Global Update – Aisa, Europe, FX Market

Market analysis – Global Update by Junaid Wilscon

 

Investors focused on China and its falling equity market and currencies last week. Little attention was given to what is usually the major event of a month’s first week, namely the U.S. employment report. For a while Friday morning, investors did pay attention to the much better than anticipated report. However, that did not last and equities in Europe ended the week on a dour note while U.S. investors could not decide which way to go — To buy? To sell? All major equity indexes retreated for the week. It reminded many of last summer when the yuan fixing dropped and the Shanghai Composite plunged.

In Europe

At week’s end, European markets were up solidly in early trading after the Chinese stock market bounced back from Thursday’s steep decline and early trading halt. The stronger than expected U.S. employment report for December also contributed to the positive mood among investors. However, those early gains quickly eroded and the European markets ended the session in the red. Crude oil prices, which had been up in early trade Friday, reversed as the session wore on and slipped back near 12-year lows. Investors also cashed in profits after a tumultuous week of trading.

On Thursday, more than £30 billion were wiped off British blue chips after China allowed its currency to weaken faster than before, rocking global markets and sending commodity shares to their lowest levels for about a decade. However, the index ended off of its lows after China suspended a circuit breaker on its stock market that traders said was causing — rather than preventing — volatility. According to some analysts, this week was similar to August and September of 2015. They said that most of the damage is not the fact that the Chinese economy is continuing to struggle to turn things around, but rather the uncertainty going forward in regards to how much the yuan will be devalued.

In Asia

Equities tumbled last week, initially thanks to disappointing data from China that indicated the economy has continued to weaken. The yuan retreated in value against the U.S. dollar adding to investors’ sentiment. China’s problems were internally generated as officials attempted to prop up plunging share prices. Equity trading was forced to close down on two separate days when a new automatic circuit breaker designed to put a floor under equities shut markets down. All equity indexes declined on the week. The Shanghai Composite sank 10.0%, the Nikkei tumbled 7.0% and the Hang Seng lost 6.7 %.

A downbeat Chinese manufacturing report first sent stocks spiralling last Monday, prompting the country’s market to close early. It also set off a global rout with stocks in Europe and the United States getting hit. Since then, investors have remained been unnerved.

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Currencies

The U.S. dollar was mixed in the first week of January. The currency advanced against the pound and the commodity currencies — the Canadian and Australian dollars. However, the U.S. dollar retreated against the euro, Swiss franc and the yen.

 

China ended an eight day run of lower values to the yuan’s reference rate on Friday. The declines sent shockwaves through financial markets and escalated fears of a global currency war. The People’s Bank of China set the daily fixing, which restricts onshore moves to a maximum 2 percent on either side, 0.02 percent stronger than the previous day’s reference rate. The offshore yuan fell 0.03 percent to 6.6843 a dollar as of 4.03 p.m.

 

Data on Thursday showed China’s foreign exchange reserves fell by the most on record last month, down $108 billion in December alone and by $513 billion overall last year. That suggests an accelerating outflow of money from China which may largely be the result of the opening up of its financial markets over the past year, but also a sign that China may be in deepening trouble.

Looking forward

 

Equities got off to a poor start in 2016. However, there was a surprising number of positive economic surprises during the week which were largely ignored as investors obsessed about China.

 

The Bank of England will make its monetary policy announcement Thursday. No policy changes are expected. The Federal Reserve will publish its Beige Book in preparation for its FOMC meeting later this month. Industrial production for November will be released by the UK, Eurozone, Italy and India. Australia posts December employment and unemployment. Investors will likely keep an eye on the continuing festering political situation in the Middle East and the price of crude.

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The rate increase ‘celebration’ lasted one day – market analysis

Market analysis by Junaid Wilson

The event global markets had been waiting for finally occurred. The Federal Reserve increased its fed funds interest rate range to 0.25% to 0.50% from zero to 0.25%. The discount rate was also raised by 25% points to 1.00%. The Fed also said that both the pace and magnitude of future rate increases will be data dependent — no change there. ‘Gradual’ became the new key word. The FOMC said that further increases would be gradual. The responses of the stock and bond markets to the Fed rate lift-off were entirely typical for the start of a rising interest rate cycle.

