This article will give traders a fundamental view and technical analysis of some major economies. Fundamentals move the markets. Therefore, traders must keep up with what is happening. A clear understanding of fundamentals allows a retail trader to be on the same page with institutional investors. We will be covering the US, Australia, China, Europe, and Brent crude.
The United States
The United States economy has contracted again with two consecutive quarters of negative GDP. The January quarter GDP release substantially declined by 1.6% followed by a decrease of 0.9% in the second quarter. A recession is defined as two consecutive quarters of negative GDP. Therefore, should we conclude that the US economy is facing a recession? if there is a recession has it impacted the labour market? In terms of the labour market, the main indicators are signalling a robust job market and the effects of the economic slowdown are still to be felt. In recent months, the federal reserve has been trying to rattle the markets by increasing interest rates to offset the higher inflation. Inflation has been at levels never seen in decades. The federal reserve's actions are necessary for bringing inflation down to 2% from a multi-year high of 9.1%.
The federal reserve is mandated to maintain a 2% inflation, price stability, and maximum employment. During the June FOMC statement, chairman Jerome Powell said the job market was flourishing and the rate of unemployment is at lower levels. The previous unemployment claims also showed a decrease of 5,000. Janet Yellen has also been complimenting the resilience of the US economy. The fear of a recession presents great opportunities for those that adopt a hedging strategy. As a reaction to the recessionary fears, the US equity market has been experiencing a lot of volatility. crypto assets and gold have experienced declines in price as investors are risk off and seeking a haven. At the time of writing this article, gold has made a significant move from the low of $1681 to the $1776 price level. The move helped to erase some losses that were printed in the previous week.
In the short-term, gold has the potential of moving past $1800 and hitting $2000 in the longer term. Bitcoin has erased some of its losses and moved from $18,500 to $23,700. Alternative coins such as Litecoin and Ethereum also experienced a surge in price. The unemployment rate has been low and the PMI averaged 54.06, which signals an industrial sector that is expanding and the manufacturing sector that is in good health. The market has been paying attention to Nancy Pelosi's visit to Taiwan, but the market reacted mildly to the possible escalation of war between the US and China. Beijing has been executing live munition drills and sending ships to surround Taiwan. China has also announced some trade restrictions with Taiwan and some direct fixed investments have been halted as a result of Pelosi's visit. The US has sent four warships to Taiwan as a response.
On Tuesday the 10-year yield increased by 70 basis points and it helped lift the dollar from two months' lows. The JOLTS report for June confirmed the slowing down of the labour market. Jobless claims' 4-week moving average stands below the 250k Mark. The jobless claims bottomed in March when the federal reserve started the rate hiking cycle. The job openings have been on a decline since. This information signals a downside risk for the jobs report on Friday. On the other hand, the federal reserve is still on a tightening cycle. The rate futures are pricing in a 1% in the rate increase for the remainder of the year. That will bring the policy rate target to 3.25%-3.50%. The EUR/USD has been trading in a range since the 20th of July on a 4-hour chart. The range extremes are at 1.0250 and 1.0180. Breaking one of the extremes might set us on a swift movement in either direction.
If the market accepts trade above 1.0270, we can expect an upside target of 1,0350. 1,0350 is strong resistance and that's where we can look for signs of acceptance or rejection of the level. A break above 1,0350 will see us visiting another key level of 1.0620. A break below 1.0100 can see the EUR/USD testing the parity levels. The consensus is bullish with caution.
Traders should also put Brent crude on the radar, with the OPEC+ meeting due soon. With recession concerns and the contraction of the Chinese PMI, demand growth is still expected to remain high. Analysts are anticipating a demand growth of 1.7 million barrels a day next year. That said, some analysts might argue and say there is a downside risk to that call and it is a factor OPEC+ will put into consideration coming into their next meeting. Supply has been on an upward trajectory with Russia and Libya increasing their output. The production cuts that were implemented during the pandemic have been undone and this brought the price of crude lower.
The data from the European Central Bank has confirmed the suspicions of the market. Officials have begun to draw on the flexibility that was discussed at the end of the last year, for the recycling of the returns of maturing securities purchased under the PEP program. The ECB gives this report every two months. In June/July the holding of Portuguese, Italian, Greek, and Spanish bonds appreciated by 17,4 billion euros. The euro system's holding of the Dutch, German, and French declined by 18,04 euros.
Most of the advanced economies are experiencing inflationary pressures, but the Australian economy has been experiencing them to a lesser degree. Recently, inflationary pressures have been gaining momentum. There is an imbalance in the labour market and wages are starting to increase as the firms compete for workers. The first quarter GDP contracted, but indicators are signaling growth in GDP for the second quarter, which means there is a lesser risk for a recession when compared with other advanced economies. The balance sheet of households in Australia has been very strong due to the high savings rate during the pandemic. Nevertheless, the outlook for consumption remained uncertain because of the increasing prices and decreasing house prices. The bond yields increased slightly in June and have recently experienced a pickup. The correlation between the Australian dollar and risky assets has been very positive. Therefore, with risk in markets, traders can look for buying opportunities.
The People's Bank of China has been implementing an expansionary monetary policy while the majority of the countries are on a tightening cycle. This has resulted in the rallying of the Chinese stock market while the yen has been significantly depreciating against the dollar. In recent days, some indicators have been signalling a slowdown in the Chinese economy and the markets are expecting a transition to a hawkish stance. The Chinese manufacturing sector has been indicating a slowdown.