July 3 Daily Market Review
Daily Market Analysis by OptionRally
Financial Market Overview
The release of disappointing US economic indicators on Monday caused the stock markets to just about breakeven. The impact of this data, which demonstrated that the output of US manufacturing sector had contracted during June for the first time in three years, could have been more dramatic except that it increased hopes of a Fed intervention. Yesterday’s trading performance also indicated that the EU summit party was already over. After last Friday’s euphoria, which was generated by struggling countries, such as Spain and Italy, apparently playing a blinder against dominating Germany, analysts have now concluded that only verbal agreements were approved with no real substance. For example, plans were agreed to restrict the Spanish and Italian borrowing costs although no details were presented about how this desirable objective will be achieved. This poses a problem since the Eurozone rescue funds presently only amount to EU 500bn in size yet the total liabilities in Spain and Italy’s banking sectors are EU 2.4 trillion. How exactly do the politicians plan to bridge this hole? Similarly, you can drive a double-decker bus through other major policies produced by this summit.
Yesterday, the Institute for Supply Management posted its manufacturing index for June registering 49.7 compared to market expectations of 52. This result disclosed that the output of US factories recorded its first contraction since July 2009. Although this dismal result caused the markets to slump, there was not a dramatic decline because once again investors drew the conclusion that the Federal Reserve will now definitely need to intervene with further stimulus measures in order to boost the flagging US economic recovery. China also reported a June decline in manufacturing yesterday with its export orders registered their largest drop since last December. To complete the global holocaust, the Eurozone published contracting manufacturing data on Monday as well as data revealing that jobs losses had increased to the largest level in two and a half years.
This pair reflected the global developments expressed above by falling over 40 pips in response to the releases of disappointing US economic indicators and fresh concerns about the general health of the global economy. Data demonstrating a contraction in US manufacturing output raised hopes that the Fed will now introduced additional quantitative easing in order to bolster the flagging US economy which would devalue the USD and strengthen the EURUSD. However, the primary driver of the directional movements of the EURUSD this week will be the expected rate cut by the European Central bank on Thursday. As such, sell the pair if price falls under 1.2566.
Despite the release of disappointing economic data disclosing that UK manufacturing output had shrunk in June for a second consecutive month, the GBPUSD broke above 1.5700 to hit a daily high at 1.5720 early Morning. The pair then sharply retracted back beneath 1.5700 after the posting of a disappointing US economic indicator revealing that manufacturing activity had contracted in June for the first time in three years. The major driver behind the directional movements of the GBPUSD this week will be the Bank of England meeting scheduled for this Thursday which is expected to announce a new wave of stimulus measures to help bolster the flagging UK economy. As such actions would effectively devalue the British pound the GBPUSD should experience a strong bearish sentiment throughout this week. As such, consider opening a new PUT currency option using the GBPUSD as its underlying asset if price drops beneath 1.5648.
The Australian dollar hit a daily high at 1.0276 against the USD before retracting following the posting of the RBA Commodity Index earlier on Monday which slumped from -10.2% in May to -10.5% in June. However, the AUDUSD weakened substantially following the disclosure of poor economic US data. The major event this week affecting the AUD is the Reserve Bank of Australia’s (RBA) interest rate decision scheduled for release today. Although most pundits are anticipating that the RBA will not make any changes by maintain its benchmark rate at 3.5%, they will still scour any accompanying reports to assess whether the central bank is considering introducing any new quantitative easing. This is because the Australian economy is beginning to struggle as a result of the European problems, general global economic slowdown and a spate of weak economic releases posted by its giant neighbor China. As these pressures are subjecting the AUDUSD to a long-term bearish bias, sell the pair if price slumps below 1.0209.
The CHF closely tracked the movements of the Euro on Monday by weakening considerably against the USD. The USDCHF surged during the session by achieving a sustain break above an important resistance level located at 0.9523. This movement was caused as a result of the post-EU summit euphoria beginning to wane and investors selecting to resolve their overbought holdings of riskier assets. The pair did weaken later in the session following the publication of a dismal US economic indicator disclosing that manufacturing was in contraction. The directional movements of the USDCHF are expected to inversely mirror those of the EURUSD as this week progresses. Consequently, with a strong bullish sentiment dominating this pair, look to buy a new CALL currency option with the USDCHF as its underlying asset if price can surge above 0.9556.
The price of gold slipped lower yesterday as investor euphoria resulting from last Friday’s EU summit announcements receded as reality set in and replaced unsubstantiated political rhetoric. Analysts had time over the weekend to scour through the details of the proposals presented to tackle the troubled banking sector of the Eurozone as well as to restrict the soaring borrowing costs of Spain and Italy. As a result, they are now advising cautious as they have concluded that the agreements could just be words that cannot be effectively implemented. Gold was also pressured by a spate of weak economic indicators from Europe, China and the USA which provided more evidence of a serious slowdown in the global economic recovery. For example, US customer confidence hit its lowest level in six months. Without question, the developments on Monday effectively quashed last Friday’s party bringing the gold markets back under a bearish bias. As such, sell gold if its price falls below $1.597.10 per oz.
The price of oil weakened yesterday amid fresh concerns over the global economy. With a renewed bearish sentiment now hanging over the oil markets, consider selling this commodity if its price drops below $78.28 per barrel.
In an attempt to fend off what could be a substantial fine, Google responded yesterday to an ultimatum issued by EU regulators by offering to resolve antitrust charges. Following an eighteen month investigation, a number of Google’s main business practices have been brought into question. For example, Google is accused of copying restaurant and travel reviews from other websites without their owners’ permission. The company may have also to stress its own search services by instigating deals with advertising internet sites that blocked out those of its rivals.
In what may be the biggest case of healthcare fraud in US history, GlaxoSmithKline Plc offered to settle criminal charges yesterday by agreeing to pay $3 billion. Court approval is still required to approve this arrangement which would settle accusations that GSK violated US laws in the production and distribution of pharmaceuticals.
Despite the stock markets just about holding their own yesterday, both Apple and Google etched out gains with the shares of the former rising by 1.46% to $592.52 while those of the latter appreciated by 0.01% to $580.14. With both companies now enjoying a degree of bullish momentum, consider buying Apple if its share price breaks above $603.00 and Google if its share price surges higher than $581.97.