CFD Markets News and Forecasts — 29-06-2021

Carsten Brzeski, the Global Head of Macro for ING Research, believes that the latest drop in German headline inflation masks another surge that we think is around the corner, adding to an increasingly heated debate at the ECB about potential next steps towards tapering.

"The drop in German headline inflation is nothing more than a thunderstorm in the summer: it brings a short period of cooling off but not really a game-changer."

"Based on inflation outcomes of several regional states, German inflation in June came in at 2.3% year-on-year, from 2.5% in May. The harmonised index relevant for the ECB decreased to 2.1%, from 2.4% in May."

"The fall in headline inflation is just a short stop before another surge. In July, the full base effects from the VAT reversal will show for the first time, probably pushing inflation to above 3%. A continuing surge in headline inflation together with what currently could be the most fertile breeding ground for second-round effects will further fuel the tapering debate."

At the last policy meeting and even since then, the ECB has stuck to its very benign view on inflation."

"An inflation outlook of 1.4% in 2023 is anything but scary, however, this benign take could soon be subject to some rethinking. In fact, in our view, the breeding ground for at least one edition of second-round-effects has hardly ever been more fertile than currently on the back of reopenings of the economy. A pass-through from producer to consumer prices as well as a pass-through from consumer prices to wages."

"Judging from recent comments, the doves and hawks at the ECB are starting to position themselves for what will become a heated tapering debate over the summer months. Contrary to the situation in the US, the ECB’s tapering will not be a process to completely stop asset purchases but rather a strategy to bring the Pandemic Emergency Purchase Programme (PEPP) to a subtle end by March 2021 and have the traditional Asset Purchase Programme (APP) take over entirely."

"As much as eurozone citizens are currently hoping for a carefree summer, ECB policymakers will inevitably lose some time (and relaxation) over the right way forward."

eFXdata reports that analysts at MUFG Research note that the correlations between G10 FX rates and the performance of global equities have strengthened over the past week.

"The still favourable conditions for risk assets is helping to dampen further upside for the US dollar from the Fed’s hawkish policy shift."

"The correlations between G10 FX rates and the performance of global equities have strengthened over the past week. The US dollar remains negatively correlated to the performance of global equities. It is providing an offset to support from the US dollar from higher short-term US rates."

The Conference Board announced on Tuesday its U.S. consumer confidence surged 7.3 points to 127.3 in June from 120.0 in May.

Economists had expected consumer confidence to come in at 119.00.

May’s consumer confidence reading was revised up from the originally estimated 117.2.

The survey showed that the present situation index rose from 148.7 in May to 157.7 this month. Meanwhile, the expectations index increased from 100.9 last month to 107.0 in June.

“Consumer confidence increased in June and is currently at its highest level since the onset of the pandemic’s first surge in March 2020,” notes Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions improved again, suggesting economic growth has strengthened further in Q2. Consumers’ short-term optimism rebounded, buoyed by expectations that business conditions and their own financial prospects will continue improving in the months ahead. While short-term inflation expectations increased, this had little impact on consumers’ confidence or purchasing intentions. In fact, the proportion of consumers planning to purchase homes, automobiles, and major appliances all rose - a sign that consumer spending will continue to support economic growth in the short-term. Vacation intentions also rose, reflecting a continued increase in spending on services.”

• Inflation and GDP growth will peak in Q2
• Like lumber, prices will come back
• One thing that looks less temporary is the rise in rents
• What the environment looks like in 2022 matters a lot
• It's possible that people's wage aspirations have increased and that could be holding workers back
• I'm a big believer of optionality in regards to tapering
• I have a preference for the least drama way of tapering
• Expects big jobs gains in August and September
• Says he feels bad for Fed's Chair Powell because he has to defend the dots, something they didn't even discuss at the latest meeting

S&P Dow Jones Indices (S&P DJI) reported on Tuesday its Case-Shiller Home Price Index, which tracks home prices in 20 U.S. metropolitan areas, jumped 14.9 percent y-o-y in April, following a revised 13.4 percent y-o-y climb in March (originally a 13.3 percent y-o-y surge). This was the biggest annual gain in house prices since December 2005.

