 2
Saturday: OPEC & non-OPEC meeting, South Korea President Moon meets Russia President Putin day 3
Sunday: England vs Panama (World Cup)
The week looks set to be an exciting one with plenty to get your teeth into, including England kicking off their World Cup campaign later this evening (7pm). Given the fact the Fed and ECB communicated their latest policy outlook just last week, I would be looking for attention to return and remain on global trade wars as was evident by the response in markets last Friday.
Meanwhile, the time has arrived for the official OPEC meeting this Friday and as per the usual I would be looking for commentary from major players to intensify as the week goes on. The latest source comments from Bloomberg this morning is that OPEC is said to discuss an output hike of 300k to 600k which is far smaller than we were led to believe last week and consequently WTI crude has turned off its lows in recent trade.
Looking longer term though, the WTI Crude weekly chart shows a key trend line break to the downside over the last 3 weeks. The 12-month sustained uptrend for price between May 2017 and May 2018 was driven by four key factors: OPEC production cuts, strong global economic growth driving an increase in demand, a weak US Dollar and supply risk from instability in the Middle East and Iranian sanctions risk.
However, in the OPEC meeting at the end of this week traders are anticipating a production increase to be announced of 1 to 1.5mlnbpd, which explains the recent correction lower for crude prices and a key break below both the January high at $66.66 and also the break of the upward trend line. Technically speaking, the chart now looks bearish in the medium term with perhaps the new range for oil being defined by the Jan to Feb 2018 range between $66.66 and $58.07. Of course, the outcome of the OPEC meeting on Friday will dictate things in the short term, but if the small production increase is announced then this is already now priced in and we would expect a period of consolidation around these levels.
May’s Brexit Dividend under fire
GBPUSD on the daily chart above shows test last week’s key of the May 2018 low. As Brexit risks rose and a strong US Dollar, after a hawkish Fed meeting, kept the pair down at the very bottom of the steep declines seen over the last two months. ‘Theresa May risk’ took a slight tangent over the weekend with her promise to deliver a £20bn per year ‘Brexit dividend’ to the NHS. This is the idea that by 2023 there will be £20bn per year of savings as the UK will no longer be paying into the EU’s budget and this money can go towards boosting the health service.
This kind of promise comes straight out of the pro-Brexit camp, with the pro-remain faction of the Conservative party, as well as the opposition parties, questioning the maths on this with claims that there would in fact be no monetary savings from Brexit and therefore to spend an additional £20bn per year on the NHS could only be possible through higher taxes and more borrowing.
There is a cabinet meeting on this policy surprise this morning and something to keep an eye on as we go through the week. Technically speaking any break below 1.32 should open the door to a move towards the key 1.30 handle. However, we would anticipate a higher likelihood of a pause in any further downside for now and perhaps the consolidation between 1.35 and 1.32 to continue.
European politics risks still present
The Dax is perhaps best market to describe the sentiment in Europe as we kick off the week and no, this is not being driven by negative sentiment following Germany’s shock defeat by Mexico in their opening world cup match yesterday!
Thursday last week saw one of the biggest green candles of the year as risk sentiment turned positive after a dovish ECB meeting shooting the Dax up to test the May 2018 high at 13206. However, all those gains have been erased this morning as some German political risk enters the arena to go along side Brexit, Italian and Spanish political risks. These surprising developments began last week with news suggesting a potential breakup of the German coalition Government. This has mildly undermined sentiment in European equities as the week kicks off, as well as more broadly the on-going US-China trade war risk.
Angela Merkel’s junior coalition partner, the CSU party, have indicated they are no longer happy with the Government’s strategy around immigration and asylum seekers. For now, Merkel seems to have staved off a collapse in the coalition by promising she will get a wider, broad consensus agreement on how to move forwards on this topic at the EU summit next week. However, this is a tall order even for Merkel, with the likes of Italy, Greece and Austria indicating opposite ideas on what the EU’s consensus strategy should be This has helped to tip the Dax back below 13000 this morning with a now full reversal of Thursday’s ECB driven gains. This is a bearish technical event that should now keep the index on the back foot in the coming weeks with no meaningful further support on the downside until we reach 12600.
Gold heavy on hawkish rate policy and heightened trade war risks
The final chart we review in this week’s strategy is the daily Gold chart above. Friday’s session was heavily negative with a sharp break to a new low for 2018, taking out the technical support offered by the May 2018 low at $1281. This now becomes key resistance in today’s session. The downside pressure has been building in recent weeks as the US Dollar has strengthened, but the Fed’s hawkish message last week helped to add further weight, which culminating in that key technical break lower on Friday.
The chart now indicates that there is potentially further downside to come as we head through the summer with $1250 and $1236 the next support levels on the downside. In the shorter term however, last week’s low of $1281 is being tested from underneath as I type, and the bears will want to be defending that key level to confirm the continuation of the downside bias.
The full market briefing delivered this morning can be seen HERE.