Global risk-on rally

Friday's employment report suggested a solid improvement in the US labour market. The US economy added 255'000 nonfarm jobs in July; the wages grew by 0.3% month-on-month. The greenback rallied across the board as the probability of a Federal Reserve (Fed) rate hike by December rose to 46.7%.
The S&P500 and Dow Jones picked up positive momentum; equity investors appeared comfortable with the idea of a tightening in the US' monetary conditions. Whether or not the Fed could hike rates this year is still dependent on the data. If the US economy continues showing a solid macroeconomic performance, the financial markets would grant their approval for an additional 25 basis points hike in Federal funds rate by the end of the year.

However, the global monetary conditions remain a major challenge for the Fed. The Bank of England and the Reserve Bank of Australia cut their policy rates last week and the Reserve Bank of New Zealand is preparing to lower its official cash rate to 2% on Thursday. Hence, by simply maintaining the status quo, the Fed's policy path diverges from the rest of the world.

Risk lovers could benefit from the current risk rally in equities and high yielding currencies. Nevertheless, the downside risks on global growth are still hidden in the broader data. In fact, the most recent reports showed that Chinese exports fell 4.4% year-on-year (vs. -3.5% expected), imports plunged 12.5% (vs. -7% expected) as a sign that the world's leading emerging market is having a hard time finding growth.

Despite soft trade figures from China, Asian stocks started the week in the green. Nikkei rallied 2.44% on the back of persistently rising speculations for additional monetary stimulus from the Bank of Japan (BoJ). Yet the BoJ may be approaching the limits of its Quantitative Easing program (QQE). The latest BoJ meeting minutes revealed concerns regarding the evidence of the QQE limits. There is not an infinite pool of sovereign bonds that the BoJ could buy. This is why the bank decided to add ETFs in its massive balance sheet at July's meeting. This being said, Japanese policymakers warned that excessive ETF purchases might not be a viable solution either.

The USDJPY is consolidating gains, but sellers on the yen remain timid as the US yields are still at depressed levels. Should the Fed-hawks take over the market, the yen could finally take a breather.

From a technical perspective, the USDJPY remains in a short-term bearish trend below the 103.25, the major 38.2% retracement on July 21st – August 2nd decline. Should the pair clear 103.25 offers, we could reconsider a sustainable recovery toward 105.00 and above. A critical mid-term resistance is eyed at 107.05, the 200-week moving average.

FTSE opened upbeat following a cheerful Asian session. Financials and energy stocks are leading gains at the open in London.