wrap of week 29

7/27/2019 Wrap of Week 29

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Simultaneously with the release of the housing date, FED Chairman Ben Bernanke released the

written statement of his semi-annual testimony, which did not offer any new information. The aim of

his comments was definitely market reassurance that there is still no definite decision about

tapering. In his words: asset purchases are by no means on a pre-set course. Bernanke also made

clear (not that he hadnt mentioned it numerous times already) that the timing of the tapering

depends on the unemployment rate, inflation rate, growth as well as financial conditions, which have

become a little bit tighter recently. His position was that the FED could continue its QE program forlonger if conditions continue to be tighter than needed, however, if conditions improve faster than

expected, the FED might bring forward or accelerate the start or pace of tapering.

The last piece of important economic data for the week came from the Department of Labour, whose

weekly report on Unemployment claims came well above expectations. The print for Initial claims

came at 334,000, which marked a significant improvement from last weeks 358,000 and also came

on top of expectations for 345,000. This print marks the lowest point since the beginning of May,

however there are a couple of important points to be made. First of all, it's difficult to precisely

measure claims this month because of distortions from events such as annual auto plant shutdowns

and the July 4 holiday. The 4-week moving average, which gives us smoother data pattern, was

346,000, a decrease of 5,250 from the previous week's revised average of 351,250. On the otherhand, however, the continuing unemployment claims rose by 91,000 to 3.114 million, resulting in the

highest point since February. This is also the highest one-week increase since November 2012. It gets

even worse if we go one more week back, because the two-week increase in continuing

unemployment claims is the highest since February 2009.

In conclusion, things are not as bright as someone might have thought. The housing market has lost

its initial spark, while the labour market has still not picked up as much as we want. If we put in that

equation the rather weak consumption on a retail level, as well as an CPI rate that has yet to show

some improvements significant improvements, we get an economy that is very fragile and every little

mistake might drag it back down. Having said that, our opinion is that the famous belief that

September will be the initial point of QE tapering is wrong. For now the economy is still far away

from FEDs targets and we believe that the earliest point when tapering might begin is the end of

2013. This notion might give confidence to investors, who have acted rather infantile every time


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someone has talked about QE in the past two months. The effects of Mr. Bernankes reassurance and

the bad economic data could already be seen in the yield of the 10yr note, which dropped below

2.5% for the first time since the beginning of July and ended the week at 2.491%.

Now, with the FED out of our way, there is only economic data and corporate earnings to focus on

for the next week. Existing Home Sales, New Home Sales and House Price Index (HPI) are the nextbatch of important housing data for June, which will show investors where the sector is going. This

will be complemented by the weekly Jobless Claims, Durable Goods orders and Michigan Consumer

Sentiment Index at the end of the week.


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EUROPE

During the previous week, the main European indexes gained slowly. The DAX elevated by 1.45%,

FTSE rose by 1.31%, EURO STOXX gained 2.2 %. The main drivers of volatility this week were the

earnings publications, the MPC meeting, as well as Feds Chairman Mr. Ben Bernanke testimony,

regarding the condition of the US economy.

European shares chalked up a fourth straight week of gains but ended flat on Friday, dampened by

fresh weakness in the technology sector as a mixed earnings season on both sides of the Atlantic

intensified. Along with tech firms, pharmaceuticals also suffered, down 0.7 percent and led lower by

Belgium's UCB. It fell 2.3 percent after saying it had been visited by Chinese authorities investigating

bribery allegations already made against British heavyweight GlaxoSmithKline.

On Wednesday, July 17, the MPC Meeting was held. Bank of England policymakers voted against

extending quantitative easing at this month's monetary policy committee meeting, amid signs that

economic recovery is becoming "more firmly established". The UK and European markets reacted.

Investors were largely shrugging off some better-than-estimated labour-market data from the UK,

with the number of people claiming unemployment benefits dropping by 21,200 in June, much more

than the 8,000 fall expected. This was the eighth straight monthly drop and the fastest rate of decline

in three years.


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The MPC made a first foray into forward guidance at its meeting a fortnight ago, taking the unusual

step of issuing a statement to financial markets warning them that interest rates were unlikely to

rise. That statement should be taking into consideration from the investors, about the further

development of the market. We believe that, despite the broadly positive UK development, it had

not been enough to warrant such an upward move in the near-term path of bank rate.

Persistently weak real income growth with high inflation more than outweighing paltry pay deals

was highlighted as a risk to the recovery. "Real income growth had remained weak and it was

unlikely that consumption growth could continue at its current rate without some rise in real

incomes", was stated by MPC members. However, the MPC said, developments in the domestic

economy had generally been positive", and broadly in line with the moderately upbeat picture

presented by King at his final inflation report press briefing. For "most members", therefore, "the

onus on policy at this juncture was to reinforce the recovery by ensuring that stimulus was not

withdrawn prematurely", subject to keeping inflation on track to hit the government's 2% target.

Next week, the investors should expect the prelim GDP q/q, which would give an answer of a lot ofqueries.

