Dangerous pause: the markets prepare for a bounce

The new drop in oil prices to around $40/barrel

The end of the summer does not stimulate the growth of volatility, but the raw materials market will be in the mainstream all year round. The oil market wars have passed into a new phase. After the publication of the excellent NFP data appetites to risk continue to grow: the Dow Jones index has grown by 1.04%, profitability of 10-year American Treasuries has recovered to 1.60%. The will be a last quiet trade week before large players’ returning back from vacation.

It is still quiet in the market that is normal for the middle of August. On the majority of platforms the positive background remains: the American stock indexes grow, there are also purchases on the European platforms. Today practically nobody looks at macrostatistics because all data are treated by investors through their possible influence on the FRS policy.

The protocols of the FRS meetings became the political tool a long time ago, their tonality and a general message to some extent contradict the official statement. But after all there is a chance that the June protocol published on August 17 will be more specific and aggressive. Especially it is worth studying economic risks attentively, especially labour market contradictions. Positive dynamics and preserving potential for the further growth of employment can become one more reason not to hurry with increase of a rate. Futures for federal funds can lead to probability of increase of a rate at the USA by September by only 9%, and here chances of rise in December are estimated approximately by 45-70%.

Last week official data on retail sales and the prices of producers have allowed dollar to fall against principal currencies. It, of course, does not give hope for growth of quotations after weak result on GDP for the second quarter which was published several weeks ago.

In the market of crude oil demand does not block the offer which is evidenced by the forecast of International Energy Agency (IEA). From July to September world oil extraction will lag behind demand almost for 1 million barrels a day. Attempt of reincarnation of the oil prices was not successful: speculative growth of quotations on a wave of verbal intervention from the Minister of Energy of Saudi Arabia has been liquidated quickly. Today all OPEC representatives have increased production amounts to record levels, but do not want to cut down quotas and prefer to shake the market.

Riyadh is ready to undertake fixing of amounts of production for support of the oil prices (this statement has caused nearly 5% growth of cost of oil contracts), but on Friday rally has ended on fixing of week short positions. This allows assuming that it the contradiction of Saudis with other members of OPEC who in tough competitive struggle have lost the shares in the market will only amplify at the forthcoming OPEC summit in Algeria. The analyst consider that after release of the summit results perhaps a new fall to a mark of 40$/barrel will happen.

The reserve bank of New Zealand has lowered interest rates by 0.25% and further fall is quite possible. A main objective of decrease in rates is weakening of NZD positions, and therefore officials will further do all their best to direct currency down.

It is also worth noting that:

  1. Following the results of 7 months 2016 direct foreign investments in economy of continental China have increased by 4,3% (in comparison with the similar period of last year) and have amounted to about $77.1 billion. The service trade attracts the largest inflow of investment ($54 billion), the greatest rate of a surplus was shown by the US (nearly 130%), British and German investments.
  2. The Chinese investors inspired by pound depreciation after Brexit and low value of the loans continue to buy up the British residential and commercial real estate. The Chinese equity believes in Britain and as the prudent buyer actively looks for discounts. Analysts expect that transactions on purchases for £450 million will be closed in August. The British real estate market gradually adapts to an exit from the EU and as the British consumers very much depend on real estate prices, their sharp fall can affect consumer expenses in the future.
  3. The amount of the world debt which is not bringing in the income - bond value with negative profitability - has grown to $13.4 trillion last week as programs of purchase of the Central Banks and negative rates have been oppressing the market of the debt equity for several years. This «encourages» investors to go to emerging markets, to undervalued assets and government securities with a long repayment period in hope to receive some profit. Spare cash has filtered also on the world stock market: the FTSE index has risen by 5.3% this year, and all three indexes in the US have updated record maxima.
  4. According to the British Sunday Times, the process of the UK exit from the EU can be postponed until the end of 2019 about what ministers have warned the high-ranking employees of the London City in an unofficial manner. The country should cancel and revise conditions of more than 80 thousand agreements. Moreover, an election of the President of France and members of the German Bundestag next year can be construed as a cause for postponing of the scandalous «divorce».
  5. Even though a low liquidity of long term bonds remains unchanged and the market lacks the debt securities. The Central Bank of Japan is ready to replace the annual purpose on QE from the current fixed $80 billion to $70-90 billion already at the meeting in September. Following the results of last week the Japanese insurance companies have purchased record amount of foreign papers, and the surplus of the account of current transactions of Japan in June has exceeded the forecast and has made 1648 billion yens. The rating of the Prime Minister Abe has grown to 55.4%.

Except the FOMC meeting on Wednesday, it is worth paying attention to data on the American inflation this week, preliminary GDP of Japan for the 2nd quarter, and also the UK data on employment, consumer prices and retail sales in search of further instructions to economic effects of Brexit. The main reaction to all fundamental factors will be shown at the end of the month unless force majeure takes place.

EUR/USD: The system of strong resistance in the range 1.1145/1.1198 protects level 1.1200. Key mark 1.1167. For the movement up couple needs to bargain steadily over range 1.1167/1.1235, the following barrier of resistance 1.1295 - (1.1395/1.1426). Intraday supports: (1.1137/1.1133) (strong) - (1.1105/1.1094) (very strong) - (1.1043/1.1039) - 1.0994. At breakdown the movement in a zone 1.0850 is possible down.

GBP/USD: The pound looks resold. Several levels of strong support are located in the range 1.2926/1.2773, in case of breakdown the movement in a zone 1.2506/1.2337 is possible. Weak, but still actual resistance of - 1.3052. Strong resistance: 1.3140 - 1.3250 - 1.3320. Level 1.3400 is kept by market makers so far, for breakdown the strong fundamental background is necessary above.

USD/JPY: Intraday resistance: 101.58 (weak) - (102.16 - 102.50 - 103.50) (levels of strong protection). Supports: (101.13/100.63) (protection of market makers) - (100.09/99.44) (system of strong supports). At breakdown the next attempt to leave under the psychological mark «100» is possible.

Author: Lachlan Patel,
ForexChief Currency strategist