Tag Archives: Currencies

article 3 months old

Aussie Dollar Upside


Bottom Line 17/01/17

Daily Trend: Up
Weekly Trend: Neutral
Monthly Trend: Neutral
Support Levels: 71.40 / 69.70 / 68.20
Resistance Levels: 75.20 / 78.40 / 80.00

Technical Discussion

The Aussie dollar has had a solid start to the year having run up strongly from 71.40 this month to 75.20, which is now on the edge of a minor supply zone. The run has been in line with strong Iron Ore prices which have now flown to a new 2 year high, which has come on the back of production cuts being proposed in China due to air pollution issues. Being a risk on currency though, just lately we have seen some minor weakness come into play potentially aligned to geopolitical issues, with Trump recently talking conditional rhetoric in regards to China's 'One China Policy'.

The pound has also taken a beating on lingering Brexit concerns and it is teetering on the edge of a bearish cliff technically. So plenty to keep us interested on the fundamental front in regards to currencies. CPI figures in the UK are coming out today and will either create stability or ruffle some feathers, so keep an eye on this. Not much happening in the States this week pre Trump's inauguration, be it New York's Fed President is scheduled to speak. Lets take a look at the technicals.

Reasons to stay cautious:
→ Inflation remains in check in Australia (yet watching)
→ unemployment data being monitored
→ Further interest rate cuts still possible
→ strong support zone 67.00 - 68.00 continues to hold
→ strong Iron Ore keeping price robust against a strengthening USD

Price patterns to the upside have been impulsive throughout January. Our medium term bullish interpretation of the trend that we were forwarding throughout 2016 admittedly hit a snag later on in the year, yet with 71.40 holding to this point, an intermediate A-B-C move higher still has potential. 71.40 is the line in the sand though so if it is broken below then the bears will be back in control. For now things are on a more neutral footing so could go either way, be it the past few weeks of price action has been positive. If our wave count proves correct, price action should now be traveling higher within an intermediate Wave-C. Wave-A vs Wave-C equality targets 81.60 with any push higher above 78.40 placing this proposed target as high probability.

More immediately though price is at an inflection point at 72.20 with further supply above here in play up to 78.40. Price is also hugging the 200 day moving and is overbought on our divergence indicator. So a healthy breather does look possible right here and if it does trigger then the potential for 73.00 to be revisited is very real, be it there is proven demand at this price point stemming back a solid 18 months. If 71.40 holds, we remain optimistic over the next 3 months or so as a minimum.

Trading Strategy

'There is a low risk opportunity to trade long here above 72.50 ...... ' We decided to hold off though to look for a more conservative entry based on the selling pressures price had been under since November last year. As mentioned in our review tonight, levels are now at an inflection point so this is not the time to start looking to take on long positions. Yet any breather from here that brings out strong buyer support will certainly see us looking for a swing trade opportunity on the long side from lower levels. It's back on our radar. 

[Note: The Aussie is trading at 75.50 at the time of publication - Ed]
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

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article 3 months old

Trump Inauguration Takes Centre Stage

Market analysts at FXCM asses likely responses in major currencies and the gold price as the Trump presidency looms.


by  Ilya Spivak, Sr. Currency Strategist ; Michael Boutros, Currency Strategist ; David Song, Currency Analyst ; Christopher Vecchio, Sr. Currency Strategist ; Tyler Yell, CMT, Forex Trading Instructor ; James Stanley, Currency Strategist ; Renee Mu, Currency Analyst  and David Cottle, Analyst

Financial markets face the return of high-profile event risk in the week ahead but US policy uncertainty may keep all eyes on the nearing Trump inauguration.

US Dollar Forecast - US Dollar May Fall Further as Trump Inauguration Nears

The US Dollar may continue to weaken as disillusioned traders continue to scale back exposure to the so-called “Trump trade” ahead of the nearing Presidential inauguration.

Euro Forecast - EUR/USD Set to Face Neutral ECB, Even as Data Improves

A further improvement in the Euro’s fundamental drivers in the short-term continues to shield the single currency from longer-term political concerns. This week, attention turns to the ECB for their first meeting of 2017.

Japanese Yen Forecast - Rising U.S. CPI, Hawkish Fed Rhetoric to Tame USD/JPY Pullback

The failed run at the December high (118.66) keeps the near-term outlook for USD/JPY tilted to the downside, but the key developments coming out of the U.S. economy may prop up the exchange rate next.

British Pound Forecast - GBP Clings to Support Ahead of Inflation, May’s Brexit Speech

Ever since the Brexit referendum in June, markets have volleyed the various prospects that might come from the actual execution of the split from the European Union.

Canadian Dollar Forecast - Canadian Dollar Looks to Poloz for Further Strength

The Canadian Dollar has been a resilient currency at the start of the year. Much of the strength is due in part to Oil’s consistency above a long-term focal point on the chart.

Australian Dollar Forecast - Australian Dollar Fightback Can Continue

Is the Australian Dollar in a sweet spot? Well, that might be premature optimism but it’s certainly in a better place than it was back in November.

Gold Forecast - Weakness to be Viewed as Opportunity- US CPI on Tap

Gold prices are higher for a third consecutive week with the precious metal up 1.8% to trade at 1194 ahead of the New York close on Friday.

