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UK think tank says unemployment will reach 10% this year

UK think tank, NIESR, comments on the UK economy

UK
  • Sees unemployment rate hitting almost 10% this year due to “premature” end to the government’s furlough program
  • Says government is making a mistake by cutting furlough program in October
  • Says that increases the risks of economic scarring
  • Forecasts UK economy to shrink by 10.1% in 2020, before growing by 6.1% in 2021

That is one take on the whole situation but if the health crisis gets worse in the coming months, who is to say that the UK government would not use that as an excuse to keep the furlough program running until the year-end.

For now, a lot about UK economic data – especially in relation to the labour market – is largely masked by the fact that the government’s furlough program is in place.
We will only get a better idea of how the economy is standing on its own two feet once the program expires. Things may be looking “good” for now but should there be substantial layoffs to come, it could lead to a bigger hit to the economy down the road.

Not a good look as USD/JPY nears 100 pip loss

USD/JPY wilts even as risk trades rise

The old correlation between the S&P 500 and USD/JPY is dead. Stocks have climbed in the past 20 minutes and the pair is at the lows of the day.
More importantly, the technical pictures is melting as the pair falls below the May low once again. It would take a miracle turnaround to finish back above 106.00 today. With the break lower, there isn’t much to halt a decline to the 2020 lows.
USD/JPY wilts even as risk trades rise

Japan PM Abe: Current situation does not call for state of emergency declaration

Comments by Japanese prime minister, Shinzo Abe

  • Coronavirus cases are rising, government is watching closely
It is clear that the virus situation across the country is not getting any better as the curve is steepening as the days go by. Japan reported a single day record of 980 new virus cases yesterday, with infections also picking up outside of Tokyo.
Japan
Osaka is reported to find 149 new cases today and that would be the daily record for the prefecture, with Tokyo having found another 260 new cases as reported earlier.
As much as the government insists that things are “under control”, you have to wonder where will they draw the line and say that they have made a mess of the situation.
Eventually, the fear of the virus spread in itself will take a toll on the economy – as much as the government wants to keep business activity running for as long as they can afford to. Unfortunately, that comes at the costs of people’s health and well being, and at worst lives.

FT report “US stimulus delays as Republican talks fall into disarray”

The ongoing bickering and war of words in the Republican senate has delayed any action on further stimulus.

This earlier – they won’t even get a rough outline until next week let alone any action:
  • US Senate leader McConnell says will introduce ‘framework’ for recovery bill “early next week”

Financial Times have a report up on the delays, link is here (may be gated)

  • Mitch McConnell, the Republican Senate majority leader, had been expected to announce the party’s stimulus proposal on Thursday morning, only to reverse course later in the day and announce the plan would not come until next week.
Getting the stimulus done is in Republican interest, any support for the economy will be welcomed by Trump’s re-election campaign.
The ongoing bickering and war of words in the Republican senate has delayed any action on further stimulus.

Apple reportedly delays launch event for new 5G iPhone

This according to a New York Post article

the New York Post is out with an article saying that “Apple is reportedly delaying a fall launch event for its next batch of iPhones to the later half of October”.

Apple is now on track to releases 5G iPhone just-in-time for the holiday season. This according to Japanese Apple blog Mac Otakara.
Apple shares are down about $10.55 or 2.71% on the day to $378.50. It’s high price reached $399.81 few days ago – just short of the magical $400 a share.  Apple is expected to announce earnings on Thursday, July 30 after the close. That will be the same day that Amazon releases their earnings.
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Hu Xijin of China Financial Times lobs some warnings to the US way

US closes China’s Houston consulate

The US announced today the closing of China’s Houston consulate.  Now China Global Times is lobbing some warning the US way.
US closes China's Houston consulate

The warm and fuzzy feelings between US and China are not all that warm and fuzzy needless to say.  It is hard to see things getting better.

USD facing more questions about its status as the primary reserve currency

Here is an item on the US dollar from Bloomberg that may be of interest.

It cites analysts from Credit Agricole and Mizuho
  • USD accounts for more than 60% of global reserves
  • the most widely used currency for international transactions
  • But it risks ceding ground to the euro after European Union leaders agreed on a 750 billion euro stimulus package that enhances the appeal of the shared currency and euro-denominated assets
CA say that the recovery fund will facilitate diversification out of the US dollar
offering liquid, high-rating, euro-denominated debt
Here is an item on the US dollar from Bloomberg that may be of interest.
I’d not be getting too gung-ho on this, and note that the analysts say ‘risks ceding ground’, they are not writing off the dollar.

What to look out for in the week ahead?

As we turn to UK/EU trade moves in FX markets been a rather quiet affair despite the EU Summit having given us little to work with.

I have no firm intel on when we get full confirmation and the outcome but we’re now heading into the fourth day of the marathon talks, but at this point it appears we’re getting closer to a deal, with the level of grants the key sticking point and rumoured to be around E390b.

EUR implied volatility (vol) has been rising of late, as we can see this in the weekly implied volatility scan, with EURUSD 1-week vol pushing into the 32nd percentile of the 12-month range.

This puts EURUSD in an expected range this week of 1.1523 to 1.1303, with a 68% level of confidence. Once again last weeks implied move/range offered a solid guide for mean reversion traders, or those just looking to manage risk more effectively.

(Weekly vol matrix – snapshot from Friday’s close)

PS2
Traders were net buyers of the single currency on Friday into the EU Council meeting, with EURUSD testing 1.1447 – a level I’ve marked as core to markets – a weekly close through here could hold huge implications for global markets and take the USDX through 95.78.

EURGBP is also getting some good interest, with price having pushed into 0.9134 before finding good supply – I have this on this cross on the radar as the buyers are back in control here and we have Fridays high in our sights. A break of 0.134 would be clearly bullish.

Options traders extremely neutral on gold moves

Gold is on the radar too, with the USD firmly at the centre of the thought-process today.

Moves today should be sanguine, and if I look at the options markets I see 1-week implied volatility falling to a 7 vol discount to 1-year vol – the lowest since 2013 – showing a belief that near-term moves in gold will be incredibly subdued and a grind. I also see 1-week risk reversals at 0.56, and 1-month risk reversals at 1.015 – effectively, the options markets is about as neutral on the metal as I have seen in some time – a move through 1813, and into new cycle highs, possibly changes that dynamic and see traders looking for a more explosive move in price.

PS3

Still upbeat on equities but fiscal debates offer new challenges

On the index side, the weekly chart of US500 looks constructive, and despite earnings season ramping up this week, the feel the technical side is suggestive of further upside. The risk for the market this week is on the fiscal side and equities could be sensitive to the news flow and one suspects it will not be smooth sailing.

Staying in the vol space and we see equity vol headed lower, with the cash VIX -2.3 vols on Friday and into 25.68% – closing below its 200-day MA, which is something it failed to do throughout the various tests in June. Our VIX index tracks the VIX futures and is approaching the June lows – one to watch as lower equity vol is saying we’re moving into the US summer doldrums and is having an effect in FX markets. (more…)