Tick mill UK Daily Market Notes

[Tickmill-News]

High expectations on NFP as a platform for greenback rally

As I have previously suggested, the dollar seemed fundamentally undervalued and at the end of last week there was a correction after what could be called a ridiculous sell-off. Powell’s soft position and the lull on the tariff front only temporarily helped keep the focus on domestic factors of other major currencies, but on Friday the attention was drawn to the dollar again. The most likely reason for this is the looming deadline of the new Trump tariffs, a powerful source of inflationary pressure, which the Fed will likely need to curb by raising rates. Other world banks continue to lag behind in terms of tightening policies and consensus grows that best risk/yield ratio among major currencies is currently offered by the dollar.

 

On Friday, risk aversion spiked and capital poured into the dollar after Trump announced that he was ready for a deal with Mexico, pointing out that it was not possible to get around sharp angles in negotiations with Canada.

 

On Saturday, the US president said that NAFTA will be quite viable in the form of a bilateral deal, hinting that the “easy” end of negotiations with Canada was unexpectedly difficult. Attempts by Congress to ease Washington’s hard stance failed, because Trump threatened to break the treaty altogether. Nevertheless, the main threat to world trade comes from the tariffs of the US and China, which can reach a new level already on Thursday. Trump said he was ready to impose duties on Chinese goods worth $ 200 billion after the end of the discussion period.

 

The data on inflation in the Eurozone pointed to the growing gap in the need to raise rates between the ECB and the Fed. The basic indicator excluding goods with volatile prices rose by only 1% in August, almost half the target value of the ECB. Employment in the region for July lacked hints about higher inflation, remaining at 8.2%. Let me remind you that a decrease in unemployment often means a shortage of workers and accompanying inflation of wages, which is then transferred through spending to consumer inflation.

 

At the same time, data on consumer optimism from the University of Michigan, the Chicago PMI beat the forecasts without giving a reason to quibble to the impeccable growth of the American economy. Inflationary expectations for the year ahead were revised upward, from 2.9% to 3.0%, another signal in favor of consumer spending growth.

 

The report on activity in the manufacturing sector of Japan as a whole indicated stagnation in the sector, but it is interesting to analyze the reasons for this. The sector is mainly aimed at export, so Japan’s economic data on the manufacturing sector reflects the trend of protectionism in global trade. The data showed that export orders decreased, mainly due to the decrease in orders from China, one of the main partners in Japan. On the other hand, pressure on producers exerts an increase in cost inflation. In addition to energy costs, it is also the US steel tariffs, which through the supply chains also affect manufacturers. In this light, the Bank of Japan will have to support the sector through a weak yen, which reduces the chances of shifts in politics or even a change of rhetoric to meetings before the end of the year.

 

The pound made a failed attempt to trade optimism on Brexit, after reports from the EU’s chief negotiator about the “unprecedented” proposal for a deal with Britain. However, May continues to promote its “Chequers plan”, which is considered unsatisfactory by the EU. The glimmer of hope turned back into gloom after EU Barnier stated that he was against May’s proposal. Informal deadline for negotiations will be shifted from October to mid-November.

 

Emerging market currencies are prone to further decline, although losses on Monday were moderate. Their slump against the dollar is likely to continue because of new tariffs. The payrolls report for August represents a benchmark for the dollar this week and data for July allows us to form rather positive expectations about the US currency. The short-term goal for DXY – level 95.50 four days before the report, the strengthening of the dollar on Friday indicates that the main preparation for growth has already been carried out.

 

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

 

[Tickmill-News]

AUD is doomed for slump after dovish RBA

Asian markets kept sliding on Tuesday while the dollar remained stable as the markets are threatened by the escalation of conflict between the US and China and the problems of emerging markets. The emergency austerity measures taken by Argentina indicate an imminent crisis of fiscal policy as the state gradually halts the fulfillment of some of its crucial obligations.

 

Futures on the S&P 500 opened with growth on Tuesday, futures e-mini on the S&P 500 climbed above the level of 2900, indicating the brisk activity of bulls on US stocks at the opening of the New York session. Reallocation of capital continues to work in favor of the US, as the impeccable economic growth, the bullish Fed, record corporate earnings and the risk of flight of inflation make US assets one of the most profitable places for holding investments.

 

The euro is glued to the level of 1.16 from yesterday, the pound was fixed at 1.2870 after yesterday’s decline. The yen also slightly changed against the dollar. Industrial polls, published on Monday, indicated that European and Asian companies are accumulating stress due to a slowdown in global trade and lower export orders. Argentine President announced new fiscal restrictions that could help balance the budget next year. Export companies fell into a special disgrace, as the state introduced higher taxes on exports.

 

The Bank of Australia left the interest rate, which has been unchanged for 25 months in a row. The statement of the regulator contained almost no surprises in it saying that “further progress is expected to reduce unemployment and inflation to the target level, however this progress will be gradual.” Obviously, the regulator is trying to soften the effect of slowing down the activity in the Chinese economy, where Australia mainly exports raw materials. Yesterday’s Japanese production activity report showed that China had cut purchases from Japan, with Australia likely experiencing the same trend of deterioration. The RBA was more optimistic about wages but became less confident about capital investments. Comments on the real estate market and wholesale prices were identical to those in August.

 

In general, both comments and decisions were widely expected by the market as the market probability of a rate hike at the end of next year is at 30%. The discord in the monetary policy between the Fed and the RBA is likely to continue to put pressure on the Australian currency in the medium term, which lost nearly 10% against the US dollar for this year. After a brief upside move during the regulator’s announcement, the pair went into a rapid decline from the level of 0.7230 and in the light of growing problems in China, the main trading partner, serious support for bears is likely to be located lower, at the level of 0.70.

 

On Saturday, Donald Trump gave a new impetus to the anxiety associated with trade wars, saying that the presence of Canada in the NAFTA is optional and delivered an ultimatum to Congress if the latter interferes in the negotiations. On Thursday, we will find out about the fate of another threat to world trade – tariffs for Chinese goods. This is likely to happen, since the only thing that can stop Trump are problems in his own economy, which so far does not give cause for concern.

 

As a new risk factor for the euro and the pound is the growing likelihood of a hard exit of Britain from the European Union. Chances for such an outcome are now 25%. The negotiators on both sides are far from resolving contradictions according to the comments of both sides. However, it is worth paying attention to the sensitivity of the pound to hints of “soft Brexit”, so it’s worthwhile to short the Pound pairs cautiously. The bullish leap last week already proved this. As for the British statistics, it turned out to be a disappointment for traders. Retail sales grew weakly last month, but transaction data showed increased sales in pubs. The data did not have a noticeable impact on GBPUSD, which now depends more on the dynamics of the dollar.

 

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

[Tickmill-News]

US stocks market and Nash Equilibrium

 

Dollar pressure on major currencies mildly increased on Wednesday ahead of the Friday Payrolls release, while the data from US factories for August are rather optimistic. The warnings about the imminent crash of the US stock market are gradually being replaced with reports about the robust state of the economy and the solid footing of US firms. It is in such an atmosphere, when the stock market attempts to leave behind historical highs, “marginal buyers” should begin to appear in the US market. No, this is not a warning, because it is impossible to prepare for the “black swan”. But before it happens there is often a heavy imbalance in market expectations, which forms a critical gap between price and fundamental value.

 

In our case, for the American market, this disequilibrium is formed by the non-alternative position of the American assets relatively to the assets of other countries. The question, “where could I look for yields other than American assets?” has no clear answer. It seems to me that the situation resembles Nash equilibrium, where it is not advantageous for each participant to deviate from the choice when others do not, although the choice itself may not be the best one. Non-optimal choice, in the context of US assets, simply means the stock which significantly deviated from the fundamental value.

 

This can be represented as follows:

 (watch Media)

Two alternatives are presented, US assets and, let’s say, gold. Yield of the first is Rrisk, The second one is Rdef.

·       Rrisk. – The yield is higher than the yield of the safe heaven asset, but risk of its holding increases.

·       Rdef. – Yield of the haven asset, lower risk.

