US Equities Rally on “Dovish” Yellen”

Daily Analysis - 13/07/2017

Dow Futures Hit Fresh Record As Dollar Nosedives

US equities soared on Wednesday, with the Dow Jones Industrial Average climbing to a record peak as investors digested comments from Federal Reserve Chair Janet Yellen’s testimony. The Dow rose by 0.60% to claim its first new closing high since June 19^th as the S&P 500 and Nasdaq Composite also notched significant gains.

Two US Rate Hikes Grow Increasingly Unlikely

Yellen took a more dovish tone than was widely anticipated during her testimony before the Congress on Wednesday, emphasizing the Central Bank’s objective of gradually normalizing monetary policy. In addition, she expressed a degree of optimism about the state of the US economy. Specifically, Yellen said interest rates did not need to rise much higher to achieve the Bank's monetary policy goals.

Following the latest speech, the likelihood of a September rate hike has been greatly reduced, with most economists now anticipating action during the December FOMC meeting. However, she did highlight the potential for tightening in the form of balance sheet reduction which may eventually prove negative for risk assets like stocks. The tech-focused Nasdaq added 1.10% to end the previous trading session at 5799. Given the technical backdrop, the index could rally towards immediate resistance at 5850.

Chinese Exports Top Forecasts

Exports out of China grew for a fourth straight month in June, as overseas demand for goods manufactured in the world's second-biggest economy remained strong. On a yearly basis, exports increased 11.30% compared to the 8.70% recorded in May according to a report from the Chinese General Administration of Customs released overnight. Imports rose by 17.20% through the 12-months ended in June from a year earlier versus a 14.80% expansion in May.

The imports growth was larger than economists’ forecast for a 12.40% gain. Despite import growth outpacing the export figure, the overall trade surplus figure widened to $42.77 billion in June from the $40.81 billion a month earlier. AUDNZD, which is prone to fluctuations in Chinese economic data, is down in Thursday morning trade to currently hover around 1.0560.

UK Unemployment Reaches Lowest Point Since 1975

For the three months through the end of May, UK unemployment fell to a 42-year low, underlining the positive impact of accommodative policy measures. However, in a disappointing development, inflation adjusted wages declined for the third straight month, indicating Britons were experiencing a squeeze in living standards despite a robust labor market. The jobless rate in the period between March and May slipped to 4.50%, the lowest level since 1975, trailing the average forecast of 4.60%.

An even more concerning aspect for Prime Minister Theresa May and her new government is -0.50% decline in real wages for the three months through May as consumer prices grew at a faster pace than earnings. EURGBP has rebounded from the strong support at 0.8840 to last trade around the 0.8850-mark.

US Crude Inventories Drop the Most in 10 Months

Official government data delivered on Wednesday revealed a sharp decline in domestic crude supplies for a second consecutive week. The US Energy Information Administration reported a 7.60 million barrel decline in stockpiles during the week ended July 7^th, topping a forecast for a drop of 2.60 million barrels by analysts polled by S&P Global Platts. This follows a 6.30 million barrels contraction recorded just a week prior. In a positive sign for the persistent surplus, crude supplies dropped below the key 500.00 million barrel-mark for the first time since late January.

However, one interesting development that was largely overlooked was US production hitting a new cycle high of 9.397 million barrels per day. WTI crude futures added a percent on Thursday to settle at $45.43 a barrel, with prices hovering around the same levels in early Thursday trade.