Chinese Yuan Forecast - Chinese Yuan Eyes on China 4Q GDP, Davos Forum

This week, the offshore Yuan remained stronger than the onshore Yuan and the PBOC’s guidance. On Friday, the USD/CNY closed at 6.8984, slightly weaker than the Yuan fix set on Friday of 6.8909.


 

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The views expressed are not by association FNArena's (see our disclaimer).

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article 3 months old

May Slays The Pound

By Kathleen Brooks, Research Director, City Index

The FX market has spoken, and, as of Sunday night, it is not confident that Theresa May can deliver the necessary clarity and confidence when she lays out her Brexit plans in a speech on Tuesday. GBP/USD fell below the key psychological level of 1.20 at the start of play, suggesting that Theresa “pound slayer” May, could strike once again and we may see further declines in sterling this week.

The details of her speech are set include plans for the UK to leave the single market and the European Customs Union, which are a bit like kryptonite for pound bulls. The FX market has been incredibly sensitive to Brexit since the EU Referendum in June, but now that we have breached this level, where can we go from here?

Could May’s speech actually help GBP?

Tuesday’s speech in London could trigger a “material drop” in the value of the pound, according to one of the PM’s aides, but is the PM calling the market’s bluff? There is an outside chance that May’s speech, if it includes details on what will replace single market access, could actually benefit the pound next week, for three reasons.

Firstly, key Brexiteer, David Davies, has said that it is likely the government will push for a transitional deal to ensure that access to our European trade partners is not stymied during Brexit negotiations. Secondly, the weekend papers also featured comments from the European Union’s lead negotiator who voiced concern about shutting the UK’s financial system out of Europe because of the disruption this could cause to financial markets. Lastly, the City’s lobby group dropped its request for financial “passporting” rights at the end of last week, which suggests to us that they may believe that a better option is available down the line. Thus, Sunday’s breach of 1.20 could be a classic sell the rumour, buy the fact. However, Theresa May will need to give the speech of her life to reverse the wave of negative sentiment towards the pound right now.

Brexit certainty could prove to be the pound’s tonic

It will be an uphill battle for Theresa May to trigger a sustained pound rally this week, especially since Brexit has been a green light to sell sterling. Added to this, markets are once more reducing their long positions in sterling. According to the most recent CFTC data, net long positions in GBP/USD fell to -65.8k last week, vs. -64.7k the week prior. But, and it’s a big but, if she can deliver a level of candidness we have not come to expect from the UK government, this may be enough to slow GBP selling if she can deliver some level of certainty about what Brexit will look like and how the government will cushion any blow from leaving the single market.

GBP/USD on the precipice ahead of May’s speech

Late on Sunday, the market was not favouring the pound, suggesting that May’s foscus on immigration in favour of single market access has been viewed badly by the FX market. GBP/USD was flirting with the psychologically important 1.20 level, which could herald a move back to 1.1841 – the low from October’s flash crash (according to Bloomberg pricing). If Theresa May can’t instil market confidence on Tuesday then the second wave of GBP selling could trigger a move back towards 1.10 in GBP/USD, we would also expect heavy losses in GBP/JPY, and the pound’s recent recovery against the euro is also likely to reverse.

FTSE 100 a silver lining to pound weakness

Conversely, this could be good news for the FTSE 100, which has, so far, been immune to the bad news surrounding Brexit. and reached another record high on Friday. Even the FTSE 250 - which is a stronger reflection of the UK’s economy than the FTSE 100 – was also higher on Friday. This index has generally been tracking the FTSE 100 since December, suggesting that Brexit fears are not clouding investors’ view of the corporate Britain, at least not yet, anyway. We could see further FTSE 100 upside on Monday now that GBP/USD is below 1.20

Elsewhere, on the agenda...

This week we’ll mostly be talking about Burberry results on Wednesday, the ECB meeting on Thursday and, of course, Trump’s inauguration on Friday. May’s speech on Tuesday and her meetings with Chinese officials at Davos this week are also high on our agenda, as they could potentially move UK markets. But as the pound takes a dip at the start of this week, we believe Theresa May has a tough job to convince markets that she can manage a “clean and hard” Brexit, without doing long-term damage to the UK economy.


Now you can follow us on Twitter: http://twitter.com/FOREXcom. Visit the website at www.cityindex.com.

Re-published with permission. Views expressed are not by association FNArena's (see our disclaimer).
 
 
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Conduct Authority (FCA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan. Please read Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/about/publications/character-risks.jsp).

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article 3 months old

ECB: Alice In Wonderland

By Kathleen Brooks, Research Director, City Index

Mario Draghi spent most of the press conference [following last night's ECB policy meeting] trying to convince the audience that tapering doesn’t actually exist, and even if it did it wasn’t on the ECB’s table. Draghi and co. at the ECB is reducing the size of its asset purchases to EUR 60bn a month from April, even if it is extending the length of time it makes purchases through to December next year. Nice try Draghi, the ECB has tapered - except tapering is now called calibration, and calibration isn’t nearly as nasty as tapering, so the euro fell, stocks rallied and German bond yields backed off their earlier highs.

The key message from Draghi is that the ECB will be in the market for a long time to come, all we know is that they will be there until at least December next year. This increase in the ECB’s balance sheet, especially in the face of a Fed rate hike next week, is mildly euro negative, however, today’s decision is probably not enough to send EUR/USD back to parity.

