FTSE +3 points at 7360
DAX +3 points at 12440
CAC +5 points at 5179
Euro Stoxx -4 points at 3475
The overnight trading session was dominated by a decent risk-off sentiment after the North Korean President Kim Jong-un said to be firmly determined to test an ICBM that could hit the US within this year.
The North Korean missile threat boosted the appetite in safe haven assets. Capital flew into the yen and gold. Nikkei and Topix edged lower on stronger yen in the morning session then recovered losses on dissipating worries; Hang Seng and Shanghai's Composite hesitated before buyers took over smoothly.
The Japanese, Australian and Chinese data remained somewhat under the shadow of North Korean shenanigans.
Japanese services performed slightly better than expected in June, but the contraction in manufacturing pulled the composite index down to 52.9 from 53.4. As such, the yen depreciation didn’t translate into enhanced activity in June. The Bank of Japan (BoJ) doves keep the hold of the market. The BoJ stated that the output gap improved to 0.79% in the first quarter for 2017, yet remained at the highest levels since June 2008. Hence, the mid-term sentiment remains bearish for the yen.
The USD/JPY pullbacks are expected to meet dip-buyers, who have been building positions targeting the 115.00 mark in the continuation of the June rebound. Support to the June positive trend is eyed at 112.62 (200-day moving average), 112.38 (minor 23.6% retracement) and 111.70 (major 38.2% retrace). Call options should give a hand above 112.25 at today’s expiry.
Growth in Chinese services cooled down in June, yet manufacturers expanded their activity surprisingly. In Australia, the AiG performance of services index printed a solid 54.8, versus 51.5 in May. The AUD/USD rebounded from 0.7590. The Aussie is still interesting for carry traders although today’s risk-off mood could limit the appetite for extending the AUD/USD’s gains to fresh high levels in the continuation of May-June uptrend.
Gold recovered to $1,229 on the back of safe haven demand and slightly softer US yields. The 200-day moving average $1,233 is the next natural target for the gold-bulls. The Federal Reserve (Fed) June meeting minutes should provide a clearer direction in the short-run. In the absence of a hawkish FOMC read, gold could secure a stronger recovery toward the $1,248 (major 38.2% retracement on June-July decline).
The FOMC minutes will be the major macroeconomic highlight as the US returns from the Independence Day break. In its June meeting, the FOMC raised the interest rates by 25 basis points and hinted at one more rate hike in 2017 and three more hikes in the course of next year. These expectations are factored in the current market prices. What is not accurately priced in is the size and the timing of the Fed’s balance sheet normalisation plans. Lack of details regarding the Fed’s balance sheet policy could further weigh on the US yields and the dollar.
In the UK, the June services PMI is on the GBP-traders’ agenda. The FTSE is set for a flat open. Cable hangs on above the 1.29 level, despite the soft manufacturing and construction PMI data released on Monday and Tuesday respectively. The services PMI is the most influent indication of the economic sentiment in the UK, given that 80% of the British economy is made of services.
The consensus for June is slightly softer at 53.5 versus 53.8 printed a month earlier. Although the PMI indicators stand at levels prior to the Brexit referendum, the uncertainties regarding the UK’s future relationship with its biggest business partner may reinforce the worries beyond the data point itself. Therefore the downside risks prevail in the pound market. A soft PMI read could help the Bank of England (BoE) doves gaining back more territory from the hawks and fight back the rising rate hike expectations with a solid weapon, the weakening economic fundamentals.
The critical support to June 20-29 rise stands at 1.2860 (major 38.2% retracement). The most popular resistance is eyed at 1.3045 (major 38.2% retracement on post-Brexit sell-off), if broken, will push the pound into the mid-term bullish consolidation zone against the greenback for the first time since the June 23r referendum.