·       Stick – means a strategy to stick to investing in US assets,

·       Deviate – to deviate in favor of a defensive asset, which is now declining and therefore has a negative return on capital. For simplicity, the negative yield is taken as 0.

In the absence of coordinated actions, participants will remain in equilibrium Rrisk., Rrisk., Although the optimal risk/reward ratio could be provided in Rdef., Rdef. if both parties choose it. The transition from the first equilibrium is possible in case of collusion. By translating this into the market language, “collusion” is possible in the event of a shock, that is, the appearance of publicly available information that reveals the possibility of coordinating actions for transition to a new state. But the shock, as you know, is always unexpected.

Of course, the scheme is rather simplistic, but it seems to me that it can become another explanation of the nature of the shocks. For the United States such a surprise should obviously become a shock of domestic demand.

Let’s move on to the traditional part of market analysis.

In emerging markets, the plague continues to rage, but if the lira felt relieved, then the Argentine peso and rand would go into almost a free fall. Yesterday, Rand lost 3.2% against the dollar for the day, the maximum decline since November 2016, after the government announced that the country is in recession. Rand-nominated government bonds have fallen sharply, fiscal policy is under a threat, as is the case with Argentina.

The new tariffs for exports in Argentina as a measure for balancing the budget were perceived by the market as ineffective, since the end of last week, the currency has lost almost 24%. The Russian ruble against their background looks quite stable. The troubled countries will probably solve problems through IMF emergency loans. They are always unpleasant for governments, as they require structural reforms, fiscal discipline (often reducing social spending), which is always politically inconvenient for the authorities.

At the same time, manufacturing activity in the US rose to a maximum in 14 years in August due to the growth of new orders, but so far the driver remains exclusively domestic demand. The survey from ISM among managers in production warned that the peak had been reached, and in the coming months the export orders may fall due to a strong dollar. The factories also reported an increase in hiring, which is a good signal for Payrolls in August. The slowdown in production was also written off to labor shortage, this trend will soon prove itself in the report on Friday.

EURUSD is expected to stabilize around the level of 1.15, the pair may fall to this level thanks to the news of new tariffs tomorrow. The further trend will be set, in fact, by the unemployment report.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

 

[Tickmill-News]

Smooth US-Canada talks can wake up big dollar bears

 

The dollar is erasing gains after the strong performance at the start of this week on reports that the US and Canada are back on track to complete the NAFTA negotiations. The search for trade-offs can continue even tonight, the Minister for Foreign Affairs of Canada said.

A wave of investors has recently been ebbing to US shores on signs of a deadlock in US trade relations with partners. In turn, any news about the resolution of trade divisions is working now as a signal to search for yields somewhere outside the United States.

Minor changes in the trade balance in July played into Trump’s favor, because he often uses the trade deficit as the main argument in the debate about fair trade with US partners. In particular, the lack of improvements in trade with Canada will allow Trump to again blame the neighbor in protecting its own exporters. Nevertheless, the president chose a softer tone in relation to Canada on Wednesday, “wondering” whether there is an opportunity to include a neighbor in the agreement in the coming days.

As for China, a favorable outcome is not yet foreseen. Trump said that the United States is not yet ready to come to an agreement but will continue negotiations with the major trading partner.

After two attempts to break through the level of 95.50 on Tuesday and Wednesday, DXY returned to around 95.00 on Thursday, bracing for the NFP report. There is a serious possibility that before the weekend the dollar can start to price in a positive outcome for NAFTA, that is, continue the decline. If data on wages tomorrow are not as expected, it will add a negative to the US currency. Upbeat data is likely to be discounted since expectations on the economy are already too high and therefore the increment in optimism towards dollar won’t come easy. We expect DXY to decline to 94.00 – 94.50 at the end of the week.

The API data showed a drop in inventories for the third week in a row, but WTI continued to fall as the market expected larger decline. Commercial crude oil reserves decreased by 1.17M barrels with a forecast of 2.9M, Cushing stocks increased by 613K, almost coinciding with expectations of 600K. Stocks of gasoline and distillates also increased, as the demand for fuel grew less than expected.

Storm Gordon passed by without hampering extracting and refinery operations in the Gulf of Mexico, but about 9% of the drilling capacities, stopped as a precaution, are still idle. At the same time, the discount for oil from the Permian basin has risen to record levels, pointing to an oversupply from working rigs in the region.

Despite the sanctions against Iran, which can reduce world oil supplies by 1M barrels, traders remain concerned about the development of the trade dispute between the US and China. In addition to the fact that this may slow down the growth of the world economy, China’s inability to respond to dollar-to-dollar tariffs, will lead to blows of “surgical accuracy” against the US. One such measure, a 25% tariff for the import of liquefied gas from the US is being considered, which will be a politically inconvenient consequence for Trump trying to make the US one of the main players on the world energy market.

 

In addition, some specific US gas production projects require Chinese funding, and China can hit the brake pedal in this regard. Therefore, despite expectations of a significant decline in the world supply of oil, prices are reluctant to grow, trying to assess the consequences of trade wars. In the short term, prices will have to respond to the warming of relations between the US and Canada. According to this, today and on Friday it is reasonable to consider calls on WTI from the level of 68.40- 68.30

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

[Tickmill-News]

US Payrolls may have prepared a downside surprise for you

 

The dollar edges lower on Friday as expected, the calls for strengthening are likely to stop acting as there are no big hopes for the NFP report. Job growth in the US is likely to have accelerated in August, unemployment is expected to fall to 3.8%, which is the lowest in 18 years. As I said yesterday, expectations for the US economy are already too high, so an increment to positive mood won’t come easy and the dollar is harder to surprise with good data.

The labor market is likely to have increased by 191K jobs compared to 157K in July, according to Reuters. Fiscal stimulation helped the US economy to turn on its key driver – domestic consumption, paying little attention to the trade wars with a number of trading partners – China, the EU, Canada, Mexico, Turkey, etc.

However, tariffs affected only part of the US economy. Among the exporters, the soybean producers were particularly affected due to China’s retaliatory tariffs. In July they were forced to reduce prices by 14% for their exports. US agricultural sector was the primary target of response measures because of their fragile position in the world market and low added cost. The White House were forced to intervene and provide help to the sector.

On the other hand, tariffs for aluminum and steel marked the “revival” of the American steel industry. One of the signals to this was the growth of hiring in the industry. The data on the Challenger job cuts showed that the loss of jobs directly related to tariffs was 521 jobs, but most were offset by the increase in hiring by steel producers.

Seasonal quirk in August is likely to be priced in expectations on payrolls. Job growth in August has been coming below the consensus for the previous seven previous years, but the revised data in September usually turned out better. Weakness in August is usually observed in such industries as the production of goods, professional services, retail, so their less than expected contribution to jobs can be ignored by the market. According to Goldman Sachs, seasonality can result in a loss of 40K jobs.

 

The rumors about the Fed’s active intervention in the economy can be left aside, as long as the growth of wages remains moderate at 0.2-0.3%. A sustained rise in wage growth above these values (for example, 3 consecutive months) will become a signal for higher inflation, which will force the Fed to reconsider the trajectory of rate hikes. In August, the wage indicator is expected at 0.2%.

The indicator of jobs from ADP did not meet expectations yesterday, indicating an increase by 164K jobs instead of 200K. However, the data on unemployment benefits, both initial and continuous, were better than expected almost throughout the entire August.

Verdict: Payrolls will probably come below the projection of 195K, wages at an unchanged level of 0.2-0.3%. Back to tariffs speculations.

An interesting note came from the Fed official Charles Evans who noted that the interest rate may have to be raised above the neutral level, though for a short time. Evans believes that the neutral level is at 2.75%, but apparently, he has information on a slightly higher inflationary pressures in the future, which should be restrained by a more aggressive rate hike. There is no indication that the market tried to price in this information in the dollar, but this can be a good handle for speculation.

