Tickmill Daily Market Notes

[Tickmill-News]

Fight fire with fire: Chinese banks issue more loans to combat effects of bad debts
After a crushing blow inflicted by Google (shares fell by 6% on the earnings report) Nasdaq futures suffered from additional pressure after Chinese PMI report release, which showed that manufacturing activity in April failed to develop the March impulse.

The rebound in March set the stage for expectations that Chinese economy will enter the second quarter with the claim on recovery after dismal winter, but April data were a big disappointment. Both productive and services sector have torn the groundwork of March, broad activity indices decreased from 50.5 to 50.1 and from 54.8 to 54.3, respectively. The estimate of production activity from Caixin, which adds more weigh to small enterprises in the index formula, also decreased from 50.8 to 50.2 points, contrary to the forecast of 50.9 points.

The decline embraced all components of the index what brought additional damage to hawkish beliefs on the markets. The leading index of new orders declined slightly, remaining in the expansion zone. However, the index of new export orders fell below 50 points, indicating a cooling in external demand.

The output component fell along with the urban unemployment component. In March, the unemployment rate navigated to the 74-month low, before the labor market cooled in April. The inventory index returned to negative territory, the goods delivery time index strengthened, indicating an acceleration of capital turnover for producers.

The pressure in prices of manufactured goods and other costs declined showed corresponding index, which of course means a less favorable outlook for consumer inflation. The balance of incentives for tightening vs. additional credit easing for the Chinese government should remain at the same level, or perhaps slightly shift in favor of counter-cyclicality (more easing).

A wait-and-see attitude may not be completely comfortable to the government when taking into account curious fact that the weak economy in 1Q, the massive infusion of liquidity (4.6 trillion yuan in January) coincided with increased ratio of bad loans to the highest level almost for three years:

At the same time, despite the slowdown in the economy, which is usually accompanied by the reduction of attractive borrowers and the growth of defaults, Chinese banks, in unison with the Central Bank, almost doubled the issuance of loans in the first quarter compared to Q4 2018:

A brilliant example of what a low level of independence in the decisions have large Chinese banks. Fight fire with fire!

The lagging of China’s banking sector shares from the ShComp broad index (19% vs. 23% YTD) may just be a concern about the increase of bad loan provisions, which, of course, will have a negative impact on EPS.

According to a survey by China Orient Asset Management (one of four state-owned companies managing bad debts), 45% of the 202 surveyed managers of Chinese banks believe that bad loans will update the record in 2019.

The implications for the rest of the world are the implicit boost to risk appetite due to the fact that the Chinese economy should remain afloat, because quickly stopping support for banks, drowning in bad credit, can be hardly included in the government plans.

 

[Tickmill-News]

More than simply a trade truce
The signs of softening stance of the White House in talks with China before the two leaders met at the G-20 summit (Trump’s phone call to Xi, reports about “extended ” meeting), to the general surprise, were not empty speculations, but a forerunner to extending the truce. The results of the meeting between Trump and Xi set a new vector of cooperation between the two states, as Trump accepted some Chinese demands, such as extending pause in tariff escalation and easing of pressure on Huawei. Markets welcomed this decision by increasing the demand for risky assets, the dollar strengthened, the yield on 10-year notes rose, and SPX futures began trading with a positive gap at around 2975 points.

And if the tariff truce was within the range of expected scenarios, then the removal of some restrictions on Huawei prompted China to return to the negotiating table, which considered attacks on the Chinese telecom giant as forcing to negotiate with a “gun pointed to its head”. China, in exchange for easing sanctions on Huawei agreed to increase purchases of agricultural products in unspecified amount. Its manufacturers in the United States suffer huge losses, hit by the millstones of the tariff war.

The chance of a rate cut by 50 bp in July keeps declining, according to futures trading with interest rate as an underlying asset, but the market remains confident that the Fed will lower the rate in July by at least 25 bp.

Asian stock markets got the biggest relief from the Trump-Xi decision. The Japanese Nikkei jumped by 2.1%, the Chinese CSI 300 by 2.6%, as the pause in the exchange of tariffs will allow firms to expand the horizon of production planning, which should add confidence to Chinese firms in decisions to boost hiring and capital investments.

The official index of manufacturing activity in China fell to 49.4 points in June, remaining in the contraction territory for the third month, the data showed on Monday. The activity index of China’s factories, calculated by Caixin, dropped to 49.4 points, the worst since January of this year. Manufacturing PMI includes several sub-indices, such as output, new orders, input and output prices, delivery time of raw materials by suppliers, inventories, employment, etc. Despite the decline in the component of new orders (from 49.8 to 49.6 points), and hiring (from 47.0 to 46.9 points) the positive part of the report was a rebound in activity of small enterprises from 47.8 to 48.3 points:

Recall that small enterprises in China endured greatest pain from the tariff war since the combination of slowdown in growth and credit crunch led to credit tightening especially to this type of firms. Banks are willing to lend to large enterprises, seeking to maintain “healthy” assets on the balance sheet because of increasing probability of default by corporate borrowers. By this, they effectively block the channel of cheap liquidity opened by the Central Bank, intended for small firms.

It is not known whether the Chinese authorities will keep pause before new stimulus measures (favoured by the outcome of the Osaka meeting), but with the deterioration of the manufacturing sector, the likelihood of expanding support measures is increasing, which should support risk appetite not only in the Chinese stock market, but also abroad in the form of lower demand for “safe havens”.

European data increased pressure on the euro. Activity indices in production in Italy, France and Germany continued to fall. Unemployment in Germany fell by 1K, the unemployment rate in the Eurozone fell more strongly than expectations to 7.5%. EURUSD is heading to 1.13 level, losing almost half of percent today.