The ECB: A financial version of Alice in Wonderland

The ECB had to change its standards for bond purchases to ensure that its QE programme did not disrupt the debt markets. It will now include bond purchases below its own deposit rate, which is already -0.4%. Thus, the ECB will be paying to hold some bonds that will be included in its QE programme. The craziness doesn’t stop there, some of those bonds have a negative yield because of the ECB’s QE programme in the first place. This meeting has been like a financial version of Alice in Wonderland.

The ECB has had to buy negative yielding bonds because it has bought all the eligible higher yielding stuff, so it has no choice. Essentially this is the market-moving news as it may mean lower yields for longer, which could be bad news for banks, who see their profitability dip in a negative yield environment. Thus, the rally in European bank stocks in recent days, could be cut short at some stage on the back of this meeting.

Other takeaways from this meeting included:

* · Draghi admits that there is a limit to what the ECB can do to assuage political risks.

* · The growth outlook is broadly unchanged: 1.7% for this year, 1.6% for 2018/19.

* · Inflation is expected to rise only to 1.7% by 2019.

* · Draghi continued to put pressure on Eurozone governments to reform to boost growth.

* · The ECB’s QE programme remains flexible.

The market impact:

• The initial reaction is euro negative, EURUSD has dropped to its lowest level since Monday, and is currently testing 1.0650. We don’t think that this meeting is enough to push EUR/USD to parity, in fact, we continue to think that if the market changes its view that calibration is a form of mild tapering then we could see a turnaround in EURUSD, and it may test 1.0930 – the 38.2% retracement of the May – December decline in EURUSD.

• But, the upside for the euro could be limited as European bond yields may struggle to push significantly higher from here due to the ECB’s plan to accept bonds that yield lower than -0.4% going forward. This suggests to us that the era of negative rates could be with us for some time yet.

• A fall in the euro should be good news for stocks. The Eurostoxx index has risen sharply since Draghi started speaking, even Deutsche bank has rallied on a wave of QE-euphoria. We are not sure that Europe’s banks can sustain this rally, even if the Eurostoxx banking sector is at its highest level since January. Overall, a negative interest rate environment is not conducive for bank profits next year. But, you can’t be hasty to ditch European banks, as the strong bullish market in the US is a powerful force, and the prospect of more liquidity than expected from the ECB could keep banks buoyed for longer than is fundamentally justified. But, any signs of weakness in Europe’s banks could lead to a sharp sell-off in the coming weeks.

Conclusion:

Overall, 2017 will usher in a new era for ECB policy, one where it has admitted it wants a long-term presence in financial markets to depress yields. Unless we see a sharp upturn in growth and inflation, then the Eurozone is likely to remain in second place to the buzzy US economy. It remains saddled with debt, bad banks and political risks, which could make it a tricky environment for some time to come. This makes it hard to get too excited about the euro, and is another reason why the dollar should keep its crown as the King of FX and the world’s most important reserve currency for some time to come.

 
Now you can follow us on Twitter: http://twitter.com/FOREXcom. Visit the website at www.cityindex.com.

Re-published with permission. Views expressed are not by association FNArena's (see our disclaimer).
 
 
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Conduct Authority (FCA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan. Please read Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/about/publications/character-risks.jsp).

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article 3 months old

Saxo Bank’s Outrageous Predictions

A summary of Saxo Bank's annual report on its ten "outrageous" predictions for 2017. Are they that outrageous?

-Trump sends US yields soaring
-Brexit doesn't happen
-Bitcoin ascends
-EU banks buckle

By Eva Brocklehurst

It is that time of year when Saxo Bank delivers its ten outrageous predictions for 2017. As usual, the selection aims to provoke discussion on what might surprise or shock investors in the year ahead. The predictions are not an official market outlook but are deemed possible events which have the potential to upset consensus views.

2016 will become known as the year where reality managed to surpass even seemingly unlikely calls, such as the UK vote to leave the European Union (Brexit) and the election of Donald Trump as the US president.

Saxo Bank's chief economist, Steen Jakobsen, believes 2017 could be a wake-up call, with a departure from business as usual, both in terms of expansionary policies by central banks and austerity policies from governments which have characterised the period post the global financial crisis. In this spirit the following are offered as the most outrageous predictions for 2017.

China

Number one involves China's GDP. China comprehends it has reached the end of its manufacturing and infrastructure growth phase and, through a massive stimulus of fiscal and monetary policies, opens up capital markets to steer a transition to consumption-led growth. This results in 8% growth in 2017. Euphoria over private consumption-led growth pushes the Shanghai Composite index to double its 2016 levels and surpass 5,000.

US Federal Reserve

As US dollar and interest rates rise, the fiscal policies of President Donald Trump cause the US 10-year bond yields to reach 3%, creating market panic. In this second outrageous prediction , on the verge of disaster, the US Federal Reserve limits 10-year yields to 1.5%, effectively introducing an endless quantitative easing. This provokes a sell-off in global equity and bond markets, leading to the biggest gain for bond prices in seven years.

High-yield Rates

At number three, long-term average default rates for high-yield bonds rise as high as 25%. As the limits of central-bank intervention are reached, governments around the world move towards fiscal stimulus and yield curves dramatically steepen. As trillions of corporate bonds are trashed, the problem is exacerbated by rotation away from bond funds, which widens spreads and makes refinancing of low-grade debt impossible.