Economists had expected a climb of 14.5 percent y-o-y.

Phoenix (+22.3 percent y-o-y), San Diego (+21.6 percent y-o-y) and Seattle (+20.2 percent y-o-y) recorded the highest y-o-y advances among the 20 cities in April. Overall, all 20 cities reported greater price gains in the year ending April 2021 versus the year ending March 2021.

Meanwhile, the S&P/Case-Shiller U.S. National Home Price Index, which measures all nine U.S. census divisions, climbed 14.6 percent y-o-y in April, following a 13.3 percent y-o-y jump in the previous month. 

“Housing prices accelerated their surge in April 2021,” noted Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI. “We have previously suggested that the strength in the U.S. housing market is being driven in part by reaction to the COVID pandemic, as potential buyers move from urban apartments to suburban homes. April’s data continue to be consistent with this hypothesis. This demand surge may simply represent an acceleration of purchases that would have occurred anyway over the next several years. Alternatively, there may have been a secular change in locational preferences, leading to a permanent shift in the demand curve for housing. More time and data will be required to analyze this question.”

U.S. stock-index futures traded mixed on Tuesday, with the Dow being supported by gains in banking stocks and the Nasdaq taking a pause after a record-setting performance a day earlier, as investors shuffled assets into the final two trading days of the quarter amid renewed concerns over the spread of the highly-infectious Delta coronavirus variant and accelerated inflation readings.

Global Stocks:

Tesla (TSLA) target lowered to $660 from $730 at UBS

(company / ticker / price / change ($/%) / volume)

FedEx (FDX) reiterated with a Buy rating at BofA; added to US1 list; target $372

FXStreet reports that the Credit Suisse analyst team notes that the S&P 500 Index is set to hold above the 13-day exponential average at 4245 to maintain the uptrend with next resistance seen at 4291, while the 4350 level remains the objective.

“The S&P 500 has moved beyond 4286 as expected, with the market reaching Fibonacci projection resistance at 4291. Given the improving short-term momentum and recent tick higher in volume, we look for a break above here to open up our 4350 next core objective. We would then look for a fresh phase of consolidation to emerge here.” 

“Overall, we maintain a tactical bullish bias whilst above the 63-day average and recent low at 4173/64.”

Germany's Federal Statistical Office (Destatis) reported on Tuesday the country’s consumer price index (CPI) is expected to increase 0.4 percent m-o-m in June after gaining 0.5 percent m-o-m in the previous month.

On the y-o-y basis, Germany’s CPI is seen to surge 2.3 in June, following a 2.5 percent jump in May.

Economists had predicted inflation would rise 0.4 percent m-o-m and 2.3 percent y-o-y in May.

According to the report, food price increased 1.2 percent y-o-y in June after a 1.5 percent y-o-y gain in May. Energy prices jumped 9.4 percent y-o-y after a 10.0 percent y-o-y surge in the previous month. Services costs rose 1.6 percent y-o-y, decelerating from 2.2 percent y-o-y in May.

Meanwhile, the harmonized index of consumer prices for Germany (HICP), which is calculated for European purposes, is expected to advance 0.4 percent m-o-m and 2.1 percent y-o-y.

FXStreet notes that the aussie is under notable pressure today as the latest batch of lockdowns across Australia have some questioning the RBA’s moves next week. Economists at TD Securities think near-term risks probably still remain skewed to the downside for AUD/USD.

“The AUD is among the day's worst performers as the latest lockdowns across Australia have now stretched to nearly half the population.” 

“The country's relative sluggishness on the vaccine front has fueled some speculation the RBA could deliver a dovish surprise at next week's policy decision. Policymakers are due to decide on whether to extend its YCC target to the November 2024 bond and the shape of their QE program going forward.”

“We continue to expect the RBA will hold to the current April 2024 maturity target and to a QE3 program of ‘up to A$100bn’.”

