July 31 Daily Market Review

Daily Market Analysis

Daily Market Analysis by OptionRally

Financial Market Overview

The stock markets hit a 3 week high on Monday before retracting by paring gains later in the day. A united front was presented by the President of the European Central Bank, Mario Draghi, the German Chancellor, Angela Merkel, and the French President, Francois Hollande towards the end of last week when they stated that they will do whatever is necessary to preserve the Euro. This message increased hopes that aggressive policies will soon be instigated in order to address the soaring borrowing costs of Spain and Italy. This prospect caused the optimism of investor to increase encouraging them to provide support for riskier assets, such as stocks and the Euro. However, gains were limited yesterday amid fears that the ECB will fail to match market expectations at its meeting on Thursday.

The root cause of this negative viewpoint is that the German central bank, Bundesbank, is vehemently opposed to many of the stimulus measures currently recommended by the ECB, such as the activation of another bout of bond-buying. Prominent market analysts are now warning that because the markets have priced in new ECB monetary easing by propelling stocks higher in the last few trading days, a crash could occur later this week if Draghi fails to deliver. For instance, investors will be closely tracking the yields of Spanish and Italian 10-year bonds over the coming days in order to assess if they are positively affected by the new approach of the ECB and Eurozone leaders. The US Federal Reserve is also scheduled to convene later this week amid speculation that it may introduce further quantitative easing in order to bolster the faltering US economic recovery especially following the disclosure of an anemic growth rate of just 1.5% last week.

EUR/USD

The pair had a relatively quiet day on Monday with the EURUSD recording a modest loss of about 35 pips after rallying from a daily low of 1.2224. Investors refrained from providing any serious support to the Euro as they anxiously await the outcome of stimulus talks held in both Europe and the USA during this week. They are particularly nervous that the European Central Bank (ECB) will not live up to its President’s bold statements of last week. This is because the ECB faces tough opposition to many of its proposed stimulus measures from the German Bundesbank. In addition, many analysts believe that the Fed may also not oblige but will prefer to wait in order to review more US labor data before instigating further stimulus measures. As these uncertainties are subjecting the EURUSD to a bearish bias, sell the pair if price slips under 1.2231.

GBP/USD

Similar to most other major currencies, the British pound weakened slightly against the USD on Monday as the markets adopted a cautious tone ahead of the important meetings of the US Federal Reserve (Wednesday) and the European Central Bank (ECB) on Thursday. In addition, investors need to be on their toes to deal with the Bank of England and European Central Bank interest rate decisions on Thursday and the release of the US labor report on Friday. The EURUSD initially plunged to a daily low at 1.5671 before paring most of its losses by rallying almost 140 pips to close at 1.5708. Analysts are now expecting that the GBP could weaken further especially if the GPUSD can achieve a sustain break below its next important support level. With a bearish sentiment hanging over the pair resulting from a weak UK economy and the European debt crisis, sell the GBPUSD if price drops beneath 1.5624.

AUD/USD

The AUDUSD inched higher yesterday by breaking above its psychologically important 1.0500 to hit a four month high at 1.0506 before undergoing a mild retraction to close at 1.0497. Currency specialists are now advising that although the pair is currently registering an overbought condition, its bullish momentum should still be sufficient to enable it to climb higher and target its next important resistance level at 1.0537, especially in the near-term. As such, with the directional movements of the AUDUSD being dominated by a bullish sentiment, consider activating a new CALL currency option using this pair as its underlying asset if price can surge above 1.0508.

USD/CHF

The US dollar inched higher against the Swiss Franc yesterday as investors spent the day in standby mode awaiting the outcome of important stimulus meetings to be held by the central banks of Europe and the United States later this week. The USDCHF tracked the movements very closely on Monday of the inversely correlated EURUSD by briefly breaking back above its 0.9800 level to hit a daily high of 1.9820 before retracting and closing at 0.9800. With investors nervous about what monetary easing measures, if any, to expect from the ECB and FED later this week, the ensuing uncertainties could enable the USD to strengthen in its capacity as a safe-haven asset over the coming days. As such, buy the USDCHF if its price can sustain a clean break above 0.9814.

COMMODITIES

The price of Gold managed to creep higher on Monday enabling the precious metal to record its fifth consecutive daily rally. However, gains were limited as the markets adopted a cautious note ahead of important stimulus events occurring later this week. A recent spate of disappointing US economic indicators has increased hopes that the FED could instigate measures to bolster growth while assertive comments from European authorities point to a similar response from the ECB. Although gold would gain significant support if stimulus is activated by these central banks, many analysts are advising that there are obstacles in the way. Still, with a modest bullish bias prevailing, buy gold if its price breaks above $1,621.78.

The price of oil slipped lower yesterday as investors preferred to keep their powder dry ahead of key meetings and important data releases later this week. With a slight bullish sentiment prevalent, buy oil if its price can climb above $90.45 per barrel.

STOCKS

An all-out war between Apple and Samsung hit the spotlight on Monday when the jury selection process began in a San Jose, California, federal court to resolve a highly lucrative US patent dispute with billions of dollars at stake. The two biggest electronic manufacturers in the world have been accusing each other of patent violations over the last year in a struggle to gain a premier global position in the mobile device market. The ten-member jury is required to deliver a unanimous decision during a trail that will, no doubt, attract international attention.

The Chief Executive of HSBC advised yesterday that Europe’s largest bank may have to pay over $2 billion in compensation for its slack and inadequate anti-money laundering controls which he stated were “shameful and embarrassing”. The shares of HSBC were still able to appreciate by 2.26% on Monday.

The stock markets practically trended water yesterday producing a mixed reaction from the shares of Apple and Google with those of the former climbing by 1.69% to $595.03 while those of the latter fell by 0.42% to $632.30. With stimulus prospects providing a slight bullish bias, buy Google if its share price leaps above $633.64 and purchase Apple if its share price breaks higher than $596.03.

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