No Brexit

The fall-out from Brexit creates a more disciplined EU leadership and a more cooperative stance towards the UK. In the fourth prediction, the EU makes key concessions on immigration and passport rights for the UK-based financial services firms. By the time Article 50 is triggered, Brexit is turned down in favour of the new deal. The UK stays within the EU and the Bank of England raises its rate to 0.5%. The EUR/GBP slumps to 0.7300.

Copper

Number five is about copper. Copper was a clear commodity winner following the US election and in 2017 the market begins to realise the new president will struggle to deliver promised investments and the increased demand expected for copper fails to materialise. President Trump turns up the volume on protectionism as a result and introduces trade barriers, spelling trouble for emerging markets as well as Europe.

Global growth weakens and China's demand for industrial metal slows, as it moves towards more consumption-led growth. Having breached trend line support, copper descends all the way back to 2002 prices of US$2/lb and a wave of speculative selling then sends it down to the 2009 financial crisis low of US$1.25/lb.

Bitcoin

President Trump spending increases the US budget deficit to US$1.2-1.8 trillion and this causes growth and inflation to skyrocket. The Federal Reserve accelerates its rate hike agenda and the US dollar reaches new highs. China starts looking for alternatives to a system dominated by the US dollar and its over-reliance on US monetary policy.

This leads to an increased popularity of currency alternatives and Bitcoin benefits the most, as leading banking systems move to accept Bitcoin as a part alternative to the US dollar. It triples in value to US$2100 from US$700.

US Health Care

Seventh on the list is healthcare expenditure in the US, at around 17% of GDP versus the world average of 10%. An initial relief rally in health care stocks after President Trump's victory quickly fades in 2017, as investors realise the administration will not go easy on health care and lodges sweeping reforms of the unproductive system. The healthcare sector plunges, ending the most spectacular bull market in US equities since the financial crisis.

Mexico and Canada

The market has drastically overestimated President Trump's true intention, or ability to crackdown on trade with Mexico, allowing the beaten down peso to surge. Meanwhile, Canada's higher interest rates initiate a credit crunch in the housing market and the banks buckle, forcing Bank of Canada into quantitative easing and injecting capital into the financial system.

Additionally, the Canadian dollar underperforms as Canadians enjoy far less of the US growth resurgence than they would have had in the past, because of the long-standing decay in the manufacturing base, as a result of globalisation and an excessively strong currency. The CAD/MXN corrects as much as 30% from 2016 highs.

EU Banks

German banks are caught up in the spiral of negative interest rates and flat yield curves and cannot access capital markets. In the EU framework a German bank bail-out inevitably means an EU bank bail-out. This is not a moment too soon for Italian banks which are saddled with non-performing loans and a stagnant local economy. A new guarantee allows the banking system to recapitalise and a European bad debt bank is established to clean up the balance sheet of the eurozone. Italian bank stocks rally more than 100%.

EU Stimulus Bonds

Finally number ten, where faced with success of populist parties in Europe and a dramatic victory for Geert Wilders far-right party in the Netherlands, traditional political parties begin moving away from austerity policies and favour Keynesian policies similar to those launched by US President Roosevelt post the 1929 crisis.

The EU lodges a stimulus package but to avoid dilution resulting from an increase in imports announces the issuance of EU bonds, at first geared towards EUR1 trillion of infrastructure investment, reinforcing the integration of the region and putting capital flows back into the EU.
 

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article 3 months old

More Pizza, Fewer Banks For Italy, Please…

Kathleen Brooks of City Index discusses why one small Italian bank could offer more substantial market risk than the referendum result.
 

By Kathleen Brooks, Research Director, City Index

So, Italian Prime Minister Renzi didn’t get to resign as he had planned to on Monday. Instead he’s been asked to stay on until after the Budget vote. This isn’t really significant for markets, he will go, we just don’t know when at this stage. After that it is likely that a coalition of centre-left and centre-right will come together to form a temporary government in an attempt to block the radical Five Star Movement from power. Of far more importance on Tuesday is the fate of Italy’s banks.

Some rare good news for Monte dei Paschi

The world’s oldest bank managed to swap over EUR 1bn of bonds into equity yesterday. This is where the good news ends, it is still looking for EUR 1bn in capital from the Qataris’, and without Doha as the anchor investor in this much-needed capital raising it is hard to see how Monte dei Paschi can avoid nationalisation. There have been reports that the bank is getting ready for some form of nationalisation at the weekend, so the clock is ticking for Italy’s third largest lender.

Why do Italian banks matter?

I often get asked why Monte dei Paschi matters for financial markets and risk sentiment, it’s certainly not as systemically important as other banks, for example Italy’s Unicredit, but Monte dei Paschi’s main problem is that it has become symbolic of Italy’s rotten banking sector that now relies on foreign capital for life support. If the Qatari’s decide against investing in it then it gives a terrible signal to the world about the ‘investability’ of Europe’s banks. Interestingly, in Europe it is not the systemically important banks that are the biggest risk to the financial sector, but the glut of mid-size banks that hold billions in bad debts that could endanger the health of the bigger banks in Europe, if contagion is to spread.