News about NAFTA agreement continue to warm up the appetite for risk from investors. On Friday it became known that a number of disputable issues had been resolved, but there are still several issues on which the negotiators cannot come to an agreement. For example, these are quotas for milk for export to the US, the possibility of acquiring Canadian media and the procedure for resolving trade disputes. An official from the White House said on condition of anonymity that despite the progress, there is still a risk that Trump will refuse to include Canada in the deal.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

[Tickmill-News]

NFP review and some notes about the ECB meeting due this week

 Surprisingly, the greenback was offered support from the economic front on Friday, after the unemployment report confirmed the firm tread of the US economy. However, the systematic reassessment of job creation in August, according to data for the past seven years, convinces us to look at the revised data in September to get a more accurate picture of the labor market.

Some investors expected to see how the economy felt the icy breath of tariff wars, but strong domestic demand has so far successfully leveled these fears in market sentiment. Below are the key points of the report:

– The unemployment rate remained at 3.9%, the number of new jobs was 201K, slightly exceeding the forecast of 195K;

– A much more important point of the report was wage growth, which grew by 0.4% almost double from the forecast. In annual terms, wages have changed by 2.9%. This speaks in favor of a more aggressive Fed monetary stance, since accelerating consumer inflation is usually preceded by a strengthening of wages. Usually, there are two channels of wages inflation from the labor market feeding to the consumer inflation: income growth allows consumers to increase spending, while firms are increasing labor costs, which urges them to raise end prices;

– In the manufacturing industry, there has been some slowdown in the pace of hiring. In August, the number of jobs decreased by 3K, mainly due to the reaction of firms to reduced export orders due to tariffs. Market expectations in this area are focused on fears related to protectionist policies, so in the short-term production is the first candidate for alarming signals in the trends of employment.

– The June and July gains in jobs were revised downward. During these two months, the increase in employment was 50K less than was indicated in previous reports.

The optimistic dollar reaction to the report was limited. The dollar index jumped Friday to 95.50, but on Monday it got down to decline. An important factor that affected the move of EURUSD on Friday was the sell-off of the European currency before the ECB meeting this week, which makes small steps in the direction policy tightening, while looking round at the weakness on the firms’ side due to tariffs’ uncertainty and lukewarm inflation.

In such a situation, it is necessary to preserve the escape routes and the ECB will probably confirm the intention to reduce the program of buying up bonds to 15 billion euros in October with “expectations” to finally come to an end by the end of this year. With each new meeting, the ECB will have to make more and more clarity in the interest rate trajectory, because there has been already a clear signal regarding the QE end. Should ECB stick to the vague wording of “leaving the rate unchanged at least until the summer of 2019,” then confusion will grow in the markets, and the uncertain response of markets to ECB statements is not exactly in the interest of the ECB. The likelihood that the ECB will raise the rate in October 2019 is currently 90%, while the market is fully confident that the increase will occur next year.

European bond markets will be particularly interested in the aspect of reinvesting bond revenues in the ECB policy. After the completion of QE, ECB demand for bonds should be formed on the basis of proceeds from bonds that have reached maturity. How and to whom ECB will “give” this money? To be more precise, the time goes by and the bonds in the ECB portfolio are getting closer to maturity. By reinvesting proceeds in long-term bonds, portfolio maturity can be prolonged while buying short-term bonds ECB can make the curve even steeper. The spread of bond yields across EU member states may also force the ECB to curb the cost of borrowing in some countries, for example, Italy. However, at the last meeting in July Draghi announced a neutral rule, where each country can get support from the ECB, according to its deductions to the EU. All this will also make the corresponding changes in the structure of interest rates.

Stabilization of yields in Italy by additional injections of the ECB could have calmed the market, but it is clear that the regulator does not want to exacerbate the problem of moral hazard. However, if Italy emerges at the conference, it will be a big upside surprise for the euro.

Global risk appetite was supported by data on industrial and consumer inflation in China. Both indicators exceeded expectations, despite trade tensions, but positive data could be the result of stimulus measures in China. Later data on the money supply and credits in the Chinese economy should be released, while if the monetary aggregates do not show significant growth (weak incentive measures), the inflation data will have an even more positive effect.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

[Tickmill-News]

10YR US auction may push the yields above 3%

Yet another deluge of Treasury bonds thanks to the US Treasury happened on Wednesday, but with each new auction investors seem less and less happy with the rapidly rising bond supply. Trying to shift future consumption towards current one through tax cuts, the government was forced to increase the speed of borrowing, but expectations of a hawkish Fed increased the borrowing costs as well, making it pricier for government to raise money through debt.

The appetite for fresh batch of debt was tepid as shown by the yield to maturity which rose to 2.821%, the highest level since May 2008. Higher YTM says that the market is willing to pay less to receive fixed payments in the future. The lower the YTM, the more attractive is fixed payment security.

Among the other auction details, it is also worth taking note of the ratio between direct, indirect bids and dealers. Foreign buyers can not directly interact with the Treasury, so they do this through intermediary banks, thus creating indirect demand. At yesterday’s auction, the percentage of indirect buyers was 46.3%, with an average value of 42.7% in August while lower than the average for 6 months value of 48.1%. Declining share of indirect investors can be explained by the fact that dollars are now needed everywhere, including emerging markets, which have been throwing US Treasury bonds to get some money. They are not yet ready to return dollars to their homeland in exchange for debt offer from the White House. Dealers purchased 43.0%, while direct buyers took only 10.7%, in accordance with historical values.

The auction took place during the phase of intraday bond market decline: yesterday, the yield of 10-year bonds gradually advanced to 2.97%, almost simultaneously with the yield on 2-year securities, which rose as well. The spread between the two practically did not change, being at 0.23%.

Today, it’s worth paying attention to 10-YR bill auction among willing masses, with a total volume of $23 billion. As the placements through the past two months show, the market does demonstrate a tendency for risk-aversion.

Oil

Against the backdrop of news about the interruption of production and refinery works on the east coast and sanctions against Iranian oil, WTI jumped above 69 per barrel, drawing optimism from the API data.

API

The change in crude oil reserves -8.636M against the forecast of -1.75M.

Cushing + 2.122M against expectations of 900K.

The reserves of gasoline increased by 5.8M barrels.

Distillates decreased by 1.165M barrels.

It is obvious that the reduction in supply due to interruptions in the Mexican Gulf and the high demand for fuel due to the economic recovery, cause such a high pace of decline in oil from storage facilities. In turn, less stocks – less opportunity for American producers to influence the market – more control options for OPEC – rising prices. Market is currently trading in backwardation meaning that current supply is lower than it will be in the future.

France and South Korea, in turn, cave in under US pressure and abandon Iranian oil, forcing the latter to reduce supplies. Also, the news slipped on the market that Russia and OPEC are ready to sign a new oil agreement. It seems for prices that the upside path is opening.

In an interview with BBC the head of BoE Mark Carney, said that China’s financial system now represents one of the main risks to financial stability. The reason is the risk of repeating same mistakes that led to the 2008 crisis in the US, that is, the accumulation of high household debt, a high percentage of bad debts in Chinese banks due to inefficient lending, including costly and uneconomic infrastructure projects.

The Chinese yuan continues to cede territory to the dollar, this morning the pair almost reached the level of 6.88, but the dollar could not fix the growth. The Chinese authorities still prefer to take a passive position, responding to threats of imposing tariffs by retaliatory measures, thus trying to minimize the damage from the confrontation. Interim US elections in November are now one of the main hopes of the Chinese government, in particular, the seizure of the House of Representatives by democrats and obstruction of measures aimed at exacerbating a trade dispute with China.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

[Tickmill-News]

ECB: Keeping low profile

 

Yesterday, the US Treasury held an auction of 10-year bonds offering $23B of them. Let me remind you that the US bond auction events should be closely monitored, since the bond supply is rising (to raise money for tax reform), while rate hikes and economic growth negatively affect demand in terms of yield and in terms of appetite to risk.

Yield to maturity came at 2.957%, slightly below the 3% which I mentioned in the past review. Investors asked for a yield which was slightly lower than it was at the auction last month (2.96%). Inside the auction, the bid-to-cover ratio was at 2.58 (2.55 in August), indicating a consistently high appetite, the percentage of indirect buyers was 64% against 61.3% in August and higher than the average of six months (60.8%), dealers took 22.6% of securities and the remaining 13.4% fell on direct buyers.

