Some colour out of the US and Japan

UK GDP confirmed at 0.7%
by Brenda Kelly

After a hectic roller-coaster of a week across financial markets many will be glad to see the back of it. Having shed some £72bn last Monday the FTSE has rallied hard to recoup some of its losses helped by China’s decision to finally pull the finger out and intervene. The moves by the PBOC and the better than expected US GDP has revived risk taking to a degree. This is most notable from the moves in bond and precious metals prices. China selling USTs is likely a major factor here too.
Gold in particular has failed to crystallise the price surge last week as investors still feel there is little alternative to equities when it comes to yield. The speculation for a rate hike in September has waned considerably with even the most stubborn of market participants changing their view point. With the current volatility levels, it seems the FOMC might be a little wary but the scramble to achieve ‘normalisation’ may well trump common sense.
Conflicting rhetoric from New York Chief Dudley and Kansas President George continue to keep the markets guessing. IF anything this Fed policy of ‘forward guidance’ only helps stoke volatility when the aim should be quite the opposite.

China’s Shanghai Composite has provided a uniquely wild ride for traders but even it has been unable to reverse its weekly losses despite a strong final session. The index is still down some 8% on the week and given that many margined traders will have been burnt quite badly in the recent weeks, its highly likely the strong finish is as a result of government intervention once again.

The FTSE is still struggling around the 6200 level despite the surge in commodity prices. The move into the cyclical stock arena from the defensive sector has been something of a head rush, not unlike yesterday’s massive bounce in oil prices.
Having spent the last few sessions languishing at the bottom of the UK benchmark, Glencore is back in favour and takes the top spot today, adding 3%.

The pickup in exports in Q2 has helped to contribute to UK economic expansion. Exports rose 3.9% from the previous three months. This is despite a stronger pound relative to the euro and the dollar in the latter part of the same quarter which only serves to prove the lack of correlation between exports and sterling strength. GDP increased 0.7% in the second quarter and despite the fall back in oil prices consumer spending was also slightly softer showing 0.7% growth. The probability for a rate hike from the BoE this year is around 65%. The pound hasn’t exactly partied in the aftermath of the release and is down 0.19% against the greenback – shedding 3% in total this week alone while losing 0.6% against the single currency this morning.

Some colour out of the US and Japan
by Ipek Ozkardeskaya

The Asian stocks recorded a second day of gains as the recovery in oil and commodity prices continued. Nikkei stocks closed the week up by 3%, while Shanghai’s Composite surged another 4.80% before the weekend.

Japan’s ex-fresh food prices remained flat in July versus expectations of deflation, jobless rate improved from 3.4% to 3.3% over the same month and the retail sales expanded 1.2% on year. Besides encouraging economic data, knowing that the BoJ stands ready to act kept the sentiment upbeat in Japan before the weekend.

In the US, the 2Q GDP has been sharply revised up from 2.3% to 3.7% (q/q annualised). Encouraging US data boosted the US yields and the USD but did not change the expectation that the Fed will probably wait at least until the end of the year before proceeding with the first rate hike. The market gives no more than 30% probability for a September action.

As uncertainties regarding the Fed outlook remains a major driver of global cash flows, the market attention shifts to the US jobs data due next Friday. The softness in oil prices has certainly been a boost in households spending in the second quarter, which could partially explain the blooming growth in the US despite the gloomy macro picture overseas. Nevertheless, the overly low oil prices could squeeze the oil and gas industry which has undoubtedly been an important stimulant for the US’ economic recovery. A negative surprise in US jobs data should unwind the residual speculation that the Fed could still hike the federal fund rate in September. A strong read however will only enhance the clash between the doves and the hawks and could bring some more volatility in the market.

Yen pares gains as risk-off flows exit
by Ipek Ozkardeskaya

Combination of positive US data and expectation of further stimulus from the BoJ pushed USDJPY above its Ichimoku conversion line 120.35. Surpassing the conversion line paves the way to a further correction to the daily cloud cover (122.38/123.07). While the PM Abe recognized it will be hard for to reach the BoJ’s 2% inflation target, BoJ’s Kuroda said the JPY appreciation is only temporary and the BoJ remains ready to adjust policy. The verbal intervention has successfully curbed the appetite in yen longs. Higher US yields continue being supportive.