Tickmill UK Daily Market Notes

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Big Surprise from ISM Data Stokes Inflation Concerns in the US
European markets trimmed Monday gains, USD recovered some lost ground after yesterday sell-off as the uncertainty remains high associated with the partial reinstation of lockdown in the United States.

The US service sector surprisingly improved in June. ISM business activity index in the services sector jumped from 41 to 66 points (49 points exp.). The leading component of new orders also advanced from 41.9 to 61.6 points, which bodes well for broad index of business activity in the next month.



Saudi Arabia once again raised the August selling prices for oil for most grades going to Asia, the US and Europe. which is seen as a signal of strengthening demand. The price of Arab Light for the Asian region rose by $1, which, however, turned out to be less than the market expected. It should also be noted that the differential between the benchmark and the price of Russian Urals in Europe continues to widen, which indicates an improvement in EU energy consumption outlook. Of course, OPEC is forced to seek trade-off between production cuts and price strategy, which will put pressure on the margin of refineries.

Today we expect release of the monthly short-term energy outlook from EIA in which the agency provides forecast for oil production in the United States. Given that oil prices are rising and some producers in the United States said they plan to increase production in response to this, it will be interesting to see how the EIA takes this information into account in its forecast. Last month, the EIA predicted an average rate of US oil production at 11.57 million bpd, 660K bpd. lower than a year earlier. Also, API weekly inventory data is expected today, which is likely to indicate further inventory decline, which should help WTI to move higher.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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Fed’s Bostic hints next leg of sharp M2 expansion may be around the corner, Gold breaks $1800
Gold futures climbed above $1800 level after one of the architects of the Fed’s current monetary stance, Rafael Bostik, made a less optimistic assessment of the US economic recovery than Fed Chairman Powell. Right in the midst of surprising economic updates in May and June, the head Atlanta’s Federal Reserve Bank said he sees signs that the recovery is moving into plateau. To save the room for maneuver in the future, he said that he hasn’t figured out whether it was just a pause or recovery in activity is changing regime.

But the most important statement, from the perspective of market impact, was the following:

“Given that possibility, to start thinking about what the next relief package should look like.”

As the latest examples of policy easing and fiscal stimulus have already shown, fiscal programs in 2020 are not only large in size but are also aggressive. In other words, the government is not just accumulating a lot of debt, but it is doing it intensively. This requires a so-called “coordination of monetary and fiscal policy” – increased supply of government bonds should be absorbed by the Fed to keep borrowing costs low. When the Fed buys Treasuries from private investors, this leads to an increase in money supply in the economy. A side effect of this process is suppression of market interest rates, the elimination of market price discovery (trading and investing turns into guessing a next Fed move), the flight of investors to the only class of assets that still have positive real yield – stocks. It is also known from macroeconomic theory that in the medium and long term, inflation path is almost solely determined by growth of money supply, so the signal from Bostic that M2 may start to rise again soon propels demand for assets which offer protection which is precisely gold:



As the latest examples of policy easing and fiscal stimulus have already shown, fiscal programs in 2020 are not only large in size but are also aggressive. In other words, the government is not just accumulating a lot of debt, but it is doing it intensively. This requires a so-called “coordination of monetary and fiscal policy” – increased supply of government bonds should be absorbed by the Fed to keep borrowing costs low. When the Fed buys Treasuries from private investors, this leads to an increase in money supply in the economy. A side effect of this process is suppression of market interest rates, the elimination of market price discovery (trading and investing turns into guessing a next Fed move), the flight of investors to the only class of assets that still have positive real yield – stocks. It is also known from macroeconomic theory that in the medium and long term, inflation path is almost solely determined by growth of money supply, so the signal from Bostic that M2 may start to rise again soon propels demand for assets which offer protection which is precisely gold:

If you look closely at the recent gold behavior, we can see domination of bullish forces with short corrective pullbacks. There are really no expectations of a bear market in gold because there are no expectations that the key contributing factor will change the sign – i.e. the Fed stance and its pledge to cooperate with government to help the Treasury market to weather increased supply. The bias of the government to borrow more in order to soften landing of the economy is huge now and it’s unlikely that we see a U-turn in the government’s fiscal policy.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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USD Index: Focus on Signals from the Fed and Congress
Exports and imports of Germany, the biggest economy of the EU, indicated an improvement in May compared with April. It is not a surprise since lockdowns in April reached their peak in the EU. In monthly terms, exports grew by 9%, after falling by 24% in April. However, compared with February volumes, exports are 26% lower. Imports increased slightly (+3.5%) which casts shady on sustainability of spike in consumption after lockdowns were lifted, since change in imports are a kind of forward-looking indicators and reflect expectations of future domestic demand.