 

Overall, the placement was quite successful compared to auction of 3-year bonds, held on Tuesday, most likely due to the fact that 10-year securities were absorbed well in August (when the yield dropped from 3% to 2.8%). The following placements, which are likely to take place with yields above 3%, will most likely start showing signs of weakness in demand.

 

ECB meeting

What is known from the last meeting:

⁃ The rates are expected to remain at current levels at least until the summer of 2019, the rational duration of such a policy depends on the time that inflation needs to reach 2% in the medium term;

⁃ If trends in economic data develop in the right direction, the volume of asset purchases will be reduced to 15 billion euros in September, and the asset-purchase program will stop at the end of the year.

⁃ The risks for the euro area remain broadly balanced. The move to protectionism, as the main challenge to world trade, remains a matter of concern. Volatility in financial markets requires close monitoring.

⁃ Inflation remains on the necessary trajectory and will remain after the completion of the QE, but for this it is required to adhere to other monetary measures to support the economy (low rates).

The data received after the July meeting:

GDP for the second quarter increased by 0.4% with a forecast of 0.5%, annual economic growth slowed to 2.1%, although 2.5% was expected. On the inflation front, core inflation rose by 1.1% in July, the highest level since September 2017, but already in August, it slowed to 1%, not living up to the forecasts. In general, the development of inflation does not allow us to take the ECB as a hawkish position, since attempting to not rely on stimulus, and therefore suggesting the presence of another source of pressure in prices, is not yet possible. Among other data, shifting the growth toward slowdown, we can note PMI for July and August without positive shifts, the strengthening of the euro against the dollar. The reason for the enthusiasm, however, may be the changes in wage growth, which rose to 2.2% in second quarter.

Possible changes in the forward guidance at the meeting today:

⁃ It is unlikely that the ECB will be generous enough to give more clues on the rate hike timeframe, as it is not easy for ECB to remain bold in policy steps without understanding how the next stage of cutting down asset-purchase will affect the economy. The situation of the Fed with the US economy is very different from what the ECB has to work with, and the tariffs did not particularly affect European prices. It also makes no sense to drop a bullish hint for the euro buyers, which the ECB also relies on as a supporting factor.

⁃ It makes even less sense to make any changes in the pace of cuts of the asset purchase program, so in this part of the statement, we are not expecting anything new. An unlikely comment about a rollback in purchases can be imagined but only if there is a severe downturn on the horizon which off course can throw off the ECB’s plans, but it’s highly unlikely.

⁃ The ECB is likely to lower the GDP forecast, and may again refer to the risks of trade tensions, but in the context of the influence of these factors on future policy, their significance may be downgraded by the market to “on-duty” wordings.

Just in case, I would like to mention bearish and bullish surprises, and what they may lead to.

Lower inflation forecasts, or hints about extension of the purchase of assets for 2019, will provoke a significant decline in the euro, to the level of 1.14 – 1.13.

On the other hand, if the ECB reports “even greater confidence” in inflation, a firm belief in the need to complete QE in 2018, it will lead to the EURUSD rally at least to 1.18

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

[Tickmill-News]

Time to start worrying about your dollar longs?

The ECB held a meeting yesterday and, although the forecasts for the GDP were indeed lowered, the market turned a deaf ear to the bearish part of the report as it was information that was rather anticipated. The market focused instead on Draghi’s verbal assessment of economic recovery and comments on inflation.

After the July and August CPI miss, the case for core inflation was not very good: in July the indicator fell to 1.1% and then to 1.0% in August which failed to meet projections. There was an uncertainty about how the ECB will react to these changes.

However, commenting on inflation, Draghi initially maintained neutrality, saying that “measures of underlying have generally remained muted”. But moderate optimism crept into the market after the words “the price pressure on the domestic market is increasing and strengthening,” “the uncertainty about future inflation is receding.” According to the head of the ECB, “by the end of the year favorable conditions for inflation will continue to develop, and in the medium term, it will continue to grow”.

More importantly, Draghi put an end to the pessimism about the data in July and August, saying that the ECB expects “a significant improvement in core inflation.”

Regarding the asset-purchase program there is nothing new or important, ECB anticipates a decrease to 15 billion euros in October and stopping the program by the end of 2018.

The emphasis on the Italian crisis squeezed bears shorting the euro on political instability in Europe. Draghi lifted the mood reminding that the Italian authorities have agreed to adhere to the budget rules of the EU and there is no imminent threat of crisis contagion.

Meanwhile the dollar which had lost all sensitivity to positive surprises on the economic front, was faced with the first serious reminder of the limits of the expansion of the American economy. Consumer inflation in the US slowed in August, following a slowdown in industrial inflation. The source of moderate data was a 1.6% drop in textile prices, deflation (-0.3%) was also observed in major commodity items and prices for medical services also failed to increase (-0.2%).

 

Interestingly, the demand for new cars was moderate, as prices in August did not change compared to July, while inflation of used car prices suggests that consumers prefer cheaper durable goods.

The main part of inflation is formed by services, while inflation for basic goods keeps around zero. Under the conditions of tariffs, which are a powerful source of inflationary pressure, a slowdown in inflation may indicate a depletion of the potential of consumer demand. In other words, the burden of tariffs imposed on the consumer can turn out to be unbearable at one time, and now when there are signs that the main support of the American economy starts to bend, US authorities will have to be much more cautious both in terms of foreign policy (trade wars) and with respect to monetary measures.

Of course, this warning can be countered by the fact that payroll data for August (an increase of 0.4% with a forecast of 0.2%) denies imminent danger, but if we consider that firms react to changes in aggregate demand after the changes occurred (and already adjusted salaries), then it can be assumed that wage growth will slightly lag behind the development of inflation.

The Fed probably received signals about a possible slowing of inflation in August, which is why when Powell was in Jackson Hole, he discussed his intention not to rush with the rate hike and to allow some overheating in the economy. At the end of September, the Fed will hold a meeting and the rate hike is warranted at the meeting, but rumors about the impact of a new portion of inflation data on Fed forecasts paves the way for the development of a negative scenario for the dollar.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

[Tickmill-News]

BoJ decision and export data curb Yen depreciation

The Bank of Japan left the parameters of the monetary policy unchanged today, which is not surprising, given the lack of any decent inflation prospects. A little surprise was buried in the regulator’s statement, as the bank kept the wording about moderate GDP growth, which, coupled with the growth in export activity (data from Tuesday), revived trade in the yen and Japanese bonds.

The short-term target rate remained at -0.1%, the long-term target rate also remained unchanged at 0 percent. The decision was made with 7 vs 2 votes.

The yield on 10-year bonds of the government increased to 0.12%, indicating a bullish effect from the comments of the bank.

Interestingly, the bank’s concern about the negative effects of easing has disappeared from the statement. However, the degree of fears about the influence of the world economy on Japan has grown. This, of course, is about tariffs and trade tensions.

Nevertheless, data on Japanese trade still deny tariffs as a serious problem. According to the bank, the damage from trade duties has so far been successfully offset by strong external demand for Japanese goods.

Japanese exports increased by 6.6% in August compared to last year. The median forecast for the indicator was 5.6%, the value in July was 3.9%. This was the first rise above the forecast for three months, most of all Japan sold medical, construction products, as well as industrial machinery. Exports to the US increased by 5.3% in August compared with last year.

Shipments to China, the main trading partner in Japan, increased by 12.1%, while exports to the rest of Asia rose by 6.8%, becoming a clear signal that Japanese trade has not yet suffered major losses from the tariff battle between the US and China.

An alarming moment in the data was the dynamics of car sales in the US, which has been declining for the third month in a row. Last year, this indicator did not cause any concerns. It is possible that the threat of tariffs on cars, which threatened Trump, implicitly had an impact on the demand of US salons on Japanese cars. Considering that 1/3 of exports from Japan to the United States is made up of cars, the export situation could deteriorate sharply if there is a cooling of relations between the two countries. In the meantime, everything is ok.

And although the Bank of Japan took a defensive position and repeated the “easing mantra” the political establishment of Japan started to support a gradual reduction in the bond program. Last week, Shinzo Abe, said that such a policy of the Central Bank cannot continue indefinitely, giving a signal about a possible radical turn in the program.

