Market Outlook for July 22, 2016

The G20 has kicked off and that can only mean random, self-serving sound bites coming from key central bank figures…be ready for volatility.

This week the People’s Bank of China (PBOC) has twice strengthened the daily fix after the yuan/dollar rate hit 6.7 which is the lowest it’s been in four years. It’s the kind of thing the PBOC has to react to 1) In front of G20 and 2) In order to reel in their outflow problems.

The UK got a post-referendum look at PMI numbers which were mixed as the Services PMI crossed the 50 line in the sand and printed below the previous (52.3) and lower than forecast (48.9). On the other side of the coin, the Manufacturing PMI printed at 49.1 beating the forecast but still below the 50 level and the previous print of 52.8. I wouldn’t call it bad but the real test is how did the market react. Here’s my “vertical line indicator”…

7-22-2016 7-42-22 AM5-Minute GBP/USD reaction to PMI numbers

 

Very sophisticated I know. It’s still the best way to make sure I don’t fall in love with my own narrative and confirm data with price action to the reaction of the market. If you had any doubt about whether the decent Manufacturing number or Services number was going to have more effect, there’s your answer. The GBP/USD and PMI numbers move pretty tightly with one another.

7-22-2016 7-44-49 AM Finviz 1-day Relative Performance shows GBP weakness

 

It’s widely expected that the IMF will cut UK growth forecasts and I still see the GBP as a good short especially against the USD.

However the part of the conversation that’s not being discussed enough is that post-Brexit the magnifying glass is being held over Europe as well and I do not see either Germany or France outpacing UK growth. That’s a EUR short in my book and I’ll look for opportunities to sell the DAX too.

We’re going to get the Bank of Japan’s two-day meeting and finally see what Abenomics 2.0 will look like: I think it will look like (possibly) upwards of 10 trillion yen flooding the market and U.S. equities are going to be the beneficiaries of that. Look for a 20bp cut as well in addition to the stimulus.

I will discuss the relationship between the USD/JPY in the next update.

Sound bite of the day (so far): Minneapolis Fed Kocherlakota: “Yellen needs to make more speeches.” We’ve been talking about that all year. And he’s 100% right. Her current FOMC Chair “mime act” only turns up the volume of the other Fed officials. And only the FOMC Chair has the ability to speak on behalf of the FOMC. That means everyone else is just running their mouths…

Enjoying these updates? What can I include (specific symbols, events, or topics) to make these more helpful. I enjoy writing them very much and if you have feedback for me, feel free to leave a comment and let me know.

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