Daily reviews

29.07.2019

Investors start to doubt about aggressive easing by central banks

news

Positive sentiment was derailed partially due to rising concerns that major central banks could be less aggressive than expected on policy amid some positive reports from the US and after the ECB President Draghi said the risk of a recession in the region was low.

  • Investors turn less optimistic on stimulus measures from central banks
  • Dollar on the offensive due to some strong economic updates from the US
  • Sterling prepares for a no-deal Brexit, trading at more than two-year lows
  • Markets are focused on the Fed meeting, US-China trade talks
  • Oil prices unchanged for the week following local fluctuations


Asian equities

After a mixed week, Stocks in Asia saw broad declines on Friday, amid expectations the U.S. Federal Reserve could be less aggressive than expected with monetary policy after some strong economic updates. However, Mainland Chinese shares managed to recover from an earlier dip, as the Shanghai composite rose 0.24% to 2,944.54 and the Shenzhen component advanced marginally to 9,349.00. Hong Kong’s Hang Seng index fell 0.69%. The Nikkei 225 in Japan slipped 0.45% despite shares of Softbank Group gained over 1% after the company reported a launch of Vision Fund 2.

In individual stocks, shares of automaker Nissan Motor dropped 3.2%, after the company announced it would slash 12,500 jobs worldwide following a plunge in its first-quarter operating profit by 95.5%. Positive sentiment was derailed partially due to rising concerns that major central banks could be less aggressive than expected on policy amid some positive reports from the US and after the ECB President Draghi said the risk of a recession in the region was low.


US equities

Robust earnings from Alphabet and Starbucks have pushed the S&P 500 and Nasdaq indexes to record highs, with support from data showing US economic growth slowed less than expected in the second quarter. In the week ending July 26, the Dow rose 0.14 percent, the S&P 500 climbed 1.65 percent and the Nasdaq advanced 2.26 percent. Alphabet posted 38.94 billion U.S. dollars in revenue for the second quarter of 2019 with a growth rate of 19 percent year on year, exceeding market expectations. The growth was driven by a substantial increase in advertising business and cloud services. Alphabet shares surged decently during Friday's session.

Facebook reported better-than-expected financial results for the second quarter of 2019 as its quarterly revenue grew to nearly 17 billion dollars, up 28 percent year over year. The stock was up 0.7 percent for the week. Meanwhile, Boeing Company posted a larger-than-expected loss for the second quarter as a result of the global grounding of 737 MAX airplanes. Shares of the aircraft manufacturer reported a nearly 9-percent weekly decline. Tesla stock lost more than 11 percent for the week as the company posted a massive second-quarter loss, despite a record delivery of e-vehicles to customers.


Currencies

The greenback was mostly higher against the majors last week due to a number of positive economic data which has somehow lowered the odds of a more aggressive stimulus by the Fed. Expectations of resuming trade talks between the US and China gave the additional support to the currency as the potential progress in negotiations suggests that the US economy won’t need aggressive stimulus measures. On the data front, FHFA house price index was up 0.1% in May and up 0.5% from last year. US existing home sales fell 1.7% in June versus a 0.2% drop expected. Philly Fed services index climbed 12 points to 24.6 in July. Flash U.S. Services Business Activity Index came at 52.2 (51.5 in June), reaching a 3-month high. Flash Manufacturing PMI registered a 118-month low at 50.0 versus 50.6 in June. US factory orders for large manufactured goods surged 2% in June. The trade deficit in goods narrowed last month as exports weakened. US GDP slowed to 2.1% in second-quarter but beat expectations due to strong consumer demand.

In other news, Kudlow said White House has ruled out currency intervention. Meanwhile, President Donald Trump and congressional leaders struck a two-year U.S. debt ceiling and budget deal early last week. According to the reports, the budget deal would raise U.S. discretionary spending to $1.37 trillion in fiscal year 2020, up from $1.32 trillion this year. These two factors supported the greenback as well.

As such, EURUSD registered fresh lows at 1.11 and remains under pressure ahead of the FOMC meeting. GBPUSD extended the decline to fresh more than two-year lows and now targets the 1.23 figure on Brexit-related headlines. The sterling was lower due comments from UK PM Boris Johnson, as he reiterated that the Withdrawal Agreement needs to be reopened and the backstop abolished. He also said that UK must fully prepare to leave without a deal on October 31.


Commodities

Oil prices were unchanged for the week following local fluctuations amid conflicting signals from the industry. Brent crude finished the week around 63.20 dollars a barrel. Earlier in the week, prices increased as investors looked at possible supply disruptions in the Middle East, with traders closely monitored the latest development of U.S.-Iran frictions, raising concerns over global oil supply. On Wednesday, the futures fell despite a massive decline in U.S. crude inventories, as investors continued to express concerns over weakening global demand.

For the week ending July 19, U.S. commercial crude oil inventories decreased by 10.8 million barrels from the previous week, more than the market forecast falls of 4.0 million barrels, but the decline was mainly due to disruptions caused by a Gulf of Mexico storm earlier this month, so the release failed to support the market. Besides, the International Monetary Fund lowered its global growth forecast to 3.2 percent in 2019 from 3.3% in April, which also capped the bullish attempts in the market. Now, traders focus shifts to the US-China trade talks as well as the upcoming FOMC meeting which will set the tone for riskier assets including oil.