Portugal alarms market into panic state

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Fundamental outlook

 

THE US job market has resumed its traction forward in recovery. Portugal has roiled the market’s confidence after its subsidiary member fails to pay short-term debts. The market recovered after Banco Espirito Santo SA justified their reserve buffer, following the regulatory requirement. Pound slowed down in ascension after reaching a five-year high record.

The US consumer credit rose in May by US$19.6 billion after following a revised US$26.1 billion gain in April. Stronger employment is still the main source of the gain in borrowing though data has declined. Jobless claims declined by 11,000 to 304,000 in the week ended July 5 as job market resumes its gradual recovery.

US government had posted a US$70.5 billion surplus in June compared with US$116.5 billion excess a year earlier. Data revealed the tapering effects of stimulus withdrawal which is targeted to be completed by year-end.

The Federal Open Market Committee (FOMC) minutes released in June stated that the interest rate on excess reserves deposited by banks with Federal Reserve should become an important tool for an exit from stimulus. Meanwhile, policymakers are moving towards utilising a new main tool to benchmark monetary policy as they exit the remaining US$35 billion stimulus.

Japan’s machinery orders dropped 19.5 per cent in May as large companies tighten their capital spendings. Yen began to strengthen against dollar as investors lose confidence in Bank of Japan’s (BoJ) policymaking. Some market analysts are betting for Japan to return to deflation as the economy is seen as slowing down again.

German industrial production, after adjusted for seasonal swings, slid 1.8 per cent from April and dropped for the third month as economy stalls. The 18-nation euro-area economy grew just 0.2 per cent during the beginning of the year, compared with an expansion of 0.8 per cent in Germany. European Central Bank (ECB) has warned that a prolonged period of low inflation could hamper the recovery.

ECB pesident Mario Draghi has repeatedly said the ultra-loose monetary policy is not sufficient to reverse the ailing economy into recovery if governments backslide. He favours the more-centralised powers as these powers should be erected to push various governments to conduct restructuring of their countries economic reforms.

After mid last week, Portugal’s 10-year bond yield jumped 21 basis points (bps) to 3.97 per cent. The second largest lending bank in Portugal; Banco Espirito Santo SA, saw one of its subsidiary member facing difficulty in paying short-term debts. Subsequently, it triggered an sudden sell panic in European and US stock markets.

Fortunately, Banco Espirito Santo SA has reassured investors by revealing its transparencies to related companies. The lender also announced that it has 2.1 billion euro buffer above the regulatory minimum requirement following a capital increase in June.

UK manufacturing unexpectedly slumped in May by the most in the past 16 months. Factory output plunged 1.3 per cent from April, the most since January 2013 and the first decline in six months.

Before the weekend, pound retreated after reaching its five-year high record at 1.717 against the dollar as growth has been struggling to keep up with the pace analysts’ estimate.

 

Technical forecast

 

US dollar/Japanese yen has come to test the crucial support at 101 levels on Friday. Technically, it is essential to observe this market for coming week because the trend may effectively break below 101 supports for a new bearish sentiment or reverse up from central bank’s salvage. We foresee that the market intends to test the ‘Abenomics’ theory by aiming to dive at 100 benchmarks. However, investors show waning confidence in recovery.

Euro/US dollar traded in a narrow range around 1.36 areas last week. The whole trend still lingered inside 1.35 to 1.37 range with no clear sign of direction or trend.

This week, we suggest observing fundamental news in European debts in case of additional financial routs which might devalue the euro currency.

British pound/US dollar fell off its recent high at 1.7180 and settled at 1.71 regions before the weekend. Technically, the trend has shown exhaustion although buying interest still emerges at 1.7 benchmarks.

This week, we reckoned that the market will consolidate by trading sideways from 1.7 to 1.718 regions until it gathers strength to march higher again. Abandon your long-view if the trend breaks below 1.7 supports.

 

Disclaimer: This article was written for general information only. No liability by the writer or newspapers. Dar Wong is an approved fund manager in Singapore with 25 years of trading experience in global Derivatives & FX markets. He can be reached at [email protected].