Daily reviews

22.07.2019

Global investors focused on monetary policy, sentiment mixed

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The monetary policy was in market focus while lack of progress towards a trade deal between the US and China made investors cautious and worried.

  • Global stocks mixed amid unstable expectations for a Fed rate cut
  • China's GDP growth has slowed to 6.2%, lowest level in 27 years
  • Volatility in the USD pair rises as FOMC meeting looms
  • US retail sales beat expectations in June
  • Oil prices under pressure despite rising geopolitical tensions


Asian equities

Asian stocks were mixed last week amid fluctuating expectations for a rate cut by the Federal Reserve later this month. The monetary policy was in market focus while lack of progress towards a trade deal between the US and China made investors cautious and worried. Hong Kong shares ended higher on Friday and registered a weekly advance after statements from US Federal Reserve officials strengthened expectations for a more aggressive rate cut this month. In particular, New York Federal Reserve President John Williams highlighted the importance of acting "quickly to lower rates at the first sign of economic distress." Meanwhile, Fed Vice Chairman Richard Clarida said that the central bank did not "need to wait until things get so bad to have a dramatic series of rate cuts."

As such, the Hang Seng Index rose 1.1%, ending the week 1% higher. Chinese internet services company Tencent Holdings advanced 1.5% after the reports that Tencent and German automaker BMW are partnering up to establish a computing center for the development of automated driving technology in mainland China. The Shanghai Composite Index rose 0.8%.

On the data front, China's GDP growth has slowed to 6.2% in the second quarter of this year, its lowest level in nearly three decades. GDP expanded 6.3 per cent year-on-year in the first half of 2019 to about 45.09 trillion yuan. Meanwhile, output of the service sector rose seven per cent in the first half of the year, outpacing a three per cent increase in the primary industry.


US equities

US stocks fell on Friday and posted weekly losses as investors digested corporate earnings reports and statements from Federal Reserve officials. The S&P 500 closed 0.6% lower at 2,976.61, the Nasdaq Composite slid 0.7% to 8,146.49, while the Dow Jones Industrial Average fell 68.77 points, or 0.3%, to close at 27,154.20. For the week, the S&P 500 and Nasdaq fell more than 1% each (the biggest weekly loss since late May). The Dow lost 0.6%. Earlier in the week, the indexes reached fresh all-time highs.

Microsoft shares hit a record after the company posted stronger-than-expected quarterly earnings and revenue. The tech giant’s results were driven by a 39% year-over-year surge in cloud revenue.

Stocks came under a local pressure after a spokesperson for the New York Fed moved to cool the speculation arising from Williams’ comments, saying that he was drawing from academic research, not hinting at potential policy actions at the upcoming FOMC meeting. As was mentioned above, Williams pointed to the importance of acting "quickly to lower rates at the first sign of economic distress."


Currencies

The dollar was higher against the European currencies and registered modest weekly losses against the yen. The economic calendar was relatively busy, but the greenback was mostly influenced by the signals from the Federal Reserve. On the data front, US retail sales rose by 0.4% in June, while the previous result was revised slightly down to 0.4% from 0.5%. The Empire State manufacturing survey rose thirteen points to 4.3 in July, U.S. manufacturing output climbs for the second month in June, homebuilder sentiment ticked up slightly, housing starts fell further last month, while building permits were at a two-year low. Philadelphia Fed manufacturing gauge rebounded sharply in July to highest level in a year. Fed’s Beige Book showed that the US economy expands at a modest pace, while the outlook is positive.

As for the Fed, Powell said that ‘uncertainties’ have increased chances of a rate cut while the core inflation picked up a bit in June. Evans mentioned that he’d be comfortable with ‘a couple’ rate cuts before the end of the year. Daly said she is not leaning one way or the other on rate decision, George hinted she could be open to lower interest rates, while Clarida highlighted that the Fed shouldn’t delay cuts until economy falters.

Against this backdrop, EURUSD registered daily lows around the 1.12 handle which served as a local support once again and finished the week marginally above this level. GBPUSD saw a drop to 1.2380 but trimmed losses to 1.25. USDJPY dipped to 107.20 but closed around 107.70 amid mixed sentiment in the global stock markets.


Commodities

Oil prices rose on Friday but registered their worst week since May as fears of excess supply still persist. Brent closed below the $63 level after an earlier dip to lows around $61.30. On Friday, the market was supported by the reports that the Iranian Revolutionary Guard Corp seizing a British oil tanker and a Liberian-flagged ship in the Strait of Hormuz. However, the rising geopolitical tensions were not enough to give a substantial lift to the futures as traders continued to express concerns over the slowing global economy and weaker oil demand.

On the data front, the weekly report published by the U.S. Energy Information Administration showed that commercial crude oil inventories in the US decreased by 3.12 million barrels in the week ending July 12, while market consensus pointed to a decline of 2.7 million. Gasoline stocks rose 3.57 million barrels to 232.75 million against expectation of a 0.9 decline, and distillate stocks rose 5.69 million barrels. Meanwhile, Baker Hughes reported that the number of active U.S. rigs drilling for oil fell by 5 to 779 last week, which followed declines in each of the last two weeks.