Friday July 29th 2016

FOMC

Friday July 29^th  2016

Overview

On Wednesday we had the July Federal Open Market Committee (FOMC) meeting which finally gave a direction to the EUR/USD which has been stuck for ages around the 1.10 handle. Although Mrs. Yellen sounded a bit hawkish to me, we saw dollar weakness across the board. “Near-term risks to the economic outlook have diminished,”; the panel “continues to closely monitor” inflation and global developments. Job gains were “strong” in June and indicators “point to some increase in labor utilization in recent months,” the Fed said. If the Fed left the door open for an interest rate hike on the September meeting (20-21 of Sep), today’s US GDP data put back everything under discussion again: US GDP (QoQ) Q2 1.2% vs exp. 2.6% a very weak number. “We’re just muddling through," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, who had forecast a 1% gain in second-quarter GDP. “Consumer spending looks good, but the problem is that the rest of the economy is soft. The economy remains vulnerable to downside risks. The Fed is right to be cautious."

The EUR/USD was already trading on its highs for the day due to a decent EU inflation number for July, (MoM) 0.2% vs exp 0.1%, and a better than expected EU GDP report (YoY) +1.6% vs Exp. 1.5%. The weaker than expected US data did deliver it around the 1.12 handle. It looks like it could continue in the short term; interesting will be to see the next Friday’s US Job report for July.

A weaker than expected US dollar helped oil to trim losses after the sharp decline of the past week. Focus is still on the supply side as traders now see the re-balancing of the market going through at a softer pace. Iranian exports to Asia's main buyers - China, India, Japan and South Korea - jumped 47.1 percent in June from a year ago to 1.72 million barrels per day, the highest levels in over four years. Disruptions in Nigeria and Libya seem solved for now. "Margins remain on a negative trajectory. This seems a clear signal that Atlantic Basin refined product markets are currently oversupplied," Jason Gammel of U.S. investment bank Jefferies said on Friday. Goldman remain moderately bullish on oil and they do not see a comeback below the 35$ handle. They adjust their price forecast saying that prices will remain stable within the 40$ and 50$ per barrel until mid-2017 due to slower than expected market re-balancing.

Metals

The base metals complex is as well enjoying a weaker US Dollar and today we are going towards the close on a positive note. Ali is trading around 1635$, Copper 4930$, Lead 1800$, Nickel 10600$, Tin 17900 and Zinc 2236$ (all basis 3M). Surely, as expected, they did adjust with respect to last week’s high but we can see some good consolidation happening all across the board at relatively high levels.

The reason for today’s move is clearly due to the expectations of the FED rate hike which now are seen on December. In addition we always have in play the same fundamental picture we saw in detail last week which gave each metal in deficit for the first 5 months of the year. Yet I feel we are at a critical juncture and we definitely have metals that are much well placed than other to rally (i.e Nickel, Tin). I will be rather cautious instead on Copper and Ali. Zinc is a bit of dilemma; even though I think is overbought it may even push higher to the 2320$ level. At some point though it will have to adjust.

Traders will be now closely look at the Chinese data out on Sunday night (Manufacturing PMI) to have a better gauge on the economy. This could give a firm direction to the complex for the August despite the thin volumes.

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