 

[Tickmill-News]

Saudi Arabia Under Pressure as the “Oil Market Goes Green”
Oil prices renewed their decline, maintaining the bearish tone set on Monday. US producers are gradually resuming oil production in the Gulf of Mexico after Hurricane Barry, in what serves as the basis for downbeat expectations for API and EIA inventory updates this week.

The rebound of Chinese economy in June, particularly in industrial production and retail sales, left a light imprint of buying activity in oil prices on Monday. However, it failed to gain a foothold, as the forecast for global economic growth (and therefore oil consumption) remains flimsy. This is further evidenced by the dovish stance of the ECB and Fed, ready to combat recession, while American oil producers are ramping up production, maintaining concerns about the glut.

On January 1, 2020, the International Maritime Organization will enforce new standards for ship fuel, designed to significantly reduce emissions of harmful gases into the atmosphere. This will be one of the biggest shifts in the oil market, as ships burn about 3 million barrels of high sulfur oil every day. These new standards will obviously create an excess of “dirty” fuels on the market and increased demand for standards-compliant fuels.

The allowable sulphur content is planned to be reduced from the current 3.5% to 0.5%. The average sulfur concentration now stands at 2.7% with a very low percentage of ships currently sticking to the new emission norms. The profits of refineries that focus on refining dirty oil will be under pressure, and this is especially true for companies in Saudi Arabia. Below is the matrix of oil grades in two ways – by density and sulfur content:

Also, for ships that are not going to switch to clean fuel, it is possible to use special installations that reduce the content of harmful substances in emissions.

The market is also under pressure due to discouraging reports from the EIA, which sees no end in sight to the potential for growth in US oil production. According to the latest forecasts, production in seven major fields will grow by 49K in August to a record 8.55 million barrels per day. The total production in the United States now exceeds 12 million barrels and is expected to rise further.

On Monday, the volume of suspended capacity in the Gulf of Mexico was 1.3 M barrels per day. On a selected day from Sunday to Monday, producers restored production to 80K barrels per day however, the recovery rate is expected to increase. Capacity utilization on some platforms reaches only 31%. Workers of more than 280 drilling platforms were evacuated but they are expected to return to their jobs in a few days after the storm leaves the region.

Risk Warning: 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 and Vietnam: from “Best Friends” to Trade Rivals?
Next possible leg of the trade war may affect countries that have emerged victorious at the expense of first victims. This assumption is explained by the fact that losing the accumulated trade and economic advantage is more expensive for any economy than simply missing it out – and Trump understands this perfectly well. Already very attractive for the US president is the ability to knock out concessions from China’s small neighbour, Vietnam, which is seen as one of the main beneficiaries of the transformation of the supply chains in the trade between the US and China:

Trump just needs to make a threat, but can Vietnam avoid this or a new trade front with an East Asian country is only a matter of time?

First, it is worth remembering that in May, the US Treasury Department included Vietnam in the list of potential currency manipulators, which gives Trump a formal pretext for imposing tariffs on Vietnamese goods if the fact of deliberate devaluation is proved. This threat has already led to the introduction of 400% of the tariffs on steel imports from Vietnam, which was produced in South Korea or Taiwan. Thus, the role of the country as an “unwitting accomplice” is being blocked, also serving as a warning that the connivance of the authorities will be punished specifically with tariffs on Vietnamese goods.

And there is a reason for this. For example, there are allegations that Chinese goods are “rebranding” in Vietnam and exported to the United States under the guise of Vietnamese goods. The rise of exports from China to Vietnam and from Vietnam to the United States indicates that there may be a phenomenon that US officials call “transshipment”:

As can be seen, China’s exports of key goods to the United States have shrunk along the “short route” and have grown along the “long route” through Vietnam.

If the United States introduces 25% tariffs on imports from Vietnam, considering that the severity of misconduct is commensurate with Chinese, then according to some estimates, this could lead to a reduction in export volumes by 25% and a loss of 1% of GDP. The United States continues to be Vietnam’s main trading partner, and vice versa, the share of US exports to Vietnam, especially in terms of agricultural products, has risen sharply:

Last month, Trump stunned the Vietnamese authorities with statements that Vietnam was “the worst abuser in the trade of everybody” and “fairness in trade with Vietnam may even be less than with China.” Back in 2016, after entering the presidency, Trump made similar complaints, but the contract for Boeing purchases of several billion dollars and the trend to strengthen alliances with China’s neighbours, in the opinion of the Vietnamese authorities, have become a reliable dam protecting the country from criticism of the POTUS. But it was not there. Trump expressed discontent with the explosive growth of Vietnam’s trade surplus with the United States, which in the first five months of this year reached $21.6 billion, almost doubling compared to the same period last year.

Several sources claim that Vietnam made several promises to Washington related to trade, and Trump’s recent criticism can only accelerate their implementation. For example, the development of a law on the creation of three free economic zones, which, according to fears of local firms, could go under the control of China, was suspended indefinitely, demonstrating to Washington that the trend of rapprochement with a neighbour was interrupted. Nevertheless, Vietnam is also working on a “spare airfield”, having entered into the Trans-Pacific Agreement (from which the United States left) and signed a free trade agreement with the European Union. Together they can mitigate damage from possible US sanctions.

Thus, the chances of introducing trade tariffs against Vietnam will directly depend on:

1. Dynamics of transshipment operations, where Vietnam serves as a gasket between China’s exporters and US importers. The lack of repression and conniving routes – loopholes is likely to provoke a new wave of criticism from Trump.
2. Vietnam surplus with the United States. The main item of US exports to Vietnam is agricultural products (4 billion dollars in 2018). If purchases will grow at a faster pace, it can be assumed that countries have agreed on something.
3. Cooperation in the military sphere. In terms of concrete numbers, this should be increased purchases of American weapons and equipment. This should be a more reliable signal of preference for cooperation with the United States to balancing between the interests of superpowers (i.e. US and China and probably Russia).

