22 August 2016 at 11:24 GMT
Crude oil broke its phenomenal, short covering-spurred winning streak today with WTI moving below the $48/barrel handle. In the news, a boost in Iraq exports as well as the fading impact of the Saudi/Opec verbal intervention are weighing on crude prices.
Both oil and gold are under pressure, in fact, as new hawkish signals from Federal Reserve vice-chair Stanley Fischer are supporting the USD against its G10 rivals, most notably the euro.
The weak euro's effects are also being seen in continental equity markets today, which are largely green on the common currency's softness.
- US July Chicago Fed National Activity Index (1230 GMT)
- Canada Jun. Wholesale Trade Sales (1230 GMT)
- US Weekly Crop Progress report (2000 GMT)
USD rally halted for now...
EURUSD found support around the 1.1270 area. This happens to be slightly above the Fibo level of 1.1267 from the daily rally starting July 25. At these levels, USD still not gaining any decent momentum until we clear the 1.1200 area (the 1.1224 area is around the 100-day moving average) so interesting support. Expect a back-and-forth until Friday, with little on the calendar. Decent resistances at 1.1365/1.1400. USDJPY providing a nervous wait here, not only for USDJPY around Yellen’s speech at the end of the week, but of course due to the September 21 Bank of Japan/Federal Open Market Committee meetings. If USD is unable to sustain a rally post-Jackson Hole, there is risk to 95.00 in USDJPY. We find the USDJPY Call for Sep 23, strike 102.5, as an interesting play on possible moves higher, even on falling below 100 where strike can be amended lower. GBP has had good moves on the day, with a market extremely short sterling and some decent Retail Sales from UK last week, but little news on the day. The temptation is for selling into strength with 1.3117 area being the 50% Fibo level from the collapse of GBPUSD on August 3, and where we saw GBPUSD a whisker higher on the day so far.
Then we have the more important and critical level at 1.3177, which survived two attempts on August 18 and 19. So short covering could result if these levels taken out and again resulting in sharper moves on such a short market. Downside 1.3058 is first tech support, where GBPUSD has failed to close below since its breakout on August 18. This support level is a whisker below todays lows.
FX Options volatilities
Today's one-month expiry date has rolled to the BoJ and FOMC, which is why 1m USDJPY is marked four vols higher. For reference, the realised vol weekly in USDJPY is 10.75.
This week has not much priced in volatility wise until we get to Friday’s Yellen speech at Jackson Hole (note her speech is after Friday’s expiry, so have to own Monday expiry to get the volatility from Jackson Hole).
One-week EURUSD is also 1.5 vols higher today due to Jackson Hole, despite 1w also being a UK holiday.
Markets recover from the early drop in which 10-year German bunds opened below 167 but are now trading firmer as market risk sentiment has also seen an improvement.
The correlated move between government bonds and equities reveals, in our view, rate hike fear as the dominant factor behind the move, and we expect this to be the theme throughout the week ahead of the Jackson Hole meeting on Friday, where Janet Yellen will be asked for direction amid very different messages from FOMC members within the past week.
European stocks pushed higher Monday with the CAC 40 gaining 0.8% to 4,435.15 and the Italian MIB rising 1.1% to 16,483.76 with financials and telecoms leading the indices. A lwer euro and corporate deals helped European indices to go north.
European exporters were pushing higher as the euro lost ground against the dollar after Fed vice-chair Fischer said the Fed is close to its targets, suggesting the central bank may be able to raise interest rates soon.
Meanwhile, deal developments including from Syngenta AG are supporting a rise in the region’s equity benchmark. Shares jumped 12% after a US national-security regulator cleared the proposed $43 billion purchase of the Swiss seedmaker by China’s China National Chemical Corp., or ChemChina. Syngenta’s rally helped push Switzerland’s SMI up 0.9% to 8,199.48.
French company Teleperformance is popping up in the movers list. The share climbed 7.6% as the outsourcing company said it’s buying translation services company LanguageLine Solutions LLC in a $1.52 billion deal. The deal when completed should add to Teleperformance’s per-share earnings by around 10% on an adjusted basis for 2016.
Also, Kingspan Group PLC shares gained 5.3% as the Irish building materials supplier raised its dividend after posting 50% jump in half-year adjusted-operating profit.
Shares of miners and oil companies were down Monday as the dollar gained ground against its rivals. In the UK, Randgold Resources PLC gave up 3.2%, and Antofagasta PLC moved down 2.1%. Oil majors were lower, with BP PLC down 0.3% and Royal Dutch Shell PLC off 0.6%.
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.
Look out below? Crude bears are profiting as oil is starting to retrace
last week's vertiginous short-covering rally. Photo: iStock
— Edited by Michael McKenna