“We note that AUDUSD's post-FOMC bounce from 0.7475 ran out of steam at 0.7617 last week. With the aussie now back below the 200-DMA (0.7565), we think near-term risks probably still remain skewed to the downside.”

USD and JPY rose against other major currencies in the European session on Tuesday as demand for “safe-haven” assets increased amid raised worries that the spread of the highly-infectious Delta coronavirus variant and the restrictions reinforced by some countries to contain its spread could delay global economic recovery.

The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, rose 0.19% to 92.07. JPY edged higher against USD. 

Market participants also await the key U.S. payrolls data, which are scheduled to be released on Friday and are expected to help determine the pace of improvement in the labor market. Economists are forecasting that nonfarm payrolls increased by 690,000 in June. Some believe that better-than-expected jobs reading could lead to a more hawkish Federal Reserve.

FXStreet reports that USD/CHF broke out of a small intraday bullish “wedge” continuation pattern as the USD strengthened vs. most pairs on Monday. The Credit Suisse analyst team believes this should trigger a break above the recent 0.9240 high and a move to next resistance at 0.9264 this week.

“USD/CHF pushed higher yesterday and broke above first resistance at 0.9214, which should open up a move to 0.9264 next, which is the 61.8% retracement of the Q2 fall.” 

“Bigger picture, we believe the recent break above the 200-day average turned the risks higher within the 2021 range over the next 1-2 months, reinforced by the cross into positive territory for daily MACD. With this in mind, the next resistance above 0.9264 is seen at 0.9300/05."

“Near-term support stays at 0.9142/33, then 0.9101/00 and at most, the 0.9073 200-day average, which we look to hold to keep the 1-month risks higher (if reached).”

FXStreet reports that UOB Group’s FX Strategists noted USD/CNH could have likely charted a near-term top in past sessions.

24-hour view: “Our expectation for USD to ‘test the strong support at 6.4500’ did not materialize as it traded within a relatively narrow range (6.4578/6.4688) before closing little changed at 6.4593. Momentum indicators are mostly ‘neutral’ and USD is expected to trade sideways between 6.4550 and 6.4750 for today.”

Next 1-3 weeks: “As highlighted, USD has likely found a short-term last week but it is too early to expect a sizeable pullback. USD is more likely to trade sideways for now, likely within a 6.4300/6.4900 range.”

FXStreet reports that USD/JPY edged lower on Monday, but economists at Credit Suisse look for a closing break above key resistance at 110.97, which would increase the risk of a major base. First support is seen at 110.43, then 110.03.

“USD/JPY remains well supported above key support from the 13-day exponential average and uptrend from January at 110.45/03 and we continue to look for a sustained break higher. This should then expose long-term and more important resistance, starting at 111.93 and stretching up to the 112.40 high of 2019.”

“Support moves to the aforementioned 13-day exponential average at 110.45/43, which we look to hold. Below can see a move back to the uptrend at 110.03, but only below 109.72 would warn of a top for a fall back to 109.31/19.”

• We will enhance our coordination with global economic policies and prevent “external shocks”
• Says China's economy is showing greater stability and recovery
• China’s prudent monetary policy will be targeted and appropriate
• Pledges to maintain adequate liquidity
• Says macro leverage ratio, or total debt as a ratio of GDP, will be kept constant
• Vowes to match the expansion of money supply in the economy and aggregate financing with nominal GDP growth

FXStreet reports that according to economists at Charles Schwab, some inflation pressures are already easing; with attendant impact on affected industries’ stocks’ performance.

“At least in the near-term, the surge in economic growth expected for the second quarter serves as an offset to the upward pressure on inflation. In addition, the bloom may already be coming off inflation’s rise if search activity is considered.”

“While CPI increases from one year ago have undoubtedly been strong, the changer over two years disputes the notion that we’re seeing a high and sustained increase in prices. Inflation remains well below levels seen during the Global Financial Crisis, and nowhere near the stratospheric climb in the 1970s.”

