Tickmill Daily Market Notes

[Tickmill-News]

An analysis in favour of a weak NFP:
for weaknesses in the US economy.
After the Fed characterized the growth of economic activity in the US as “strong” at a meeting on Wednesday, it is unlikely that any economic report will surprise the market, even if it beats the forecasts. Therefore, today’s report does not hold much hope, the general Fed tightening course comparing to other Central Banks is now a sufficient driver of growth for the dollar. But do not assume that a negative deviation in the report will also pass unnoticed.

The case below is in favor of the second option.

As was indicated by the ADP report released on Wednesday, the US economy is likely to have maintained a high rate of hiring in July. The growth of jobs according to an unofficial estimate amounted to 219K jobs, which exceeded the forecast of 186K. The indicator of employment from the ISM changed insignificantly in July compared to the previous value of 56.5 points. Values above 50 signal that the economy is in a state of recovery.

High consumer optimism in July (127.1 points) indirectly indicates a possible improvement in pay and a rise in vacancies, since consumers usually closely associate their well-being in the future with rising incomes and the ability to change jobs.

As for unemployment in the US, in July we see the following change of unemployment benefits:

“Fresh” unemployment (initial applications):

Note: the blue line is the actual reading, the purple line is the forecast.

In July, the rate of initial unemployment claims was below projections throughout the month. This suggests that the pace of transition from the category of employed to the unemployed declined faster than expected, which is undoubtedly good for economy. This could indicate one of two things – either the working conditions are good, and wages are sufficiently high which could mean that people are less willing to leave the jobs, or the forcedly stay at work, which is certainly unlikely. In the second scenario, the rate of layoffs is also growing, so if the economic situation worsens, the indicator of initial claims will grow more rapidly.

That is, according to the initial claims report, July proved to be very successful for the labor market.

Now let’s take a look at the “old” unemployment (continued claims):

Throughout July, the indicator exceeded the estimate. It turns out that finding a new job or starting to work was harder for unemployed than expected. Given that some economic reports such as ISM Employment or PMI indicators warned of a growing labor market deficit, a weak indicator of continued claims indicates a “disconnect” in supply and demand-side qualifications. That is, employers, for example, make demand for workers of high qualification, and the labor supply is mainly represented by low-skilled labor force (a common scenario happens). However, what is interesting here is that a structural problem could hinder the growth of wages.

As you probably already know, inflow into the labor force (population 16-64 years) is about 100K per month in the US (supply increment). We add to this number the part of labor force who turned into unemployed and claimed for unemployment benefits for the first time. It turns out that in order not to widen the deficit in the labor market, the remaining new jobs, roughly speaking, should be covered, by a reduction in the previously unemployed (continued claims). We do not take into account the slight fluctuations in the level of participation in the labor force.

Let’s take a look at the change of continued claims for the last three months:

In May – the indicator decreased and was mainly below the forecasts, that month BLS released reports on the growth of employment in almost all sectors. In June, the indicator was also better than expected, with a continued decline, BLS reports a reduction of 21K jobs in the retail sector. In July, we see that the indicator is worse than the forecasts, so we can assume that the Labor Department will indicate a reduction in activity or lack of expansion in several sectors. The forecast for pay and the increase in jobs are respectively moderate.

References to the reports of the Ministry of Labor:

For May: https://www.bls.gov/ces/highlights052018.pdf

For June: https://www.bls.gov/web/empsit/ceshighlights.pdf

Sector reports will be useful to study in the context of Trump tariffs, for example, slowing employment growth or layoffs in industries that have already been affected by tariffs (for example, steel). It is possible to single out the following sectors, which use steel intensively:

1. 
   
   
   • Construction
   • Transport and mechanical engineering
   • Infrastructure for Energy
   • Packaging
   • Household appliances

For June, in all sectors as a whole, we see job growth.

The impact of tariffs has not yet been traced in terms of employment. But as the accommodation is gradual, the reduction in the use of labor cannot follow immediately, and we will explore July for the reaction of firms to tariffs in terms of hiring. Along with the Fed’s bullish position, it is also worth recalling the statements by Powell that “small US firms already feel the tariffs. This is not visible in the aggregated data, but signs of economic discomfort will show up gradually. ”

Today, I’ve presented the case in favor of a weak NFP, which could hinder the growth of the dollar. In general, everything seems to be working out alright for the US economy, and there seems to be no reason for worries, but “smart money” is probably already in search of the first signs of weakness, isn’t it?

