Daily Market Outlook, July 25, 2023

Munnelly’s Market Commentary…

Asian equity markets traded higher, with Chinese stocks leading the gains. The rally in Chinese stocks came after the country's Politburo made support pledges, boosting investor sentiment. However, gains in the rest of the region were limited due to soft global PMI data and caution ahead of upcoming risk events. The Nikkei 225 index in Japan lagged, with uncertainty surrounding the upcoming Bank of Japan meeting. Reports suggested that the central bank is considering a significant increase in its 2023 inflation outlook, possibly raising it to around 2.5%.

The Hang Seng index in Hong Kong surged by 3.4%, and the Shanghai Composite index in mainland China rose by 1.9%. The gains in these markets were led by a surge in property and tech stocks, fueled by the optimistic support pledges from the Chinese Politburo. Notably, the Hang Seng Tech Index climbed by approximately 5%, and the Hang Seng Mainland Properties Index saw a double-digit percentage rise from early trading, as the Politburo's statement omitted language suggesting that homes are not for speculation.

Yesterday's UK Purchasing Managers' Index (PMI) data fell short of expectations, although the composite index remained above the 50-expansion level, indicating continued growth in the economy. Looking ahead to the Bank of England's monetary policy update next week, the data docket for the UK is now limited. Today's July CBI Industrial Trends Survey will provide an update on the manufacturing sector, which has been facing challenges not only in the UK but globally. The survey includes the results of a more comprehensive quarterly survey, and of particular interest will be the business investment intentions. This will shed light on how businesses are planning to invest in the current economic climate and may provide insights into their confidence in the recovery and future growth prospects.

European investors will focus on perspectives from managers in Germany, Europe's largest economy, they are anticipated to express decreasing optimism about the business environment. The leading survey on German business confidence, conducted by the Ifo economics institute, is expected to show a decline for the third consecutive month. Economists predict that the headline business climate index for Germany will slip to 88.0 from the June reading of 88.5, which had already declined from a mark recorded in December. The expectations component of the index, which measures business outlook for the coming six months, is also forecasted to ease to 83.0 from June's reading of 83.6. Additionally, this month's current assessment component is expected to slide to 93.0 from 93.7. These declines in the business confidence index suggest that German managers are becoming less optimistic about the economic conditions in the country in the coming months.

Stateside, US consumer confidence measures have shown a lot of volatility recently, reflecting uncertainties about the outlook for inflation and interest rates. The Conference Board's confidence measure experienced a significant increase in June, and it is expected to have risen again in July. One of the reasons for this expected increase is likely the surge in the alternative University of Michigan consumer sentiment index, which reached its highest level since mid-2020. This rise in consumer sentiment may be driven by hopes that US interest rates are nearing a peak. However, it could also have implications for the Federal Reserve's approach to future rate hikes, possibly encouraging them to proceed cautiously before ruling out further increases.

CFTC Data As Of 18-07-23

USD net spec short grew in the Jul 12-18 period amid a $IDX 1.65% slide
EUR$ +2% in period, specs +38,670 into strength, now long 178,832 contracts
$JPY -1.05%, specs +26,943 contracts, short reduced to -90,239
GBP$ +0.77%, specs +5,666 contracts now +63,729; data pre-UK CPI Wednesday
AUD$ +1.88%, specs -5,317 now -50,401 contracts; $CAD -0.46% specs -3,923
BTC -2.6% in period specs buy 694 contracts on dip, now -1,161 contracts
Note since Tuesday reporting period close the $IDX is down near 0.9%
EUR$ has dipped 0.88%, $JPY rose 2.11% after period closed leaving recent EUR & JPY buyers in the red(Source: Reuters)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.1020-25 (375M), 1.1085 (1BLN), 1.1095-1.1100 (800M)
1.1190 (440M), 1.1225 (1.3BLN)
GBP/USD: 1.2900 (150M), 1.2935 (178M), 1.3000 (240M)
AUD/USD: 0.6660-70 (1BLN), 0.6685 (700M), 0.6715 (1.1BLN), 0.6770 (1.1BLN)
USD/CAD: 1.3200-10 (1.2BLN)
USD/JPY: 140.00 (626M), 140.40 (658M), 141.00 (456M), 141.70 (350M)
EUR/JPY: 155.00 (350M), 157.50 (200M)

Options Market Positioning

FX option volatility risk premiums remain elevated as the U.S. dollar recovers lost ground ahead of this week's central bank decisions from the United States, Eurozone and Japan. One-week expiry options have been influenced by the Federal Reserve and European Central Bank decisions, contributing to the initial boost in implied volatility. Additionally, with the inclusion of the Bank of Japan in the one-week expiry, there have been significant gains in Japanese yen (JPY) related implied volatility and premiums for JPY calls over puts. This indicates that the market is not ruling out potential easing by the Bank of Japan, despite official rhetoric suggesting otherwise. The entire implied volatility curve for EUR/USD remains above recent lows, and risk reversals have recovered some downside strike premium. However, the barrier at 1.1300 remains challenging for EUR/USD to break through.