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The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The US Dollar regained its mojo as the market took most notice of a very strong US non-manufacturing ISM survey, even if traders had to previously contend with the lowest US ADP employment report in over 9 years. This mixed bag of economic indicators has led to confusing signals heading into Friday’s US NFP report, which is going to be cardinal to re-assess the chances of the Fed cutting its interest rate in the July to Sept window. Before the US NFP lottery event though, traders will be fixated on two fronts. Firstly, the ECB policy decision, set to release updated forecasts on inflation and GDP. Secondly, the market needs clarification on whether the US will impose tariffs to Mexico as Monday’s deadline set by Trump approaches. Overall, the risk environment has been friendly once again, especially in the volatile equity market, supported by the notion of a dovish Fed in coming months, as the 69% pricing of a rate cut by the July 31st FOMC meeting clearly depicts. The Yen seems to be defying this rationale by still finding strong demand, which comes to show that the current risk rally is limping of one leg as one would expect Yen selling as part of the ‘risk on’ procedures. The Kiwi, meanwhile, was the only currency that managed to challenge the pick up in USD demand, spurred by the neutral tone by the RBNZ assistant goveor against dovish expectations. The behavior in the Kiwi comes in stark contrast with the poor performance of the Aussie, as the market remains of the belief that there is more easing ammunition to be utilized by the RBA. Ahead of the ECB, and in anticipation of Draghi striking a more pessimistic message that may reinforce their existing dovish stance, the market has been selling Euros. Sandwiched in between the currency crosscurrents we find the Canadian Dollar and the Pound, unstimulated by the absence of fundamental developments.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
The more the market prices in a cut in the Fed’s fund rate, more of an excuse exist to justify a recovery in equity valuations, as clearly reflected by the reversal in the micro and macro flows via the bullish slope of the 25 and 125-HMAs. According to the CME Fedwatch tool, the market is pricing a 69% chance that the Fed will lower its interest rate in its July 31st FOMC meeting. As a secondary culprit behind the renewed buying interest, hopes that the US and Mexico may strike a deal that will avoid the imposition of tariffs by next Monday also contributed to the ongoing momentum in equities, putting the tensions between the US and China on trade temporarily on the backbuer, even if such impasse remains the key macro issue to be fixated with casting a major shadow in this risk recovery.
The state of play in US equities runs the risk of growing disjointed to other risky assets as the paradigm that seems to be evolving is one where the Fed lowers rates to stimulate growth, which would only occur if the US and China fail to breach the major gap on trade. In this scenario, equities may still stay supported. Remember though, that paradoxically, one of the triggers for the Fed to be pushed into easing action in the July to Sept window, would be a deterioration of financial conditions, hence why it still may take fresh rounds of selling pressure in equities for the Fed to be fully convinced that they must act in order to circuit break the bearish trend in stocks.
On the currency front, it’s interesting to note that the Yen and the DXY both traded firm, especially the latter, despite the rejuvenated risk appetite currently present, implying there is a disparity between how equities and bond traders view current dynamics and the state of affairs, especially in the Yen. Other measures of risk such as the S&P 500 vol index (VIX) or junk bonds do justify the rise in equities, even if by assessing the valuation in Chinese assets, it’s clear that the market’s renewed ‘risk on’ profile is not built upon hopes of the US and China addressing the trade conundrum. Remember, we have a new driver for risk to be supported in the form of expectations for a more accommodative Fed, a factor that is being discounted through higher valuations in equities as large companies’ dividends become more attractive in an environment of lower rates by the Fed.
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