Pound Rallies With BOE Holding Rates Until August, S&P500 At New All-Time High, Chinese GDP At Midday, ASX SPI200 Futures 6 Points Higher

European equity markets rallied on Thursday while U.K. benchmarks lagged behind as the Bank of England held interest rates steady at 0.5%. Both the FTSE100 & FTSE250 were relatively flat, down -0.24% & up +0.22% respectively as the Pound gained +1.62%. The market continues to expect easing from the Bank of England over the coming months following the decision for the U.K. to leave the EU with commentary in the statement following the decision stating “most members of the Committee expect monetary policy to be loosened in August”.

The decision to hold rates steady was against the predictions of many analysts, including myself and this is most evident by the sharp move higher in the Pound against both the USD & EUR shown on the chart below. The August 4th meeting will be accompanied by revised quarterly projections for interest rates and provide Mark Carney with the opportunity to explain in detail any easing decisions. Overall the expectations of the market that the BOE will ease and the certainty around the U.K. political situation will continue to be supportive of equities in Europe.

The S&P500 reached a new all-time high on Thursday for the third time this week as earnings season in the U.S. is underway. Both the S&P500 & Nasdaq100 gained +0.53% & 0.67% respectively as the U.S. dollar index fell -0.12%. Financials & technology led gains up +0.89% & +0.81% respectively while traditionally defensive sectors such as utilities, healthcare and telecommunications lagged behind.

Elsewhere initial jobless claims remained consistent with what many economists consider near-full employment with claims of 254,000 vs 265,000 expectations. Initial claims reflect weekly firings and readings below 300,000 suggest a healthy labour market. Continuing claims was slightly higher than forecast with a reading of 2.149m vs 2.130m expected.

The recently weaker U.S. dollar along with the global risk on moves continues to be supportive of commodity prices with WTI & Brent crude oil up +2.08% & +2.01% respectively, copper gained +0.13% while both natural gas and iron ore fell -0.37% & -1.15%. Precious metals spot gold & silver also declined -0.55% & -0.22% as investors continue to move money out of safe haven assets into riskier assets such as equities.

The chart below highlights various 10 year government bond yields globally, the search for yield, declining inflation & growth expectations, negative rates and record stimulus have continued to drive these lower. These expectations along with the S&P500 reaching new all-time highs is helping bring investors back into the market as they search for a higher return however to really justify the next leg higher in U.S. equities in particular we need to see a pickup in earnings to support this. Earnings for the S&P500 are expected to decline between 5.5%-6% in the second quarter so broadly better than expected results will drive the market higher.

Key Chinese data is out around midday Sydney time today with the release of GDP (YoY and QoQ Q2) along with fixed asset investment, industrial production and retail sales so expect this to really drive the direction of the market. Expectations are for around 6.60% growth on an annualised basis down from 6.70% in the first quarter.

Domestically the ASX200 closed +0.43% higher on Thursday following the release of unemployment data which was mixed. The headline seasonality figure increased to 5.8% from 5.7% in line with forecasts, 8,300 new jobs were created of which 700 were full time leaving something to be desired. The positive note was the increase a switch to full-time employment from part-time with the full time employment change up 38,400 against expectations of a 2,500 increase. Inflation figures at the end of this month will be key in determining the likelihood of the RBA lowering rates at the August meeting, a low figure or deflationary reading similar to the first quarter would prompt action. The Australia dollar climbed modestly following the release to finish +0.29% and we can expect a flat open for the market this morning with ASX SPI200 futures up 6 points. 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:

·         Chinese GDP (YoY & QoQ Q2) 12:00pm AEST

·         Chinese Industrial Production, Retail Sales & Fixed Asset Investments (YoY Jun) 12:00pm AEST

·         Euro-zone CPI & Core CPI (YoY Jun) 7:00pm AEST

·         U.S. Advance Retail Sales (MoM Jun) 10:30pm AEST

·         U.S. CPI (YoY Jun) 10:30pm AEST

·         U.S. Industrial & Manufacturing Production (MoM Jun) 11:15pm AEST

·         U.S. University of Michigan Confidence Survey (MoM Jul) 12:00am AEST

·         U.S. Baker Hughes Rig Count (July 15th) 3:00am 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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