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]

Turkish turmoil pauses but uncertainty is high
USDTRY retreated today from the record highs reached on Monday, as the speculators’ attack ended with profit taking, investors started analyzing the CBR’s measures to stabilize the foreign exchange market.

Yesterday, “hot money” sent the lira in knockout to the level of 7.24, the maximum since the revaluation of the lira in the past decade. Today the main issue is the nature of the pullback – the debate focuses on whether it occurs on the grounds of a retreat of the Turkish crisis and emerging markets in general, or because traders took a halt before resuming pressure on the lira. It is interesting that the rate of the CDS after the end of last week’s takeoff did not follow the rollback of the lira, stabilizing at the level of 540 points:

This suggests that either the fears about defaults on Turkish bonds remain high or that the strengthening of the Turkish currency is the result of the Central Bank’s actions.

Yesterday’s plan of the regulator included reducing the reserve ratio by 4%, an increase in repo auctions, in which banks were given short-term currency liquidity against government bonds. Also, banks will be able to increase the borrowing of foreign currency deposits for a month, in addition to loans for one week.

However, it is obvious that emergency measures will not be able to solve the systemic problems of Turkey – the impressive deficit of the current account, the inadequate level of the Central Bank’s currency reserves and the ideological opposition of President Erdogan to standard monetarist ideas for stimulating the economy. Turkey’s gold reserves fell sharply from 582.2 tons in the first quarter to 236 tons in the second quarter. Foreign exchange reserves in May amounted to 130 billion dollars and probably also fell sharply in recent months. Erdogan called interest rates “evil”, so the prevailing market consensus that Turkey can help short-term rate increase by 10% is probably not realized.
The publication of the CBR’s plan to save the lira failed to convince foreign capital to return to Turkish bonds – the yield on 10-year treasury bonds (TR10Y) only halted the explosive growth, falling from a peak of 22.580% on Monday to 22.415% on Tuesday. This once again proves that investors are waiting for concrete decisions from the government of Turkey on long-term stabilization of the economy.

Chinese economic data released today did not meet expectations, retail sales and industrial production grew by a lower value than anticipated. Key growth drivers are starting to undermine the Chinese economy which is giving more leakage because of trade tensions with the US. The growth of capital investments, the key leading indicator for Chinese production, grew by only 5.5% instead of the expected 6.0%. Usually companies increase their investments in fixed assets when they expect the increase in demand for their products, but in China there is a reverse trend.

Economic reports, however, contributed mildly to fears over the Chinese economy and did not cause additional weakening of the yuan. USDCNY is in a narrow range, close to the maximum of 6.90 and the return of the markets to a trade dispute with the US is likely to lead to further downturn, because ahead of us is a series of events related to the escalation of the conflict, and not its resolution. In particular, this decision of China on the tariffs for 16 billion US exports to China, which will be adopted on August 23. At the end of this month, news on the new Trump tariffs for 200 billion Chinese goods is expected.

The pound sterling failed to get a positive recharge from the labor market’s; job growth and wage growth did not live up to expectations. The British currency is trading near the opening against the dollar at 1.2770. The absence of signs of inflationary pressure on the wages front, unfortunately, sets weak expectations for tomorrow’s inflation despite a sharp weakening of the pound. The chances of growth in the British currency are declining.

Eurozone production data and improvement of ZEW optimism indicators could not help the euro, as the European currency is now concerned about the situation in Turkey, especially after the Central Bank expressed concern over the consequences of the Turkish crisis on the European territory. The euro could probably win back some of the losses against the dollar, but this could be a short-term relapse.

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.

 

[jellyeb]

Thanks, what's your view on EURUSD next week?

 

[Tickmill-News]

Initial Dollar move on Powell speech could be reversed.

