Fed Beige Book Suggests No Rate Hikes Soon, Theresa May Names Key Minister Appointments, China Trade Balance Beats Estimates, ASX SPI200 Futures Up 8 Points

U.S. equity markets paused on Wednesday following a three day rally that saw two new all-time highs for the S&P500. The S&P500 finished +0.01% higher, the Nasdaq100 fell -0.26% and the US Dollar index remained relatively flat down -0.09% following the release of the Federal Reserve’s Beige Book, which is a summary of commentary on the current economic conditions released eight times a year.

Overall the commentary added little weight to the view the FOMC is likely to hike interest rates anytime soon citing the U.S. economy expanding at a modest pace with some minor signs of price pressures. Looking to the labour market “conditions remained stable as employment continued to grow modestly“ and “wage pressures remained modest to moderate in most districts”. Businesses contacts also cited uncertainty around the potential fallout from the Brexit referendum which occurred one week before the end of the data collection on July 1st.

European equity markets took a breather following strong gains this week on optimism central banks will act along with more certainty around the U.K. political leadership with Theresa May officially becoming U.K. Prime Minister on Wednesday. The Euro Stoxx 600 fell -0.13%, as the did the DAX30 -0.33% and the FTSE100 -0.15% as the Pound fell -0.82%. The first chart below highlights the major European equity benchmarks all of which remain below pre-Brexit levels with the exception of the FTSE100 which has benefited from the falling Pound, although in Dollar terms is also below pre-Brexit levels. Elsewhere the Bank of England will meet on Thursday where it is widely expected they will lower interest rates to 0.25%. Any cut will be positive for equities however it is highly likely this has already been priced in by the market shown in recent gains.

May began organizing her cabinet of ministers overnight naming key positions. Phillip Hammond who has been the foreign minister for the past two years will replace George Osborne as Chancellor of the Exchequer. Hammond is a sound choice for the position having filled a number of key government roles since his election to parliament in 1997 including transportation, defensive and shadow secretary to the treasury. Osborne’s previous austerity measures are now likely to be reduced with May announcing there was no longer the target of reaching a budget surplus by 2020 as focus now shifts to stimulating the economy.

David Davis was announced as the key man to lead the Brexit negotiations, who has served as shadow deputy prime minister and shadow home secretary. Perhaps the surprise appointment was former London Mayor and prominent Brexiteer Boris Johnson as foreign secretary. This is relatively unexpected given the importance of the chief diplomat role, May has previously criticized Johnson’s negotiating ability and also his history of uncomfortable comments. A final key appointment included former secretary of state for energy and climate Amber Rudd to replace May as home secretary.

Despite a drop in U.S. crude oil inventories of 2.546 million barrels for the week ending July 8th, oil prices dropped overnight following a larger than expected increase in gasoline stockpiles, up 1.213 million barrels versus estimates of a 432,000 barrel increase as the peak driving season in the U.S. comes to an end. Both WTI & Brent crude oil declined -4.38% & -3.94% respectively in response. Elsewhere commodities were mixed, copper continued recent gains increasing +1.22%, natural gas closed modestly higher up +0.11% while Iron Ore fell -0.39% after reaching the highest levels since early May. Precious metals spot gold & silver both gained +0.72% & +0.92% respectively.

China’s balance of trade decreased less than expected for the month of June beating estimates of US$46.64 billion balance with a reading of US$48.11 billion. A drop in imports of -8.4% compared with expectations of a -5% decline helped offset a decline in exports of -4.8%. Attention will now turn to Friday’s data released for GDP with forecast of an expansion of 6.6%. Private investment in China remains relatively weak with fixed investment coming from state owned enterprises however there have been continued signs of the economy stabilizing as deflationary pressures at the wholesale level are easing.

Domestically the ASX200 closed +0.66% higher on Wednesday and the market is set for a modestly stronger open this morning with ASX SPI200 futures up 8 points in overnight trading. The second chart below shows the ASX200 from a technical perspective, Global Investment Director Oliver Gordon notes “momentum indicators have now crossed into overbought territory highlighting the growing risk of a pause or pullback in the near-term. Recent gains look sustainable and any near-term weakness is likely to be viewed as merely corrective”.  Australian unemployment data for June is released at 11:30am today and expect this to determine the direction of trading today. If you’re interested in trading global markets and still need practice, click here to open a free $100,000 Rivkin Trader account.

Data releases:

·         Australian Consumer Inflation Expectations (MoM Jul) 11:0am AEST

·         Australian Unemployment Rate (MoM Jun) 11:30am AEST

·         Bank of England Rate Decision (Jul 14) 9:00pm AEST

·         U.S. Initial & Continuing Jobless Claims (Jul 9th & 2nd) 10:30pm AEST

·         Canadian Housing Price Index (YoY May) 10:30pm AEST

Source: Rivkin, Bloomberg

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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