On Friday, the UK stocks dropped from their highest level in seven weeks as Google Inc. and

Microsoft Corp. posted worse-than-projected earnings (the US part of the wrap). British Banks

dropped with HSBC Holdings Plc (HSBA) slipping 0.5 percent to 737.5 pence. Investec Plc lowered its

rating on the FTSE 100s heaviest stock to hold from buy. Lloyds Banking Group Plc (LLOY) fell 1.1

percent to 69.25 pence. IMI increased 2 percent to 1,400 pence, extending its highest price since at

least 1988. Vodafone Group Plc (VOD) added 1.3 percent to 193.85 pence, its biggest advance in two

weeks. The worlds second-largest wireless carrier posted a smaller drop in first-quarter service sales

than analysts had predicted as markets outside Europe improved.

The next week performance of the market would be highly volatile, taking into consideration the

continuing earnings season. On Monday the markets should be reflected by the G20 Meeting, which

focus will be pointed to the high unemployment, market volatility and the global economic recovery.

The global consequences of uncertainty regarding the tapering of US quantitative easing will also

likely be on the agenda.


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ASIA

China

It has been an extremely busy week in Asia, full of macro news and events, most of which were from

China.

Retail sales have increased 13.3% in June compared to a 12.9% rise reported in May. Industrial

production has risen 8.9% YoY in June, less than market estimates of 9.1% and less than the 9.2%

increase posted in the preceding month; the leading economic confidence improved.

PBOC released its H1 2013 financial statistics this week. Outstanding loans at the end of June

registered 72.87T yuan, up 15.1% YoY, where household loans accounted for 18.8% of the YoY

increase. The highlights were also on the money supply where M2 was 105.45T yuan, up by 14% YoY,but 0.2% YTD. M1 registered 31.36T yuan, rising by 9.l% YoY and 2.6% YTD. With the slowdown of the

Chinese economy and lower forecasts from various institutions flooding the news, we wish to see

some expansion in the banks balance sheet (quite a modern practice these years), in order to

become more bullish on the otherwise slumping Chinese market, even though this is not the only

factor that can drive the investor expectations up (like in the US). Li said that:The lower limit is to

stabilize economic growth and maintain employment, while the upper limit is to prevent inflation,

this leads us to believe that China will do whatever it takes to achieve the 7.5% forecasted annual

real GDP growth. As it happened on Monday, the YoY real GDP growth matched analyst expectations

posting 7.5%. This number surprised most investors, as the overall comments and outlook on the

Chinese economy were priced in for a lower growth and as a result, along with the QFII boost noted

in last weeks wrap the market rallied at first. As a results of the QFII boost, FDI in China hasincreased 4.9% from January to June 2013 period compared to a 1.0% rise posted in the period from

January to May 2013.

Worth noting in equities was Xian LONGi Silicon Materials Corporation (601012) and Risen Energy

(300118) which jumped 10% and 7.8%, respectively, after the Chinese government raised the target

for solar power generation capacity. We begin to see the green energy plans to start pricing in and

reducing the risks of investing in such companies. Quite an easy trade due to the known downward

trending commodity prices was Huadian Power International (600027), which increased after it

forecasted a substantial jump in its first half year profit, citing declining thermal coal prices.


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Japan

This week was the release of the Monthly Report of Recent Economic and FinancialDevelopmentandthe Minutes of the Monetary Policy Meeting. Apart from this, not much else happened in Japan in

term of macro news. Something interesting that we decided to show here is the evolution of the first

summary sentence of the monthly economic report.

August 2012Japan's economic activity has started picking up moderately as domestic

demand remains firm mainly supported by reconstruction-related demand.

September 2012 The pick-up in Japan's economic activity has come to a pause.

October 2012 Japan's economic activity is levelling off more or less.

November 2012 Japan's economy has been weakening somewhat.

December 2012 Japan's economy has added somewhat weak movement.

January 2013 Japan's economy remains relatively weak.

February 2013 Japan's economy appears to stop weakening.

March 2013 Japan's economy has stopped weakening.

April 2013Japan's economy has stopped weakening and has shown some signs of picking

up

May 2013 Japan's economy has started picking up.

June 2013 Japan's economy has been picking up.

July 2013 Japan's economy is starting to recover moderately.

True, this is backward looking, however if you enjoy cycle analysis, assuming that the stock market is

leading the economic cycle, in a booming economy if you notice a downtrending stock market, thensome attention should be given to why is this divergence occurs. Of course so far, it seems we re

away from such a long term conclusion, but then again the Japanese economy has been like so in the

past 20 years.

BoJ minutes shows a discussion on steps to stabilise bond market volatility, where some board

members contemplated the idea of supplying longer-dated fixed-rate funds in market operations to

curb excessive interest rate volatility. Other members opposed the idea fearing that it could be

misinterpreted by markets as a revision to the monetary-policy framework. Overall the bond market

has been flat as noted in the minutes and most of the yield increases are due to the US tapering

expectations.


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Many other obvious comments were made, such as the outflow of capital from bonds; due to the

increasing yield form the historically low levels. Due to this however interesting things happen. As a

result, not only there are some people stuck in evaluating the opportunity cost in waiting until

maturity or accepting capital losses and buying new higher yielding bonds, but on the corporate side,

many companies have deferred the issuance of new debt for later. This leads to a moderate increase

in credit demand, mostly related to M&A activity.

