ISM above expectations…

The US ISM industrial activity index surprised to the upside with a reading of 55,6 pts., instead of expected 52 pts. and up from 53,5 pts. in May. Make no mistake – the data doesn’t mean there are no risk to the growth – subindices of production, new orders and exports were at 54,5 pts., 51,6 pts. and 53,5 pts. whereas just two months ago they all were comfortably above 60 pts. Also, activity indices in other major economies – starting from Japan, through China, through euro zone, through Switzerland, through UK, they all were declining, sending a clear message – the global growth is slowing down due to too high oil prices.

However, a mere fact that the ISM remained around 55 pts. rather than diving below 50 pts. (as NY and Philly Fed suggested) is a good news as it says that while we’re still on the soft-patch, this patch doesn’t necessarily lead us back to the recession.

…but the good news priced in

While the news is good, the bulls went on an euphoric run last week, that might have led us too high too fast. Indeed, the S&P500 futures within a week recovered an impressive 70% of a decline that lasted 2 months. With risks to the growth still there and no chance of further monetary (or fiscal) stimulus, bulls might find it hard to continue their rally.

Technically, however, the bulls are free to charge towards resistances: 1347 pts., 1358 pts. and the key one (’11 highs) 1372 pts.

EURCHF – a strong reversal

Last week brought about a strong reversal on the EURCHF as euro benefited from the votes in Greece. We are still far from optimistic on Greece: austerity may reduce a present deficit but does little to spur economic growth and thus doesn’t get us much closer to solve the problem. However, high credit spreads on government debt of PIIGS have encouraged investors to take an advantage of at least a temporary improvement in sentiment. This, in turn, have helped euro against the Swiss franc – a process that might be continued until fresh worries arrive (which might be in some two months as the new package will need to be shaped). Speaking about EURCHF one might not omit the Swiss data – the PMI in June tumbled from 59,2 to 53,4 pts. suggesting that the franc might start to seriously bite into the Swiss growth.

Technically, June ended up with a hammer formation on this pair and a rally at the beginning of July is an early sign of confirmation. On the weekly, we had a bullish engulfment pattern. Both suggest a rebound to at least 1,28.

Events to watch – awaiting the US labor market data

The euro zone’s sentix index (4.30 ET, 10.30 CET, consensus 1,3 pts.) or the PPI (5.00 ET, 11.00 CET, consensus 6,3% y/y) are unlikely to impact the market significantly today. The RBA meeting (Tuesday’s Asian trade) carries a bit higher weight but with a virtually no chance for a move, the Aussie will look at global markets for directions. With the Greek issues likely moving out of the radar, the markets will await the key data from the US which are due on Thursday and Friday.

Przemyslaw Kwiecien PhD
Chief Economist
X-Trade Brokers Dom Maklerski S.A.
Przemyslaw.kwiecien@xtb.pl