In our Investment Bank Outlook we're going to bring you a selection of perspectives from leading investment banks to outline the key issues and directional views for the week ahead. These excerpts, taken from research notes, will cover issues such as key market themes, economic releases, as well as any major trends and levels to watch. Please note, this material, which does not reflect the opinions of Tickmill, is provided for educational purposes only and should not be taken as an investment recommendation.
Nomura
The market's consensus take on the latest ECB policy meeting and the content of ECB President Mario Draghi's post-meeting press conference, is that the tone was less dovish than expected. Although the prospect of further monetary easing was floated, the ECB does not evidently see an urgent need for a rate cut. Of course, nothing in the meeting results or the press conference did anything to shake up what has become a QE-driven market, and we expect the risk-taking attitude of fundamentals-oriented investors in particular to hold up.
That said, stock market sentiment did not perk up much after the meeting (in Europe or elsewhere), and speculative traders that had been counting on a bonanza after the ECB meeting were disappointed. Barring a radically dovish surprise from the FOMC at its meeting next week (30-31 July), we expect the meeting to be followed by an increase in the number of investors choosing to "sell the fact", particularly among quick-moving hedge funds. Already, hedge funds' overall long exposure to US equities seems to have plateaued. In the US bond market as well, directional traders (CTAs, global macro hedge funds) have accumulated large net long positions. Judging from the positions that investors have already established, we think an overall selling bias may develop in both the stock market and the bond market as investors make position adjustments.
ING
25bp or 50bp?
Several analysts have made the case for the Fed going early and aggressively to head off the risks to US growth with a 50bp move on 31 July. However, recent firm data has put paid to that view with the implied probability of such action drifting lower over the past couple of weeks. St Louis Fed President James Bullard, who is perceived to be one of the most dovish members of the FOMC, having voted for a rate cut in June, has also downplayed that prospect. He said last Friday that “I’d like to go to 25bp at the upcoming meeting”. Moreover, we have to remember that at the June FOMC meeting, the median forecast of FOMC members had no rate cuts for this year and only one for next. The news flow hasn't deteriorated over the intervening period, so based on this we expect just a precautionary 25bp rate cut next Wednesday.
Danske Bank
Stock markets slid in Japan, but headed up in Australia. The oil price, US futures and the USD were steady after the S&P 500 and Nasdaq Composite reached new all-time highs last Friday.
The JPY strengthened further. The Bank of Japan (BoJ) finishes a two-day policy meeting on Tuesday morning. The global slowdown has taken its toll on the Japanese manufacturing sector but domestic demand has fared okay. As long as USD/JPY keeps a safe distance from 100, we expect the BoJ to stand pat and hold on to the remaining few easing tools it has left. With the October VAT tax hike closing in, it might come in handy later on.
The BoJ might extend its forward guidance and promise low rates beyond spring 2020 (in the wordings now), in order to signal its readiness to do something if needed. However, the market reaction is likely to be negligible if the extension just goes further into 2020. At this meeting, we also get an update on the BoJ’s expectations for the economy. We are likely to see yet another downward revision of the inflation outlook for the fiscal year 2019 here.
US Treasury Secretary Mnuchin and the US Trade Representative Lighthizer fly to Shanghai today for the first high-level negotiations after these stopped in May. US President Trump mentioned China might want to wait until after the 2020 US presidential elections as the Chinese authorities would prefer to make a deal with a Democrat.
Last Friday, the Bank of Russia (CBR) delivered a 25bp cut to the key rate, lowering it to 7.25% in line with our expectations, Bloomberg and Reuters consensus. The decision was RUB-neutral despite a moderately dovish statement. We see that under the current conditions, a September 25bp cut is still very likely. Now the focus will be on September's press conference and whether the CBR could possibly cut twice later this year.
Morgan Stanley
USD Dovish Fed to Weaken USD Bearish
Watch: GDP, Core PCE, FOMC Decision, ECI, ISM Mfg, NFP
We expect the FOMC to surprise the market by cutting rates by 50bps at its July meeting, which we believe would lead to a broad USD selloff in response. US data continues to show signs of weakness. One example is this week's Markit manufacturing PM, which reached a post-crisis low and the services component suggested only a modest level of expansion. A lower and steeper yield curve in response to the dovish Fed both reduces the nominal attractiveness of US assets but also raises the risk that foreign investors, particularly in Japan, will add FX hedges, leading to a USD negative flow. DXY may be nearing the top of its recent uptrend; we are watching the 96.70 level closely.
EUR Dovish ECB vs. Dovish Fed Neutral
Watch: Consumer Confidence, GDP, CPI, Retail Sales
EURUSD will be driven chiefly by the relative policy stance of the ECB and the Fed. The ECB provided a dovish signal, noting that it is preparing for any possible number of easing measures, while emphasizing the symmetry of its inflation target. However, we anticipate a dovish shift from the Fed as well, cutting by an out-of-consensus 50bps, suggesting EURUSD may trade higher over the next week. Still, EUR may continue to be used as a funding currency for carry trades as investors internalize global central banks' new accommodation, suggesting EURUSD may stay range-bound for now.
JPY Fade any USDJPY Rally Bullish
Watch: Jobless Rate, IP, BoJ Decision
USDJPY may find modest support ahead of the FOMC meeting, perhaps as high as 109.20, though we would use any rally as an opportunity to re-sell. If the FOMC cuts by our out-of-consensus 50bps, rate-sensitive pairs like USDJPY may fall the most, particularly if the market begins to price in additional Fed cuts. Positioning is a concern for us as it seems that USDJPY bearishness is increasingly common, as indicated in CFTC data. Another key risk we are watching is the BoJ. Ultimately though, we still see the balance of risks as favoring USDJPY downside based on the likely curve steepening in the US, the continued slowdown in US data, and the relative attractiveness of assets abroad. USDJPY may find resistance at 109.20 and the previous low of 106.78 is an important support point.
GBP Room for Positioning Adjustment Neutral
Watch: House Prices, Mortgage Approvals, PMI, BoE Rates Decision
We turn neutral on GBP. Markets have priced in higher probability of a no-deal Brexit and CFTC GBP short positioning is approaching an extreme, suggesting the currency is susceptible to a short covering rally on any potential positive news. In the coming week, we expect the BoE to drop its neutral stance, but the rates markets may not reprice significantly, suggesting modest GBP weakness. After Parliament returns from recess, though, GBP should come under renewed pressure as there is likely to be an increase in uncertainty as we expect a political process – likely elections – to happen to resolve Brexit.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.