Markets sold off rather aggressively last month as a host of improving US data made for increased flows into the dollar and kept higher-yielding assets in check.
During July, the US Dollar Index, a measure of the dollar relative to a basket of major currencies, rose 2.075 per cent on the month. The euro closed at 10-month lows against the dollar, gold traded at six-week lows and the Dow Jones and S&P 500 index were both down 1.5 per cent and 1.6 per cent, respectively, in a month filled with high-risk events that will determine upcoming pricing action in the months ahead.
Friday meant the release of the July US nonfarm payrolls. The figure came in at a solid 209,000 new jobs, slightly below market expectations of 230,000, and was the sixth consecutive month of job gains in excess of 200,000 – the longest stretch since 1998.
June’s figure was revised upwards to 298,000 from a previous 288,000, and although the unemployment rate increased to 6.2 per cent from 6.1 per cent it was on the back of an increasing labour force participation rate, which increased 0.1 per cent to 62.9 per cent.
Overall markets were spooked with the weaker reading and immediately sold off as the lower-than-expected figure scaled back expectations of a Fed hike in US interest rates. This reaction in markets to last month’s report was curious and will dictate pricing action in the months ahead – with the Fed already on course to wind down its asset-purchase programme by the third quarter of this year, markets are now focusing on the timing of the first rate hike.
Earlier in the week the Fed chairwoman, Janet Yellen, maintained the Fed’s tapering of the programme, cutting bond buying by another $10 billion to $25bn per month, as expected. But her emphasis on the condition of the US labour market and its potential for improvement tied the performance of the labour market to any future rate hike.
Markets will continue to watch for US data flow and adjust their expectations of future rate hikes accordingly – and the US jobs report will once again be the biggest factor in upcoming US central bank policy.
The second-quarter GDP figures from the US were also released last month. Following a 2.1 per cent contraction in the first quarter, growth in the US rebounded to a robust 4 per cent during the second quarter. The figure supports the view that the first-quarter slip was an anomaly caused by a harsh winter. A bright spot on the report was the US personal consumption figure, which came in much better than expected at 2.5 per cent compared with an anticipated 1.9 per cent.
The GDP figure was not enough to alter the Fed’s plans, and the upcoming months of US data will be key in determining sentiment and overall market trends for both the dollar and US equity markets. We do not foresee a rate hike until the end of next year, but the upcoming data from the US will continue to create volatility in the markets.
The euro closed the month below $1.34 – the lowest level in more than 10 months. The euro continues to be underpinned by a dovish European Central Bank, which over the past few months, has been slicing rates in a bid to stimulate inflation.
Recent data from the euro zone showed that the consumer price index increased 0.4 per cent, its weakest since 2009 and far below expectations.
It is unlikely that the ECB president, Mario Draghi, will initiate another round of rate cuts when the bank reconvenes this Thursday. However, the bearish trend in the euro is set to continue. Technically, the euro has breached the 50-month moving average of $1.343, which was a key support level, and it looks like it will approach $1.324 in the month ahead.
And finally, gold pared much of its gains from June to close last month at a six-week low at $1,293. The precious metal continues to be weighed down by a bullish US Dollar Index, and as long as inflation remains under par in the leading economies gold will remain under pressure. Geo-political tensions in Eastern Europe and the Middle East could create intraday spikes, which could bring gold up to $1,380, but we expect stabilisation between $1,240 and $1,280 in the month ahead.
Gaurav Kashyap is the head of futures at Alpari Middle East
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