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Weekly Market Review 29/06 – 5/07/2015

Stormy Thursday Ahead

This week, there are numerous economic releases due out from both sides of the Atlantic. Yet none are more important than two key releases coming out on Thursday. To say that there will be some tension in the markets in the days ahead would be an understatement. Each release, alone, would surely be enough to give an investor jitters. But together? Well, we’re talking about Richter-scale reading jitters. Either or both of those releases could set the stage for choppy trading. Investors on Wall Street and in the FX arena, primarily around the Euro and US Dollar, are likely to be extremely wary ahead of the news. But the question is will investors need to batten down the hatches? First on Thursday’s agenda is the ECB monetary decision which will dominate sentiment for the already embattled Euro. Then, across the pond, we have the US Non-farms Payroll release which will dominate US Dollar sentiment and perhaps, Wall Street.

Mario and the Greek Tragedy

First up on Thursday is the ECB policy decision and Mario Draghi’s customary discussion after the formal announcement. Though nothing can match the excitement of the lone protestor who interrupted April’s press conference, there is, of course, the ongoing Greek drama.  For the most part, analysts don’t expect any major shift in policy and any discussion is likely to be run of the mill. However, Draghi will surely be strapped into the hot seat and grilled on the ongoing Greece saga.

Recently, the ECB has been shoring up Greece’s banking system by providing emergency funding in the wake of a “run” on Greek banks. Over the last eight days, the ECB has increased Greece’s funding ceiling four times as deposit outflows accelerate. Draghi recently warned the Greek Prime Minister that emergency funding for the Greek banking system would be provided, but only if certain conditions are met. Primarily, that the Greek government comes to terms with its creditors and quickly reaches an aid accord. The real concern is that that accord won’t be quick enough. That begs the question just how long would the ECB be willing to continue to provide emergency liquidity?

NFP to Spell Rate Hike?

Early in June, it was reported that May’s US Non-farms payrolls rose by 280,000, beating expectations handily by some 55,000 new jobs. Given the relative improvements in the NFP figures over the past few months, there is growing hope that it would give the Fed some reassurance. The Federal Reserve has a dual mandate of price stability and full employment; the recent improvements in the labor component could be enough to sway sentiment among the FOMC members. Experts and analysts are generally of the consensus that the string of improved numbers is a good sign of a rebound in the US economy. If that string continues it could result in raised expectations of a Fed rate hike. In the absence of that, i.e. new jobs not meeting the consensus, it would likely be seen as a setback which might leave the FOMC on the fence for yet another month. While for the FX arena it could mean a US Dollar still feeling the pinch, Wall Street bulls would not be disappointed. The Fed’s current ultra-loose policy has been nothing if not a boon for Wall Street investors.

 Down to Business

The combination of those two major market moving events is undoubtedly deadly with the FX arena undulating like choppy water as we near Thursday. With possible shockwaves from both sides of the Atlantic, volatility around the EUR/USD is expected to be especially elevated. If Draghi shows a willingness to help the Greek banking system while NFP undershoots, the EUR/USD could bounce back. But if the NFP beats expectations, unless Draghi transforms to a hawk from a dove, the impact will mostly favor the US Dollar. And as for Wall Street? A rate hike between September and December is already baked in; anything that will cause those expectations to be postponed could provide some tail wind to US indices.

On the plate

UK Inflation hearings( Tuesday)- Will shed light on the UK’s inflation outlook. Any upgrade to the inflation outlook would favor the Pound and vice versa.

ISM Manufacturing (Wednesday)-  Would provide a reality check on the US manufacturing sector.

ECB Rate Decision(Thursday)- One of the two major events of the week, if the ECB voices an upbeat down it could favor the Euro and vice versa.

Nonfarm Payrolls(Thursday)- The main even for the dollar and one of the two market moving events of the week. If the NFP beats estimates , the dollar could gain bullish momentum.

Chart of the Week: Oil

Oil Weekly Chart

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