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I. Market focus:
The resignation of the UK’s Brexit Secretary David Davis was the main news in the global financial markets at the beginning of the new week. At the end of last week, it became known that Britain’s cabinet headed by Theresa May agreed on a collective position on future negotiations with the European Union (EU), according to which it was proposed to create a free trade area. The markets positively reacted to the fact of overcoming differences within the UK cabinet on trade and customs issues, but Davis’ quit revealed that these differences apparently were not resolved. According to media reports, the reason the third minister exited the UK's Brexit department was the disagreement with the position of the country's prime minister, who advocated maintaining close economic relations with the union. Although Davis's exit pointed to the lack of cohesion in the UK’s government, it also supported the pound, since most ministers now support a "soft" Brexit, which is considered to be less harmful to the British economy.
The main scheduled events of the first day of the new week will be the comments of the ECB president Mario Draghi, who is supposed to appear twice before the European Parliament. At 13:00 GMT, he will speak about the situation in the economy, monetary policy and virtual currencies. At 15:00 GMT, he will answer the questions from members of the European Systemic Risk Board (ESRB).
II. The market highlights are:
Statistics Canada reported on Friday that the number of employed people rose by 31,800 m-o-m (+0.2 percent m-o-m) in June, beating economists’ forecast for a 24,000 increase and after an unrevised drop of 7,500 in the previous month. Meanwhile, Canada's unemployment rate increased by 0.2 percentage points m-o-m to 6.0 percent last month, while economists’ had forecast the reading to remain unchanged. That was the highest jobless rate since October of 2017. According to the report, full-time employment increased by 9,100 (+0.1 percent m-o-m) in June, while part-time jobs surged by 22,700 (+0.7 percent m-o-m). In June, the number of private sector employees was little-changed m-o-m (-2,000 or 0.0 percent m-o-m), while the number of public sector employees rose by 11,800 (+0.3 percent m-o-m). At the same time, the number of self-employed boosted by 22,000 m-o-m (+0.8 percent m-o-m) last month. Sector-wise, there were more people working in natural resources (+3.8 percent m-o-m), construction (+1.9 percent m-o-m) and manufacturing (+0.7 percent m-o-m). At the same time, employment decreased in accommodation and food services (-1.3 percent m-o-m), and in agriculture (-2.2 percent m-o-m).
Another report from Statistics Canada showed that Canada’s merchandise trade deficit stood at CAD2.77 billion in May, widening from a revised CAD1.86 billion gap in April (originally a CAD1.90-billion deficit). Economists had expected a deficit of CAD2.05 billion. According to the report, the country’s exports edged down 0.1 percent m-o-m to CAD48.34 billion in May, mainly due to declines in exports of motor vehicles and parts (-3.6 percent m-o-m) as well as metal ores and non-metallic minerals (-14.6 percent m-o-m), which, however, were largely offset by higher exports of aircraft and other transportation equipment and parts (+7.8 percent m-o-m), as well as forestry products and building and packaging materials (+3.1 percent m-o-m). Meanwhile, imports increased 1.7 percent m-o-m to a record CAD51.16 billion in May, with higher imports of aircraft and other transportation equipment (+17.7 percent m-o-m) as well as energy products (+4.4 percent m-o-m) contributing the most to the gain.
The Department of Commerce said on Friday the U.S. the goods and services trade deficit narrowed by 6.6 percent m-o-m (or $3.03 billion) to $43.05 billion in May from a revised $46.08 billion in April (originally a gap of $46.20 billion). That was the lowest trade deficit since October 2016. Economists had expected a deficit of $43.70 billion. According to the report, the May decrease in the goods and services deficit reflected a drop in the goods deficit of 3.8 percent m-o-m (or $2.58 billion) to $65.79 billion and an increase in the services surplus of 2.0 percent m-o-m (or $0.45 billion) to $22.74 billion. May exports were $215.33 billion, up 1.9 percent m-o-m, while May imports stood at $258.38 billion, up 0.4 percent m-o-m. Year-to-date, the goods and services deficit surged 7.9 percent y-o-y (or $17.90 billion). Exports rose 8.8 percent y-o-y (or $84.54 billion), while imports boosted 8.6 percent y-o-y (or $102.44 billion).
The Labor Department announced on Friday that nonfarm payrolls increased by 213,000 in June after an upwardly revised 244,000 gain in the prior month (originally an increase of 223,000). According to the report, employment rose in professional and business services (+50,000 jobs), manufacturing (+36,000), and health care (+34,700), while retail trade (-21,600) lost jobs. At the same time, the unemployment rate rose to 4.0 percent in June from 3.8 percent in May, which was the lowest rate since April 2000. Economists had forecast 195,000 new jobs and the jobless rate to stay at 3.8 percent. The labor force participation rate increased by 0.2 percentage point over the month to 62.9 percent, while hourly earnings for private-sector workers rose by 0.2 percent m-o-m (5 cents) to $26.98, after gaining 0.3 percent m-o-m in May. Economists had forecast labor force participation rate to come in at 62.7 percent and a 0.3 percent advance in the average hourly earnings. The average workweek was unchanged m-o-m at 34.5 hours in June, in-line with economists’ forecast.
The weekly report from Baker Hughes, which was released on Friday, showed that the number of active U.S. rigs drilling for oil rose by five to 863 during the week ended July 6. That gain followed two straight weeks of drops. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also rose by five to 1,052, as the gas rig count was unchanged at 187 last week, and the miscellaneous rig count remained at 2. The U.S. rig count is up 100 rigs from this time last year when it stood at 952.
