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The current mixture of strong macroeconomic signals and what is expected to be a strong showing from today's nonfarm payrolls report is flashing a "green light" to Federal Reserve hawks. Meanwhile, fear of Sunday's Italian vote seems to be fading.
Article / 04 July 2016 at 11:29 GMT

Mid-session Europe: A most volatile calm

Saxo Markets
Denmark

t

Foreign exchange

Forex
 
The resignation of Ukip leader and Brexit ur-champion Nigel Farage adds yet another layor of chaos and unpredictability to the UK political landscape, but markets appear willing to sit this one out. The US' absence due to the July 4 public holiday is also playing a major role here.

In commodities, silver is at the heights but may need a further boost from gold. Vols are contracting and corporate bonds are still enjoying their post-Brexit boost.

This week marks the first US nonfarm payrolls release since the landmark Brexit vote, which will be a major test of both the Fed's rate plans and the market's ability to return to macro data as its key driver.

Watchlist

  • US out for July 4 holidays 
  • Canada’s June RBC’s Canadian Manufacturing PMI (1330 GMT, previous 52.1)

v
Forex developments

July 4 sentiment can be felt in the market with the US closes and little else happening. Commodity currencies are all advancing with higher commodities. Reserve Bank of Australia up tomorrow; risk is for upside surprise if no clear easing bias.

EURUSD remains doing the 1.1100 dance and has so far been attracted back to this level on any moves mostly to the upside in last two days. Market might be in check ahead of Friday's US jobs print. Upside tech resistance on a US holiday being 1.1158 (10-day moving average); a break of that opens us up to the 1.1190 area (around lows of June 14-15).

USDJPY almost flat on the day. Tech resistances of note are 103.29 (10-day moving average). We have been touching daily lows since June 30 at around the 102.30 area (we visited a low of 102.16 on June 29) so we need these levels to hold to avoid another visit lower.

GBP took a beating following the release of the construction PMI, which was sharply lower and showed contraction. GBP recovered its losses post- Ukip leader Nigel Farage's resignation announcement. Since the Brexit referendum, 1.3250 has been decent tech support with GBPUSD closing there or finding its low there for five days, including today. We watch any close of day below 1.3250 as a possible signal for further weakness.  

FX Options volatilities
 
Vols

Vols
 
In general vols are coming off on a quiet day which most likely will stay quiet, as the US is out. GBP volatilities are also continuing to drop, and liquidity is coming back. 

Silver has been a very volatile during the Asian session, which also continued into the European session, and the market has been reacting by buying options.

Fixed income

Rates
 
A very quiet session with the US absent due to its Independence Day celebrations. BTP futures marginally lower as a result of the increased noise about its vulnerable banking sector.

Corporate bonds are still enjoying the post-Brexit tailwind, though, with XOVER contracting a further five basis points and is now only 20 bps wider than before the UK vote.

Commodities

Commodities
 
d
Equities

Equities
 
European markets were trading mixed this morning as investors were looking for a direction in the Brexit's aftermath and the absence of US trading for July 4. We saw lots of consolidation ahead of the Federal Open Market Committee inutes and Friday’s key US nonfarm payrolls, especially after last week’s rally.

As the banking issues bubble in Italy, the market is monitoring financial stocks and trading mixed while Santander and BBVA are up. Spanish Unemployment was out better than expected and hopes of forming the government helped IBEX 30 Index to trade in green (15%). 

The EuroStoxx 50 is down 0.20%, the Dax 30 down 0.27%, and the CAC 40 down by 0.33%.
On the flip side, Italian banks are trading under pressure as investors are awaiting the political resolution/support.

The good performance of silver and gold supports commodity and mining stocks (FTSE 100 is flat). A very bad UK Construction PMI was partly offset by chancellor Osborne’s plan to cut the corporate tax rate from 20% to 15%.

CEO of Royal Bank of Scotland Group Pls was out saying that Brexit can delay the sale of government stake by two years. Shares were down 1.7% before recouping the losses and turning positive.

The replay of our Morning Call can be found here.

Join our Weekly OptionsLab on Wednesday  to find out more on covered call strategy.

Read more

Mid-session Europe is part of TradingFloor's stable of commentary running through from the US close, through Asia to the European session. Click below to keep abreast of all the developments as they happen.




Rolls-Royce's 'Spirit of Ecstacy'

Silver has been given wings of late, but it needs a further 
pickup in gold if its flight is set to continue. Photo: iStock

— Edited by Michael McKenna

The Global Sales Trading desk is a multi-asset team providing customised trading solutions
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