London Capital Group: Markets calm before the US NFP data

Jul 5, 2019

European equity markets were flat on Thursday, the US was closed for the Independence Day and the Asian markets opened sideways on Friday on lack of indication from overnight.

The US equity futures edged slightly higher, but the FTSE and DAX futures remained muted pointing at a flat open on Friday.

A decent drop in WTI crude (-1.12%) stood out in the quiet Asian session. Brent crude remained flat near $63 a barrel. Oil markets are set to close the week with the biggest weekly drop since May, as OPEC+ decision to curb production for additional nine months was interpreted as insufficient to match the waning global demand. This was the worst market reaction to an OPEC production-cut decision over the past four years.

Canadian unemployment rate may have deteriorated in June

Loonie extended advance versus the US dollar on Thursday. The USDCAD traded at 1.3038, the lowest since October 2018, on the back of an unexpected trade surplus in May.

However, the employment data, due later in the session, could hint that the weakening oil demand may have weighed on the Canadian jobs market in June. The Canadian economy is expected to have added 9.9K jobs last month, down from 27.7K printed a month earlier. The unemployment rate may have risen from 5.4% to 5.5%.

Still, the Bank of Canada (BoC) is expected to maintain its policy rate unchanged at 0.75% at next week’s monetary policy meeting.

A trend reversal in oil prices and soft employment report could curb gains in Loonie. But the divergence between the Federal Reserve (Fed) and the BoC’s monetary policy expectations could give a further support to the Canadian dollar against the greenback. The next natural target for USDCAD stands at 1.30.

US nonfarm payrolls in focus

The key highlight of the day is the US labour data. Released on Wednesday, the ADP report showed that the US economy added 102K private jobs in June, less than 140K expected by analysts. The weak ADP data whispers that the US nonfarm payrolls could fall short of 160K expected by analysts versus 75K printed a month earlier. But the US unemployment rate probably remained unchanged at 3.6%, a fifty-year low, despite the slowing economic activity and waning inflation amid the ongoing trade tensions with China.

The US dollar is slightly stronger against its G10 counterparts ahead of the NFP data. A read below 100K could keep the Federal Reserve (Fed) doves in charge of the market, further weigh on the US yields and cap gains in the dollar. Whereas a stronger-than-expected figure should temporarily pause the rush into the US bonds and bring investors to review their dovish Fed expectations before the release of the FOMC meeting minutes next Wednesday.

A 25-basis-point interest rate cut is priced in at 100% at the Fed’s July meeting, according to the activity on US treasury markets. But what may follow the likely July cut shall give a fresh direction to the market.

Euro stable, as 10-year Bund yield hits -0.40%

The EURUSD remained little changed around the 1.1280 mark. German 10-year bund yield eased to -0.40%, a record low, as the Eurozone sovereign bond markets continued pricing in more asset purchases from the European Central Bank (ECB) and an eventual interest rate cut before the end of this year.

And Christine Lagarde’s nomination as the ECB’s next chief gave investors a reason to hold on to their dovish expectations. Lagarde will certainly fight back the slowing European economy and falling inflation expectations by a prolonged period of ultra-accommodative monetary policy. Hence, the Eurozone bonds remain attractive, as investors believe that capital gains will outweigh the very low, or negative yields in the coming months.

Pound under the pressure of rising no-deal Brexit pricing 

The pound had a tough week, as the composite PMI figure slipped below 50 in June, pointing at contraction in the UK’s activity for the first time since the immediate aftermath of the Brexit referendum. After three years of fruitless talks with the EU, the UK is preparing to appoint a new Conservative leader to carry on with the negotiations. With Britain running out of patience, a possibility of a no-deal Brexit becomes increasingly plausible. This is at least what the pound markets have been pricing in. Both Boris Johnson and Jeremy Hunt are determined to lead the country out of the European Union, though front-runner Boris Johnson is ready to make appeal to more drastic measures, such as suspending parliament, to get it done with the EU membership.

Opening calls

FTSE to open 3 points lower at 7600

DAX to open5 points lower at 12625