Equities rallied on the news as the Fed reinforced the view that the U.S. economy was growing. The U.S. dollar however was mixed and bond yields were up. The rate increase ‘celebration’ lasted one day, then investors were back to worrying about global growth and ever sinking commodity prices. Equities retreated giving back all or most of their Fed inspired gains.

Market Analysis London-Trader

In Europe- Despite losses on Monday and Friday, equities ended the week with healthy gains. Friday’s declines were attributed to profit taking after the mid-week rally and renewed concerns regarding global growth. Markets around the world were under pressure at the end of the trading week as investors remained focused on crude oil prices and the underlying weaknesses in the global economy. The FTSE and CAC were up 1.7%, the DAX gained 2.6% and the SMI added 1.3%.

On Thursday, investors had their first opportunity to react to Wednesday’s interest rate increase by the Federal Reserve. U.S. markets already had positively reacted mainly on Wednesday and Asian markets followed early in Thursday’s global market day. However, weakness in commodity prices and especially crude saw equity gains erode in late trading. An analyst noted that the Fed increased rates and the markets survived.

Two key business surveys were released for Germany during the week. Both indicated some weakness in sentiment. The UK posted three key reports for November — consumer prices, labour force data and retail sales. Consumer prices continued to display weakness while both the labour force and retail sales indicated strength.

Looking ahead-  This week we have GDP release out of the UK and US that will be the main market movers.

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CPI figures out of the UK and US today – Market Analysis

Market Analysis by Junaid Wilson

The dollar edged lower against major currencies on Monday on worries that heightened market volatility caused by an oil price slump and turmoil in credit markets could limit the number of U.S. interest rate hikes and dampen the dollars attraction.

In mid-morning trading, the dollar fell 0.2% against the yen at 120.76 yen and was down 0.2% against the Swiss franc at 0.9807 franc. The euro, on the other hand, rose 0.4% to 1.1028. The Australian dollar rose 0.9 percent to 0.7248, and the New Zealand dollar gained 0.8% to 0.6756. Against the Canadian dollar, the dollar was up 0.1% at 1.3742 after hitting 1.3677, its highest since June 2004.

The Euro-zone goods producing sector started the fourth quarter with a stronger than expected 0.6% monthly rise in output, its first increase since July. October’s gain followed an unrevised 0.3% in September from 1.3 percent to 1.9 percent.

Morning Analysis

October’s monthly advance came largely courtesy of the capital and durable consumer goods sub sectors where output climbed 1.4% and 1.8% respectively. Non-durable consumer goods were also up 0.4% energy advanced 0.6% but intermediates dipped 0.1%

Regionally there were monthly increases in all of the larger four member states with France and Italy both with 0.5% leading the way ahead of Spain 0.3% gain and Germany gain.

The latest data put October Eurozone industrial production 0.3% above its average level in the third quarter when it rose 0.2% versus April-June. The November PMI also pointed to a slight improvement in activity rates in mid-quarter so unless December disappoints (note, flash PMI figures are due Wednesday) goods production should contribute positively to real GDP growth this quarter.

Today we have CPI figures out of the UK and US we also have the ZEW survey out of France.

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The FOMC is widely expected to announce an interest rate increase

The FOMC is widely expected to announce an interest rate increase – market analysis by Junaid Wilson

It was another bad week for equities and commodities as investors waited for the FOMC meeting which takes place on December 15 and 16. With investors expecting the Fed to raise its key fed fund rate on December 16, focus was on crumbling oil prices, especially after OPEC failed to agree to production quotas at their meeting on December 4. Warm weather in the U.S., while welcomed by the populace after last winter’s cold and snow, has reduced demand for energy products.

 

Stock markets worldwide tumbled on Friday as falling Brent crude oil prices to seven-year lows and a drop in China’s yuan currency fell as investor risk aversion is ahead of a widely anticipated U.S. interest rate increase. Equities sank as crude prices plunged on continued oversupply concerns. Indeed, the International Energy Agency said it sees the oil glut worsening in 2016 as demand slows and OPEC shows no signs of slowing production. All equity indexes were down for the week.

