01 July 2016 at 11:41 GMT
Markets may have calmed somewhat after the extreme volatility witnessed in the wake of the Brexit vote one week ago today, but how willing traders will be to hold risky assets over the weekend – a long weekend in the US – remains an open and very pointed question.
In commodities, corn and soybeans are in focus as crop and acreage reports have funds rushing to correct their positioning (short in corn, long in soybeans).
The precious metals trade is also a pronounced one this week as investors look to silver and platinum in the wake of gold's consolidation post-Brexit.
- US June Markit Manufacturing PMI (1345 GMT, expected 51.2, previous 51.4
- US June ISM Manufacturing (1400 GMT, expected 51.3, previous 51.3
- US May Construction Spending (1400 GMT, Expected 0.6%, previous minus 1.8%)
We are approaching the weekend so the question is how confident are investors being long risk in such an environment, especially as the US is out on Monday.
EURUSD still hovers around its 200-day moving average that has acted as a magnet for the last few days. Tech resistance of note at 1.1170 (50% Fibo from highs and lows of June 24), then around 1.1230 (61% and also around the 100-day moving average). To the downside, the first tech level is around the 200-day moving average now at 1.1096. USDJPY strengthening in the European and US sessions only to be sold off in the Asian session in recent days. This not happening so far today, and we first watch lows of today around 102.40 a technical support then 101.50 – the weekly 50% Fibo level from the rally starting the week of September 10, 2012, and also the 101.10 area.
Closing below the latter exposes to the sub-100 levels. Back on August 20, 2014, the 103.08 had to be taken out on interest rate hike speculation in the US, so this could be first tech resistance level of interest.
GBP: The activation of Article 50 might not be in the horizon now, but uncertainty increases by the day. Politically it’s a mess, with talk of a possible recession in UK as a result of Brexit vote, and the possible need for rate cuts from the Bank of England putting pressure on GBP.
If we want to play the range in GBPUSD, then 1.3200 needs to hold; 1.3500/33 looks like decent resistance. We are approaching a weekend so beware of gaps on opening next week, which could be substantial.
FX Options volatilities
XAUXAG: Vols opened higher today and risk reversals as well. Have seen strong interest to buy XAUUSD calls throughout the curve. XAGUSD vols also higher on the day.
EURUSD: Liquidity almost back to the levels we saw before Brexit. Frontend vols are well offered.
GBPUSD: Liquidity in GBP significantly improved throughout the week. Frontend vols under pressure.
Markets are now starting to price in another easing cycle, so get ready for another round of lower bond yields and risk sentiment boost. Some notable changes following Brexit and last night’s significant message of looser European Central Bank quantitative easing rules:
- United Kingdom short end now turning negative for the first time ever!
- The entire Swiss government curve is now negative as the 2064 bond has dipped below 0!
- German government bond yields are negative out to 15 years, although bonds are underperforming today as the ECB changes focus to the periphery.
- Italian and Spanish government bonds are outperforming and yields are negative out to three years for the first time ever!-
- The US 30 year yield just dipped to an all-time low of 2.21% with the chance of a single rate hike by end of 2017 priced at just 40%.
European markets traded mostly mixed on additional stimulus talks from central banks while better final PMIs data were published. The Euro Stoxx 50 Index was down 0.13% while the Daxwas marginally higher by 0.10%.
Financials were also mixed as the rises in Deutsche Bank and Santander were balanced by peripheral names being lower on the day.
EasyJet is looking at moving its legal HQ outside of UK (up 1.2%), has started talks with EU.
Peugeot and Renault are up 5.8% and 4.5% respectively on better than expected PMI prints.
Nothing suggests a prolonged rally as the global economy is still balancing on a knife’s edge. China's manufacturing PMI weakened in June while services held up. The only catalysts for an extended rally are stimulus actions from governments and central banks in major countries, but we need to see how they will actually translate into the further push higher in equity markets, as (for example) the Dax index has recouped only half of the losses from the Brexit selloff.
After yesterday’s worse than expected earnings, Micron Technology could be under pressure during US session today..
The replay of our Morning Call can be found here.
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.
The view from the heights of the post-Brexit rally is both thrilling
and a little worrisome. Photo: iStock
— Edited by Michael McKenna