Bag a bargain, invest in Unicredit

Unicredit, Italy’s largest bank, is less of a concern, in our view. It also needs to raise EUR 13bn in capital, but its global reach, size and scope makes it a much more attractive option for foreign investors, such as rich Middle Eastern sovereign wealth funds. In fact, its weak share price - Unicredit has seen its stock price fall more than 60% in the past year - could make it an even more attractive option for investors with deep pockets, as it looks cheap. On Monday, Unicredit managed to sell its asset management arm, Pioneer, to France’s Amundi for more than EUR 3bn, which helped to limit its share price sell-off yesterday afternoon. Its CEO has said that it will update its capital raising plans on 13th December, if this contains positive news, then the markets could have hope that the big hitters in Italy’s financial system can whether the political storm.

More pizza and less banks

If Monte dei Paschi can’t attract foreign investors to boost its capital base then we would expect a sweetened nationalisation, something that protects the retail investors that hold the bulk of the bank’s bonds. This may not be what the EU had in mind when it envisioned banking union, but it will help stabilise the transition of power to Italy’s new government once Renzi resigns. Developments this weekend are worth watching. As we have said before, Europe would be mad to let Italy’s banks go to the wall, but that doesn’t mean that it needs to shut down some banks. Italy has more bank branches than pizzerias, in the future it desperately needs more pizza and less banks!
Interestingly, the investment world has known about the capital issues at Monte dei Paschi and other banks for some months, so why is it getting cold feet now; after all, the bank is in no worse shape now compared to where it was on Friday, ahead of the referendum. The reason is that bankers tend to see political events through a financial lens, hence why a No vote was considered so toxic to Monte dei Paschi’s attempts to woo the Qatari’s.

Why we haven’t seen risk sentiment fall off a cliff

In terms of the market reaction, the EUR has backed away from the 1.0770 high from earlier, but it remains in a strong position in the G10 FX space, and the reaction to the referendum has generally been mild. If Monte dei Paschi fails to attract investment from the Qataris’ then we could see the wind knocked out of the euro’s sails, however, we would still expect EURUSD to stay above 1.0500 in the short term. Likewise, Italian bond yields could also rise again, although we don’t expect to see the levels of panic in the Italian bond market like we did in 2012. Political risk matters, but as long as Italy’s banking sector can scrape together some foreign investment, mixed with a sweetened nationalised deal for Monte dei Paschi then we can’t see how Italy’s political woes can have anything other than a temporary impact on risk sentiment in global financial markets.

 
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article 3 months old

Forex Markets Set For Volatility

By Christopher Vecchio, senior currency strategist, and Nick Cawley and Oliver Morrison, analysts
 

- Transition into first week of a new month means economic calendar will be saturated with significant data throughout the week.

- Wednesday the most significant day for event risk: 10 of the week’s 19 events/data rated ‘high’ are due in the middle of the week.

- Rising political risk holding a greater sway over FX markets; Europe in focus with Euro waiting on Italian constitutional referendum result.
 

Markets are quickly returning to normal liquidity conditions after last week’s holiday-disrupted trade. Traders won’t have much time to get their bearings as the economic calendar ratchets up with significant event risk in the early part of the week, reach its crescendo with the November US Nonfarm Payrolls report on Friday – the last labor market report due out before the Federal Reserve meets for its final policy meeting of 2016 on December 14.

Before then, Europe rightly deserves attention, having just passed through the French Republican primaries and now waiting on the Italian constitutional referendum on Sunday, December 4 (we’re don’t believe it will pass). European Central Bank President Mario Draghi is speaking several times this week, and similarly, we’ll have the November CPI readings for Germany and the Euro-Zone; these in sum will help further guide expectations for the ECB’s last meeting of the year on December 8 (since September we’ve forecast the ECB to change their QE program at the December meeting).

Pound

A twice-yearly report from the Financial Policy Committee (FPC) on the current strength and weaknesses of the UK financial system is due out on the last day of November. The report also provides a forward-looking outlook and a backward-looking review of the FPC’s actions over the previous reporting period and highlights the effectiveness of its actions, which will be noteworthy considering the reporting period covers the immediate actions after the June 23 Brexit vote.

The previous report, released on July 5 2016, covered the initial reaction to the UK’s decision to leave the European Union, when GBP/USD dropped sharply from around 1.5000 to 1.3300. The prevailing talk from the FPC was that the country would quickly see growth flatten out ahead of a sharp recession. Since then, data has picked up from its post-Brexit lows, mainly due to the positive effects of a weaker pound, although imported inflation is now very much in policymakers’ thoughts.

Looking forward, the FPC will likely note that while financial markets have stabilized, with Article 50 to be triggered by the end of March, domestic and global uncertainty lies ahead. The UK’s widening current account deficit will also be closely monitored. CA deficits necessitate a weaker currency to offset, which in the Pound’s case could cause an additional headache given the inflation ramifications.

Pair to Watch: GBP/USD

Euro

The Euro-Zone’s preliminary November CPI figures will be published Wednesday and may play a role in deciding the European Central Bank’s policy ahead of its next meeting on December 8. In October, final Euro-Zone CPI gained +0.5%, up from +0.4% in the prior month (y/y). This was above analysts’ forecast of +0.4% and was the strongest gain since June 2014. The core inflation reading settled in at +0.8% (y/y). Similarly, recent PMI data which pointed to stronger growth in Europe and rising inflation pressures.