On Friday, Federal Reserve Chairman Powell delivered a speech at the meeting in Jackson Hole. There were no surprises in the speech and as expected, all remarks emphasized the Fed’s gradual approach to tightening the policy. The content of the speech in many respects echoes the opinion of the Federal Reserve in the Minutes of the July meeting, where officials also expected the continuation of significant economic growth, and since “there were no increased risks of overheating,” the process of “gradual normalization of the policy will remain to be appropriate.”

In light of the CPI increase to 2.4% in July, which is above the target level of 2%, the phrase “we did not notice signs of accelerating inflation above 2%” was a little disappointing and signaled the beginning for the sale of the dollar. The report for the most part became a bearish catalyst, which was also reflected in the upside move of US stock indices

Powell said that there are reasons to expect that good economic performance will persist for some time.

The speech was much like a lesson on theoretical macroeconomics, as Powell began to discuss the Fed’s approach to monetary policy, which is based on the natural rate of unemployment (NAIRU). This is the next stage in the evolution of the Phillips curve, where the relationship between inflation and unemployment may vary depending on the level inflationary expectations.

Roughly speaking, the policy of the Federal Reserve is based on the theoretical definition of the natural jobless rate, then applying policy tools which as a result pull inflation to the desired level. The problem is that NAIRU is an unobservable value that can vary depending on the structural features of the economy. A nice example is a decline in labor productivity, economic mobility in the US or automation of production. If the Central Bank is pursuing a false level of NAIRU (for example, believes that it is below the true level), then its policy will ultimately lead to an increase in inflation with the inflation-unemployment relationship moving to a new level.

The Fed’s natural unemployment rate is now set at 5%, while the latest actual figure is about 4%, that is, the regulator already allows the jobless rate to stay below NAIRU’s, thus biased to stimulus measure, rather than control which is fraught with the acceleration of inflationary expectations. According to the University of Michigan, in June, inflation expectations jumped to 3.0%:

In this case, the Fed would have to raise rates faster to prevent the acceleration of inflationary expectations, but the answer lies in the fact that the Fed does not want to interrupt the expansion of the economy too quickly:

Perhaps Powell just wanted to please Trump, after his recent discontent with the Fed’s work. After all, the request is essentially fulfilled. Now with a less aggressive Fed, Trump can more confidently attack China with new tariffs.

The short-term effect for the dollar is definitely negative, but given that the Fed is ready to support expansion by a gradual increase in rates, concerns about the volatility of the expansion of the US economy could subside. The growth of stock indices on Powell’s soft speech also allows room for breathing out, as the immediate threat of expensive loans had also receded the American firms. There may be an inflow of capital into dollar if data on GDP on Wednesday live up to elevated hopes.

The strengthening of the yuan on Friday, after the authorities announced the return of the counter-cyclical factor in calculating the “reference rate”, finally dispelled the myth of its intentional devaluation. The dollar also suffered from this news, while the strengthening of the yuan signaled a sign of stability in the region, and an end to the outflow from emerging markets. Today USDCNY added 0.32% at the time of writing, the dollar index is stable at 95.17, and with the approach of the date of possible introduction of new tariffs, the weakening of the Chinese currency is likely to resume. On Friday, we are waiting for important data on activity in the manufacturing and service sectors, the Chinese yuan remains very sensitive to these data, as history shows over the past few months.

Geopolitics remains a negative factor for the dollar as relations with North Korea are deteriorating again. Trump withdrew Pompeo’s visit to the country, in addition, North Korea accuses the US of wanting to overthrow the government in the country, along with a “smile on its face.” Against this background, gold can even add more, as well as other defensive assets. USDJPY fell today at 0.15%, gold is holding just above the opening.

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 Dollar waits for trade balance and GDP data to determine direction

American stock indices struggled on Monday at historic peaks, the S&P 500 safely beat its own record approaching the 2900 mark. Monday’s rise is largely a result of Powell’s speech who noted that during the expansion of the economy there is no need to rush to raise rates. As an example, he cited the policy of Alan Greenspan in the 90s, which, contrary to market expectations of the return of high inflation, chose to wait for reliable signals about this before raising rates.

The US deal with Mexico under the NAFTA agreement and the expectation that Canada will soon join it allowed the markets to shyly bet on improving the state of affairs in world trade. The Australian and Asian markets reacted positively to the news.

