The Drawback Of Fungible Stimuli: Global Impact Of QE

With the integration of financial markets the world of finance has moved into a state with relatively easy capital flows that are fungible. Monetary stimuli in the form of quantitative easing have increased money supply and liquidity, transforming country-specific central bank actions into global market events. The Bank of Japan’s decision to not engage in further loosening of its monetary policy, by for instance prolonging the duration of loan operations, has led to a steep decline of more than 4% on the Nikkei whilst driving the yen higher, marking its greatest gain versus the dollar since the 2011 earthquake and tsunami. The lack of further fungible stimulus, however, impacted equities around the globe with the U.S. indices shedding 1% as they are coming into terms with a possible Fed tapering off that would lift the foot off the equities accelerator.

The prospect of an initial tightening of the U.S. monetary policy through a $10 to $20 billion reduction in monthly asset purchases is expected to initiate deleveraging as the action’s impact is equivalent to a 25bp increase in the benchmark rate, affecting interest rate sensitive equities, which were the most hard-hit yesterday. The markets look confused at the moment, being swung by volatility, with the JP Morgan G7 Volatility Index increasing 2.8% yesterday lying close to a 1-year high, with the VIX spiking higher by 11%, demonstrating inherent volatility in U.S. equity options as well.

Today sees the conclusion of the German constitutional court ruling on the legality of the ECB’s Outright Monetary Transactions. With the markets struggling to find direction it is likely that the news will have a bearing, with a surprise denouncement of the ECB’s actions leading most probably to euro weakness, likely causing a breakdown from resistance for EUR/USD.

The pound will receive yet again traders’ attention with the publication of the U.K.’s May employment report. The ILO unemployment rate is expected to remain steady at 7.8% with the claimant count expected to decrease by 5k, a decrease from the 7.3k reduction in April, but still a seventh consecutive month of falling claims.

The Eurozone figures for the day are the working days adjusted and seasonally adjusted industrial production for April, with both expected to contract. The former, a YoY figure, is expected to contract at a slower pace from -1.7% to -1.2%, and the latter, a MoM figure, is expected to relapse to contractionary territory, by shrinking by 0.2% when a 1% expansion was experienced in March.

In the U.S., the weekly MBA mortgage applications are due, with markets eager to see whether there will be a fifth consecutive week of falling applications. The indicator does not carry a forecast. The monthly budget statement will also be issued, with forecasts exhibiting large standard deviations. Surveys indicate a median deficit ranging from 110B to 136.5B.

Overnight sees the release of significant data. The Reserve Bank of New Zealand will make its interest rate decision, with none of the 15 economists surveyed forecasting a change from the current 2.5% benchmark rate. Moreover, the Japanese Ministry of Finance releases its weekly data of foreign capital flows, which may trigger more market movement than is usually the case given the volatility seen recently on the yen, the Nikkei and the Japanese government bonds. The BoJ Policy Board Member Sayuri Shirai is also expected to give a speech at a meeting with business leaders, which may serve as an opportunity to talk down the yen, reversing somewhat the market reaction triggered by the BoJ’s lack of further stimulus. Finally, Australia releases its employment report for May, with unemployment expected to increase from 5.5% to 5.6% as a reduction in the number of people employed is anticipated.

The Market

EUR/USD

• EUR/USD gained yesterday despite Greece’s demotion to emerging country status by the MSCI, as this event was largely factored in the market by an earlier downward reclassification of Greece by Russell Investments.

• The pair currently lies within the significant 1.3300 – 1.3320 area, finding resistance at the latter, the 23.6% retracement level of the July 2012 – February 2013 rally. Significant resistance, though also comes at 1.3340, the 61.8% retracement level of the February – March plunge, which coincides with trendline and Bollinger band resistance. Weaker resistance thereafter comes at 1.3370 and 1.3425. Support is seen at 1.3300, 1.3230 and 1.3200.

USD/JPY

• The weaker than expected Japanese machine orders, which showed an 8.8% MoM reduction in this form of corporate investments for April, weakened the yen causing a rebound for USD/JPY.

• Resistance is likely to come at 96.40 and 97.05, with 97.90 being the 23.6% retracement level of the November – May rally. Support comes at 95.90, with spike support seen yesterday at 95.60. Further support levels are 95.30 and 94.90.

GBP/USD

• The better than expected U.K. industrial and manufacturing industrial production for April boosted cable, which was further assisted by the downward pressures the dollar was experiencing versus most majors.

• Resistance came yesterday at 1.5650, the former support line of the upward-sloping channel, which held from March to May. Very strong resistance comes next at 1.5690, the 61.8% retracement level of the rally that took place in the second half of 2012, with that level coinciding with the 200-day MA. Significant support is seen at 1.5610, with further support in the 1.5550 – 1.5570 area.

Gold


• Gold was unable to capitalise on the dollar’s depreciation, which saw the Dollar Index lose 0.70% since yesterday morning.

• Resistance is seen in the $1378 - $1387 former trading range with further resistance at $1400. Support comes yet again around $1363 and $1348.

Oil

• WTI plunged yesterday finding support at $94.05 before rebounding and currently retesting support at $94.45. With the release of crude inventories today the commodity is almost bound to see increased attention by traders.

• Resistance comes in the $95.50 – 95.70 area, which sees two Fibonacci retracement levels. Strong trendline resistances come at $96.35 and $97.00. Support is found at $94.45, $94.05 and $93.50, the 50-day MA.

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MARKETS SUMMARY