The world seems brighter after the G20 summit

US Session Forex Brief, July 1 – Risk-on Sentiment Returns After the G20 Summit, USD Makes a Comeback

Posted Monday, July 1, 2019 by
Skerdian Meta • 5 min read

The sentiment has been really negative in financial markets in recent months as the global trade war escalated and the global economy turned even weaker in Q2 of this year, than in Q4 of last year which was already pretty weak. The tones from US and China have been heating up further in recent weeks, which hurt the sentiment further. But there was a slight hope that the G20 summit which was held on Friday and Saturday last week would bring some positive outcome. But at the same time, there was the risk of another failed G20 summit which would turn the sentiment even more negative.

But the G20 Summit went better than most were expecting and comments from US President Donald Trump and Chinese officials now point towards a trade agreement soon. The meeting between Trump and the Chinese President Xi went well, which has turned the sentiment positive again in financial markets after a long time. Stock markets opened with a big bullish gap higher this morning and have been crawling higher in the European session, while safe havens have turned bearish. GOLD has lost more than $50 and has returned back below $1,400, while USD/JPY and EUR/CHF have turned bullish today, which means that the CHF and the JPY are under pressure. The USD is also feeling better today, since the end of the trade war with China would remove one of the major negative components for the Buck.

European Session

  • Eurozone Manufacturing PMI – The manufacturing sector has been hit the hardest across the globe from this trade war and this morning’s figures from East Asia confirmed that, as did the figures from Europe. Chinese Caixing manufacturing dipped below the 50 level, which means that it fell in contraction last month, while Japan was already there, but dipped further below as the numbers showed. The Eurozone manufacturing report for May was released this morning and it showed yet another slowdown, falling from 47.8 points to 47.6, missing expectations too. Although, this wasn’t much of a surprise since all the manufacturing numbers from the Euro countries came weaker today. German manufacturing PMI came at 45.0 points today, down from 45.4 points expected and previously. At least, French manufacturing is holding up pretty well despite it ticking lower as well to 51,9 points, down from 52.0 previously, but it still remains in expansion. Italian manufacturing also slowed falling from 49.7 points to 48.4, missing expectations of 48.7 points. Spanish manufacturing also fell in contraction last month, declining from 50.1 points to 47.8.
  • UK Manufacturing PMI – UK manufacturing fell in contraction in May as last month’s report showed. UK manufacturing was expected to tick higher in June, but it slipped deeper in contraction, falling to 48 points against 49.5 points expected. This is the weakest reading since February 2013. The output component also fell to 47.2 points from 50.3 previously. This is the lowest reading since October 2012. M4 money supply also declined by 0.1% while it was expected to increase by 0.6%. After the inventory buildup in Q1 by British companies ahead of a disruptive Brexit, now the shape of the economy is really showing and it is pretty weak.
  • OPEC Set to Continue the Production Cuts – Russia’s energy minister, Alexander Novak, was speaking this morning on the issue, saying that all ministers approve 9-month OPEC+ cuts extension. There is no proposal to extend cuts longer than 9 months, Iran confirmed in the meeting that 9-month extension is good and all current OPEC+ quotas will be retained in the extension.
  • Will Brexit Be Postponed Again Too? – The conservative leadership candidate, Jeremy Hunt was commenting earlier on Brexit. He said that he would decide by 30 September if Brexit deal is possible. He has plans to negotiate with EU leaders in July, August. But, chances are that Boris Johnson will take the position of the Tory leader and the Prime Minister.

US Session

  • Chinese Officials Turning Optimistic Now After the G20 – Yi from the People’s Bank of China (PBOC) made a bunch of comments in Finland a while ago. He said that the shrinking labour market supply is one factor in slower growth and increasing environmental standards also hurting growth. China labour supply peaked in 2010-2011. Growth rate will moderate as economy grows. Current account surplus to stay below 1% of GDP. The economy is basically driven by domestic demand and consumption is now 2/3 of growth. China still has plenty of savings while the growth rate is right around 6%. China does not want competitive devaluation. We still have the policy and try to maintain RMB stability. Doesn’t want competitive devaluation of RMB either. China will continue market-oriented FX reform. Interest rates are currently at comfortable levels. The future PBOC policy will be prudent. The G20 outcome was a little better than expected. The road map for trade talks is very constructive.
  • Saudi Arabia’s Falih Confirms Production Cut Extension – The Saudi oil minister Al-Falih was speaking a while ago ahead of tomorrow’s OPEC meeting. He said that OPEC already agreed on principles of output rollover. They already agreed on principles of rollover and more countries want 9 months instead of 6 months. Saudi’s July oil production seen at about 9.7M barrels per day. Saudi oil output to be below 10 bpd. OPEC+ conformity will be a lot better in 2H and the demand not necessarily looking grim for 2020. Iran doesn’t want OPEC to condemn US at this meeting. We are already seeing oil demand pick up. It’s all pointing in the right direction He hopes for agreement on OPEC+ charter tomorrow. Iran agreed on all issues in meeting with Russia’s Novak.
  • ECB Is Not Optimistic About Inflation – ECB members Pablos Hernadez de Cos and Klaus Knot were speaking in Helsinki, saying that inflation is far from the target. Obviously, we are in a difficult situation, inflation is far from target and 1.6% inflation forecast for 2021 is far from their goal. We are still suffering from prolonged uncertainty but are not in recessionary territory. Expectations for Q2 and Q3 are less favorable than for Q1. It’s indisputable that inflation remains too low and if there is an adverse scenario, ECB determined to act
  • US ISM Manufacturing PMI – The US ISM manufacturing report was not as bad as expected. The ISM manufacturing PMI came at 51.7 points in June, while it was expected to fall from 52.1 points in May to 51.0 points. Final manufacturing PMI also came out better, pulling off from near stagnation, popping up to 50.6 points from 50.1 points in May, which was expected to remain at the same level in June. The employment component also improved, jumping to 54.7 points from 53.7 points previously. Although other indicators such as prices paid came out pretty weak at 47.9 points from 53.2 previously and New orders also fell to 50.0 points, which means stagnation, against 52.7 points previously.

Bullish USD/JPY

  1. The trend has shifted in the last few days
  2. Fundamentals are turning bullish for this pair
  3. The 20 SA is providing support on H1 chart

Now moving averages are providing support for this pair

USD/JPY has been bearish for about two months since it turned lower following the escalation of the trade war. This pair lost around 500 pips during that time, but in the last few days the situation has improved for this pair and it has made a bullish reversal. The price has climbed around 150 pips from the bottom and it opened with a big bullish gap last night when markets opened, due to the positive tones from the G20 summit. The 20 SMA (grey) is also providing support for this pair, which means that buyers are in control at the moment.

In Conclusion

The G20 Summit has improved things for financial markets and now there’s a new positive vibe in markets. Traders are moving away from safe havens and the USD has improved considerably. But the global economy continues to weaken as the manufacturing reports from the rest of the globe apart from the US showed today.

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