Analysts expect the Core inflation reading on Wednesday to stay at +0.8%. The headline rate is forecast to increase slightly from +0.5% to +0.6% (m/m). Concerns are growing that the central bank’s aim of stimulating the real economy isn’t working, despite more evidence of inflation rising above expectations in the Euro area. Ultimately, while important on a longer-term basis, the November CPI may not impact the ECB’s decision, however, to extend its €1.74 trillion bond-buying program beyond March, which would be done for more-or-less technical reasons on December 8.

Pair to Watch: EUR/USD

Yuan

The Chinese Manufacturing Index rose to 51.2 in October, beating market expectations of 50.2, the fourth straight month of economic expansion and the highest reading since July 2014. According to data provider IHS Markit, Chinese output expanded at the quickest rate in over five-and-a-half years, spurred on by a rebound in New Orders growth. Market expectations are for a small downturn to 51.0 in November, a positive albeit slower rate of growth than what’s been previously observed.

Official data reported that the Chinese economy grew by +6.7% in the third quarter, the same level as the first- and second-quarter. Export activity will have been aided this month by a weakening Chinese currency. The offshore Chinese Yuan recently traded as high as USD/CNH 6.965, having started the month around 6.7750.

Pair to Watch: USD/CNH

US Dollar

Expectations for the November US jobs report are modest, with the unemployment rate forecast to hold at 4.9% and the headline jobs figure to come in at +175K. The trend of 200K jobs growth per month has recently been a psychological level for markets, but Fed officials tend have another number in mind. In October 2015 (and numerous times since then), San Fran Fed President John Williams wrote in a research note that he believed growth of +100K jobs per month was enough to sustain the growth in the labor force and maintain the current unemployment rate. In December 2015 (and numerous times since then), Chair Janet Yellen reiterated this same view. By the Atlanta Fed’s Jobs Calculator, assuming a 4.9% longer term unemployment rate, the economy only needs +120k job growth per month to sustain that level through October 2017.

The data should have no bearing on whether or not the Federal Reserve raises rates in December. Fed funds futures contracts are currently pricing in a 100% chance of a 25-bps hike next month. Instead, the pace of jobs growth will be important in helping the market determine what it believes the Fed’s glide path will look like: 25-bps rate hikes are currently priced in for June 2017 and December 2017.


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article 3 months old

The Overnight Report: Holiday Spree

By Greg Peel

The Dow closed up 59 points or 0.3% while the S&P gained 0.1% to 2204 and the Nasdaq fell 0.1%.

Let slip the bulls

The SPI Overnight was suggesting only a 7 point gain before the opening bell on the local market yesterday – a fair call despite more records on Wall Street given the ASX200 had rallied 60-odd points the day before. Iron ore had jumped 6% that night but iron ore futures had already rallied during Tuesday so the market was on to it.

But we closed up another 71 points. The chartists had suggested a breach of 5400 would pave the way for a move to 5500 and there seemed some level of self-fulfilment yesterday. As was the case on Tuesday, the local market did not step-jump up yesterday, it started from zero and tracked a straight line up to the close, without as much as a stumble. Momentum was at work.

It seems as if the local market has been in a daze this past couple of weeks as it tries to come to terms with a Trump presidency. There have been many reports in the media warning of just how bad Trump could prove for Australia. But as each passing day indicates Trump’s policy pledges were all about winning the election and not about how he would actually run the country, those initial fears have begun to be tempered.

If it didn’t happen on Tuesday, it happened yesterday – investors suddenly saw Wall Street breaking records and decided Australia was missing the boat. Get in and buy!

Only the healthcare sector missed out on an otherwise market-wide rally yesterday, thanks to the ongoing fallout from Fisher & Paykal Healthcare’s ((FPH)) earnings result. That stock was down 7% and the healthcare sector closed flat. Otherwise, it was green-on-screen.

The resource sectors were again in the frame – materials up 2.0% and energy up 1.3% -- but the fact industrials were up 2.2%, telcos 2.1% and utilities 1.4% indicated investors were moving back into the likes of bond proxy stocks and previous high-PE names that had been trounced over the past month or more. The banks also made their contribution with a 1.1% gain.

Did anyone notice yesterday’s major data release? It seems not.

Construction work done fell 4.9% in the September quarter to be down 11.1% year on year. It was a much softer result than economists were expecting. Private sector work fell 6.6% to be down 36%. The bulk of that fall reflects the ongoing wind-down of resource sector construction. Engineering fell 3.8% to be down 23.2%.

Last year it was all about building work, particularly residential, striking the balance. Building work in general fell 5.7% to now be only 1.4% higher year on year. Within that, residential fell 3.1%. The decline in resource sector construction will soon reach its nadir, but now we see the beginning of the cooling of the housing market. The Australian economy needs a new hero.

Within those companies most impacted over the last few years by the mining downturn – engineers & contractors – a scramble has been on to diversify into public infrastructure and away from the mining and oil & gas sectors in order to re-establish themselves. In the September quarter, public construction rose by only 1.4% but it is 15.7% higher year on year. Economists estimate the overall construction number for the quarter will shave 0.4 percentage points off GDP. As housing cools, public sector spending will need to take the baton.

Happy Thanksgiving

The healthcare sector was also a drag on Wall Street last night. Test results showed that Eli Lilly’s prospective Alzheimer’s drug failed to deliver. That stock fell 10% and weighed generally on biotechs, sending the Nasdaq down 0.1% following two record-breaking sessions.

It looked for most of the session that the S&P500 would also ease back after its record thirteen-day winning streak, but the broad market index just managed to fall over the line at the death. The Dow, on the other hand, powered on.