“Much of the sell-off in the growth-oriented areas of the market earlier this year was driven by the rise in real rates into March. They have since come down and drifted sideways. That has given the growth trade some more breathing room. Importantly, though, while some cyclical and value-oriented areas have eased their ascent, they haven’t come down meaningfully; confirming the strength in both the prospects for the economy and the continued durability of value factors’ leadership.”

CNBC reports that ECB member Jens Weidmann has said the massive coronavirus stimulus program should be scaled back “step-by-step,” but others are worried about a premature lifting of the measures.

“I see two prerequisites for completely ending net purchases under the PEPP,” Jens Weidmann, a hawkish member of the ECB, said.

These would be the total removal of Covid-19-related restrictions, such as social distancing and a solid economic recovery, he added.

However, the path of the pandemic is uncertain and, despite strong economic data in recent weeks, there are concerns that a premature lifting of the stimulus would undermine the economic recovery even further.

To avoid this so-called “cliff-edge” situation, Weidmann called for the scaling back of pandemic-related stimulus “step-by-step.” 

“Due to the still existing uncertainty, we cannot determine the exit from the monetary policy crisis mode far in advance. In order not to have to end the PEPP suddenly, however, the net purchases could be reduced step by step in advance,” Weidmann said.

According to the report from the European Commission, in June 2021, the Economic Sentiment Indicator (ESI) increased again strongly in both the EU (+3.0 points) and the euro area (+3.4 points) compared to May. At 117.0 (EU) / 117.9 (EA) points, the ESI by far outstrips its long term average and pre-pandemic level, hitting a 21-year high. The Employment Expectations Indicator (EEI) also increased markedly (+1.2 points to 111.5 in the EU and +1.6 points to 111.6 in the euro area), bringing it to the highest level since November 2018 in both areas.

In the EU, the ESI’s increase was propelled by improving confidence in the services sector, but all other surveyed business sectors (i.e. industry, retail trade, construction) and consumers recorded an improvement, too. At the country level, the ESI reached an all-time high in Germany (+5.0) and increased also in Italy (+2.1), the Netherlands (+1.9), France (+1.3) and Poland (+0.2). Of the six largest EU countries, only Spain saw a slight decline (-1.1).

Industry confidence increased for the seventh month in a row (+0.9) and reached a new all-time high. Services confidence posted its fourth significant improvement in a row (+6.0), hitting the highest since February 2018, and returning to well above its long-term average. Consumer confidence increased for the fifth time in a row (+1.5), driven by an improvement in all its components. Retail trade confidence rose for the fourth time in a row (+3.8). Construction confidence improved (+0.6), as managers posted better appraisals of the level of order books, despite slightly less optimistic employment expectations. Finally, financial services confidence (not included in the ESI) increased strongly again in June (+8.4), thanks to managers’ more positive appraisals of the past business situation, past demand and demand expectations.

According to the report from the Bank of England, net mortgage borrowing rebounded to £6.6 billion in May from £3.0 billion in April, but remained below the record £11.4 billion in March. Mortgage approvals for house purchase were 87,500 in May, up very slightly from 86,900 in April, but lower than the recent peak of 103,200 in November 2020. Economists had expected a decrease to 85 900.

For the first time since August 2020, consumers borrowed more as consumer credit than they paid off in May. Net borrowing was £0.3 billion. The effective rate on new personal loans remained low at 5.61%, compared to 7.03% in January 2020.

Households’ net flow in to deposit accounts fell again in May, to £7.0 billion. Deposit interest rates fell slightly to new historically low levels.

Large businesses made net repayments of £1.9 billion of loans in May, with small and medium sized businesses also making their first repayment, of £0.4 billion, in over a year. Private non-financial companies raised £0.6 billion of finance from capital markets in May, compared to a monthly average net issuance of £3.3 billion since March 2020.

FXStreet reports that according to strategists at Natixis, we can begin to worry about the risk of a sharp rise in oil prices in the second half of 2021, in 2022 and even beyond for four reasons.