 

Investors were also cautious ahead of the Federal Reserve meeting. The FOMC is widely expected to announce an interest rate increase when it concludes its monetary policy meeting on Wednesday. Meanwhile, UK interest rate increase expectations tumbled to their lowest level in two years according to the results of a quarterly survey by the Bank of England.

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The U.S. dollar declined against the euro, yen, pound and Swiss franc last week. However, the dollar gained against all others followed here including the commodity currencies — the Australian and Canadian dollars. The U.S. currency dropped after the European Central Bank disappointed markets with less stimulus than traders had expected. This sent the euro upward and talk of parity disappeared.

 

China’s People’s Bank of China signalled its intention to change the way it manages the yuan’s value by potentially loosening its peg to the U.S. dollar and instead letting it track the currencies of its broader trading partners. In an editorial posted on its website Friday night (local time), the PBoC said it makes more sense to measure the yuan’s exchange rate against a basket of currencies than the US dollar alone. The foreign exchange trading system run by the central bank will start calculating a yuan exchange rate index Friday to provide a reference against a basket of currencies.

 

The US dollar has surged by more than 22 percent against a basket of currencies since June 2014. But has remained in a range for much of this year. The Chinese renminbi, which is “fixed” to the dollar each morning and only allowed to trade within a tight band of that rate, has been taken along for the ride. The rapid climb has made the country’s exports less competitive with rivals in Southeast Asia, contributing to a slowdown in the economy. The shift can also be seen as a way to give China room to back away from the U.S. dollar, particularly if the Federal Reserve lifts rates next week and the currency strengthens further.

 

Looking forward this week, one thing we can guaranty is there will be volatility, a lot of it.

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Market Analysis

Market Analysis by Junaid Wilson

Yesterday we saw commodity currencies fall across the board, the CAD made new highs vs. the USD on the back of weaker oil. OPEC choose not to cut back supply after their meeting on Friday.

It was also a light day on economic calendar with the only notable data realise being industrial production from Germany. Goods production in October saw its first increase since July but a modest 0.2 percent monthly gain was still comfortably short of expectations. Annual growth dropped a couple of ticks to a minimal 0.1%.

Today’s figures put overall industrial production 0.8 percent below its average level in the third quarter when it decreased 0.3 percent versus April-June. However, October’s manufacturing orders were up a monthly 1.8 percent and the most recent business surveys have been relatively upbeat. As such the rest of the quarter should see some improvement.

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Today we have the second 3rd GDP estimate out of the Euro zone expected to come in at 0.3% which is already priced into the market. Later in the US session we have the NIESR UK GDP estimate.

We expect the USD to stay strong vs all major and the commodity block ahead of the FOMC meeting next week.

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ECB expected cut Deposit Rate further into negative territory

Market Analysis by Junaid Wilson

 

Yesterday, was dominated by US dollar strength the GBP/USD broke the 1.5000 level and is currently trading at 1.49500.

Yesterday main events started with the UK construction PMI. At 55.3 the sector PMI was down more than 3 points from its unrevised October reading and at its lowest level in seven months. That said, the latest print was still well into solid growth territory and firms remain highly optimistic about the the business outlook.

Slower growth of new business was largely responsible for the headline decline and this in turn contributed to a much smaller increase in employment than the 11-month high recorded at the start of the quarter. Input buying also expanded more modestly although vendor performance continued to deteriorate amidst further reports of stock shortages and pressure on capacity.

Sub-contractor usage still rose at a solid rate but the increase in their average charges was the smallest in almost two years. Indeed, overall input cost inflation moderated and was well below its long-run average.

The November results point to an overdue deceleration in activity rates in the construction industry. However, the overall picture remains positive enough and if costs pressures are beginning to ease slightly, the BoE will certainly not be unhappy.

Later in the day we had the ADP employment report. ADP is calling for strength in Friday’s employment report, at a higher-than-expected gain of 217,000 for government payrolls in November. Month-to-month, this report is not always an accurate indicator for the government’s data, forecasting a much lower reading than what turned out for October and a much higher reading than what turned out for September. But ADP’s trend has been accurate, that is steady payroll growth near 200,000 — and today’s report points to strength that would be slightly above trend.

After the realise we had prolonged dollar strength throughout the afternoon. With NZD and AUS giving up some of the gains it made early in the week.