 

[Tickmill-News]

Reserve Currency Status as a Factor for Medium-term Dollar Decline
The status of reserve currency should be necessarily supported by an economic power of the issuing country as it makes possible for the currency to assume key functions of money – a means of payment and store of value (protection of purchasing power). Within one country, the money is empowered with these functions via monopolisation of the money supply by single body (state) as well as enforcement of their use, covered in the notion of “legal tender”. If we talk about world economy where different currencies exist and no enforcement can be carried out, other natural mechanisms are instead at work, namely:

• The dominant share of the country’s GDP in world output and product diversity. The more goods or services you can buy for a reserve currency, and the wider their range, the greater the chance that this currency will become a transnational means of payment. All previous economies, which currencies held the status of reserve, met this criterion, but, oddly enough, only temporarily:

• Low and stable price level growth. Low inflation provides a better protection of purchasing power relative to other currencies, which makes savings in it more attractive;
• Efficient capital markets, which provides a quick and cheap transformation of savings into investments.

From the standpoint of inflation, there are no wide inflation gaps between world powers, like persistently high inflation in US Dollar and low in the Euro what makes Euro more attractive & puts pressure on dollar as reserve currency, as the inflation slackening became global issue. Same with capital markets, US still rocks. But if we talk about economic growth, technological advancement and competition, the dollar losing the role as global means of payment is becoming an increasingly relevant topic for discussion. The July note of Morgan Stanley’s investment strategy, entitled “Exorbitant dollar privileges are coming to an end?” was dedicated precisely to the factor of reserve status in the mid-term outlook of the dollar.

The brief conclusion is that MS analysts have lost faith in the dollar, believing that it will soon lose the status of reserve currency (which will cause its decline in the medium term) due to structural changes and cyclical impediments. After one hundred years of dollar domination, investors have accumulated significant positions in dollars, but feel quite comfortable with this overweight. Diversification makes sense if investors put more weight on Asian currencies and EM, however, to keep it safe, the underlying assets may remain the same, but investment instruments will be denominated in other currencies, which will balance out the FX proportions.

This is the current and recommended currency composition of MS client portfolios:

The bank’s analysts point out that the accelerated growth rate of China’s GDP at purchasing power parity, as well as the improving balance between low and high value added sectors, create the necessary basis for increasing the share of the yuan in world calculations once the country takes more decisive steps to liberalise the monetary regime:

Source: IMF, J.P. Morgan Private Bank Economics

Source: Bloomberg, J.P. Morgan Private Bank Economics

Over 70 years, China’s GDP has more than quadrupled to 20%, compared with 25% of the United States. The growth of other Southeast economies, such as India, means that the number of transactions in a currency other than the dollar will grow, reducing the relative share of the dollar in the total volume of global transactions. Between 2015 and 2030, the growth of middle-class consumption is estimated at 30 trillion dollars and only 1 trillion dollars will be spent by the middle class of Western economies.

The latest data on central bank reserves show that the share of dollar reserves in the assets of the Central Bank has steadily decreased since 2008:

Source: Exante

However, while the share of global transactions involving the dollar is at a very high level – 85%, the US share in global GDP is only 25%. Strengthening the US position in the oil market suggests that payments for primary products – energy will also be carried out in dollars, which is a strong counter argument to the arguments of JP Morgan, predicting quite swift changes.

What are your thoughts about future dollar dominance? Have your say in the comments section below.

 

[Tickmill-News]

ECB Increases Focus on the Side-effects of NIRP, Warranting new Depths in Negative Rates
ECB’s statement and Draghi’s remarks at the press conference on Thursday set the stage for exploring new bottoms of NIRP, QE and other mitigation measures. But not surprisingly, they did not justify the wildest expectations of euro bears.

Overnight interest rate swaps gave a 50% chance of a rate cut yesterday, but the ECB opted to put off active operations until September. Exploring new depths of negative rates is associated with a rise in imbalances, marginal costs, side effects and possibly unknown surprises, so the ECB needs time to “cover its back” with a thought-out package of measures, rather than acting straightforwardly by cutting rates.

The key side effect is of course greatly reduced profitability of the banking sector. Although banks’ ROE rose from 3% in 2016 to 6% in 2018, profitability is below the long-term cost of capital, estimated by banks at about 8-10%. There were costs of immediate rate cut like further pressure of the yield curve and banks’ net interest margin and they are likely exceeding the costs of “delay” of rate cuts till September. Otherwise, the ECB would follow the Fed’s path, which is expected to preemptively cut the rate by 0.25% next week. The same conclusion can be drawn from the stock index of the banking sector STOXX 600, which, in case of ECB tepid attitude to banks profitability issues, is ready to retest the multi-year bottom:

The package to ease pressure on the banking sector is likely to include a progressive deposit rate (tiering), a new QE package, which can “strengthen” the assets of banks holding bonds on their balance sheets. Exempting a portion of bank reserves from the ECB “deposit tax” may be needed for those countries where costs of maintaining excess reserves are quite high relative to net profits, such as in the case of Germany:

According to the ECB, rates will remain at current levels or below at least until the second half of 2020. “A considerable mass of inflation expectations is moving towards lower inflation”, Draghi said at a press conference. “We don’t like it, so we are determined to act.” Discussions about deposit tiering, which the ECB brings up to the public knowledge indicate that the rates can go much lower, since the only thing holding back the Central Bank in this way are side effects.

As a result, the market prices in a rate cut by 10 basis points in September and almost 25 basis points at the end of next year:

“Diverse” package of easing measures, which Draghi promoted to our attention, gives rise to a very wide rumors in the market about the extent of the bearish surprise in September. Even in the absence of weak economic and sentiments data, considerable moral effort will be required to rely on the rise of the euro. If, of course, the Fed won’t surprise us next week, cutting rate by 50 basis points and urge to prepare for the worst, which is unlikely.

