July 5 Daily Market Review
Daily Market Analysis by OptionRally
Financial Market Overview
With the US stock markets closed for Independence Day, global shares fell during Wednesday following the release of disappointing economic indicators from Europe and China. A Chinese index revealed that a decline in new orders caused the activity of the nation’s service sector to slow during June for the first time in 10 months. A similar disclosure from Europe showed that the service sector of Germany had surprisingly contracted during June again because of declining sales. These depressing results merely added to the increasing speculation that the global economy is, indeed, in recession. Investors are now facing a barrage of serious problems arising from the US fiscal cliff, the European debt crisis and a potential hard landing of the Chinese economy. Consequently, analysts are currently advising that because the markets are facing such considerable challenges, risk aversion will be the dominating theme for the rest of 2012.
The downward movement of stocks yesterday could have been much worse except that increasing hopes of new stimulus prevented it from degenerating into a total collapse. The persistent stream of disappointing economic data releases from around the world is fueling expectations that the central banks will soon have to instigate new monetary easing. Consequently, all eyes will be on the European Central Bank (ECB) today when it is expected to cut its interest rate by 0.25 basis points to an historic low of 0.75%. Investors will also scour all accompanying speeches and statements for any clues revealing that the ECB is about to introduce additional quantitative easing in order to bolster the Eurozone’s struggling economy. The prospects of new stimulus were increased yesterday after the yields of both the Italian and Spanish 10-year bonds rose once again. Investors forced these rises because they are worried about whether the recently agreed measures at the EU Summit last week can be implemented in reality.
The Euro weakened against the USD on Wednesday for the fourth consecutive day by dropping over 40 pips to close near 1.2540. The Euro came under pressure from the USD as a result of more depressing economic news issued from around the world as well as from a potential ECB rate cut expected today. However, the situation is complex because if the ECB also instigated additional stimulus measures then such a move should benefit riskier assets such as stocks and the euro. Until further clarification of these developments can be acquired and analyzed, the directional movements of the EURUSD are clouded in uncertainty. However, as the EURUSD is still subjected to a long-term bearish bias, sell the pair if price drops below 1.2487.
The British pound came under another bout of pressure from the USD yesterday causing the GBPUSD to crash beneath its important support at 1.5600, hitting a weekly low at 1.5575 before finally performing a modest rally. This movement was generated by the USD strengthening in its capacity as a safe-haven asset following the release of disappointing economic data. The all-pervading Bank of England (BoE) meeting is scheduled today which should confirm its intent to instigate further extensive stimulus measures in order to boost the UK economy, which is now officially in recession. As such, the GBP is very likely to come under significant pressure from the USD because such a move will effectively devalue the British currency. Consequently, consider selling this pair on confirmation of new quantitative easing by the BoE and if price falls below 1.5571.
With no important economic data posted by either the USA or Australia on Wednesday, the AUDUSD traded a very tight range of just 40 pips. Even the disappointing Chinese economic data published yesterday failed to budge the resilient AUD. The directional movements of the AUDUSD are difficult to determine with any confidence at present amid all the current global drama. On one hand, the USD will strengthen in its role as a safe-haven asset following the occurrence of any new deterioration in the European debt crisis and the global economic slowdown. On the other hand, the Australian economy is currently outperforming that of the USA which lends support to the AUDUSD. The outcome of the ECB meeting and the release of the Australian Trade Balance today will help resolve this indecision by shaping the trading trend of the AUDUSD in the short-term. As the pair is enjoying a slight bullish bias, buy the AUDUSD if price soars above 1.0320.
The USD placed the CHF firmly on the defensive yesterday with the USDCHF briefly breaking above 0.9600 before retracting back to close near 1.9590. During this process, the USDCHF once again closely tracked the movements of its inversely correlated partner, the EURUSD. The meeting of the European Central Bank (ECB) today will heavily influence the directional movements of the USDCHF. Analysts are advising that whatever actions the ECB announce, any surprises will have the potential to generate significant movements in either direction. With such uncertainty hovering over the pair, determining the directional movements of the USDCHF with any accuracy is a complex task until the exact details of all ECB decisions are acquired and assessed. With a slight preference to a bullish sentiment, look to buy the pair if price jumps above 0.9615.
After appreciating in value by 4% this week, the price of gold slipped 0.4% on Wednesday as investors adopted a cautious note ahead of the ECB announcements today and the US non-farm payroll figures tomorrow. Analysts are predicting that if the ECB cuts its interest as widely expected to 0.75%, then this move should prove beneficial for gold over the long-term. This is because gold has a positive correlation to the euro. Although the single currency is expected to weaken initially following an interest rate cut, it should eventually strengthen because such a move by the ECB will alleviate financial stress within the Eurozone over the long term. Consequently, gold is expected to track the same route by weakening to begin with but then to strengthen as the prospects for the Euro start to improve. As such, consider selling gold if its price drops beneath $1,613.40 per oz and an ECB rate cut is confirmed.
The price of oil slipped slightly yesterday as poor global economic data increased the chances of new stimulus actions. .As the oil will appreciate in value, if such steps are activated, consider buying this commodity if its price rises above $88.41 per barrel.
Renesas Electronics Corp, the world’s fifth-largest chipmaker based in Japan, announced on Wednesday that it plans to sell 50% of its national branches and to dismiss 12% of its workforce within the next three years in an attempt to acquire a more competitive profile by producing smaller and better silicon chips. The firm reported a substantial fiscal loss last year and expects the job cuts alone with save $541.97 million annually. Following this announcement, the company’s shares rose by 9.8% on Wednesday.
After Fiat informed the markets yesterday that it was able and willing to purchase the remaining 38.2% stake in Chrysler, the firm’s shares soared by 5% during Wednesday’s session. This move would benefit Fiat greatly as it would provide the company with access to Chrysler’s valuable cashflows.
The markets climbed on Tuesday on hopes that the central banks will introduce fresh stimulus dragging both Apple and Google higher with the shares of the former rising by 1.16% to $599.41 while those of the latter climbed by 1.27% to $587.83. With the markets closed yesterday and a bullish bias dominating, consider buying Apple if its share price breaks above $599.95 and Google if its share price leaps higher than $594.34.