USDJPY accelerated gains from the start of this week, but today bullish pressure on the Yen saved the currency from further depreciation.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

[Tickmill-News]

The comeback of bonds after years of heavy QE seems to have put pressure on the US stock market

Asian markets appear to have traded in a somewhat depressed mode on Monday, due to decision of the Chinese delegation to cancel trade talks which has reinforced fears that none of the opponents want to concede in the trade war.

At the same time, oil prices jumped as major producers said they were not going to increase production in response to Trump’s calls.

Shares from the MSCI index excluding Japan decreased by 0.8%. The Hong Kong stock market showed the worst results in Asia, losing 1.3% of value today. Trading in China and South Korea is suspended in case of national holidays.

US tariffs for 200 billion Chinese goods were to come into effect this morning, while the formal response from the Chinese side will follow today at noon. However, in the bilateral trade of the two countries, China imports less than it exports, so at relatively safe tariff rates (5-25%), it can tax less goods than the US. It turns out that due to the deficit in the trade balance, Trump wins time in tariffs battle and can probably inflict more damage to Chinese exporters than China can to the US ones. In turn, the Chinese authorities are considering non-tariff ways to punish the US; it is rumored that these could be implicit administrative barriers for US companies in the US, as well as monetary easing to depreciate the yuan and protect the profits of exporters.

Markets were baffled by the news that China decided to keep negotiators at home which could mean that the countries have little room for compromises. In addition, Deputy Prime Minister Lew He, who was supposed to restore trade relations with the US this week, will be staying at home as well.

The US administration, in turn, appears to be open to future negotiations.

With the approaching deadline on Brexit negotiations, volatility in Pound trading is growing. At the end of last week, the British currency lost almost 1.4%, which the market has not seen since June 2017. Intraday changes of more than 1% seem to have become the norm in the movements of GBPUSD, as the “roller coaster” seems to have attracted more speculators and drove out investors. GBPUSD found a balance at 1.3076, slightly above the minimum level of 1.3053 since mid-September.

On Friday, Prime Minister Teresa May said that talks with the EU have once again reached a deadlock after the leaders of the bloc rejected her “Chequers” plan without sensible comments.

The dollar appears to have made a turn on Friday and seems to be developing momentum for the beginning of this this week as the approaching date of the Fed meeting, despite the known changes in the parameters of the monetary stance, continues to prepare some surprises for the money market. As I said last week, braking inflation in August may not allow the Fed to make hawkish updates in the rate forecast, as this time a tired consumer may not be able to cope with the inflationary momentum from tariffs. The main uncertainty in the Fed’s policy is now focused on whether officials will raise the rate above the neutral level, and if so, what the timeframe for it may be. It depends on how the Fed has received recent data which are likely to have indicated a slowdown in the economy.

After the September meeting, cash, for the first time in a decade, can begin to bring real positive returns. These are short-term one-month TIPS, the yield on which after deduction of inflation may again become positive along with bonds of other maturities. Overcoming this psychological mark will allow the demand for yield to turn attention to the money market. The stock market thus gradually loses the advantage in the form of dividend yield exceeding the fixed yield of bonds, and with the decision of the Fed, the bonds could fall even further in price, and their yields grow.

It makes sense that if safe assets become more profitable (their gap in yields with risky ones is eliminated), then this will put pressure on the market of risky assets, i.е. stock market. As soon as there are signals that the growth rates of corporate incomes begin to lag behind rates of rate hikes (this moment is nearing), investors will start massively getting rid of stocks.

Oil prices stand out in the commodity market with sharp rise on Monday, as Saudi Arabia and Russia denied the need to increase production in response to Trump’s calls to do so in order to reduce prices. Both grades added almost 2% on Monday, while Brent will struggle for a psychologically important mark of $ 80 per barrel, which in case of successful breakthrough will open new prospects for further growth.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

[Tickmill-News]

BoJ Minutes show strong commitment to the QEE

 

This was stated towards the end of the last meeting, published on Tuesday. Some members of the Bank of Japan said that the Central Bank should study in greater detail the negative consequences of prolonged QE, for example, the squeezing of profits of commercial banks. This was stated in the minutes of the last meeting, published on Tuesday.

The committee consisting of nine members raised concerns about how the recent decision by the Central Bank to allow yields to fluctuate with greater amplitude around the target level, affects the manageability of long-term interest rates.

Such a discussion once again brought the problem of weak inflation to the fore which the regulator is trying to “cure” by a large-scale easing program, despite the growth of costs in the form of weakening the banking system and the outflow of capital. “And although the current monetary easing does not cause problems in the financial intermediation system” … “It is important to take into account two perspectives – short-term and long-term, in which QE has its advantages and disadvantages,” the protocol said. When talking about long-term problems, QE usually implies a decrease in profits in the banking system. Low rates suppress the credit activity of banks, which in turn tries to stimulate QE. In fact, this situation is called a liquidity trap.

Another member of the committee said that the Central Bank should focus on what generates monetary policy in financial markets. “When assessing the performance of the financial system and the functioning of the market, it is necessary to delve into the discussion of their dynamics as a response to the efforts of the Central Bank, rather than to examine the economic indicators separately.” Recall that the BoJ made some tweaks to the monetary policy in July, which for the first time in a long time were characterized by the movement not towards QE, but by a slight departure from it. For example, the intervention of the Bank of Japan in the form of “unlimited” demand for bonds in the event of deviation of the yield from the target, began to occur less frequently, as the corridor of yield fluctuations widened. This returned other market participants to trade (i.e. liquidity).

Two members of the committee did not agree with this decision, since they considered that the potential harm exceeds the benefitd. In their opinion, the market could find the solution ambiguous or even doubt the relevance of inflation targets. In addition, market knowledge of more freedom for the yield movement can become the basis for its irrational deviations, which BoJ should curb with increased amounts of bond purchases that before. That is, yield targeting could become even more “costly”.

The fact that only two participants out of the nine insist on studying the negative effects of QE, suggests that the Central Bank has not yet matured to any significant deviation from the course of easing. The Japanese yen changed insignificantly on Tuesday, but getting to the resistance of 113, the highest since the end of 2017.

Of the significant results of QE, one can note the strengthening of Japanese exports and the growth of corporate optimism. The price and costs of these improvements remain the subject of debate. Asian markets could not grow on Tuesday, expanding the sluggish dynamics of Monday, so a new round of trade tariffs in the Sino-American duel and rising oil prices to a 4-year high added concerns about the prospects for a global recovery. The dollar slightly changed before the meeting of the Fed, both camps are pulling forces to the level of 94.00 on the US dollar index. The Chinese yuan is cautiously losing ground, the news of the disruption of the talks between the US and China has allowed the yuan to again be sold on the potential growth of trade tension. It was followed by gold, which shows consolidation near the level of $1200.

 

 

Buyers and sellers of gold probably count on the dovish and hawkish scenarios of the Fed meeting, respectively.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

 

 

[Tickmill-News]

Fed’s hawkish policy keeps the Dollar fit

 

Fed’s eight rate hike had probably been anticipated since the start of policy tightening in 2015 and Powell did not disappoint investors this time. However, the Fed’s statement and Powell’s remarks were in contradiction with each other, which led to a racy price action of the FX market and bonds.

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Since the market was sufficiently prepared for the rate hike, the focus was on dot plot and wordings in the statement. Accordingly, the market prepared two questions for the Fed before the meeting:

– “Is it possible to discuss the December decision now or is it better to wait until we are closer to it?” (actually the question of the policy of accommodation)

– “What is the optimal rate trajectory with the approach of the neutral level?”

The Fed responded as follows:

– The sentence mentioning the accommodation policy was removed from the statement.

– The review of economic conditions basically did not change compared to the August statement. The labor market “continued to strengthen,” economic activity remains “strong”, etc.

Of course, the decision to end the usage of the phrase “accommodative policy” means a shift in the approach to decision-making, although Powell at the meeting tried to reassure markets that this will not affect the Fed’s decision. I got the impression that Powell tried to prevent an overly bullish interpretation of the meeting, stressing on neutral effects of the exit from accommodation. Therefore, his speech was somewhat inconsistent with the way it was stated in the statement.