Rumours that the US hastened the EU with the settlement of trade disputes also had a positive impact on the appetite for risk. On Monday, the White House reported that Trump and Merkel had telephone conversations in which both sides supported the need to remove trade barriers. European markets closed in positive territory on Monday.

Positive shifts in trade on the American continent have not yet been extrapolated to global trade, especially, US relations with China, since the nature of the claims to the Celestial Empire as a competitor in the high-tech sphere are somewhat different. Broad state support for enterprises, both financial and implicit regulatory, export subsidies, the relative closure of the domestic trading market, manipulation of the yuan, undermine, in the opinion of the US administration, the principles of free competition and fairness in trade. China is trying to fight back with the increase in purchases of hydrocarbons and some sensitive items of US exports, but so far, unsuccessfully.

The recent low-level talks between the representatives of the two countries, reached a deadlock and in a few hours after the end, additional tariffs were introduced for 16 billion dollars from both sides. The aggregate amount of goods that fell under the tariffs amounted to 100 billion dollars.

Now the US administration is in the process of developing new tariffs and news has already appeared that the US is going to introduce wheel rim tariffs, which, according to the US, are heavily subsidized (from 50% to 175%). The duties will be introduced in proportion to these subsidies.

The dollar index fell to the level of 94.60, but the cautious nature of the dollar’s decline against other major currencies indicates a correctional nature of the movement, rather than full-scale sell-off. Support from the Fed, as I noted in my previous article, will allow Trump to fight more confidently against China, so the new tariffs and the potential for a jump in inflation as a consequence, so far remains relevant as an upside risk to the dollar. The economic picture so far also indicates the preponderance of the dollar, because other world Central banks remain unsure of the need to tighten the policy, just because of the lack of strong signals from inflation and rising wages.

Data on the US trade balance for July, which will come out later today, will help evaluate the effectiveness of the protection policy of Trump. The previous two months, the trade surplus shrank, indicating either a decrease in imports or an increase in exports, or their combined effect. On Wednesday we expect data on US GDP for the second quarter, which will also affect the dynamics of the dollar. Data on personal consumption allow us to assess consumer inflation and the effect of income on consumption patterns. Demand for tomorrow’s auction of treasury 2-year and 7-year securities will allow us to look at the market’s reaction to the massive increase in public debt due to the financing of the tax reform.

The Turkish lira continues to slowly bear losses against the dollar, after a brief relief against the publication of measures to reduce the pressure of speculators on the lira, US tension and Turkey’s debt problems again come to the fore as risks for the Turkish currency. USDTRY topped 6.20 on Tuesday.

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]

Dollar to come back?

Yesterday, the dollar index broke through support at 94.50 and touched the level of 94.30 before the recovery.

For several days I have been writing about the comeback of US, and today it finally seems as it might happen.


Yesterday, the dollar index broke through support at 94.50 and touched the level of 94.30 before the recovery, but what is interesting is that there is still no full-scale sell-off of the dollar. The joint move of the major currencies in the dollar index, ie. EUR, JPY, GBP, and CAD, shows that they exerted uneven pressure on the dollar in the last two weeks. In particular, the leaders of growth were CAD and EUR, while JPY and GBP grew weaker, i.е. incidentally reacting on domestic issues in Japan and UK:

Approximately for the same period there was an outflow from German Bunds, one of the main indicators of risk-taking. Their yield has grown with the hopes that the EM storm has passed. Euro could receive the boost particularly from the bond market outflow:

The Turkish lira remains a risk factor – today USDTRY is already 6.30, while the other EM currencies are also in negative territory, though in modest terms.


And the reason is one, every new portion of good economic data means tighter Fed policies, which means the contraction of dollar liquidity and as a consequence troubles for countries that borrowed heavily in dollars, for example Turkey.


What has happened to signify a likely positive change for the US economy? The index of consumer optimism jumped as much as 133.4 points in July. The market had not seen such significant rise in 18 years!


The US trade deficit widened to 72.2 billion dollars, slightly higher than expected, but now it is less important.


It was clear that the market overestimated Powell’s speech in Jackson Hole, there are already articles in the FT, what Powell is cunning and that he wants to please everyone. In my opinion, the Fed will raise the rates at planned, and as such, I could argue that we should not expect a deviation from the course when consumer optimism is breaking records.



