With Asian markets stabilising on the Chinese equity index rebound, the basic material sector today is amongst the key gainers. Near term risk remains skewed to the downside here, however, as the demand outlook looks shaky in the face of a slowing Chinese economy.
One also has to question the compass of mind of the Chinese authorities in relation to the ban on stock sales. We have now seen everything thrown at this equity market volatility bar the kitchen sink.
Having made a formal request to ESM for loans in exchange for reforms is final proposal day for Greece’s Tsipras. The final deadline is Sunday, markets are clearly optimistic that a resolution Is near hand. We will have to wait and see. Given past form and the heightened probability of a Greek exit from the Eurozone, we may see some weakness in equity indices over the next couple of trading sessions as market participants unwind positions ahead of the ‘final deadline’.
Retailers remain under pressure this morning with Next Plc (LONDON:NXT) (-2.14%), J Sainsbury (OTC:JSAIY) PLC (LONDON:SBRY)(-1.06%) and WM Morrison Supermarkets PLC (LONDON:MRW) (-0.78%) taking the bottom spots on the UK benchmark. The new ‘living wage’ introduced by George Osborne yesterday is likely to dent margins and even the lowering of the corporation tax is not expected to temper it.
Smith & Nephew (LONDON:SN) (+2.21%) shares have benefitted this morning from a broker upgrade from Berenberg. The company is expected to cut operating costs due to synergies form its Arthrocare acquisition.
Tullow Oil (LONDON:TLW) PLC(+0.5%) State-run Ghana Gas Company has shut down its Atuabo gas processing plant due to an unexpected disruption of gas supplies from the offshore Jubilee field operated by ex FTSE 100 company, Tullow Oil Plc (LONDON:TLW).
According to Reuters, Tullow holds a 35.48 percent stake in the Jubilee field. The other stakeholders are the state-owned Ghana National Petroleum Corporation with 13.64 percent, Kosmos Energy Ltd (NYSE:KOS) with 24.08 percent, Anadarko Petroleum Corp (NYSE:APC) with 24.08 percent, and Sabre/PetroSA with 2.73 percent.’
Debenhams Plc (LONDON:DEB) (-2.96%) With all retailers sliding over the cost of the living wage, Debenhams has been cut to neutral by UBS. Shares are down 11.5% from the highs seen in May. The current average target price of 91p may be a little optimistic given the recent turn of events
Associated British Foods (LONDON:ABF) (+2.15%) With FY expectations unchanged, group sales for ABF are 2% ahead of the same period last year. Sales on a LFL basis at actual exchange rates was up 9%. Strong conviction buying amongst most brokers sets the average target price at 3114 which match with the highs seen last month.
Later sees US unemployment claims released, expected to fall to 274,000 from last week’s 281,000.
We expect the Dow to open higher by 125 points to 17640
US sovereigns hint at no Fed action by December
The Fed minutes hint at nothing but inertia as we move toward the September meeting. The minutes were mixed with some participants voicing caution regarding a too-early rate hike, whereas others stated that the conditions for the first rate hike should be met shortly.
Clearly, the global macroeconomic environment is not all that favourable for higher US rates. The recent short squeeze in Chinese equity market, the Greek barrier on the EU’s recovery path, the softness in the commodity markets and the leading central banks’ step back into the dovish territories warn that any Fed move within the next 3-to-6 months could result in outsized USD demand. Strong USD rally following a potential Fed action could therefore backfire on the US recovery.
The IMF concerns on a premature Fed action are certainly justified as the world economy is not on a solid base for sustainable recovery.
All in all, the Fed minutes gave no further clarity on the timing of the first rate hike while the dovish shift in Fed members’ dot plot weighed on the US sovereign curve. The implied probabilities extracted from the sovereign bond market suggest less than 50% chance for a rate hike before the end of 2015.
Euro trims post-Fed gains as traders look to cut long positions before the weekend
EUR/USD rallied to 1.1125 in Asia following the pullback in USD appetite after yesterday’s minutes gave no further clarity on the timing of the first potential Fed rate hike. The euro enthusiasm remained short-lived into the European open. The 10-year yield spread between Spanish and German bunds remain at a year high, although the interest in bunds market remains fairly balanced to talk about a contagion panic in Eurozone’s periphery walking into the third straight Greece focused weekend.
The euro trading is expected to remain choppy before the weekend as traders will certainly be reluctant to open fresh EUR long positions on unresolved Greek uncertainties. Greece has until Sunday to come up with new proposal for a potential bailout package from the EU. Given the complexity of the situation, a successful deal would be a miracle. The Grexit is now the base case scenario.
In EUR/USD, the 1.0916 week low paves the way to 1.0819 (May 27th low) walking into the weekend. The upside attempts are expected to remain capped with resistance seen at 1.1140 (Fib 61.8% retrace on Jun 29 – Jul 7 sell-off), max 1.1240/78 (Jun 29 and Jun 30 top respectively).
Gold trades on Fed, not on Greece
The dovish Fed minutes gave a light boost to gold which managed to hold the ground despite short squeezes below $1150 over the past two sessions.
The gold market has remained on the opposite side of the risk haven traffic during the entire Greek saga. This market behaviour suggests that the USD levels tend to have a larger impact on the gold market as the paper gold is no more seen as a safe haven harbour. The correlation between the S&P 500 stocks and the gold prices has been significantly positive in June. As the gold market bottomed below $1150 marker this week, the interest in cheap gold on anticipation of inaction from the Fed could form a base for a short-term recovery toward $1200.
Further weakness should see support at 1142/32 (Mar’15 and Nov’14 lows respectively).