The Trump theme continues to underscore for many of the big caps in the Dow Industrials and very much so in the Dow Transports. But there was more to be positive about last night.

Deer & Co shares jumped 11% following that company’s earnings report. Deere is not a Dow stock but peer Caterpillar is. The banks continued on their merry way last night and because of the peculiarities of the arcane price-average, recent addition Goldman Sachs is very influential because it is a US$200-plus per share stock.

US durable goods orders surged 4.8% in October when 3.3% was expected. It mostly came down to lumpy aircraft orders, but ex-transport the result was still a 1% gain.

The minutes of the November Fed meeting were released last night but no one paid any attention, given they are pre-Trump. The indications are nevertheless a rate rise next month is baked in, but everyone knows that.

There would have been no surprise had Wall Street eased off last night as traders squared up ahead of what is effectively a four-day holiday. But that was not the case. We’ll need to see what happens next week after everyone’s had a rest.

Commodities

Iron ore is up another US$1.10 at US$74.90/t. At what point will the Chinese government step in with more dramatic measures to curb speculation?

And not just in the bulks, but in base metals too. Aluminium and lead rose another 1% last night, copper and nickel 2% and zinc 3%.

These moves came, yet again, despite a stronger greenback. After one little dip, the US dollar index is back up 0.6% at 101.64.

Alas, the death knell sounded for gold. It fell US$24.60 to US$1187.10/oz, accelerating once the 1200 mark was breached.

The oils were little moved last night.

The Aussie is down 0.2% at US$0.7386. On a combination of US dollar strength and the weakness in yesterday’s Australian data, we might expect a bigger drop. But look at those commodity prices.

Today

The SPI Overnight closed down one point.

There’s no holiday in Australia tomorrow, but with Wall Street closed, it may be a case of looking to square up a bit downunder, particularly after a 130 point rally over two sessions.

Today brings September quarter capital expenditure numbers.

It is also a very big day on the AGM calendar, with highlights including South32 ((S32)) and Woolworths ((WOW)).
 

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article 3 months old

The Overnight Report: Dow 19,000

By Greg Peel

The Dow closed up 67 points or 0.4% at 19,023 while the S&P rose 0.2% to 2202 and the Nasdaq gained 0.3%.

Buy Everything

Surging commodity prices were the major trigger but new all-time highs on Wall Street also seemed to spur investors into diving back into the Australian stock market as a whole yesterday, given no sector finished in the red in a 1.2% rally for the ASX200. Rotation of any sort was not apparent, although not every sector performed equally.

Materials (up 2.8%) and energy (up 2.6%) led the charge on stronger base metal and oil prices, despite a weak overnight session for iron ore, and helped by little counter-movement in gold. Iron ore futures went the other way and traded “limit up” in the session, negating that offset. In contrast to trading over the past couple of months, the next best sector was utilities, up 2.1%.

It has been typical in recent times for resources and other cyclicals to trade inversely to yield stocks and defensives. Yesterday was different; seemingly more of a case of buying anything that looked sufficiently cheap. Not joining the party were the banks and telcos, up only 0.3% each.

Telstra ((TLS)) has been a volatile stock of late – not what you’d normally associate with a supposedly defensive telco. It seems talk of an NBN-related “earnings gap” ahead has investors thinking twice. And the lingering possibility of the banks having to raise new capital to meet new regulations, or at the least cut their dividends, may also have investors shying away from that sector.

Yesterday’s rally was not a step-jump but a classic case of moving steadily upward as the day progressed. This suggests “real” buying. In sights was the technical level of 5400 for the index which was surpassed late morning, sparking some brief profit-taking, but once the rally resumed it fed on itself.

If the index holds over 5400, chartists suggest then 5500 is in play.

Blue Sky

Donald Trump must be starting to think he’s a bit of a hero, if he didn’t already. The S&P500 has now posted a thirteen-day winning streak since Trump’s victory speech, to the tune of almost 3%. Nixon managed to spark a similar response, but Trump is still well behind Republican pin-up boy Ronny Ray Guns, whose election was worth over 8% in the same period.

The Dow has closed over 19,000 for the first time in history. The S&P has closed over 2200 for the first time in history. The Nasdaq and Russell small cap indices also hit new all-time highs last night, marking the second consecutive session of all four doing so – a feat not seen since 1998. The thirteen-day day winning streak for the S&P is the first since 1996.

Across Wall Street all talk is of just how far this rally can run on election promises (that are already being broken – “lock her up” is now off the table) which will take time to implement. Surely the honeymoon must fade at some point.  Tonight in the US is all about trains, planes and automobiles. A mass exodus will begin from lunch time. A good day to take profits ahead of the Thanksgiving holiday?

Commodities

Recent volatility in bulks and base metal prices has had a lot to do with the Chinese government increasing margin requirements to curb rampant speculation, offsetting Trump euphoria. We’ve seen some sharp dips in iron ore and coal prices lately as a result. But is Beijing winning?

Iron ore is up US$4.00 or 5.7% at US$73.80/t. Thermal coal is up 6.2%.

There were some very big moves up for base metals on Monday night, with aluminium a smaller mover. Last night aluminium jumped 2% while copper, lead and nickel all added a further 1% and nickel fell 1%, having jumped over 5% in the prior session.

