US equities rebounded after New York Federal Reserve (Fed) President John Williams said that central bankers should ‘act quickly to lower interest rates at the first sign of economic distress’. Although a 25-basis-point rate cut would perhaps do as a ‘preventive measure’ to support the economy, equity investors thought otherwise. The US 10-year yield eased to 2.02%. The probability of a 50-basis-point cut in FOMC’s July meeting rose to 40%. The S&P 500 gained 0.36% and NASDAQ Composite closed 0.27% higher.
Gold surged to $1350 for the first time since May 2013 on tumbling US yields.
Yen and Swiss franc lagged as risk-on trades poured in. The inflation in Japan slowed to the weakest levels in nearly two years. The inflation excluding fresh food, closely monitored by the Bank of Japan (BoJ) eased from 0.8% y-o-y to 0.6% in June. The USD/JPY rebounded from a three-week low (107.21).
The S&P, Dow and Nasdaq futures followed up on gains in the Asian trading session.
The FTSE futures traded 0.42% up. Brent crude edged 2% higher on growing tensions in the Straits of Hormuz after the US downed an Iranian drone.
The FTSE is expected to open 32 points higher at 7530p in London.
Dovish Fed remarks are priced in with greatest enthusiasm
Investors are highly sensitive to dovish comments from Fed presidents these days, as they are trying to figure out whether the Fed would lower its interest rates by 50 basis points by the end of this month, instead of 25 basis points fully priced in.
Given that a 50bp cut would trigger a further rally in global equities, any remark of dovish nature translates immediately into higher asset prices.
The probability of a 50-basis-point cut advanced 40% according to the activity in US treasury markets. This probability stood near 25% a week earlier. Hence, if the market goes down this road, the Fed may have to follow to avoid an unnecessary tumble across the US and global equities.
As a result, there is room for a further advance in the equity space and the US dollar and US yields will likely remain under pressure ahead of the July 30/31 FOMC meeting.
Pound rebounds as MPs back amendment to block no-deal Brexit
The UK had a busy economic calendar this week. The unemployment rate remained unchanged at 3.8% in May, the lowest since 1975, and the wages grew by 3.4% on yearly average. Retail sales excluding auto fuel expanded 0.9% m-o-m in June, versus -0.2% expected by analysts. But neither higher wages, nor improved retail sales translated into a higher inflation. The June headline inflation remained unchanged at 2.0%.
This week’s economic data was encouraging besides the tepid inflation, but the Brexit headache remained persistently on the back of traders’ heads.
The pound finally took a breather after British MPs voted 315 to 274 to back an amendment to stop the next Prime Minister from suspending Parliament from leaving the European Union without a deal by October 31st.
Yesterday’s vote eased the odds of a no-deal Brexit and sent Cable rallying above the 1.25 mark, combined with encouraging economic data released earlier this week. In the dearth of major economic data this Friday, the pound could digest the week’s events and consolidate above the 1.25 mark into the weekly closing bell.
Moving forward, Conservatives’ race for leadership will end on July 21 and the winner, who should secure more than 50% of ballots, will be announced on July 23rd. After that, Britain’s Parliament will go to a well-deserved holiday by the end of next week. The pound will likely take a breather as well and attempt a correction after having erased 7% against the US dollar since March and nearly 6% against the euro since May.
But when policymakers return in September, it will be a rapid count down to the October 31st deadline.
From a technical perspective, the first resistance to a pound rebound versus the greenback stands at 1.2618 (minor 23.6% Fibonacci retracement on March – July debasement). A key resistance lies at 1.2764, the major 38.2% Fibonacci retracement on March – July decline. A move above this level should hint at a short-term bullish reversal and encourage a further rebound to 1.2880 (50% level) and to the 1.30 mark, the 61.8% retracement.
The EUR/GBP on the other hand could see resistance near the 0.90 mark and make an attempt to the 0.8920 (minor 23.6% retrace on May – July rise) before 0.8837 (major 38.2% retrace).
Japanese stocks rebound, but exporters remain under pressure of the rising yen. Upper House election due Sunday.
Japanese equities recovered a part of Thursday’s losses as soft inflation read revived the BoJ doves, halted the yen’s appreciation and somewhat relieved the strong fx pressure on Japanese exporters. The yen gained 4.68% against the greenback since April. With the restriction in high tech exports toward Korea, Japan’s exporters will likely continue feeling the pinch of a strong yen, which could eventually convince BoJ’s Kuroda to join the policy-easing club.
But before that, investors will focus on Japan’s upper house election due Sunday. The ruling LDP, Komeito coalition is expected to maintain the majority in the elections. There are 245 seats, among which 124 are for grab. LDP and Komeito already have 70 seats versus the opposition’s 51 seats. The coalition needs at least 53 seats to secure majority. An additional 38 seats would offer the coalition a super majority and a solid say in constitutional reforms, tax policy, trade dispute with South Korea and security issues.
60% of Japanese firms want PM Abe to keep the large majority. A positive outcome for Mr. Abe could push Japanese stocks higher on Monday.