July 6 Daily Market Review

Daily Market Analysis

Daily Market Analysis by OptionRally

Financial Market Overview

A number of global central banks introduced stimulus measures yesterday causing the stock markets to initially sell-off before rallying later in the session. In a surprising move, the Chinese Central Bank sliced its benchmark interest rates in an attempt to boost its nation’s faltering economy. Later in the session, the Bank of England voted to keep its interest rate unchanged as well as instigating a 50 billion GBP program of additional quantitative easing, as expected. The European Central Bank then cut its interest rates by 25 basis points to an historic low of 0.75%. Although the markets were anticipating this move by the ECB, they were completely caught off-guard when the bank also reduced its deposit rate in an effort to encourage overnight interbank lending. However, despite all these positive moves, investors were still not impressed forcing the Stock Markets to plunge initially although they did stage a recovery towards closure.

Why was the markets’ response to these stimulus measures so muted? The primary reason was because investors preferred to keep their options open ahead of today’s release of the all-pervading US non-farm payrolls. They want to evaluate this parameter in order to assess the likelihood of the Federal Reserve introducing additional quantitative easing in the short-term. Two important economic indicators were released yesterday providing clues about what today’s labor report will disclose. The US Labor Department advised that the number of citizens applying for new jobless claims dropped during last week by over 14,000. In addition, the payroll service provider ADP surprised the markets by reporting that US private employers hired 176K employees last month compared to the expected 105K. All eyes will now be on the non-farm payroll release today. This is because another poor report could entice the Fed into the arena with fresh stimulus action.

EUR/USD

The Euro experienced a dramatic day’s trading on Thursday as epitomized by the EURUSD plunging nearly 130 pips following the ECB’s interest rate cuts. This movement was primarily caused by the bank’s decision to cut its deposit rate which caught the markets totally by surprise. As a result, the pair plunged below a number of important support levels to hit lows not seen since the start of June. The main driver behind the directional movements of this pair today will be, without doubt, the release of the US labor report. A poor result should be beneficial for the Euro as it will increase the possibilities of a Fed intervention. However, with a strong bearish sentiment in play, sell the EURUSD if price slips beneath 1.2362.

GBP/USD

The British pound came under pressure from the USD yesterday for the third consequence day with the GBPUSD extending its losses by another 60 pips. The main reason behind this movement was the expected announcement from the Bank of England (BoE) to activate a new 50billion GBP package of stimulus measures which will be introduced into the struggling UK economy over the next four months. Analysts are now advising that this development is detrimental to the British pound because additional quantitative easing increases the supply of the GBP lowering its value against other currencies. Consequently, the GBPUSD should now be subjected to a strong bearish sentiment causing it to weaken substantially over coming months. As such, sell the GBPUSD if price drops below 1.5507.

AUD/USD

In contrast with other major currencies, the Australian dollar appreciated against the USD on Thursday with the AUDUSD achieving a modest gain of over 30 pips. The pair tested its psychologically important resistance level at 1.0300 by hitting 1.0327, its highest value since the start of May. The AUDUSD then retracted later in the session by dropping below 1.0300 to close near 1.0290. The primary driver behind these movements was the release of a disappointing US economic indicator disclosing that the ISM non-manufacturing index for June had dropped to 52.1 from 53.7 missing the general consensus figure of 53.0. With the AUDUSD managing to sustain a healthy bullish trend, the pair is expected to continue to strengthen in the coming weeks. Consequently, look to buy the AUDUSD if price is able to achieve a sustain break above 1.0321.

USD/CHF

Following the European Central Bank’s interest rate announcements yesterday, the USDCHF rocketed by over 100 pips to hit its highest levels since the start of June. In the process of this dramatic bullish movement, the pair surged above resistances located at 0.9642 and 0.9677 before climbing above its psychologically important resistance level at 0.9700. The USDCHF did then retract later in the session to close near 0.9690. The USD also gained strength on Thursday in its role as a safe-haven asset from the disappointing releases of a number of US economic indicators. The pair is now engulfed by a strong bullish bias after achieving upward gains over five consecutive days. As such, consider opening a new CALL option using the USDCHF as its underlying asset if price can sustain a break above 0.9713.

COMMODITIES

The price of gold tumbled on Thursday amid investors’ frustrations that the central banks of China, UK and Europe failed to adopt more aggressive stimulus measures. The precious metal came under pressure after these three major central banks confirmed their worries about the health of the world’s economy by feeling the need to instigate additional quantitative easing. The value of gold has weakened in recent months because global economic and political problems have caused it to lose its hedge appeal against inflation. Still, this commodity had appreciated during this week on the prospects that the Federal Reserve will be enticed into instigating new stimulus measures if today’s labor report is disappointing. With this commodity under pressure from a bearish bias, consider selling it if its price falls below $1,605.67 per oz and today’s non-farm payrolls surprise to the upside.

The price of oil slide lower on Thursday after three major central banks announced additional stimulus measures. With a new bearish bias prevailing, consider selling this commodity if its price drops below $83.33 per barrel.

STOCKS

After Netflix announced on Thursday that subscribers had produced a substantial surge in the usage of its services, the firm’s shares leapt by 12%. The company’s Chief Executive reported that clients had watched nearly 1 billion hours of Netflix movies and television shows in June alone compared to just 2 billion hours during the last three months of 2011. Despite this impressive result, many analysts are now expressing doubts about the ability of Netflix to convert this improved viewing performance into revenue.

Media reports issued on Thursday disclosed that Apple had expressed intentions to merge the website services of Yelp into the next version of its operating system as a new maps application. Following this news release, Yelp saw its shares surged by over 12% yesterday.

Despite the markets dropping on Thursday following the stimulus announcements made by central banks, both Apple and Google still rose higher with the shares of the former climbing by 1.85% to $610.51 while those of the latter appreciated by 1.42% to $596.16. With a bullish bias dominating these two companies, consider buying Apple if its share price jumps above $612.32 and Google if its share price soars higher than $598.01.

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