Market Volatility Slows as Summer Trading Activity Sets In
As is often the case, trading activity is seeing a marked slowdown as the end of the summer season draws near but stock markets and high yielding currencies as getting most of the benefit with small pushes higher. But the key going forward will be whether or not these small trends continue once markets return to full strength and a larger percentage of the trading community injects its bias into asset prices.
Ahead next week, the Euro could be one of the biggest market movers, as there is a great deal of marco economic data for analysts to assess. With the Euro currency trading at its lowest levels since the sub 1.20 drop seen in 2010, and whether or not this data comes in strongly will determine the general directional trading bias in equity markets as well. The key element, once again, is risk sentiment and investors will be looking to find reasons to buy European assets (both the currency and regional bank stocks) at these historically inexpensive levels.
But to get a sense of where markets are at the moment, it should be noted that trading volumes in this last week slowed to its lowest non-holiday levels in nearly 15 years. Trading activity does tend to slow in the summer months but volumes that are this light will bring any rally (or decline) into question. To get a better sense of the markets current tolerance for risk, we might need to wait until Fall rolls around and trading conditions could be choppy until that point. Currency volumes, however, can be viewed as slightly more credible, as the trading volumes in the Euro are only trading at their lowest levels since the middle of 2009.
Next Week’s Market Sensitive Macro Data
As investors begin to move away from the possibility that we will see a financial collapse in the Euro zone, specific data releases will start to take on a higher level of importance. Next week, most of the key releases will come at the beginning of the week, with advanced second quarter GDP out Greece likely to get most of the attention. Greece is still viewed as the Euro area’s weak link but any positive surprises in this number will likely bring about news headlines that the monetary union will remain intact. Currently, markets expectations are for a very weak number (an annual productivity drop of 7 percent), so it will not take much to create a positive surprise.
We will also have GDP figures out of Portugal, Germany, France and the Euro zone as a whole. Second data will include the German ZEW survey, so we are definitely in for some key developments in the region next week. Stock traders should expect positive numbers to affect global equities as a whole, so expect some strength in the S&P 500 and the FTSE if these numbers come in above market expectations.
The EUR/USD continues to be caught in a significant downtrend channel on the daily charts and this is suggestive of further downside pressure but when we pull out to the weekly charts, we can see that massive support can be found not far off at 1.1870. With this in mind, traders will be looking to buy back into the psychological 1.20 level, as downside from there look limited.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.