 

[Tickmill-News]

High-tech shares drive growth on the Chinese stock market
Major stock indices in China rose on Friday, posting weekly gains thanks to the high-tech firms’ rally, while investors welcomed the potential progress in US-China trade negotiations. Shares of most companies in the new technology platform, STAR Market, fell on Friday in a take-profit move, posting significant gains in the first week of trading.

CSI 300 blue chip index rose 0.2% to 3.858.57 points as the Shanghai Composite Shanghai Stock Exchange Index also advanced by 0.2%, to 2.944.54 points. For the week, CSI300 scored 1.3%, while SSEC climbed 0.7%. Investors remain focused on the development of Sino-US trade negotiations.

The White House announced on Wednesday, that High-ranking US officials will visit China on Tuesday, July 30, for talks “aimed at improving trade relations between the US and China,”. Tech stocks led the weekly increase. IT-index CSI rose by 5%, while the index, which tracks the main telecommunications companies, gained 3%.

 

[Tickmill-News]

Preview of the Fed Meeting: Hard Data vs. Soft Data Puzzle for the Fed
In the last two or three FOMC meetings, it was increasingly harder for the officials to communicate their decisions properly to the markets. Teetering market expectations fed by conflicting economic and sentiment signals have been especially vulnerable to Fed’s communication mistakes. Recall Fed’s Williams speech about possible response to recessions which market took as a clear guide for a rate cut by 50 basis points. Thankfully, Fed’s spokesman was quick to issue disproof which averted disaster.

The economy and expectations (especially corporate sentiments) are sending conflicting signals, pulling the blanket of monetary policy to each other what makes it difficult for the Fed to be consistent, predictable and adhere to the line of its own medium-term forecasts. It is unknown from where the next shock will appear, which may either prolong the expansion or drive the economy into crisis.

Based on the premise of “data dependence” in determining the policy course, as Powell recalled at the previous meeting, the data for the last month can shed light about possible Fed decision this week. In the following table I compiled recent soft and hard data (statistical data and surveys), two multidirectional vectors which puzzle the Fed:

The big surprise, what complicates matters for the Fed is the acceleration of GDP, retail sales and jobs growth in July. The tax cuts were supposed to run out of steam in 1Q – 2Q of 2019, moreover, the trade war should have quickly depleted this driver of growth. Over the past three months, there has been some improvement in orders for durable goods and capital goods while sales of existing houses have also stabilized.

Surveys of company managers, on the contrary, indicate a fall in optimism in the outlook for demand and investments. So far, these fears “miraculously” haven’t translated into the employment figures, which is growing at relatively robust pace. The growth of layoffs and the slowdown in creating new jobs usually follow in response to declining sales but based on the current state of employment this is clearly not the case. However, Powell has previously stressed that employment, while remaining an important factor in macroeconomic stability, is pushed to the background in terms of forecasting ability. Prolonged decline in unemployment and the weak inflation response in wages and consumer prices show that any obvious connection between them has been lost. Since the pursuit of inflation targets remains the primary task for the Fed, soft monetary policy can now occur simultaneously with the strengthening of the labor market.

By cutting the rate, the Fed will also have to get rid of the stigma of “Trump’s puppet”, since the possible easing of credit conditions will follow precisely Trump’s numerous reproaches that the Fed is holding rates too high.

Important point of the July meeting is the absence of updates on the dot plot, i.e. signal about the long-term plans of the officials. This speaks in favour of dry wordings a la “act as appropriate”, since Powell will have to explain only the “statement” in which officials usually interpret past changes.

Another factor restraining ability to ease policy – inflated stock market which recently renewed historical peaks. It is likely that Powell will again add the phrase about a slightly “stretched valuations”, which also rules out “big rate cut” scenario without obvious recession risks.

There are two days left before the meeting, however futures continue to price high chance of easing by 50 bp. – at 23%. With such expectations the rate cut by 25 bp and reiteration of “patient” stance with scant explanations should be a bullish surprise, what is my current baseline scenario. In this case, we should expect a positive dollar response to the meeting.

 

[Tickmill-News]

BoJ Takes Pause in opening New Season of “Cheap Money”, Complicating Decision for the Fed
Bank of Japan left the amount of monetary stimulus unchanged at the meeting on Tuesday, however, it signaled its readiness to cut rates and ramp up bond purchases significantly if the risks associated with global growth materialize in the domestic economy.

The bank’s decision carries little, if any surprise for the Yen as BoJ has been least successful in forecasting and pushing inflation to the target among its peers and the baseline case for its actions is unlimited assistance to the economy.

But with ECB hitting pause button once more before opening the “new season” of cheap money increases the likelihood that the Fed will take only a modest step towards easing, by only 25 basis points. However, the chance for aggressive rate cut by 50 bp continued to increase, reaching 27.1% on Tuesday. There is a growing conviction among investors that retail sales, GDP, employment and other “lagging” indicators should now worry the Fed less than a drop in corporate optimism and a squeeze of investment. Aggressive rate cut should be the necessary shock that can outweigh caution and distrust, fueled by trading tensions.

Years of low interest rates have eroded the margins of the banking sector in Japan, which brings the Japanese Central Bank to the limit of using non-traditional instruments, apart from inflation being immune to rapid expansion of money supply. For the Central Bank, it is also important to “preserve the ammunition” in the absence of Yen appreciation, which also paves the way for less dovish wordings. If the Fed’s decision causes a strengthening of the yen, the Bank of Japan may expand the horizon of policy guarantees (aka forward guidance) or allow the yields of 10-year bonds to move in a wider range, as was done earlier.