The data is interesting in the sense that global trade indicators for May spoke in sync that foreign demand continued to stall. If you look at trade figures of Asian economies (which are also export-oriented), the situation there is similar – weak export growth or even MoM decline in May. The divergence of foreign with domestic demand which rebounded in May suggests that the growth in consumption is forced and probably unstable. It was achieved due to the use of “steroids” in the form of fiscal programs of the EU government, which has evolved from a long-term saver to a big spender.

However, combined policy of the Fed and US Congress is suppressing any attempts of USD buyers to seize the initiative. Therefore, in currency pairs with USD, including EURUSD it’s crucial to analyze expectations related to the Fed and US government. The government is clearly inclined to borrow more because of signals of deterioration in rising US economic activity and the Fed will likely to continue to “collect” government debt on its balance sheet, because there is no other way to generate demand that can replace the lost demand in consumption and investment. The negative picture of USD is also confirmed by technical developments:



From the beginning of June, the bearish trend turned into a correction, which ended with the development of a fairly symmetrical double top. Usually this is a trend reversal pattern, but sometimes it acts as a continuation pattern, which is possible in our case. A convenient moment for sales may be a return to the key support zone at 96.50. We can set a fairly attractive stop loss not higher than intermediate resistance at 97.00, with reasonable take profit target – the previous low at 95.50-95.60.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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US Labor Market on Steroids – How long will that last?
Market bears decided to find a pressing point of stock buyers before the weekend amid a release of worrying US employment data. In fact, the point of concern is quite unobvious, as it’s hiding behind the improvement of some “popular” indicators, but let’s try to figure it out what’s wrong.

US stocks closed in the red on Thursday, Friday trading shows that pressure remains, which can be seen in the modest sell-off of Asian and European equities as well as weak futures on US stocks.

Yesterday, attention of market participants was drawn to the piece of statistics released on every Thursday – initial and continuing claims for unemployment benefits. This data has gained particular significance after the US substantially expanded its income insurance program by introducing a variety of generous pandemic-related payments to unemployed. At the same time, the unemployed who are not in search of work also became eligible to receive payments, which created a situation where a good part of jobless is not captured by official unemployment measures. Consequently, the importance of alternative labor market metrics, which capture these “unreported” unemployed, has increased significantly.

The data this Thursday showed that the initial and continuing claims, in a positive sense, exceeded expectations:

  • Initial claims – 1.314M, 1.375M expected.
  • Continuing claims – 18.062M, 18.8M expected.
However, if we dig deeper, some disturbing underlying employment trends continue to unfold. For example, claims for all unemployment benefit programs, contrary to expectations, continued to increase and rose by 1.4M to 32.9M, highest on record. In the chart below, you can see how many people the BLS considers unemployed and how many people receive unemployment benefits – almost twice higher:



Using values of the gray curve, real unemployment should be now around 20% (compared to official 11.1% of the BLS)!

In the context of “awakening” pessimism in remarks of the Fed officials, such a dynamics of unemployment claims is quite expected. Recall that earlier this week the head of Atlanta Fed said that “there are signs” that recovery in economic activity starts to stifle and discussions about a new stimulus package are becoming more and more appropriate. One of the subtle signals that the government is working on this issue was the extension of the Paycheck Protection Program (that “non-repayable” paycheck loans) until August 8. Increased unemployment benefits expire at the end of this month and the growing dependence of consumer component of GDP on this program suggests that the government will be forced to extend them. Already according to the established, slightly ugly tradition, such a decision will probably only launch a new leg of rally in the US stock markets.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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