West Texas crude has now rolled into the January delivery contract and last night it fell US17c to US$48.07/bbl after Monday night’s big move.

The US dollar didn’t much come into play last night, ticking up less than 0.1% to 101.07.

Gold is flat at US$1211.70/oz.

The Aussie is up 0.5% at US$0.7399 despite the steady greenback, driven by commodity prices strength and, presumably, all this sudden talk of the next move in Australian interest rates being up. There are plenty of economists holding the opposite view.

Today

The SPI Overnight closed up 9 points.

Locally we’ll see September quarter construction work done numbers today.

Japanese markets are closed.

Wall Street will see a big dump of data tonight, including the minutes of the November Fed meeting, before the evacuation begins.

Programmed Maintenance ((PRG)) will release its earnings report today while the centres of attention in another round of AGMs will likely be Estia Health ((EHE)), following its torrid few months, and one of the most volatile stocks on the market at present, lithium producer Orocobre ((ORE)).

Rudi will appear on Sky Business today, 12.30-2.30pm, instead of his usual Thursday appearance.
 

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article 3 months old

The Overnight Report: Commodity Price Surge

By Greg Peel

The Dow closed up 88 points or 0.5% while the S&P gained 0.8% to 2198 and the Nasdaq rose 0.9%.

Confused

It was a quiet session on the local bourse yesterday. Volume was weak as the ASX200 meandered its way in a minimal range to a soggy close. But again the lack of movement in the index belies what was going on underneath amongst the sectors.

It would seem investors are simply not sure how they should be positioned going into year-end. I have highlighted in the previous couple of sessions that it appeared the long sell-off of yield stocks and defensives was finding a bottom and the abrupt run-up in resource stocks was tipping over. But yesterday, we went back the other way once more.

On a tick-up in the oil price, energy was the best performer on the day with a 1.7% gain. It would seem traders were heartened by the WTI price rising back through the US$45/bbl mark on cautious confidence of an OPEC agreement being reached, rather than tanking down through 40. That buying will prove rather prescient today.

Materials chimed in with a 0.3% gain but other than a flat day for the banks, all other sectors finished in the red. Notably, consumer staples and healthcare each fell 1.3%, telcos fell 0.9% and utilities fell 0.5%. The theme of the previous couple of sessions was reversed. Perhaps the seemingly relentless rise of US bond yields is just too much.

The US bond yield stalled last night and the US dollar index dipped for the first time in several sessions. The door was opened for commodities to take centre stage.

Commodities

APEC meetings are not what we’d normally think of as market movers but aside from the attention being drawn by it being President Obama’s final outing, the attendance in Peru of Vladimir Putin and Xi Jinping has provided us with some headlines.

The Russian president sees “a high probability” of an agreement being reached in Vienna on November 30, when OPEC tries to implement a production freeze. Russia will cooperate, Putin suggested, as a production freeze “is not an issue for us”.

Those comments were worth 4.2% for the West Texas crude price, which rose US$1.92 to US$47.49/bbl.

What is good for oil is seen as good for other commodities. Meanwhile, the Chinese president used his speech in Peru to confirm China’s support for a free trade area in the Asia-Pacific. The Chinese government is pushing for a Regional Comprehensive Economic Partnership of 16 countries. The now dead-in-the-water TPP was to involve 12 countries, including the big one, the US. We might presume China sees an opportunity to further step-up its global strength as the trade wall goes up around the United States.

Free trade offers up the possibility of increased Chinese imports of raw materials, including lead, up 1% on the LME last night, aluminium and zinc, up 1.5%, copper, up 2.5%, and nickel, up 5%.

Xi Jinping did not, however, manage to light a flame under the bulks, which few disagree have run too far, too fast. The thermal coal price was steady last night and iron ore plunged US$2.80 to US$69.80/t.

The 0.3% dip in the US dollar index to 100.97 provided a green light for those commodities that did rally to do so, and also allowed gold to tick back US$3.30 to US$1211.90/oz.

And the Aussie to tick back 0.3% to US$0.7361.

Quadruple Watching

The energy sector duly led Wall Street higher last night with materials trailing in its wake. But otherwise the positive mood was market-wide. The Dow, S&P and Nasdaq all simultaneously hit new all-time highs, for the first time since August. Back in August, US small caps were underperforming. Last night the Russell 2000 index also hit a new all-time high, marking a rare quadrella.

What’s good for M&M Enterprises is good for the country. Except in this case Milo Minderbinder is Donald Trump and no one can yet identify the Catch-22.

Outside of the commodity story there was no real new news to drive Wall Street higher last night. Only the dip in the greenback after a long run higher could be seen as any particular incentive. And the ten-year bond rate stalling.

Donald Trump continues to interview prospective cabinet members but there has been no new news on that front either. Either way, US business television currently features commentator after commentator suggesting a Trump presidency cannot be anything other than positive for the stock market. They just can’t see any other scenario.

The previous couple of sessions showed signs the Trump euphoria rally might be losing steam. Not so last night.

Today

Fresh all-time highs on Wall Street and surging commodity prices. How will this affect the Australian market today? Forget iron ore, the SPI Overnight has closed up 40 points or 0.8%.

Earnings results are due out today from CYBG ((CYB)), Fisher & Paykel Healthcare ((FPH)) and Technology One ((TNE)). There is another round of AGMs to digest including another prominent Kiwi, The A2 Milk Company ((A2M)).
 

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