US equities indices edged a little bit higher on Friday despite mixed corporate earnings while European equities ended the day practically unchanged despite the fact that European Flash PMIs for July were better than expected. The USD was stronger across the board with GBP the biggest loser on the back of soft PMI data, core global yields were little changed and in commodities, base metals and oil were softer.

Under a light-trading environment, the S&P500 gained 0.5% on Friday climbing to 2175.03, a new record. The Dow Jones ended 0.3% and the NASDAQ was 0.5%. Honeywell International posted Q2 revenue and profit gains, however it downgraded its revenue outlook for the year. GE shares ended the day under pressure, falling 1.6%, the company reported better than expected earnings, but it noted a gloomier outlook given the current volatile and slow growth environment.

Softer than expected July UK services (47.7 from 52.3) and manufacturing (from 52.1 to 48.7) flash Markit PMIs saw the UK centric FTSE 250 index drop 0.4% while the FTSE100 index climbed 0.5%, supported by the performance of export orientated companies as the GBP weakened.

Indeed, on Friday GBP was the G10 underperformer, falling 0.94%against the USD. Markit noted that the decline in UK activity was consistent with GDP shrinking at a quarterly rate of 0.4%. NZD/USD was the best performer ending the day basically unchanged. The AUD/USD ended the week at 0.7462, 0.44% lower after trading to an intraday high of 0.7485. The EUR/USD also lost 0.44% with some of the losses recorded following the news of Munich shooting. Canada’s retail sales and CPI numbers were better than expected, helping USD/CAD move from 1.3109 to 1.3057, however as oil prices soften later in the session, the currency pair recovered, ending the day 0.3%. The Yen lost a little bit of ground against the USD (-0.29%) and NOK was also under pressure (0.69%) on the back of softer oil prices.

Core global yields had a quiet and mixed night. 10y Bunds ended the week 1.2bps lower at -0.03% and 10y USTs rose 1bps to 1.57% after reaching an intra night high of 1.590%. 10y UST are now just over 20bps from the lows reached early in July, but they are well below their pre Brexit level (1.747%) reflecting a still high level of uncertainty on the global economic outlook.

As for commodities, oil prices ended the week a little bit softer with WTI down 0.3% to $44.26 and Brent down 0.4% to $45.74. Renewed over supply concerns, this time from Asia, dragged prices lower. Iron Ore dropped 2.27% on Friday, effectively reversing all the previous days gains. Base metals in general were also softer with the LMEX index falling 0.79% on Friday to be down 0.70% for the week.

Corelogic RP weekend auction update shows the auction market remains firm with combined capitals clearance rates above 70% for a third week in a row. Sydney preliminary clearance rate was 75.3% rising from 74.9% prev. while Melbourne had a clearance rate of 72.4% compared to last week’s 76.1%.

Policymakers from the G20 economies said on Sunday that a) They recognise excess capacity in steel and other industries is a global issue that has had a negative impact on trade and workers and which requires a collective response b) They would resist all forms of protectionism while also reiterating that excess volatility and disorderly movements in exchange rates could have adverse implications on stability C) They are well positioned to proactively address potential economic and financial consequences of Britain’s decision to leave the EU.

Coming Up

Monday is likely to see a quiet start to what could potentially be a big week for markets. As for today’s events Japan’s trade balance (June) and the German Ifo survey (July) tonight are the two data highlights (there is also a non-public speech from RBNZ’s Wheeler tonight).

Ahead of next week’s RBA meeting, Australia’s Q2 CPI report on Wednesday will be crucial for RBA rate cut expectations and the AUD. Market consensus has the Q2 CPI at 0.4% q/q for both headline and underlying inflation. In contrast, NAB sees headline inflation at 0.7% q/q while underlying inflation at a low 0.5%qoq. An outcome that we assess would be sufficient for the RBA to be on hold.

Meanwhile the US FOMC meeting on Wednesday and Q2 advance print on Friday will be critical for the stronger USD story that has been evolving over the past two weeks. The market will also be watching headlines in Japan for any news on the government stimulus plan. The BoJ meets on Friday and while expectations are that the bank will eventually ease policy together with the government, if we don’t have a fiscal announcement before Friday, then there will be an increasing chance of a BoJ disappointment

Overnight

On global stock markets, the S&P 500 was +0.46%. Bond markets saw US 10-years +1.03bp to 1.57%. In commodities, Brent crude oil -0.97% to $45.74, gold-0.7% to $1,322, iron ore -2.3% to $55.87. AUD is at 0.7462 and the range since Friday 5pm Sydney time is 0.7444 to 0.7484.

Good luck

For full analysis, download report:

•  Markets Today:  25 July 2016 (PDF, 89kb)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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