Daily Market Outlook, July 24, 2023

Munnelly’s Market Commentary…

Asian equity markets started the week on a positive note, but gains were limited due to uncertainty ahead of key risk events. US equity futures also showed a non-committal tone as investors await the outcomes of upcoming monetary policy meetings by the Federal Reserve (FOMC), European Central Bank (ECB), and Bank of Japan (BoJ). Additionally, big tech earnings results are also anticipated from Microsoft and Alphabet. The Nikkei 225 in Japan rose, buoyed by reports suggesting that the BoJ is likely to keep its yield curve control policy unchanged at the upcoming meeting and sees little immediate need to act on YCC. The Hang Seng in Hong Kong declined while the Shanghai Composite in mainland China posted a marginal gain. Hong Kong's market was pressured by weakness in the property sector and tech stocks, while the mainland market was indecisive as the National Development and Reform Commission's (NDRC) notice to promote high-quality development of private investment countered reduced hopes for aggressive stimulus measures following China's politburo meeting, where top officials reviewed the economic performance for the first half of the year.

The results of Sunday's election in Spain did not provide a clear majority for either of the main parties, the PP (People's Party) or the Socialists, in the 350-seat congress. Neither party secured the 176 seats needed for a majority, leading to an inconclusive outcome. As a result, Spanish equity futures have been negatively affected by the uncertainty, with the prospect of another election later in the year looming. The inconclusive election outcome has raised concerns among political analysts about the possibility of ongoing political instability and the potential for further uncertainty in the Spanish political landscape. The lack of a clear majority in the congress could make it challenging for any party to form a stable government, and the possibility of a subsequent election later in the year adds to the uncertainty in the markets.

Global flash PMIs for July, the U.S. The Federal Reserve's favoured inflation gauge and Australian consumer inflation data will be in the spotlight as traders look for signs that central banks are nearing the end of aggressive rate-hiking cycles. The U.S. core PCE price index, which is known to influence the Fed's rate path, is released Friday and is expected to have risen 4.2% annually in June, cooling from 4.6%. Advance Q2 GDP on Thursday is expected to post a 1.7% quarterly rise. Other U.S. data includes PCE consumption, personal income, durable goods employment cost index, consumer confidence, new home sales, flash S&P Global PMIs, weekly jobless claims and University of Michigan consumer sentiment. Data from the Eurozone includes flash July PMIs, economic sentiment and consumer confidence, the German Ifo survey and preliminary inflation for July.

For the UK, there are expectations of a further easing in both manufacturing and services momentum in July. The manufacturing sector is forecasted to register a 12th consecutive reading below 50, indicating a contraction in activity. Recent data from the UK Sector Tracker, which analyses PMIs at a more detailed level, showed that 5 out of 7 pure-play manufacturing sectors experienced declines in activity in June, suggesting a broader slowdown. Notably, the Orders-to-Inventory Ratio, a closely watched indicator, dropped to a six-month low, indicating that manufacturers may need to reduce production in the coming months to avoid accumulating excessive stock. As a result, the forecast for the manufacturing PMI in July is a decline to 46.0 from June's reading of 46.5. Similarly, for the UK services PMI, there is an expectation of a drop in the headline balance from 53.7 to 53.3. This is attributed to signs of a recent softening in demand for services in the UK economy.

CFTC Data As Of 18-07-23

USD net spec short grew in the Jul 12-18 period amid a $IDX 1.65% slide
EUR$ +2% in period, specs +38,670 into strength, now long 178,832 contracts
$JPY -1.05%, specs +26,943 contracts, short reduced to -90,239
GBP$ +0.77%, specs +5,666 contracts now +63,729; data pre-UK CPI Wednesday
AUD$ +1.88%, specs -5,317 now -50,401 contracts; $CAD -0.46% specs -3,923
BTC -2.6% in period specs buy 694 contracts on dip, now -1,161 contracts
Note since Tuesday reporting period close the $IDX is down near 0.9%
EUR$ has dipped 0.88%, $JPY rose 2.11% after period closed leaving recent EUR & JPY buyers in the red(Source: Reuters)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.1015-25 (702M), 1.1075 (200M), 1.1130 (638M)
1.1175-80 (479M), 1.1250 (324M)
USD/JPY: 140.00 (2.0BLN), 140.25 (500M), 140.75 (260M)
141.00 (200M), 141.25-29 (1.17BLN), 142.00-10 (869M)
GBP/USD: 1.2785-95 (449M), 1.294-50 (1.0BLN), 1.2975 (343M)
EUR/GBP: 0.8475 (1.4BLN), 0.8500 (235M), 0.8600 (950M)
0.8625-30 (339M)
AUD/USD: 0.6720 (430M), 0.6780 (432M), 0.680-05 (1.32BLN)
NZD/USD: 0.6000-10 (386M), 0.6160 (1.0BLN)
USD/CAD: 1.3180-90 (314M), 1.3350 (225M)

Options Market Positioning

FX option volatility risk premiums remain elevated as the U.S. dollar recovers lost ground ahead of this week's central bank decisions from the United States, Eurozone and Japan. One-week expiry options have been influenced by the Federal Reserve and European Central Bank decisions, contributing to the initial boost in implied volatility. Additionally, with the inclusion of the Bank of Japan in the one-week expiry, there have been significant gains in Japanese yen (JPY) related implied volatility and premiums for JPY calls over puts. This indicates that the market is not ruling out potential easing by the Bank of Japan, despite official rhetoric suggesting otherwise. EUR/USD is currently consolidating in the low 1.11s after reaching a recent peak of 1.1274. The entire implied volatility curve for EUR/USD remains above recent lows, and risk reversals have recovered some downside strike premium. However, the barrier at 1.1300 remains challenging for EUR/USD to break through.

Overnight Newswire Updates of Note