BoJ’s policy stance in July hardly differs from June, but a new line appeared in the statement, which says that the Central Bank is ready to increase stimulus without any hesitation, if the chances that the inflationary momentum is lost, will grow. This is actually rephrasing of the notorious “whatever it takes” wording of Draghi we heard in 2013. But Yen has so far developed resilience to the dovish stunts of the BoJ.

The Japanese yen strengthened against the dollar by a quarter percent due to increased demand for safe assets, as well as return of Japanese investors “home” before the extremely uncertain outcome of tomorrow’s Fed meeting. Together with the yen, gold and the Swiss franc rose by 0.61% and 0.16%, respectively.

 

[Tickmill-News]

Trump Wasn’t Lying When he said that “China needs the deal more than me”
It seems that Trump wasn’t lying when he said that “China needs the deal more than me.” This time the distress signal came from the industrial sector in China, where profits declined at the fastest pace in eight months in October, what also didn’t live up to expectations of the seasonal autumn “bump”:

Industrial profits fell 9.9% year on year, data showed on Wednesday. It was only worse in January-February of this year, when profits naturally fall due to the celebration of the Lunar New Year. In September, profit also turned out to be negative – -5.3%.
The “poisonous mix” for firms was deflation of production prices and rising borrowing costs, despite the efforts of the PBOC. This suggests that external demand for final goods fell, which affected the demand of these enterprises and also for intermediate goods, i.e. for raw materials. Credit impulses of the Central Bank, as a result, cannot get through “bottlenecks”, for example, increased risks of default on firms’ debts, which leads to a tightening of credit ratings. The “traditional channel” of shadow lending (that is, bypassing banks) cannot come to the rescue because of the government crackdown.
The production price index, which changes precede the changes in corporate profit, fell to the lowest level for three years in October. This was also reflected in the manufacturing PMI, where the downtrend has been going on for six months. The subcomponent of export orders has been declining for 17 consecutive months.

Last Tuesday, the NBK played in the big league and lowered the medium-term financing rate, for the first time in several years, since a consistent 7-fold decrease in the reserve ratio has little effect in terms of economy support.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% and 71% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Tickmill-News]

Gold – Does History Repeat Itself?
Gold price has extended buying momentum on Tuesday, developing the takeoff from $1,500 seen on Monday. I guess the explanation for the move lies primarily in the following chart:

As you might expect, I’m talking about inflation expectations in the United States. I also raised this topic in my yesterday post. Since last Friday, average expected inflation over the next five years has jumped from 0.86% to 1.23%. It is well known that gold and the inflation factor in pricing of the dollar are inversely related, which is based on the simple idea that an asset that loses its purchasing power should become cheaper in relation to the asset that retains it.

The latest jump in gold can be explained by the following factors:

• Fundamentally determined weak prospects and an increased expected variance of returns on risky assets;
• Rising concerns of inflation outbreak in the United States thanks to “unlimited” asset purchases by the Fed, which also expanded the range of securities to include corporate and municipal bonds and is now basically in “whatever it takes” mode;
• Basic supply/demand change: expectations an increase in the money supply in the economy contributed to the currency weakness against other majors (including gold) which outweighed demand driven by “flight into cash” motive;

If you look at how gold behaved during and after the previous crisis, there are some parallels that we can draw:

At that time, there were debates whether QE would lead to an acceleration in price growth or not, i.e. at the beginning of QE, there were expectations of this, which was priced in accordingly in the price of gold. I emphasize that QE’s novelty as a policy measure at that time was a volume of guaranteed bond purchases (the Fed achieves its interest rate targets by the same open market operations – treasury purchases that change supply of bank reserves). The novelty of the current measures, in my opinion, is in their volume again, which has potential to lead to similar gold response.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Tickmill-News]

Narrowing Range in Oil Could Suggest Sweeping Move on the Cards
Stock market euphoria, which is also expressed by a global dollar dump, does not resonate with crude oil: WTI trades in a narrowing range around the $23 mark, remaining unimpressed by the dollar weakness and rebound in risk assets:

Such a pattern usually precedes a strong move and there are some reasons to expect the market to lose its temper. Government actions around the world are increasingly saying that countries are making bets on the experience of Wuhan in suppression of the outbreak – organizing home quarantine for at least two weeks. This is accompanied by serious short-term economic losses, including a drop in demand for fuel and a decrease in manufacturing and production activity because of forced decreased labor supply. This week the second most populated country in the world and the largest oil consumer, India, announced a 21-day full quarantine, which is likely to force experts to revise consumption forecast even more to the downside.

Data on Thursday showed that the number of initial unemployment claims in the US rose to a significant 3.3M. The response of the stock market showed that the downside surprise was quickly absorbed. The number of confirmed cases worldwide increased by 13.43% on Thursday compared with the previous day after several days of consistent decrease in the growth rate:

The head of the IEA Fatih Birol said that global oil demand is now “in a free fall”, and the glut is deepening due to the price war between Russia and Saudi Arabia. According to him, 3 billion people are locked down, as a result, oil demand may fall by 20 million barrels per day (almost 20%). Goldman gave similar depressing figures for March and April (10.5M b/d and 18.7M b/d) and it is clear that bigger and longer lockdowns should shave off more near-term consumption demand. That’s why “updated” EIA forecasts offer even gloomier view. In the near-term prices may be supported by the decision of the US government to restart economy earlier as Trump promised. Rumors about the move should be kept on the radar.

Oil trader Vitol Group expects that demand drop will accelerate over the next three months and will not fully recover this year.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Tickmill-News]

Investors Eye Unemployment Claims as the key Proxy of Stress of the US economy
Oil

Today we’ve seen relatively robust upward swing in oil as the market did not wait for negative news but were offered solid support thanks to a number of positive catalysts, including:

• Rumors that China has started to fill strategic reserves taking advantage of the low oil price. The volume, duration, speed of purchases was not made public, so the news played out as a very general bullish catalyst.
• Trump tweeted that Saudi Arabia and Russia may again commit themselves to coordination of oil supply. The deal, according to Trump, may take place in the coming days, which is consistent with reports that Trump held phone talks with President Putin during which they “discussed oil market.” It also became known that Trump invited US oil producers to the White House to discuss the situation, in addition, Texas companies turned to the state administration to discuss possible output cuts.
• The Baltic Exchange data shows that the cost of transportation of US oil to China reached $10 per barrel, i.e. half the price of a barrel of the American benchmark WTI.

