Are markets set for a stronger rebound in July?

Investors face a new week trying to ascertain whether the recent bounce in risk appetite can hold. Attention will focus on Federal Reserve chair Jay Powell when he testifies on monetary and economic policy before Congress, while UK politics and the debate over a Brexit deal hangs heavily over the pound.

Risk back on, but for how long?

The FTSE All-World equity index moved back into positive territory last week and also climbed above key measures of momentum, suggesting the prosect of a larger break higher that in turn attracts further buying.

Now as Wall Street’s latest quarterly earnings season cranks up, investors will assess whether guidance from S&P 500 companies can deliver a broader-based rally. Tech has continued to drive the broad market and such narrow leadership is a typical late-cycle pattern. And while large US banks such as JPMorgan and Citigroup beat estimates on Friday, the reaction from Wall Street was mixed.

That raises the question as to whether we do see a sustained rise beyond 2,800 on the S&P 500 — a level that has represented the broad market’s ceiling since February — that would target the late-January record peak of 2,872.

Such a run will drag the All-World index higher, but in the past two months the story for global equities has been one of investors eyeing Wall Street as a haven from trade war jitters. The S&P 500 has outperformed the FTSE All-World, excluding the US, by some 10 per cent since early May.

With European equities having rallied in the past two weeks and Asia-Pacific markets, excluding Japan, having just broken a four-week run of losses, global equities are enjoying a respite, but it remains to be seen whether this is nothing more than a shortlived bounce.

Helping set the tone this week will be the views on trade, the economy and inflation from Fed chair Jay Powell and how this plays out in terms of the US bond yields and the dollar when he speaks on Tuesday and Wednesday. The Fed’s semi-annual monetary policy report released on Friday painted an optimistic outlook for the economy and downplayed threats from trade protectionism.

The recovery in risk appetite in July has largely been led by those EM currencies that were certainly due a bounce — Argentina, Mexico and South Africa. Turkey’s lira remains in the basement for very good reasons, while the renminbi, Korean won and Thai baht’s underperformance in July suggests they are being marked out as front-line casualties from a trade war.

Havens such as the Japanese yen, swiss franc and gold have been falling as the dollar has rebounded. In turn, gold is back testing $1,240 an ounce and copper, for now, has stopped sliding after plumbing a 12-month low.

As investors look at the price action and gauge whether the current bounce has substance, one important consideration is that thin summer trading conditions can cut both ways, exacerbating selling and buying flows. Rather than fret over a classic summer swoon, investors could well be rewarded further as a bounce in risk appetite gathers pace. Michael Mackenzie

Will UK data outshine Brexit and lift the pound?

After a wave of political turbulence, sterling traders are in need of some respite — but they are unlikely to get it.

The pound seemed to have weathered last week’s Brexit white paper publication and cabinet resignations, raising hopes that a floor in the currency had been reached. Sterling volatility is surprisingly low, given the political heat being generated.

Then Donald Trump breezed into town to rubbish Theresa May’s Brexit plan and toss her dream of a US-UK free trade deal into the Chequers fireplace. Sterling promptly fell.

The pound is back down among the 2018 lows, hovering around the $1.31 mark, nearly 10 per cent off its April peak of $1.43. Brexit remains a tortuous affair for investors to read, this week bringing further attempts by backbenchers to pivot the debate their way and important votes on the trade bill.

But investors will also be watching how European leaders respond to Mrs May’s proposal. A hardening of its position will be negative for the pound and put the prime minister under pressure to offer further concessions. That will imperil her government.

It is more straightforward for investors to trade the pound on monetary policy, and most analysts are looking at market pricing that strongly expects a rate increase at the August meeting of the Bank of England. Better data of late have been supporting that case, and this week’s jobs and wages figures, inflation numbers and retail sales all have the potential to distract investors from Brexit uncertainty. Roger Blitz


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