by Pinchas Cohen
The Week That Was
Politics
Last week, rising tension between North Korea and the US dominated many headlines and unsettled global markets, inducing a risk-off for global assets heading into the weekend, while the S&P 500 dropped 1.3 percent. From a historical perspective, this isn't a big decline, given normal equity market volatility. However, the extraordinary calm recently pervading the market was shattered as the index witnessed its biggest weekly decline since March.
Ironically, while the recent geopolitical standoff is between North Korea and the US, it has had a greater effect on equities abroad rather than at home. Emerging markets were weighed down, as well as their interconnected European indices, which fell 2.7 percent, while the South Korean KOSPI declined 3 percent, a natural reaction considering it geographical proximity to the tension
US Inflation
US inflation numbers were arguably the most important economic data released this past week, as it is a concrete gauge used to interpret the economy. July recorded a 0.1 percent rise, missing the expected 0.2 percent increase, in its fifth consecutive month of weaker than-expected core inflation data. For historical perspective, CPI hasn't missed its target for this long since the 1960’s, while its worst continued decline was in the immediate aftermath of the great financial crisis. Investors are wondering how this impacts the anticipated December hike, and how no rate increase would affect the markets—including equity and safe havens such as gold, the yen, the Swiss franc and Treasuries.
German Production Data
German industrial production data in June was weaker than expected, falling 1.1 percent. However, keeping an eye on the big picture and looking at the second-quarter as a whole, industrial production growth climbed 5 percent and has demonstrated the benefits of Europe's strong macro-economic fundamentals—while the US has been showing the opposite.
The Week Ahead
All Times EDT
Highlights
- The Trump Administration begins renegotiation the North American Free Trade Agreement (NAFTA) with Canada and Mexico.
- Wal-Mart Stores Inc (NYSE:WMT), the world’s biggest retailer, reports quarterly earnings.
- The German election campaign begins in earnest.
- Japan is set to release GDP data.
German Parliamentary Campaign
Germany's current chancellor, Angel Merkel, begins her first full week of campaigning for September’s parliamentary election with a string of public speeches and television appearances.
Markel had just returned from a 3-week break to a rude shock. An ARD television poll—a joint organization of Germany’s regional public-service broadcasters—is showing a brutal 10-percent decline for the Chancellor in just 3 months. To be fair, her main challenger, the Social Democrat Chief Martin Schultz is also down, but only by 4 percent. Still, with 6 weeks to go, Merkel can rest assured with a 14-percent lead.
The EUR/USD pair is on edge, between completing a bottom and falling back into its 1,000-pip trading range since the beginning of 2015. While the weekly price did close for a second week above its August 2015 1.1711 peak, it completed a bearish shooting star, after having been forced down by the 200 wma. A close back below the range’s peak may be a bearish signal, while a close above the 1.1913 shooting star high may be a bullish signal. The psychological, round 1.2000 may prove a catalyst. A close above it would confirm a reversal, while alternatively, it could act as a resistance.
Monday
19:50 : Japan - GDP (2Q preliminary): From a short-term perspective, quarterly growth has been stagnant at 0.3% for three consecutive quarters. However, from a long-term outlook, the data is expected to show that the economy expanded for six consecutive quarters, the country’s longest growth streak since 2006. Economists are forecasting an annualized rate of increase of 2.5-percent. This would demonstrate that the Japanese economy is back on track, after economic expansion in the first 3 months of the year was adversely affected by a drawdown of oil inventories. Markets to watch: JPY crosses, TOPIX, Nikkei 225
The Nikkei 225 has been climbing since June 24, 2016. On May 8 it crossed above the 196000.00 resistance level of its December peak, after having previously failed to do so six times. Despite the exposure to North Korean aggression, the peak which took the index 6-months to overcome provided support.
Tuesday
2:00: Germany - GDP (2Q flash): quarterly growth is expected to remain stable at 0.6%, while the annual reading is expected to rise to 2.1%. Markets to watch: EUR crosses, Stoxx 600, Euro Stoxx 50, the DAX, CAC 40
While the euro and dollar are caught between two opposing forces, as described via the weekly chart above, both the RSI and MACD provided sell signals. The price needs to overcome its August 2nd 1.1911 high, for a confirmation of its uptrend to remain intact.