• “The strong recovery in global activity, which will lead to a marked upswing in global oil consumption.”

• “The inertia of global oil demand due to the long lifespan of cars, aircraft, industrial equipment, power plants, etc.”

• “Weak investment in exploration-production for several years. Investment in exploration-production has decreased in the recent period, which will reduce oil supply for several years.”

• “Pressure on private oil and gas companies is strong for them to reduce their investments in fossil fuels, which will weaken the supply of oil from these companies, and which will not be easily offset by the production of national oil and gas companies in producer countries.”

CNBC reports that veteran investor David Roche says investors should be wary of the bubble bursting, as the S&P 500 notches record highs despite the backdrop of potential monetary tightening and the new delta Covid-19 variant.

The Fed recently surprised markets with a slightly hawkish pivot, upping its inflation expectations and bringing forward its interest rate hike schedule to indicate two raises in 2023.

Roche, president of investment firm Independent Strategy, said current valuations were a “bubble.”

“These things always come to an end, and it’s very hard to say what the catalyst that will bring it to an end will be. It could be another Covid variant, at the moment I think that is fairly unlikely,” he said.

“The most likely [catalyst] from my view is that the Fed actually is forced to stop giving a double message and starts having to talk quite seriously about the days of additional monetary stimulus and financing of budget deficits [being] over,” he said.

Roche suggested the spread of the delta variant was unlikely to be the trigger for pent-up consumer savings to be withheld and for markets to pull back.

“With regards fiscal stimulus, the likelihood is that the combination of excess savings in both the housing sector and in the corporate sector, plus the fact that there will be more stimulus coming down the line, will keep people fairly optimistic about growth,” he said.

FXStreet reports that economists at Nordea find that the scope for an aggressive wind-down of purchases is bigger for the Fed than the ECB and hence see a stronger USD on the cards.

“Jay Powell and the Fed finally admitted to talking about tapering at the June meeting, and it looks fairly likely that we will get a decision already at the meeting in September, potentially with several taper pre-warnings during July and August. Usually, the Fed would utilize the Jackson Hole conference in late August to provide a fairly firm clue about the upcoming tapering process. This is likely to be the case again this time.”

“We see the net purchases for the PEPP ending in March 2022, and expect the ECB to decide on lowering the pace of bond purchases at the September meeting. We expect the ECB to expand the Asset Purchase Programme (APP), when the PEPP ends, but the end result would still be a considerably lower pace of buying compared to the current situation.”

“We keep a 1.15-1.16 target intact for EUR/USD already this year. We find that the USD strength will be broad-based (typical during a tapering process), also against important peers such as CNY and JPY.”

During today's Asian trading, the US dollar rose slightly against the euro and the pound, and consolidated against the yen.

Market participants this week expect the release of data on unemployment in the United States for June, which will be released on July 2. Data on the labor market are key for the policy of the Federal Reserve System, along with inflation indicators. The dynamics of employment will largely depend on when the Federal Reserve will begin to curtail large-scale stimulus measures introduced at the peak of the coronavirus pandemic.

Neil Kashkari, president of the Federal Reserve Bank of Minneapolis, said last Friday that although the US economy is at the beginning of a powerful recovery, it still has a long way to go to regain the jobs lost during the coronavirus pandemic.

Meanwhile, the head of the Federal Reserve Bank of Boston, Eric Rosengren, expressed his readiness to discuss the curtailment of measures to support the American economy, partly due to fears that extremely cheap loans could destabilize it. "It's definitely time to start thinking about how quickly it would be appropriate to abandon the stimulus measures," Rosengren said. At the same time, he did not specify the time frame in which, in his opinion, this may happen.

Some support for both the dollar and the yen is provided by the demand for safe haven assets against the background of the spread of the more contagious delta COVID-19 strain in Asia and other countries, which raises concerns about the introduction of new restrictions.

The ICE index, which tracks the dynamics of the dollar against six currencies (euro, swiss franc, yen, canadian dollar, pound sterling and swedish krona), rose by 0.05%.