Today we have the highly anticipated EU monetary policy decision at midday GMT.

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ECB expected cut Deposit Rate further into negative territory, maintain other rates

– Cut Deposit Rate by 10bps to -0.30%
– Maintain Main Refinancing Rate at 0.05%
– Maintains Marginal Lending Rates at 0.30%

If the decision will be to cut main refinancing rate and extend their 60 billion a month bond buying program then we could expect another leg lower in the EUR downtrend targeting 1.00 by the end of the year.

Market Overview

Market Overview – by Junaid Wilson

Yesterday, we saw the AUS, NZD continue higher throughout the day. EUR and GBP headed higher later in the US session. The JPY made gain but gave them back in the Asian session.

The yesterday’s economic news was mixed to solid with weakness in the ISM, a report that points to a November downturn for manufacturing, offset by strength in vehicle sales and in construction spending, both reflecting strength in the domestic consumer. And the dip in the ISM, where the index fell to 48.7 for a six-year low, is not a great surprise given that the factory sector, hit by weak exports, has been soft all year.

The Dow jumped a sizable 1.0 percent to 17,888 and money also moved into Treasuries where the 10-year yield fell 6 basis points to 2.15 percent. Lower rates are often a negative for the dollar where the dollar index fell 0.5 percent to 99.78. Oil remains very soft, just under $42, with gold steady near $1,068.

Canadian GDP: As expected, the economy pulled itself out of recession last quarter but growth was still quite sluggish and would have been still weaker but for a decent hand-off in June. Indeed, while a 0.6 percent increase in total output versus April-June was in line with expectations, it still masked a surprisingly sharp 0.5 percent monthly contraction in September

In fact, the third quarter expansion came largely courtesy of a 2.3 percent surge in exports which, combined with a 0.7 percent decline in imports, saw net foreign trade add nearly a full percentage point to quarterly growth. Elsewhere, household consumption rose 0.4 percent, down from a 0.6 percent gain last time, but gross fixed capital formation fell 0.7 percent, compounding a 1.5 percent drop in the second quarter. Within this, business investment in non-residential structures, machinery and equipment shrank 1.5 percent and easily more than offset a 0.6 percent rise in residential structures.

US ISM: ISM’s manufacturing index broke below in November to 48.6 which is more than 1 point below low-end estimate for the lowest reading since June 2009. The decline includes a significant dip for new orders which are down 4.0 points to 48.9 and the lowest reading since August 2012. At 43.0, backlog orders are in a six-month streak of contraction. With orders down, ISM’s sample cut back on production, down nearly 4 points to 49.2, and cut back on inventories, down 3.5 points to 43.0. Employment firmed but remains soft at 51.3.

A convincing detail in the report is the breadth of weakness with only five of 18 industries reporting composite growth in the month. Transportation equipment, getting a boost no doubt from aircraft and motor vehicles, is among those in the plus column while the negative column includes petroleum as well as a number of capital goods industries including machinery, primary metals, and fabricated metals. Weakness in these industries points to weakness in business expectations.

This report is closely watched and will raise expectations for a quick reversal in the factory sector which, in October at least, did show glimpses of strength. And though Friday’s employment report is most pivotal for the December FOMC, this report does not point to urgency for a rate hike.

Today we had data from the UK and waiting for Inflation from the Euro area and the ADP report from the US

ECB and NonFarm Payroll – the most important week of the year

The week is one of the most important of the year – by Junaid Wilson.

The main driver in the foreign exchange market is monetary policy, and week we will see if the divergence between the FED and ECB widens.

ECB policy decision: Even though there is great uncertainty about what the ECB will do, on Thursday expectations for additional action seems nearly universal.

On the other hand, it may be significant in that in confirms that the divergence of monetary policy may persist, which in turn begs the question of how much has been been discounted.

 

Previously Draghi had indicated that at this rate, monetary policy had been exhausted.  More recently, Draghi have indicated that a lower deposit rate could still be helpful.  The interest rate market appears to be pricing in about a 0.5-0.7 bp cut in the deposit rate while surveys suggest the market is divided between 0.10 and 0.20 cut a slight majority at the lower end.

This month’s jobs report takes on extra special meaning, This report is seen as the last hurdle to an FOMC decision later on December 16 to deliver the much-anticipated rate hike.