We recall that consumption is the main component of growth in the US -72% of GDP. And if you take into account the leading nature of the indicator, then such a leap definitely lays the foundation for good wages and as a consequence leads solid figures in consumer inflation.

The dollar could receive a boost from the economy’s side from today.


Today, data on GDP, tomorrow on consumption, in general, there is something to focus on, while politics is on the sidelines. The data will probably become an additional trigger for strengthening the dollar.


The Chinese yuan is falling today, though cautiously, the news of the inclusion of a counter-cyclical factor in the calculation so far is weakly asserting itself. Gold is just above the opening, but is trying to go below 1200, hinting that the correction after the dive at 1160 may be over. The


National Development and Reform Commission published on their site a bitter note that some goals in the second half of the year may not be achieved. So it is not surprising, tariffs caught China at the time of barely noticeable signs of the economy’s weakness and a large-scale campaign to reduce financial leverage in the economy. Now, they can’t keep pursuing all goals at once – either go back to easing mode and keep accumulating debt, or sacrifice growth, but smooth out the negative effects of previous stimulus package.


The burden of this hard trade-off will now hang for a long time on the shoulders of the Chinese authorities.


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]

EM seems to be preparing a new surprise for investors

The dollar stages another growth attempt, after pulling back to local support at 94.40 on Wednesday. Yesterday’s attempt to hike failed as the upbeat data on GDP did not make any impression on the market. But the clouds gathering in the EM markets today, promise to unnerve traders once again.

Oil traders were highly upbeat on Wednesday after EIA data on reserves unexpectedly pleased for a second week in a row. The market continues to receive reports that Iran will find it increasingly difficult to find buyers for its oil under US sanctions and it is preparing for the most stringent response, for example, blocking the strait of Hormuz.

The decline in US reserves occurs for the second week in a row and both times it caught the market by surprise. Commercial inventories fell by 2.6 million barrels with a forecast of -1.5M. Demand for gasoline in the US probably increased, as firms reduced their reserves by 1.5M barrels, with expectations of 0 change.

“OPEC will consider the possibility of compensation for the fall in production in Iran due to sanctions that will enter into force in November,” the Iraqi oil official said on Wednesday. It turns out that the oil purchases of the allies will not save Iran’s oil sector despite their bold statements that it’s not the first time to sell oil under sanctions.

According to IEA calculations, exports from Iran in August could fall from 3.1M in April to 2M in August, mainly because of falling orders from South Korea and Japan. The interruptions in market supply due to dropping exports from Iran and Venezuela and the growing appetite in Asia may allow the rumors to circulate again about the tightening market by the end of the year. The head of IEA Fatih Birol expressed similar concerns on Wednesday.

Pound got its wings yesterday and flew above 1.30 following news related to Brexit. The chief negotiator on Brexit from the EU, Michael Barnier, said that London can get more favorable terms of cooperation with the EU after Brexit. This eased fear associated with the “hard Brexit”. The official noted that the proposal doesn’t include access to the single trade market.

Pound has retreated today back to 1.30, paring back the swift gains. Yesterday, the British currency rose by 1.2% against the dollar. Some “big bears” probably rushed to cover short positions, indicating that the Brexit factor may be the main component in the pressure on the pound, even after the Bank of England’s policies. Let me remind you that the EU summit will be held September 19-20 in Salzburg, where more details will be released on the “process of divorce” with Britain. Peaceful deal of EU with Britain is also important for the euro, as the two countries are important trade partners for one another, so we may see the European currency flying higher.

The pound rally pulled the dollar down, and more importantly, it was the only significant concession of the dollar against other major currencies yesterday. The dollar may lose against the Canadian dollar, if the negotiations on NAFTA end successfully (most likely). It is reasonable to assume that the main movement will begin in the first days of September, when the White House will jolt market sentiments with new tariffs, plus trading will switch from summer to normal autumn mode

EM markets are again depressed today, the main alarm signal comes from the lira, which again aimed at a level of 7 lira per dollar. The Yuan depreciates for the third consecutive day, pointing to the outflow of capital and growing problems in the Chinese economy. The Chinese currency is declining before the release of data on activity in the factories, as well as in the service sector. Domestic demand is expected to remain low, and a decrease in export orders due to uncertainty with tariffs is likely to be reflected in weaker indicators than expected.

