Economic Activity Remains Mixed

Daily Analysis - 28/07/2015

The Unclear Trajectory of Economic Data Increasingly Difficulty in Making Policy Adjustments

While headline numbers remain positive for many important economic metrics, a deeper analysis of the aggregated components shows that certain areas of activity remain dangerously weak, beckoning the possibility of another recession and potential global downturn.

Durable Goods Revised

The headline durable goods orders data released yesterday showed a surprising bounce after multiple soft prints in prior readings. However, a closer look at the figures showed that the number ex-transportation continues to slump, contracting for almost 5-straight months as economic activity remains below-trend. Capital expenditures continue to bear the brunt of the losses in the numbers, in-line with developments already evident in large corporations which have reduced investment and spending on longer-term assets. Despite the stronger headline figures which saw core durable goods orders rise 0.80% and the regular figure inclusive of transportation and defense grow 3.40%, stocks continued to give ground with the S&P 500 breaking a critical uptrend line that has been intact since the depths of the last financial crisis. This could indicate the beginning of a larger correction and reversal lower in the US benchmark ahead of the perception of upcoming monetary policy tightening.

China Slide Accelerates

Despite multiple interventions during the session, Chinese equity losses continue to mount as policymakers fail to restore confidence. After falling over -4.00% at the open, Chinese stocks were bid back to unchanged before another round of weakness overtook momentum higher, with the index currently down -2.00%. Despite comments from the People’s Bank of China highlighting the willingness of the Central Bank to do more to accommodate the economy, stocks remained unconvinced. The Central Bank plans to continue cutting financing costs and interest rates in order to keep the growth engine intact for the broader economy. Nevertheless, with over 200 stocks trading limit down and halted at the open and coupled with increasing scrutiny of sellers is making the Chinese equity markets increasingly risky for investors as ability to short or even sell shares is limited. While Shanghai continues to tumble, Hong Kong has managed to outperform with the Hang Seng rising 1.18%.

Crude Dump

Along with dumping exposure in other commodity classes, hedge funds have been rapidly closing out remaining long positions in crude oil as the market gears up for another round of downside. According to the Commodity Futures Trading Commission (CFTC), long positions in crude oil have fallen to two year lows while short positions have risen by over 25%. The adjustment has seen prices continue to trend lower ahead of this week’s critical inventory data which could show another build to inventories already sitting near 80-year seasonal highs. Momentum lower in crude prices is accelerating as output gains from the US, Iraq, and Iran force other established peers like Saudi Arabia to compete further on price to maintain market share. The spread between Brent and West Texas Intermediate has narrowed to just under $6 points after widening to nearly $8 point in the prior week.

EURJPY Equidistant Channel Technical Pattern

The Euro continues to trend higher as the dollar softens ahead of the FOMC decision tomorrow. The Yen carry-trades remain bid, with EURJPY benefiting from the strength in the Euro as the pair continues to trend higher on the approach of another round of Greek negotiations with the Troika. The equidistant channel pattern emerging in the EURJPY currency pair has a bullish bias with ideal positions initiated at the lower channel line targeting the upper channel line. However, should stocks continue to edge lower, it could see momentum higher in the pair start to cool, potentially seeing the EURJPY pair break lower. A move below the lower channel line could potentially indicate a channel-based breakout to the downside to be accompanied by renewed momentum and volume.