Cheaper grades of oil in the US are currently trading at absurd prices for producers which is increasing chances that the market may soon be surprised with substantial output curbs.

• At the same time, Saudi Arabia is not going to stop – kingdom production reportedly exceeded 12.5 million b/d, which, however, is not a surprise for the market.

U.S. dollar

The focus is now on the growth of unemployment due to self-isolation measures, with initial unemployment claims as the key proxy indicator. The estimated March reading is 3.7M (+ 400K compared to the March 21 print), but risks are skewed to the upside, since the number of regions where self-isolation regime have been introduced is rising rapidly while it is difficult to calculate precise figures due to difficulties of Labor Department in processing a huge inflow of applications. More than 80% of Americans are now in some way affected by quarantine measures.

Huge spending package from the government which includes unemployed benefit of $680 per week (or 17 per hour for 40-hour week) may contribute to the growth of “intended unemployment” which is an unwelcome consequence of emergency fiscal stimulus that can hamper rebound of labor supply after quarantine measures are lifted. Dollar is expected to move lower after the release pricing in growing weakness of the US economy.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Tickmill-News]

Is it Late to go Long in Gold? Real Interest Rate Path in the US Suggests “no”
The first signs of consistency appear in the decrease of the number of confirmed cases of Covid-19. The whole near-term market optimism hinges on that trend so it’s worth to keep a watchful eye on it. Following the abrupt daily drop in the number of new cases from peak 98135 to 75956 on April 5, it fell the second day in a row to 68608, extending relief rally in world stock markets today:

Asian stocks have ended session in green, key European indices advanced by an average of 5%. US stock index futures have been also trading higher on Tuesday. Thanks to upbeat sentiments in the oil market, it is very likely that the bullish momentum in EM including Russia will be extended for the rest of today’s trading session. The ruble is expected to continue to strengthen with the main goal of 75 rubles per dollar, passing intermediate support without much effort.

Some questions are caused by the rise of gold coexisting with the rally of stocks which are considered to be the asset classes reacting to opposite market sentiments. But taking a look at the dynamics of TIPS yield (yield on inflation-protected treasury bonds), we can see that the real interest rate in the US seems to play a big role in gold pricing currently:

The real interest rate (nominal rate minus expected inflation) and gold are inversely related, since the decrease in the first reflects the deterioration of investment alternatives in the economy and decrease in the purchasing power of money (inflation), while gold serves as protection for all of this.

The nominal interest rate is likely to linger for longer near the zero level due to cautious Fed unwilling to touch the interest rate, while enormous fiscal incentives from the government should have strong inflationary effect (due to the fact that the money will also fall into the hands of the poor which have much higher propensity to consume). The real interest rate will probably decrease further and based on the dependence above, the likelihood of gold extending the rally is pretty high, making it attractive medium-term bet.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Tickmill-News]

US CPI: Downside Risks Prevail
Broad and core US inflation printed lower than expected in March reflecting downward pressure from fuel prices, narrowing demand for apparel, transportation costs but only moderate upside pressure in other components. On the side of negative risks for CPI we can note explosive growth in unemployment and deepening fuel price deflation because of the oil price shock. The massive anticipated increase in government spending including tax reliefs and transfers to impacted households is likely to create inflationary pressures on certain goods including food while easing monetary policy is expected to have minor impact on prices due to decreasing supply and demand for loans.

The broad CPI declined 0.4% compared to February, holding back annual inflation which amounted to 1.5%. The fall was stronger than expected (-0.3%), price declines were led by fuel prices (-5.8%), transportation costs (-2.9%) and price for apparel (-2%).

The rest of consumer categories showed muted inflation pressure. The price for tobacco products gained 1%, prices for medical services increased by 0.4%, food inflation amounted to 0.3%. Rental prices rose 0.3%. Inflation in services sector decreased by 0.1% in monthly terms and amounted to 2.1% in annual terms against 2.4% in February.

Considering the negative risks for inflation, the biggest of them is collapse in oil prices, which feeds into retail prices for gasoline, utilities, producer costs what in turn limits inflation on final goods.

Travel and transportation curbs will adversely affect housing prices, hotel accommodation prices, and rental rates. The weight of this component in the CPI is 33%.

Demand for services usually depends on the dynamics of the wages of the population. The explosive rise in US unemployment (+17 million over the past three weeks) is likely to translate into price deflation in this sector. The weight of this component in the CPI is 26%.

The minutes of the March Fed meeting revealed that officials do not expect inflation to accelerate in the near future even after a possible restart of the economy in the summer or even if lockdowns continue until the beginning of next year. According to the report, in all scenarios, inflation is expected to weaken, reflecting underutilization of resources and the drop in oil prices.

Loosening access to credit won’t lead to perceptible increase in consumer inflation unless, in fact, credit expansion takes place, which depends on the desire of banks to issue loans and on the demand of households for them. The main effect that we can expect is asset price inflation with first signs of it expressing in the latest stock market rebound in response to Fed actions.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Tickmill-News]

IEA April Energy Outlook Pressures Oil Producing Nations to cut Bigger and Faster
The People’s Bank of China cut its medium-term lending rate for financial institutions on Wednesday to the lowest level on record. This is far from “fine-tuning” of monetary policy, but rather a powerful stimulus of the banking sector, which raises concerns about smoothness of economic recovery. The government tries to deal with the fallout of coronavirus mainly by taking the gloves off of the banking sector.