Beijing will probably have to respond by easing measures, reducing the cost of credit, increasing government interventions and flooding banks with liquidity. However, such measures will only increase the pressure on the yuan, as the authorities by their actions will officially recognize the approach of the crisis and the need to fight it.

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]

Trump’s tariffs spark new wave of global uncertainty

Asian markets lost ground on Friday amid reports that Trump is ready to open a new chapter in the trade war with China. Chinese stocks were also in the red, eliminating any modest achievements made this week.


EM markets remain weak, the Argentine peso continued to fall despite the rate increase by the Argentine Central Bank. And although the world market managed to relatively isolate itself from the consequences of Argentina’s crisis and the depreciation of the Turkish lira, it seems that this chain of unpleasant events will cause suffering to the markets.


Data released on the Chinese economy on Friday exceeded expectations, albeit slightly. Production activity was 51.3 points in August, only 0.3 points higher than the forecast. Activity in the non-manufacturing sector grew slightly more rapidly, the key indicator was 54.2 points, with a forecast of 53.7. Despite the relief on the economic front of China, ShCOMP continues to target the support level of 2,700, the Chinese yuan has slightly strengthened on the news.


Despite the relative manageability of the yuan exchange rate, an unpleasant consequence of the trade wars was the growth of volatility in USDCNY, which even exceeds the volatility in EURUSD in the last 30 days.


PMI data barely improved the mood, because attention is now focused on the new Trump tariffs. Bloomberg said that the president is ready to push new tariffs at $200 billion Chinese goods, as soon as the public discussion period ends this week. At first, there were doubts that the administration would be able to prepare tariffs in such a short period, but doubts quickly dispelled with the president’s resolute messages.


In an interview with Bloomberg on Thursday, Trump also threatened that he was ready to withdraw the US from WTO if they don’t finally “shape up.” Such an isolationist step is likely to be opposed by the Congress, but there is definitely a benefit from such verbal interventions.

Trump also rejected the European Union’s proposal to take off tariffs on cars, calling the EU’s trade policy “as bad as China’s.”


Canadian and Mexican concessions to the US, which almost led to a new NAFTA agreement, unfortunately, do not yet give grounds to believe that trade disputes with other partners will soon be resolved. In particular, yesterday the Chinese minister said that until the US talks with China on an equal footing, progress in trade negotiations will not be achieved. It seems that Trump’s tariffs aimed at improving the trade balance and the settlement intellectual property issues, are just a cover, in fact, it’s about eliminating a potential competitor in the technological sphere.


EURUSD broke the lower border of the channel on Thursday, recovering from the level of 1.1650, so further growth is limited and news about new tariffs will likely provoke a similar effect to the previous one – a sharp strengthening of the dollar due to expectations of increased inflation and instability in the markets of the emerging countries. If EURUSD fails to consolidate today significantly above 1.1700 – 1.1720, the pair will likely drop next week since the markets will be convinced that the momentum gained since a pullback from 1.13 is lost. The statement of the head of the Central Bank of Austria Ewald Novotny failed to help the euro increase its advantage against the dollar, or had, what appears to be, a very limited effect.

Short positions on the lira appear to be taking profit today, this is evident from the rebound of USDTRY from the level of 6.80 to 6.51 on Friday. However, most likely this will not help the Turkish currency decline to a psychologically important mark of 7 lire per dollar, after which a new spiral of depreciation may begin.


Uncertainty about the future on the financial markets finally woke up sellers of volatility, which closed some of their positions. The VIX index jumped by 10.45% on Friday, primarily due to the fact that the markets are seriously aware of the threat of new US tariffs against China.

As expected, Trump’s new tariffs caused a wave of uncertainty and outflow from markets with high returns. However, the dollar can not boast of the status of a defensive asset this time, as the US and the first signal probably can enter a new round of conflict escalation from the stock market. The market of treasury bonds does not trust the euphoria in the economy and the relatively good mood in the stock market, the yield of 10-year Treasury bonds is declining over the past two days, indicating that demand for risk-free assets is growing.


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]

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:

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.