4:30: UK - inflation (July): CPI inflation is expected to tick up to 2.7%, with the Bank of England anticipating the rate to reach above 3% later in 2017 before dropping back down again. Markets to watch: GBP crosses, FTSE 100
While the GBP/USD price has been climbing above a rising trendline since the October flash crash in Asian trading, its channel top has been squeezing the price in what may prove to be a bearish rising wedge. This was not for nothing though, as the price has reached a confluence of technical forces: the psychological 1.3 number, the resistance of the 1.29-1.34 congestion of June-September 2016, and nearing its long-term downtrend line since the beginning of July 2014. The MACD and the RSI already provided sell signals which can be seen on the daily chart, and are also showing pressure on the weekly chart.
8:30: US - retail sales (July): expected to move back to a positive figure after they fell 0.2% in June. Market to watch: USD crosses
Wednesday
NAFTA Negotiations—The agreement has been very good to the Mexican economy. Any interruption to its exports may create a major risk for the country.
USD/MXN has fallen 20-percent this year, on the weakening dollar. The pair has provided an upside breakout in the beginning of the month and found support with the July trough. If the currencies reach 18.5000, they will have crossed over the price level of the July peak/May trough, and officially declare a reversal. For now, the dollar has found support at the bottom of its trading range since early 2015. A weakening Mexican peso compounded with a dollar bounce could potentially be the catalyst for a reversal.
14:00: US- FOMC minutes: Markets will receive further clues about when the Federal Reserve’s policy makers will continue their tightening path and how rapidly they intend to act. Markets to watch: USD crosses, precious metals, global indices
The price of gold has reached its $1,298.80 June 6 peak. This will be its third attempt to cross the $1,300 level. Should the FOMC minutes paint a picture of a slower path to higher interest rates, gold may break that psychological barrier and its $800 target implication. If investors deem that the minutes point toward higher interest rates, gold may start a slow decent back to its $1,200 bottom.
Thursday
4:30: UK - retail sales (July): monthly figures tend to fluctuate and so it’s always best to look for a trend, but still, the monthly numbers impact markets nonetheless. Expect the data to come in at 0.4% for the quarter and 3.2% on the year including fuel, and 0.5% and 3.4%, respectively, when excluding fuel. Markets to watch: GBP crosses, FTSE 100
The inability of the FTSE 100's August peak to overcome its June climax may suggest a top. The price is right on the July trough at the 7300.00 level. Should the price close below 7280.00, it may provide a 250-point target downwards.
EARNINGS
Wal-Mart (NYSE:WMT), the retail giant, is scheduled to report earnings before market open for the fiscal quarter ending July 2017. EPS forecast is $1.06 vs $1.07 YoY.
In a bid to keep its stature, it is taking on Amazon's (NASDAQ:AMZN) customers, as well as maximizing customers, by investing in employee satisfaction. While this is traditionally good business, it’s currently hurting earnings. While Buffet-type long term investors may bet their money, shorter term traders would likely focus on the bottom line.
On August 3, Wal-Mart's price climbed over its June $80.47 peak, signaling an uptrend resumption. The stock has fallen 1.89 percent since its $81.99 all-time high price. The fact that the price closed above the support of its June peak suggests interested buyers are supporting the price.
Friday
5:00: Eurozone - Construction Output (June): expected to remain stable at 2.5%. Markets to watch: EUR crosses, Eurozone indices
8:30: US - Michigan Consumer Sentiment (Aug, preliminary): expected to remain stable just above 93. Market to watch: USD crosses
9:45: US - Manufacturing PMI (June, flash): forecast to rise to 53.7 from 52.7. Markets to watch: US indices, USD crosses
10:00: US - New Home Sales (May): previous reading saw a MoM drop of 11.4%. Markets to watch: US indices, USD crosses