III. Market Situation
The currency pair EUR/USD traded higher, near Friday's peak. The dollar remained under pressure due to Friday’s report on the U.S. labor market, which revealed that the economy created more jobs than expected in June, but earnings rose less than projected, and the unemployment rate unexpectedly increased. However, experts note that nothing in this report should force the Fed to reconsider its forecasts, and the regulator can continue a gradual tightening of its monetary policy. The persistent trade conflict between the U.S. and China remains a negative factor for the dollar as well. Today, investors will focus on the ECB president’s testimony before the European Parliament. At 13:00 GMT, Mario Draghi is scheduled to speak about the situation in the economy, monetary policy and virtual currencies. At 15:00 GMT, he will answer the questions from members of the European Systemic Risk Board (ESRB). Resistance level - $1.1851 (high of June 14). Support level - $1.1591 (low of July 2).
The currency pair GBP/USD rose sharply at the beginning of the session on the back of news from the UK, but then lost some of the positions it had earned. David Davis, a member of Theresa May’s cabinet, responsible for Brexit negotiations, unexpectedly resigned Sunday night. This key minister, who was actively advocating Brexit, left office after Friday's meeting of the cabinet, at which the plan for future relationship between the UK and the EU was approved. Nevertheless, Davis's resignation had a positive impact on the pound, as most ministers now support a "soft" Brexit, which is considered to be less harmful to the British economy. With an empty economic calendar in the UK ahead, investors will focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Later this week, the Office for National Statistics (ONS) will publish its first estimate of monthly GDP growth for May, and this, according to experts, will be the last obstacle for the Bank of England (BoE) to raise the rates, since it is expected that economic data in the summer will be quite positive. Resistance level - $1.3446 (high of June 14). Support level - $1.3204 (low of July 6).
The currency pair AUD/USD rose solidly, reaching a high of June 15, helped by the weakening of the U.S. dollar and rising prices for commodities, particularly copper. The U.S. dollar remained under pressure as the latest report on employment situation in the U.S. revealed weaker than expected earnings growth in June, which pointed to the fact that that the country's labor market might not yet have approached full employment. Weak earnings growth rates may cause some market participants to doubt whether the U.S. Federal Reserve will hike interest rates twice before the end of this year. Meanwhile, some investors may be just looking for a reason to take profits after the recent rise in the dollar. Resistance level - AUD0.7443 (high of June 22). Support level - AUD0.7310 (low of July 2).
The currency pair USD/JPY consolidated near the opening level, due to the lack of new drivers. The yen was also somewhat impacted by the statement of the Bank of Japan (BoJ) governor Haruhiko Kuroda, who stressed once again that the central bank would maintain its ultra-easy monetary policy until inflation hits its 2 percent target. Speaking at the quarterly meeting of regional branch managers of the BoJ, Mr. Kuroda said that the central bank would support the quantitative easing (QQE) program with Yield Curve Control (YCC) until inflation is stable above its 2 percent goal. He also noted that Japan's economy was expected to continue expanding moderately. Resistance level - Y111.13 (high of July 3). Support level - Y110.27 (low of July 4).
U.S. stock indexes closed solidly higher on Friday, as optimism over pleasing U.S. employment report for June offset the concerns over trade conflict between the U.S. and China. The Labor Department announced that nonfarm payrolls increased by 213,000 in June after an upwardly revised 244,000 gain in the prior month (originally an increase of 223,000). At the same time, the unemployment rate rose to 4.0 percent in June from 3.8 percent in May, which was the lowest rate since April 2000. Economists had forecast 195,000 new jobs and the jobless rate to stay at 3.8 percent. The labor force participation rate increased by 0.2 percentage point over the month to 62.9 percent, while hourly earnings for private-sector workers rose by 0.2 percent m-o-m (5 cents) to $26.98, after gaining 0.3 percent m-o-m in May. Economists had forecast labor force participation rate to come in at 62.7 percent and a 0.3 percent advance in the average hourly earnings.
Asian stock indexes closed higher on Monday, tracking Wall Street's gains on jobs report. However, investors continue to worry about escalating trade tensions. The U.S. tariffs on $34 billion worth of Chinese goods went into effect on Friday, and the Chinese government responded with tariffs of equal measure.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 2.84% (+2 basis points)
Yields of German 10-year bonds hold at 0.30% (0 basis points)
Yields of UK 10-year gilts hold at 1.27% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in August settled at $74.19 (+0.53%). The crude oil prices rose moderately, driven by expectations of output disruptions in Libya and Canada, as well as the weakening of the U.S. dollar. At the same time, some pressure on the oil quotations was put by Friday’s data from Baker Hughes, which revealed the number of active U.S. rigs drilling for oil rose by five to 863 during the week ended July 6. That gain followed two straight weeks of drops. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also rose by five to 1,052, as the gas rig count was unchanged at 187 last week, and the miscellaneous rig count remained at 2. The U.S. rig count is up 100 rigs from this time last year when it stood at 952.
Gold traded at $1,261.20 (+0.47%). Gold prices advanced on the back of a broad weakening of the U.S. dollar. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell 0.23 percent to 93.82. Since gold prices are tied to the dollar, a weaker dollar makes the precious metal cheaper for holders of foreign currencies.
IV. The most important scheduled events (time GMT 0)
ECB's Peter Praet Speaks
Sentix Investor Confidence
ECB President Mario Draghi Speaks
FOMC Member Kashkari Speaks
ECB President Mario Draghi Speaks
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