No one expects a repeat of the 271k increase in October non-farm payrolls.  It was the best of the year, the consensus is for around 200k.

Today should be a light trading day, as it’s the last day of the month and we have a busy week ahead of us. We have economic realises from the UK: consumer spending and the EU: CPI

Market Analysis – ECB Minutes and FOMC summary

Market Analysis by Junaid Wilson

FOMC voters weren’t ready for a rate hike in October but they sensed that conditions could be met in December. This is the inspiration for the unusual reference in the October FOMC statement to the upcoming importance of the December meeting, a reference that together with the very strong October employment report are pointing strongly to a December rate hike.

And the odds for a hike shouldn’t shift that much following yesterday’s minutes. The Fed’s two policy goals, which are stated and restated again and again in the minutes, employment does look like it’s improving. The second is less certain, as most readings on inflation are not moving with any certainty toward the Fed’s 2 percent target

And the minutes definitely offer very dovish overtones from some non-voters at the meeting who were concerned that the addition of the reference to the December meeting was too strong, adding that it was unlikely that economic data would warrant a lift-off in December. Several even suggested consideration of new monetary stimulus if the economy fizzled.

Investors reacted by increasing the odds for a rate increase next month to 72%, from 64% on Tuesday, based on interest rate futures prices.

The dollar pulled back in Asian trading on Thursday as investors took profits following its rise to seven-month highs, as Federal Reserve officials confirmed the likeliness of a September rate hike

The dollar index, was down about 0.4% at 99.217. It hit a high of 99.853 overnight, closing in on its 12-year peak of 100.39

Looking forward today, the main event will be ECB minutes from their last meeting. The ECB will release the minutes of its latest policy meeting later in the session, which investors will scan for clues to what the central bank might do in December.

 

Market Analysis – FOMC minutes realise

Market Analysis – FOMC minutes realise, by Junaid Wilson

Yesterday, was dominated by the USD bulls pushing the USD vs EUR to 7 years lows. Gains for stocks were erased, due to a bomb threat, of a football match in Europe where Angela Merkel was to attend. We had a fair amount of economic data realises throughout the day with better then consensus CPI reports from both the UK and UK. The manufacturing component of the US industrial production report, boosted by wide strength, posted a strong gain and offers a lift for the struggling sector.

 

Consumer prices moved in line with expectations in October. A 0.1% monthly rise in the CPI reversed September’s decline but left the YoY inflation rate unchanged at -0.1%. This was the third month in a row that inflation has been either zero or below.

The main change in the annual rate came from clothing and footwear where prices rose 2.0% MoM compared with a 0.6 percent increase during the same period a year ago. The other boosts were from recreation and culture where a 0.8 percent monthly gain this year was double the rate posted in 2014.

GBP vs USD had a significant rally on the back of this report as risks of deflation in the United Kingdom have already been priced into the market. But due to the board strength dollar the GBP gave back gains throughout the trading day.

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The day’s US economic news is solid and points to a December rate hike. Turning to inflation, consumer prices remain subdued but core inflation, driven by higher service costs, is getting higher.

US Consumer prices are showing some lift but not pressure The CPI rose 0.2 percent in October with the core also up 0.2 percent, both hitting expectations. YoY, CPI is up only 0.2% which is up from zero in September while the core is unchanged at plus 1.9 percent which is right at the Fed’s 2 percent goal.

Energy prices rose 0.3 percent in the month following steep plunges in the prior two months. YoY, energy is down 17 percent with oil at the pump down 28 percent. Food prices were weak, up only 0.1% in October with the year-on-year rate at only plus 1.6 percent.

Industrial production fell 0.2% in October but the weakness was in utilities and mining. Boosted by construction supplies, manufacturing, which is the core component in this report, rose a very solid and higher than consensus 0.4 percent to end two months of decline.

 

Today I will expect a quiet trading day as we have the FOMC minutes realise late in the US trading session. Investors will scan the minutes for any clue for when the FED may hike rates that was left out in the October statement.

If the minutes is bullish I will expect to see the USD rally vs all majors and commodity currencies, commodities to fall on the back of a stronger dollar and stock indexes to fall on an anticipated rate hike.

 

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