The change in dot plot, together with the Fed statement, indicates that the regulator has gained “cruising speed” and is ready to make four rate increases this year and three in the next. The December rate increase is already expected by 12 officials compared to 8 in a meeting in June. Next year, the level of the rate of 3.375% is expected by four officials, against three at the previous meeting. In 2020, dot plot shows doubled confidence on the appropriate rate of 3.675% (6 votes against the previous three). The median estimate of the long-term neutral rate increased from 2.875% to 3%. Other changes in dot plot are less significant.

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Updates of economic forecasts

In September, the Federal Reserve raised its GDP forecast from 2.8% to 3.1% in 2018, with fiscal stimulus and good wage dynamics becoming the main factors. Interestingly, the tariffs, in the context of medium-term growth forecasts of the Fed, have virtually no weight: in 2019, GDP is expected to reach 2.5%, after 2.4% of the forecast in July. That is, the tension in foreign trade practically does not affect the prospects for the economy.

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Long-term GDP remained at 1.8%, another stone in the garden of Trump, who hoped to increase the productivity and growth of the US economy in the long run.  Dampening inflation pressure through fairly aggressive rate hikes has prevented US companies from transferring pressure from input costs and wages to end prices. So the fairness of the current market valuation again raises doubts as company profits may not live up to projections next year.

Powell in his comments finally drew attention to overbought in the stock market but did so very carefully. He said that prices for some assets are in the range of historically maximum values, hinting that further continuation of the rally can draw close attention from the regulator. Stock markets fell on Powell’s comments.

The Fed tried to look as neutral as possible, but a change in wording in line with bullish market expectations will help the dollar to stay on the growth track. The target for EURUSD is level 1.16 – 1.1550, which is likely to be reached next week.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

 

[Tickmill-News]

Italian rumors – the only source of pressure on the euro?

So what’s happened on the economic front since yesterday:

– ISM survey in the US manufacturing sector indicated activity levelling off at a 14-year high. The key indicator in September was 59.8 points with expectations of 60. The growth rate of new orders slowed down significantly, the corresponding subindex decreased from 65.1 to 61.8 points. Assessment of employment in manufacturing sector maintains upbeat outlook on the expansion of the economy (but with a lag as layoffs increase after firms face the slack in consumer demand), the sub-index of employment has grown from 58 points to 58.8.

– ISM survey on prices paid declined compared with the previous reading. This change in the index indicates that companies are gradually catching up with demand by increasing output. In addition, the jolt effect following the US administration-initiated tariff war is also fading away, as companies become abundant with resources. Relieving supply strains is also reflected in the supply deliveries index, which also cooled in September.

Generally speaking, the dip in price pressure on the resource market provides, in my opinion, an insight into how the manufacturing sector responded to inflation outbreak by slowly increasing output which helped to dissipate price pressure which occurred in a discreet fashion. The fact is that firms seeing the swift rise in the price level, faced a choice: consider it a result of increased demand or a consequence of monetary inflation (in our case, the effect of fiscal stimulus in the US). If a firm makes a mistake with a source of price pressure, the increase in output may not pay off, hence it explains the delay in responding to market signals. The case was complicated by the effect of tariffs, which spurred cost inflation and subdued growth of export orders, so the decision to sharply increase production in response to price increases was even more difficult to take.

In short, the retreat of the Prices Paid index says that the adjustment of firms to the economic recovery is most likely completed. Now, on the basis of the nature of crises, the delay is due to an adjustment to the economic downturn. But it will take time since clearly US economy is in a phase of healthy expansion.

The rise in employment component also suggests that manufacturing payrolls will make up for August slowdown in September, which will be reflected in the Friday report. Nevertheless, the manufacturing sector takes modest place in NFP report.

The growth rate of construction costs, an indirect indicator of housing demand, slowed down in August; government infrastructure projects are holding back the decline, while private construction is shrinking. The overall figure rose by 0.1% compared to July, with expectations of 0.4%. In the previous review I had considered the situation with the real estate market in the US and weak demand continues to restrain activity.

The situation in Italy remains disturbing, the government is actively engaged in blackmail in order to solicit another sop from a big brother. On Tuesday, the government received a statement that it would be nice to have its own currency to solve problems within the country. From this position, the risks in the bond increases as a result of their sale continued today. The yield jumped to a level of 3.4%, higher than it was in a panic in May when the market also began to question the membership of Italy in the EU.

The government has so far submitted a draft plan, which should be sent to the European Commission before October 15. In my opinion, this hype and loud statements by the government are purely a political step to maintain ratings. What will be in the final plan may differ from the suggestions made. It is logical to assume that the government understands how dangerous the policy of uncontrolled debt can be, which will not leave anything of their reputation after the debt stimulus runs out. I remain convinced that the European currency remains an excellent candidate for longs, since the source of pressure is now exclusively speculation about Italy. It remains only to see and carefully watch the news where the information about compromises will gradually be included.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

 

[Tickmill-News]

Italy folds to EU’s pressure but the war of words seems to not be over

After two days of heavy sell-off on the euro and Italian bonds as a sign of market dissent with the fiscal course the Italian government, the latter finally came to their senses. As expected, the Italian populists made concessions and announced that they are ready to reduce the budget deficit to 2% in the near future. By 2019, it should be reduced to 2.2% and by 2020 to 2.0%. Of course, this hardly comes in line with EU expectations, although it seems to be a solid argument for euro sceptics to pause pressure on the euro.

Yesterday, EURUSD made a technical pullback holding the support at 1.15, and on early Wednesday jumped to the level of 1.1580, just on the Italian news.

Specific nature of shorts on the euro, i.e. based on particular political risk probably suggest the same rapid recovery when the catalyst charge changes sign. But this does not mean that we should immediately expect a global U-turn. The sustainability of the current rollback of EURUSD depends on what the European Commission responds to the proposal of the Italian government. I recall that, according to EU budget directives, the structural deficit can reach 3%, provided that the country has accumulated a small government debt (about 60% of GDP). It is clear that Italy has gone somewhat beyond the line.

The problem is also exacerbated by the fact that Italian debt is losing its main buyer – the ECB. The regulator expects to complete the asset purchase program by the end of 2018. Other investors will demand a higher risk premium, so in the long run the cost of servicing the debt will increase significantly and the depth of the problem may become comparable to the Greek one. As in the case of Greece, the EU will probably have to make concessions, but it is better to do it now, when their price is not so high.

From the Fed’s Chairman, Jeremy Powell speech yesterday in Boston, there are several points that seemed interesting to me:

·       The economy boasts a remarkably positive outlook;

·       The Fed has not yet seen signs of inflationary pressure due to tariffs;

·       The fiscal policy of the government is not stable;

·       The economy is in a historically rare position, when long-term unemployment is at record low levels and wage pressure is not transmitted to consumer inflation.

·       The Fed is aware that inflation can take revenge backfiring the later, so the regulator is on the alert and ready for appropriate measures.

·       Interest rate is the core thing in the Fed’s toolbox.

The main conclusion is that the Fed does not see significant risks that can potentially change the monetary course. Since the pace of rate increases announced by the Fed has already been priced in the dollar, the prospects for its strengthening are earthy (but lets’ wait for NFP data). That’s why I would consider adding more longs on the currencies of emerging markets, especially the USDRUB pair.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

 

[Tickmill-News]

Powell’s unusual “verbal stimulus” creates storm on the global bond markets

 

Heads of the central bank have been probably envying Powell’s clarity in recent communication. Dollar sellers hardly believed that the hawkish leg of Fed’s course was over; the chairman made an unusual move signalling it’s too early to relax while speaking yesterday with in an extremely frank fashion regarding the policy of interest rates.

 

And if market participants presumed earlier that the Fed’s rate hike path takes into consideration both pros and cons in terms of impact on economic growth, yesterday Powell offered to leave only the advantages. In Powell’s remarks, not only the rationale for a cautious approach didn’t exist, that is a somewhat traditional part of the speech of any central banker, but there was also a conscious bias towards excessive optimism. For example, as in Boston, Powell noted that “remarkably positive circumstances” have developed in the economy, and that “there is no reason to believe that this won’t last for quite some time”

 

Describing behaviours of the wages, Powell said that some important components began to get out of stagnation and that “the Phillips curve is not dead, it’s just resting.” Since real interest rates have left negative territory for the first time in a long time and are barely above zero, the Fed chief believes that for the time being they should be considered as accommodative. Hence, we conclude that the policy of tightening is still in full swing.