The cut of the lending rate for commercial banks should bring similar relief in financing for firms and households that were dragged under the mills of epidemic.

Commercial banks in China can now borrow at a record low rate of 2.95%. This credit facility was launched in 2014 and the latest rate cut amounted to 20 basis points which is relatively big cut. By lowering the rate, PBOC tries to spur the competition of commercial banks in making loans, which in theory should lead to a further decrease in the prime loan rate – benchmark loan rate offered to first-class borrowers:

Trade data from China released on Tuesday beat expectations. Exports decreased by 6.6% against expectations of -13.9%, imports fell by only 0.9% compared with the forecast of -9.8%. A smaller than anticipated decline in China foreign trade contains pessimism about the virus impact on world trade which supported short-term positive market sentiment on Tuesday. The data on export and import prices in the US and Indonesia’s foreign trade in March laying the groundwork for better estimates of world trade recovery.

The risk-off wave as a next big test for the Fed

China will release March GDP, retail, and industrial production data on April 17. Weak figures will probably force markets to revise the pace of economic recovery and energy consumption outlook to the downside, restraining upturn in oil. The price resumed decline despite the pledge of many oil producers to reduce output during which the countries agreed to reduce production by 10 million bpd from May 2020. The IEA’s April outlook included dire predictions of demand recovery: the agency estimates that demand in April will fall by 29 mn b/d, which is almost a third of world consumption. Even if lockdowns are weakened in the second quarter, underconsumption for 2020 will amount to 9 mn b/d which is just 1 mn b/d less that max output cuts expecting to last only a couple of months:

EIA valuation exceeded market expectations negatively

Countries that set lockdowns earlier, such as Italy, announced on the weekend that quarantine would be extended until May. Recall that Wuhan was unblocked only 63 days after the introduction of the measures, so one-month social restrictions imposed in other countries are likely to be too short to be effective. They will probably also need to be extended.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Tickmill-News]

Oil: Near-term Pressure may Remain in Place Because of Storage Issues
It is not surprising that the outlook for front-month oil futures, especially for June, remains bleak as some market participants continue to price project shocking drop of May contract price to June contract. Recall that May WTI contract dropped below 0 on April 20 and the NYMEX decided to use the negative settlement price on April 21. This forces investors to drop one of the fundamental concepts of risk limit in WTI futures market (the loss on long futures position is no longer limited to trading equity, even in “normal” market conditions).

The story also reveals the real degree of oversupply and importance of limits of Cushing storage hub, which underlies the mechanism for settlement of WTI deliverable futures. Despite the fact that the government data indicates that the storage is only 77% full (~ 59 out of 76 million barrels), Reuters reports that the remaining storage was fully “reserved” in mid-March. The storage issues should accelerate rebalancing of the market in the near future.

At the same time, the fact of possible permanent loss of some US oil output, financial constraints limiting proper supply response to demand rebound, create an upside risk that supply rebound won’t keep pace with recovery of consumption after lockdowns are lifted. This is a favorable fact that strengthens contango in the market. However, much depends on the willingness of the US government to save the sector and jobs.

Negative prices is an unlikely threat to front-month Brent contracts, because firstly, deliveries on Brent are carried out by sea, in contrast to the “landlocked” WTI market, where Cushing oil delivery is a part of settlement mechanism on deliverable WTI futures, and secondly, Brent contracts are settled in cash, so with the approach of expiration date there should be less pressure on buyers to cover long positions.

The storage in Cushing at the current rate will be likely filled up in mid-May, with adjustment for producers which are cutting production – around the end of May. This means that pressure in front month contracts, ceteris paribus, may remain for a week or so. When the storage is full, producers will have to curb output to approximately equal the loss of demand.

OPEC held another teleconference yesterday, together with comments by IEA head Fatih Birol, market expectations are emerging that countries that joined OPEC+ pact may begin to cut production earlier than planned in May, though this looks like a late measure. The meeting of Texas Railroad Commission ended with no positive results for the market, the next meeting is scheduled for May 5. API reported an increase in stocks of 13.2M barrels, this is the fourth consecutive week when stocks are growing at more than 10M barrels per week. Cushing reserves have increased by 4.91M barrels.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Tickmill-News]

Oil and US Durable Goods Data Paint Mixed Picture About Recovery
Oil: An Unfinished Story

Oil prices renewed decline this week, June WTI contract dropped by more than 15%, Brent fell by 7.5%. The market expects OPEC to start cutting production later this week. Given fragile state of the market, some countries decided to start cutting output ahead of the agreed date in the OPEC + pact, including Saudi Arabia. Although bringing forward production cuts should positively contribute to market recovery, short-term market sentiment is under the sway of both near-term fundamental imbalances (the unresolved problem of oil storage in Cushing, highly uncertain pace of demand recovery) and psychological factors (fear of being on wrong side, FOMO shorts)

Drilling activity in the United States declined last week, Baker Hughes reported, pointing to a reduction in the rig count by 60 to 378 units:

The number of oil rigs is quickly approaching the level that we observed in 2016. Since mid-March, the number of rigs has shrunk by almost 45%, which means an imminent coming decline in US output which should additionally ease supply pressure on the market.

Another important component of current expectations in the oil market is the information related to signs of demand recovery. The worst for global oil demand appears to be in the past and it is reasonable to assume that it is reflected in the price. Data on volumes of oil refining in China gives benign indication of a welcomed rebound. Independent refineries in Shandong province increased refining to record levels while the data from the analytical agency SCI99 shows that refinery capacity utilization last week increased to 72.67% (+ 0.71% compared to the previous week). However, more importantly, compared with February, capacity utilization increased by almost 30% (the lowest point in February was approximately 42%). This suggests that oil demand in China is growing at a relatively steady pace.

