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Risk Assets Struggle to Rebound in Quiet Trade

The optimism from the enthusiastic employment report last Thursday quickly faded as the new trading week began, with equities ceding the majority of  Thursday’s  gains as the S&P slipped 0.39%.   Whether it was nervousness around escalating tensions between Palestine and Israel on the the Gaza strip, or skepticism surrounding the underlying strength between full and part time jobs with the June employment report, risk assets traded with an offer tone throughout the day as the VIX popped above the 11% handle and US treasury yields dove lower.

Currency markets were fairly quiet, though the Loonie had a volatile day after it was unable to move higher on the back of a stronger than expected building permit report, and had it’s wings clipped after purchasing manager activity contracted for the second consecutive month.   Not helping the Loonie regain its footing was the fact that the BoC’s quarterly loan officer survey showed that export-intensive businesses had yet to experience a strong and sustained pick-up in demand  from the relative  weakness in the Loonie earlier in the year, highlighting  skepticism that  Poloz’s weak Loonie strategy  can be a panacea for  Canada’s export sector.

The overnight Asian session experienced some follow-through from the sell off on Wall Street, with Yen strength weighing down the Nikkei as it dropped by 0.42%.   Japan’s larger than expected current account surplus for May that was released overnight helped the Yen grind higher against the big dollar throughout overnight trade, with USDJPY slipping through the 200-day moving average, though the pair has managed to find support in the high-101s.   Although Japan’s trade  balance is still in a much larger cumulative deficit than last year due to the deterioration in the Yen making imported goods more expensive, the better  current account surplus aided by a smaller than expected trade deficit for May continues  to add to the concern  the Bank of Japan will shy away from any further stimulus measures this year, thus making it a tough slog for the JPY bears.

European equities have not fared any better than their  Asian counterparts this morning, with the major bourses under pressure as it has been reported that Germany’s second largest bank has agreed to a settlement of  at least USD $500mln for breaking US sanctions and  transferring money through its American operations on behalf of countries that are blacklisted by the United States.   The  significance of this settlement is  the crackdown on money laundering has now shifted from France and BNP to Germany and Commerzbank, as the German  government actually owns 17% of the lender, causing concern more probes and indictments could inflame diplomatic tensions between Washington and Berlin.

Heading further West from mainland Europe, the Pound is struggling to regain its ground after a sharp drop this morning as a result of much worse than expected manufacturing and industrial production numbers.   Instead of modest increases for the month of May as expected, manufacturing and industrial output dropped by 1.3% and 0.7% respectively, causing GBPUSD to break to the downside through 1.71.   Cable has since managed to recover a good portion of its early losses and is now only modestly weaker on the day, as traders saw the partial wash-out as a good opportunity to establish long positions.   One bad month of output activity is not enough to leave investors questioning how this will affect the BoE’s methodology around  slack in the economy, as another monthly rise would have been the largest string of unbroken growth  since 1997. We would argue that price action will be fairly subdued for  Sterling over the rest of the week as it is unlikely we see any change in policy at the BoE meeting  on Thursday, thus leaving investors waiting until the minutes are published to receive more colour.

Heading into the North American open, equity futures are echoing the softness witnessed around the globe, with the S&P poised to extend its losses for a second consecutive session.   Hydrocarbons are also trading with some weight to their tapes, as Brent slips below $110/barrel despite Israel targeting strategic Hamas targets on the Gaza Strip along with mobilizing troops for a potential ground invasion.    USDCAD is essentially flat from yesterday’s close after a failed attempt at  re-taking the 1.07 handle, which is  a crucial level that will need to be ceded in  order for the pair to make another break higher.    A weak employment report for the Canadian labour market  on Friday  could provide the tinder to snap USDCAD above the  key  resistance level, but  the greater pivot for direction will be the Bank of Canada policy meeting next week.

The remainder of the session is light from an economic data perspective, though at10:00EST  we will get further information on the American labour market with the May JOLTS report.    Confirmation the labour  market is on the road to recovery has been well documented by  strong Non-Farm Payroll readings  over the second quarter,  and  further confirmation is likely to be received with the amount of  job openings continuing to increase as firms look to expand their work forces  in anticipation of increased demand.   A fourth consecutive month  with over 4M job openings  will be something not experienced since early 2008, and likely to provide further confidence the second quarter is  on track to  witness a  strong  rebound from the contraction registered in  the first three months of the year.

Further reading:

First Fed hike likely around Q2 2015, ECB QE seems more likely

The Aussie

Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.