 

But what caused the storm for short positions on the dollar: Powell said that the rates are not only far from the neutral level, but the fact that the rates can overcome this level and remain there for some time.

 

“The rates still remain characteristic of the accommodation policy, but we are gradually moving towards the neutral point and we can overcome it. But up to this point it’s probably still far away”

 

Powell’s words stirred sharp strengthening of the dollar against other major currencies on Wednesday, while Eurodollar bears triggered stops 1.15.  But already on Thursday, the rally ran into resistance and the US currency pulled back to the level of 95.50. The combination of Powell’s remarks and heightened sanction risks became a painful combination for the Ruble, which lost more than 1% on Thursday. And this despite the fact that oil prices rushed sharply upwards, targeting next “checkpoint” in the area of $90 per barrel.

 

In light of the Fed’s move to more aggressive rhetoric, labor market data due on Friday is losing some of its significance, as it can be said that the market shifted exclusively to Powell’s words, which significantly expanded the horizon of confidence in the yields of American assets, and therefore in dollar.

 

The yield on 10-year Treasury bonds rose to new local highs, holding above the 3.2% mark. The sovereign debt of other developed and developing countries also sank in price, and in the light of this, it is interesting to draw attention to countries where the Central Bank targets yields, i.e. in Japan. The yield on 10-year securities rose to 0.16%, but in June the Central Bank kept it at about zero percent. The Bank of Japan, judging by the JGB sell-off is calling off the intervention, but as soon as it announces the next round of “unlimited buying”, we can expect a strengthening of the bearish trend in the yen. In light of the significant deviation of the yield from the target, it may be worth to consider buying USDJPY with a target of 115 yen per dollar.

 

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

 

[Tickmill-News]

PBOC RR illustrates deepening problems in the Chinese economy

 

The employment situation in the United States continued to develop in September in accordance with the definition of a healthy labor market. The unemployment rate fell by 0.2% to 3.7%, wages increased by 0.3% compared to August. The number of new jobs increased by 134K, which did not meet expectations, but the stability of the dollar after the report proves that the market attributed weakness to the deterioration of weather on the East Coast.

Revised readings of the job gain for July and August changed in a positive direction, which partly offsets the decline in September. The change in jobs in July was revised from 147K to 165K, the demand for labor in August increased by 270K, instead of 201K, which was the previous estimate. Thus, the refined number of jobs for July and August was 87K more than the value of previous estimates. The average number of job gains for three months increased from 180 to 190K.

The market may have paid particular attention to labor demand in the manufacturing sector, which is now the center of attraction for pessimistic views on the American economy. Recall that the manufacturing, in particular export-oriented companies, faced with rising costs, higher Fed rates, lower export prices, were expected to offset the blow by lowering labor costs, i.e. reducing the pace of hiring. September NFP report showed that such assumptions are at least premature, since the job gains in the sector was positive and amounted to 18K. The main contribution to the slowdown in jobs was made by the leisure and hospitality sector, which most likely has been affected by hurricane Florence that lashed onto South and North Carolina. In September, the sector lost about 17K jobs. Retail trade sector, in turn, declined by 20K jobs.

Summary of the report: all eyes were turned to the wage growth change, since it is the harbinger of changes in consumer inflation and thus the Fed’s policy shifts. Salaries in September increased by 0.3% and by 2.8% in annual terms, which corresponds to the lower limit of market expectations (0.3 – 0.4%). Unemployment has already reached the Fed’s target level of 3.7%, somewhat faster than the projected end of the year. Regarding the pace of overall economic expansion, the report turned out to be neutral, as it was more likely to be its confirmation, rather than the basis for expectations on its changes.

Meanwhile PBOC announced fresh steps toward monetary easing, cutting the reserve requirement by 1%, which will additionally deliver 750 billion yuan to the ailing economy. The Chinese Central Bank also reported a decline of $23 billion in currency reserves in September and $8 billion in August. This has already exceeded modest market expectations that the reserves would drop by only $500 million to 3.105 trillion. The only time that China lost reserves faster than this was in 2016.

Unlike recent months, when the yuan sharply lost in value, USDCNY rate was much more stable in September. Apparently, they had to pay for this by selling reserves, which were also devaluated because of the growth in yields of US Treasury bonds and the strengthening of the dollar. Prior to the announcement of easing measures, it was difficult to assess the intensity of capital outflow from the Chinese economy, hence it was done through an attempt to draw a link between the FX reserve changes and the exchange rate. But now with PBOC’s concrete actions it becomes clear that the depreciation of USDCNY to 7 yuan per dollar becomes a very realistic goal. Already on Monday, the dollar strengthened against the yuan by 0.64%, exceeding the level of 6.91. The preparation of the Chinese authorities for further yuan diving has been probably completed, as seen from the period of strengthening of the yuan from August 15 to August 27.

While the manufacturing sector in China is trying to recover from a blow in foreign trade, the service sector is growing at a very fast pace. The Caixin report, which focuses on private enterprises, showed that activity in the sector grew at the highest rate in three years. The main indicator rose to 53.1 points in September.

The surge in activity in the services sector will definitely be a favorable signal for the authorities trying to shift the center of gravity in the economy from production to consumption. However, a sharp contraction of employment in this sector can speak about increasing stress, in particular, an increase in costs for enterprises. Thus, the subcomponent of employment fell to 49 points in September, which is below 50 points separating growth and slowdown.

Oil prices post rapid pullback today, as the US administration decided to introduce relief measures regarding oil sanctions, allowing some countries to keep buying Iranian oil in a small amount. Saudi Arabia, in turn, said that it would be able to cover the market deficit driven by the blockage of Iranian exports. Thus, there is some overbought on the market, as recent purchases were based mainly on expectations of a strong deficit due to Iran’s withdrawal from the market. The lack of positive drivers will probably allow the bears to seize the initiative and further pullback of Brent will be the topic of trade this week.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

 

[Tickmill-News]

Yuan starts to feel the pain of the Chinese economy’s slowdown

Chinese authorities hiked the exchange reference rate of USDCNY to 6.9019 yuan on Tuesday.  From the perspective of traders this became the guidance to short yuan further, which they actually did. This also stirred more concerns about the growing weakness of the Chinese economy.

Asian stocks fell to a 17-year low on Tuesday as the slowdown of the stock market in China spreads to neighbouring regions. PBOC’s move to softer credit policy has become even more worrying after the state newspaper confirmed concerns by releasing an article about why government should push stimulus pedal to shore up economic expansion.

Growth forecasts for the IMF added gloom to the market mood which suggested that the global trade tensions do not bode well for growth and economic activity in the United States, Europe and China may soon slow down.

Traders pushed yuan to 6.9320 against the dollar on Tuesday, taking advantage of the fact that China is ready to cede ground in the foreign exchange market. The devaluation can have a positive effect on exporters though, so ShCOMP edged higher on this assumption, but this was a rather cautious move. The nature of the bullish rushes in Chinese stock market, against the backdrop of capital outflows from the Chinese economy, should be attributed to technical corrections rather than growth attempts. This Monday, China’s largest stock index collapsed by 4.3% (“mini-black Monday”), which was the most severe reaction of investors in the past two years.

Asian indices as a whole are also experiencing a decline, the broad MSCI Asian index continued to fall, closing Monday at a minimum of 15 months.

It is highly likely that Trump’s threats to punish China for currency manipulation will start to appear soon, given that one of US Treasury official expressed concern about how rapidly the yuan is losing ground. There are also rumors that this week, the head of the US Treasury Department, Mnuchin may meet with his Chinese colleagues which may help contain the wave of sales.

Obviously, the main threat to growth comes from the outflow of capital from the bond market, as it increases the cost of borrowing, which may weigh on capital expenditures. The whole process unfolded with a new force after Fed Chairman, Powell, took a very aggressive verbal position last week, unexpectedly saying that investors were lagging behind the Fed’s rate hike forecasts. The yield on US T-bills on Tuesday reached 3.24, a maximum of seven years.