Australia

In line with BoJ and PBOC, the RBA released their minutes too, where another wait and watch

statement was announced. They will be waiting until a decision is made, so no change so far. The

subject of further interest rate cut if necessary was touch on once again, however for now their view

was that the current monetary policy was appropriate. It seems that in Australia, like the USA,

watching all economic indicator releases is crucial in understanding what the RBA might decide next.

We are expecting big swings to come in the Australian stock and FX market.

Singapore

Moodys Investors Service cut their outlook for Singapores banking system on concern that

borrowing costs may climb, as June home sales rose by 24% to 1,806 units, thus posting a second

month increase to the highest since Marchs record. The rating agency noted that the rapid loan

growth and rising property prices in the city adds more risk to credit quality. I guess finally

economists have learned how rising property prices alone does not add much benefit to the

economy in the long run.


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FOREX

Pair Open Close Weekly % Mothly % YTD

EUR/USD 1.3065 1.314 0.57% 1.00% 0.59%USD/JPY 99.23 100.51 1.29% 1.30% 14.01%

USD/CHF 0.9458 0.9404 -0.57% -0.44% 1.72%

USD/CAD 1.0394 1.0364 -0.29% -1.54% 5.03%

AUD/USD 0.9048 0.9175 1.40% 0.70% -12.49%

NZD/USD 0.7776 0.7924 1.90% 1.60% -4.70%

USD/CNY 6.1375 6.1379 0.01% 0.08% -1.49%

GBP/USD 1.5102 1.5263 1.07% 0.42% -4.96%

So, the QE speculations are continuing. The week, on the FOREX markets, was very interesting andinconsistent, for the main counterparts.

Obviously, the investors start to accustom to the contradictory statements of Feds Chairman Mr.

Ben Bernanke about the reducing stimulus for the US economy. That is why the week was marked by

volatility not as strong as the instability caused by the previous testimonies of Mr. Bernanke, held in

May and June. According to the expectations the US dollar generally consolidated, with a modest

downside bias, over the past week. The Euro strengthened, reaching a level of $1.314 per 1Euro. The

British Pound evaluate by 1.07 %, getting to $1.5263 per 1GBP. The risk is for more of the same in the

week ahead. A relative light economic and political calendar in North America and Europe will make

for thinner participation. At the same time, Bernanke has driven home the conditional nature of the

Fed's willingness to scale back on its purchases of long-term assets, as it is stated at the US part of

the wrap. That is why we believe that, even if the next week might be marked by devaluation of the

Dollar, in a medium long term, we would witnessing a strong increase of the USD against its main

counterparts.

The movement of the Yen, during the week, was influenced by elections for Japan's upper house, onSunday. As the Bank of Japan states, the yen had temporarily appreciated in view of the decline in


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Japanese stock prices, but then has depreciated against the U.S. dollar due to speculation about U.S.

monetary policies. In these circumstances, the yens exchange rate against the euro has basically

been more or less unchanged, albeit with some fluctuations.

In regard to the elections, it is strongly expected that the Prime Minister Shinzo Abe's would win,

which would add an aggressive push for monetary easing to lift growth and fight deflation. Underthese conditions, our opinion about a bullish USDJPY is maintained. The victory of Mr. Abe would

give him more freedom to push his agenda of monetary easing, public spending and structural

reform, which could weigh on the yen. The investors would respond, and the reaction will be visible

on the Mondays opening of the FOREX market.

Australias dollar strengthened during the week. The Aussie reacted on the Chinas GDP data from

Sunday, and on the RBA meeting on Monday, as you could read at Asian part. That is why for the first

time since June 13th the Aussie has had a rally of over 200 pips. Even that increase, we believe that

some further devaluation of the Aussie would be taking place.

The main event, which would mark the next week FOREX performance, would be the G20 meeting in

Moscow. The group of 20 nations finance ministers will be discussing a common approach to QE

programs to avoid market volatility in the future. Ministers will be working out a comprehensible

criteria for when and how such programs can be tapered. A predictable exit would be stated,

creating a strategy that is supposed to leave investors more secured. The FOREX marked would react.

Better be prepared and as always, manage well your money

Calendar

DayHour/Time

Zone (GMT - 5)Currency Indicator Forecast Previous

Monday 10:00 AM USD Existing Home Sales 5.27M 5.18M

Tuesday 9:30 PM AUD CPI q/q 0.5% 0.4%

9:45 PM CNY HSBC Flash Manufacturing PMI 48.6 48.2

Wednesday 3:00 AM EUR French Flash Manufacturing PMI 48.9 48.4

3:30 AM EUR German Flash Manufacturing PMI 49.3 48.6

10:00 AM USD New Home Sales 482K 476K

Thursday 4:30 AM GBP Prelim GDP q/q 0.6% 0.3%

8:30 AM USD Core Durable Goods Orders m/m 0.5% 0.5%

USD Unemployment Claims 339K 334K

wrap of week 29

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