According to the report from Insee, in June 2021, households’ confidence in the economic situation has increased significantly. At 102, the indicator that summaries it has gained four points and is back above its long-term average (100), for the first time since the start of the health crisis.

In June, the share of households considering it is a suitable time to make major purchases has increased significantly: the corresponding balance has gained ten points and reach its highest level since February 2018.

The households’ opinion balance related to their future financial situation has gained six points, and is set at its highest level since June 2007. The opinion balance related to their personal past financial situation has risen by two points. Both balances are well above their long-term averages.

In June, households’ opinion balance related to their current saving capacity has fallen by one point but is still well above its average. Households’ opinion balance related to their future saving capacity has risen by two points, reaching a new historical high.

On the contrary, the share of households considering it is a suitable time to save has fallen. The corresponding balance has lost four points but remains well above its average.

Households' fears about unemployment trend have fallen sharply in June. The corresponding balance has fallen by nineteen points to below its long-term average, to its lowest level since the start of the health crisis.

CNBC reports that JPMorgan Private Bank’s Alex Wolf said that the recent surge in producer prices in China will not likely to drive up costs for consumers.

“We don’t see (producer inflation) really going into consumer prices. They’ve risen a bit, but we don’t see much of a further rise in consumer prices that would force the (People’s Bank of China) to act in any way,” said Wolf, who is head of investment strategy for Asia at the firm.

Producer inflation “has likely peaked and likely come down,” while consumer prices in some cases are also appearing to peak, he told.

Soaring production costs in China, largely due to surging commodity prices, have cut into profits for manufacturers. Official data released over the weekend showed profits at China’s industrial firms rose 36.4% in May compared to a year earlier — slower than the 57% year-on-year growth posted in April.

He added that “the only time” historically that producer inflation has has trickled down into consumer prices is “when there’s really strong consumer demand” — a situation that seems implausible for now given the sluggish recovery in Chinese retail sales.

EUR/USD

Resistance levels (open interest**, contracts)

$1.2021 (673)

$1.1990 (1012)

$1.1969 (577)

Price at time of writing this review: $1.1922

Support levels (open interest**, contracts):

$1.1873 (1921)

$1.1836 (593)

$1.1793 (686)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date June, 28 is 55526 contracts (according to data from July, 9) with the maximum number of contracts with strike price $1,2200 (5954);

GBP/USD

$1.4106 (326)

$1.4017 (1356)

$1.3949 (268)

Price at time of writing this review: $1.3869

Support levels (open interest**, contracts):

$1.3805 (1315)

$1.3772 (860)

$1.3733 (539)

Comments:

- Overall open interest on the CALL options with the expiration date July, 9 is 15946 contracts, with the maximum number of contracts with strike price $1,4500 (3570);

- Overall open interest on the PUT options with the expiration date July, 9 is 17723 contracts, with the maximum number of contracts with strike price $1,4000 (2936);

- The ratio of PUT/CALL was 1.11 versus 1.11 from the previous trading day according to data from June, 28

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.

According to the report from Nationwide Building Society, annual house price growth rises to 13.4%, the highest level since November 2004. Prices up 0.7% month-on-month, after taking account of seasonal factors. Northern Ireland sees strongest growth in Q2, Scotland the weakest, closely followed by London.

Commenting on the figures, Robert Gardner, Nationwide's Chief Economist, said: “Annual house price growth accelerated to 13.4% in June, the highest outturn since November 2004. While the strength is partly due to base effects, with June last year unusually weak due to the first lockdown, the market continues to show significant momentum. Indeed, June saw the third consecutive month-on-month rise (0.7%), after taking account of seasonal effects. Prices in June were almost 5% higher than in March. Regional data for the three months to June indicates that all parts of the UK saw an acceleration in annual house price growth. Northern Ireland and Wales saw the largest gains, at 14% and 13.4% respectively in Q2. By contrast Scotland saw the weakest rate of annual growth, at 7.1% closely followed by London at 7.3%.