The VIX volatility index jumped by almost 6% on Tuesday to a level of 15.7. The volatility sellers are finally taking a break, as this creates the right moment in the form of uncertainty in the Chinese economy.

The scope and speed of the bearish impulse in the bond market may mean a shift in the “collective assumption” of the market about the outlook of US economy and the implications of Fed policy. To do this, just look at the change of futures for the Fed rate, which reflects the change in expectations from 2 to 2.5 rate hikes in the next year.

Euro remains fragile frustrated by the separatist penchants of the Italian government also another emerging risk is the slowing growth which can be spread from China to the Europe. There is a risk that the pair will go below 1.14 by the end of the week, since October 15 will be the deadline for Italy to submit a budget plan to the European Commission. Despite the contradictory statements, the market has no clear signals about a possible compromise.

Gold got completely knocked out on Tuesday, dropping to 1182, but was quickly bought off.  China troubles and the risk of rising yields in the United States make the yellow metal even less appealing for long. The target for gold is to re-test levels below, in particular the August lows at 1160 per troy ounce.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

 

[Tickmill-News]

Will the Fed continue to hike rate aggressively?

 The stock market crashes, growing trade tensions with China, low growth forecasts from the IMF, and even Trump’s verbal attacks are likely to not be able to stop the “insane” Fed from further rate hikes. There is a serious reason for this – the development of the economy is still in accordance with the forecasts of the central bank.

 Thursday inflation figures revealed a slowdown in price growth from 2.4% to 2.3%, which nevertheless remains near the target level of 2%. At the same time, the absence of inflationary pressure is accompanied by record-breaking low unemployment, which makes it possible to contain consumer inflation expectations around a long-term equilibrium. All historical periods of high employment were usually accompanied by an out-of-control inflation, which led to a recession. The fact that the economy is in “historically rare” conditions was said by Fed Chairman Powell in his last speech, which is the “core” of the aggressive plans of the regulator to tighten the policy. It is unlikely that the Fed has changed its mind in the last 48 hours, just on the basis of the pullback of the stock market, less upbeat IMF forecasts, and discontent from Trump, who called the Fed’s actions “crazy”.

 It is curious that the market also does not believe that the Fed will abandon its plans: despite the correction, the probability of the December rate hike, according to the futures market, rose to 81.4% compared to 74.4% last week.

Gradual rate hike process up to 3% or higher next year may not allow the economy to grow at an impressive pace, but will take control of inflation, which leads the list of warning tokens before the crisis. On the eve of the 2008 recession, the prices had been growing at 6% pace; in previous periods of crises, the pace was also high.

Now when there is a choice between keeping expansion slower but long or impressive but short, Powell won’t repeat the mistakes of his predecessors and will subdue the risks of overheating now. One of them was, of course, the stock market, where the continuous flow of buyers put the rationality of growth in question. However, no one expected the Fed to slaughter the “sacred cow” in such a rough way.

In the presidential administration, not everyone shares Trump’s position regarding the Fed. Close Trump aide Larry Kudlow, when asked to comment on Trump’s comments said the central bank is “on target” and the possibility of a rate hike is a sign of “stable economy, which should be welcomed than feared”.

Robust hiring in the United States has narrowed the jobless rate to unprecedented levels in the last 50 years. In September, unemployment fell to 3.7% while wages rose by 2.8% in annual terms. The inflation rate of 2.3% means that the growth of real incomes has accelerated, which could give an additional impetus to consumption.

The correction in the stock market led to a reversal of the yield curve, which took alarming shape due to the diverging views of the market and the Fed regarding the pace of rate hikes. A part of investors from the stock market flew to short-term Treasury bonds, so the spread began to grow again. The short-term cost of borrowing thus began to change in a more favorable direction.

The only cause of concern remains the “welfare effect”, which adversely affects household incomes in the event of a fall in the stock market, as their assets depreciate. Accordingly, a long-term bear market in shares can stifle consumer optimism and business confidence, risking turning firms and households to the “savings” mode.

Major US stock indexes closed in the red on Thursday, the S&P 500 broke the 200-day moving average down, which is slightly worse than the situation in February, when the technical level effectively kept the fall. Nevertheless, the current pullback is not something extraordinary, since the history is full of 5% corrections during the expansion leg.

Today, data on export and import prices in the US, as well as consumer confidence from W. Michigan, are due to release. The stock market is likely to cover shorts, which should be supported by positive outcomes in the data.

In my opinion, the market could be preparing for the New Year rally, as the rollback of the stock market initiated by the Fed is somewhat different from the decline during the recession. Therefore, if the economic data continues to give signals of steady growth, the market panic will be short-lived.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

 

[Tickmill-News]

The Fed is waiting for inflation but it’s not here yet

 

The main contribution to the rise in prices for imported goods become fuel price growth. In September, an increase of 3.8% was the most dramatic change since May, when fuel prices recorded a 6.1% increase. If you break the fuel inflation into gasoline and gas, then you can see that the prices for the former product increased by 4.1% and this is only in September. And now we can understand Trump’s oil tweets, as the rise in gasoline prices before the November elections could hit Republican positions.

It is noteworthy though, that apart from fuel, prices for imported goods remained virtually unchanged in September. Higher prices for food, food and beverages offset the decline in prices for products for industrial needs, materials and consumer goods. For the American consumer, this is positive news, since wages are rising, and prices are stagnant, so consumer optimism should remain high.

From the details of the export price report, it is worth noting the deterioration in the terms of trade with China. At the same time, it is interesting to discern the damage for both sides in the trade data, since rumors have so far been on the side of the United States. First, export prices to China fell by 1.7% last month, which was the largest decline among major US trading partners. In July and August, this figure also declined, and in July the decline was 2.2%.

Indices of the terms of trade (purchasing power of exports vs. imports) also changed not in favor of the United States. I note that the fall in export prices to China is stronger than the fall in China’s export prices in the United States (that is, the demand for Chinese exports to the United States has turned out to be more resistant to the trade war). Perhaps this is why we are seeing statistics on changes in the US trade balance with China that are unpleasant for Trump, which points to China’s rising gains in trade to a maximum of six months.

 

On Friday, US consumer optimism data from U. Michigan hit the wires though not as upbeat as expected. The rebound in the indicator is now probably one of the main hopes for the Fed, as in the conditions of tension in foreign trade it is necessary to rely on domestic consumption. In September, this figure was 99 points, which is 1.5 points less than in August. From April to August, the indicator steadily declined, therefore, with a slight pullback in September, an ambiguous impression is taking shape. A weak rise in import prices and control of inflation expectations will most likely be supported by optimism, therefore, from this point of view, the Fed has no reason to deviate from the aggressive course.

 

The growth of the VIX and the resumption of the downward movement of the dollar create the basis for weak buying activity at the opening of the New York session today. The more severe fall of the S&P 500 than expected, namely the breaking of moving averages does not allow buyers to quickly buy back the decline despite the fundamental prerequisites for this, for example, the Fed’s confidence. Therefore, pulling the ropes around the 200-day moving average may continue this week.

The US sector was well bought off last week, but things are not so good at premarket. The major stock locomotive i.e. group FAANG dropped at premarket, which points to the weaker start in NY. The best choice in this case is to sit on the fence and wait for the reversal in sentiments

Oil prices are gradually turning into a rise on the threat of US sanctions against Saudi Arabia. The disappearance of the Washington Post journalist after visiting the Saudi embassy in Turkey resonated on the Kingdom’s stock markets after Trump promised severe punishment for those involved in the incident. The Saudi King promised to revenge.

Of course, the threat is still very weak, and it is unlikely that it will reach sanctions comparable to Iran. But the sudden cancellation of US investment banks on a trip to an investment forum in Saudi Arabia says that the emergence of the conflict between the two countries should be kept on the radar. Speaking about the revenge of the Saudi King, we can recall Trump’s calls to restrain the rise in oil prices. In the event of an escalation, Saudi Arabia can hurt, restraining production so that energy prices soar, and Trump would face an unpleasant surprise in the form of expensive gasoline before the elections.