USA: Strange CAPEX Stability

Orders for durable goods fell 14.4% in March YoY, which seems to fit into the overall picture of the crisis and not particularly noteworthy information. However, one of the components of the indicator, namely, orders for capital goods excluding orders in the civil aviation sector, showed strange stability in March:

Not taking into the account distressing situation with Boeing (13 new orders and 295 canceled), it seems that firms in the US were in no hurry to cut investment plans in March, as can be seen from the stable dynamics of the red curve in the above chart. The change relative to March 2019 was + 0.1%, but strangely it wasn’t reflected in production surveys from ISM (49.1 points) or from the Philly Fed (-12.7 points in March). It was expected that the reading will print much lower at -6.0%.

The Fed is closely monitoring the dynamics of orders for capital goods, as it reflects the expectations of financial managers regarding future demand for their goods. Taking “forward-looking” information into the account helps the Fed to not be lost in policy responses solely to past events. It is likely that firms were not able to assess the full severity of the lockdown in March, but there is also a chance that impact of lockdowns may be somewhat overstated (if we assume that financial managers have more information than we do). In any case, a positive surprise creates the basis for less gloomy figures for the first quarter of GDP, which will be released next week.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Tickmill-News]

Oil: Historical Price Inefficiency Thanks to USO ETF
The fall in oil prices continued on Tuesday, the June WTI contract was offered a short-term support at around $10.60, front-month Brent contract is trading below $20 per barrel. With such scary nosediving moves the question arises about the true cause of the wave of liquidation which started on Monday. Settlement of June WTI contract will take place on May 19 and, in general terms, the core underlying problem is still an unresolved issue of WTI physical delivery. However, the fall of oil price below 0 due to a lack of liquidity drew market attention to the vulnerability of oil ETFs, which need normal liquidity to transfer positions to the next contract month (which is called rollover).

Of greatest interest are the positions of USO, the largest oil ETF in the United States. It came to the attention of traders after the April 20 carnage due to the fact that a fairly common trading strategy for commodity ETFs – holding front-month futures and sequentially rolling them over to the next month, began to have sharply increased risks. Although the USO rolled over into the June contracts some time before the collapse of May WTI, same delivery issues for June contract were creating huge risks for investment position of the fund in terms of opportunity for safe roll-over. On April 23, the fund said that it is going to change its holdings from June contracts to the following composition:

To change the composition of its investments, the USO has to entirely sell its June contracts and buy the ones indicated on the chart. But what is most remarkable, in the same statement, the USO indicated exact timeline of alteration of its investment portfolio (from April 27 to 29, by 33.3% every day).

In simple words, the largest oil ETF in the US has clearly indicated what it will sell and what to buy. Well, how could you not front-run them here? Basically, it is probably the biggest and most evident market inefficiency for decade.

And the oil sell-off which began on April 27 is most likely a result of the fact, that a major participant, in this case the USO, announced in advance that it would sell all the June contracts to which it had previously been rolled over. The dovish pressure from other market participants has created a large speculative wave, which is only gaining momentum, as another 66.6% of the USO contracts in June will be sold today and tomorrow.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Tickmill-News]

ECB Meeting preview: Wrong Words in a Wrong Time
The April ECB meeting has all chances to become a factor of support for EURUSD. At the March meeting, Lagarde failed to show off ECB’s firepower at a critical time for the economy, forcing investors to demand extra returns for holding Euro (i.e. creating risk premium in it). They obviously expected “whatever it takes” tone from the ECB president but Lagarde didn’t live up to expectations. This ambiguity became a bearish factor for EURUSD. If Lagarde elaborates properly on ECB’s rescue plan, including details on the pandemic asset purchase program (PEPP) the risk premium in Euro will probably vanish helping the currency to outperform USD in the near-term.

Two key aspects of the meeting to pay attention are updates on pandemic asset-buying program (PEPP) and ability of Lagarde to reassure markets that ECB has enough ammo and won’t hesitate to use it. It is clear that the policy response of the ECB in March was less profound compared to the Fed:

And although interest rates cuts and increase of QE operations should normally lead to decline in national currency this doesn’t happen when economic conditions do not favor expansion of credit (which is the main driver of money supply growth) so positive QE effects (like bringing ease to funding markets) become a factor of currency strengthening, leading to capital inflows! The Fed and dollar performance in March perfectly support this reasoning.

The PEPP program, which is so much talked about now, can be increased both in breadth (from the current 750 billion euros to 1.250 trillion) and in depth (including the purchase of bonds of the so-called fallen angels – former investment-grade companies falling into speculative category). If this happens at the meeting on Thursday, it will be a big bullish factor for the euro, but given that updated economic forecasts from the ECB will not appear until June, the expansion of PEPP may be delayed. One of the simple but useful indicators of risk for the Eurozone economy is the yield on Italian bonds and its recent decline from 2% to 1.7% suggests that the anxiety about problematic debtors has somewhat eased. This increases chances that the ECB won’t rush to expand PEPP in April, but a signal that this will be done in July will be nevertheless a moderate positive factor for EURUSD.

As for the press conference with Lagarde, attention should be paid to the comments regarding inflation outlook, economic growth, interest rate and QE paths. In March, Lagarde surprised markets with a rather neutral statement that “inflation is expected to rise in the medium term,” so Lagarde’s remarks on Thursday that the ECB is moving away from the inflation target is a baseline scenario and should not be surprising. No changes are expected in the interest rates and QE; comments on economic growth are expected to focus on confirming sharp slowdown in March and April. In general, the trading idea for the meeting on Thursday concentrates on Lagarde’s ability to correct communication mistakes made at the March meeting.

Reducing distance between the interest rates of the Fed and the ECB, declining demand for dollar as a safe haven may determine fundamental advantage of EUR over USD in the medium term.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.