22 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.22 – EU and German PMIs Today

Today’s market
The European day starts off with the manufacturing and service-sector purchasing managers’ indices (PMIs) for France, Germany and the EU as a whole. The manufacturing PMIs are expected to be slightly lower, which could prove negative for the euro, at least temporarily. However, given the rather high level that these indices are at to begin with (the EU manufacturing PMI is at its highest level since April 2011), I’m not sure a small decline as is forecast would really make much of a difference to anyone’s view.


 
When the North American day starts up, it’s a big day for Canadian indicators with both CPI and retail sales coming out.
Canadian CPI headline figure is expected to rise notably, bringing it closer to the center of the Bank of Canada’s 1%-3% target band. This could boost the likelihood of another rate hike this year. But since the market’s estimate of the probability has gone from 47% last Friday to 65% on Thursday, it seems opinion is already shifting that way. That suggests the figure may already be largely discounted and although it should be positive for CAD, we might not see much movement if indeed it does come out as forecast. 


 
On the other hand, Canadian retail sales are expected to come in below trend. That could prove negative for CAD and slightly offset any positive impulse from the CPI figure – although there’s little doubt that the Bank of Canada is more focused on the CPI, as it seems confident about the strength of the economy.


 
The Markit US PMIs are expected to show a mixed picture, with manufacturing rising but services falling. The market generally pays more attention to manufacturing though, so the news could be mildly positive for the dollar, especially given the currency’s recent surge following the FOMC meeting.


 
UK PM Theresa May will make an important speech on Brexit in Florence, Italy. The official comments on the speech are only that May will give an "update on Brexit negotiations so far" and “will underline the government's wish for a deep and special partnership with the European Union once the UK leaves the EU." But with the negotiations deadlocked, everyone is hoping for a major policy initiative that can get the talks going again when they resume next Monday.

The main stumbling block in the negotiations seems to be what’s being called the “divorce bill,” or how much Britain has to pay to cover existing commitments at the time it leaves. The Financial Times has reported that she will offer EUR 20bn, but this is only about half what the EU is looking for. This payment is the main priority for the EU negotiators, while maintaining trade relationships after Brexit is the main priority for the UK. That’s why I expect the speech to disappoint the EU and the markets by failing to provide any breakthrough, and why I expect the pound to fall afterwards.
Over the weekend, Germany holds an election for the Bundestag, or Parliament. This is the first vote since Chancellor Merkel opened the door to a huge influx of immigrants in 2015. While Merkel is expected to win a fourth term, it’s expected that six parties will win seats for the first time in the post-war period. This may make it more difficult for Merkel’s coalition to pass legislation, especially if the junior party in the coalition, the Christian Socialist Union (CSU), decides to distance itself from Merkel and her Christian Democratic Union (CDU) in preparation for Merkel’s eventual retirement. Nonetheless, she is expected win, which could be EUR-positive at the opening on Monday.
 

 
This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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21 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.21 – FOMC and BoJ Meetings

Today’s market
Following yesterday’s excitement with the FOMC and the overnight focus on the Bank of Japan, the rest of the day is likely to be spent analysing the impact of those two meetings. The schedule during the day isn’t likely to move rates that much.
The UK Government’s borrowing in August is expected to be higher than the previous month, but the figure isn’t seasonally adjusted. The consensus forecast of GBP 7.1bn would bring the 12-month moving average to GBP 3.95bn, little changed from the previous two months (GBP 3.92bn in July and GBP 3.96bn in June). In other words, fiscal policy looks pretty stable – the deficit is neither widening nor narrowing. In that case, a figure along the lines of the consensus forecast should be GBP-neutral.

 
The Philadelphia Fed business outlook index is forecast to be down slightly, much like the Empire State index of a week earlier, which also fell a bit. That could depress the dollar somewhat as this is a market-affecting index.  

 
 
ECB President Draghi gives a keynote address in his capacity of Chair of the European Systemic Risk Board. It’s unclear if the speech will hit upon monetary policy, but if he wants to he can always find a way to sneak a comment in. Look especially for some comment on whether the market’s interpretation of last week’s ECB meeting was correct.
EU consumer confidence is expected to be unchanged at just below the post-Global Financial Crisis high set back in June. The last time the index was around this level was in 2007 before the Lehman Bros crisis. Thus I would say that even no change in the index would be a show of confidence that should prove positive for the euro.

 
 

 
This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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20 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.20 – Fed Balance Sheet, FOMC Meeting Today

Today’s market
The focus today will no doubt be on the Federal Open Market Committee (FOMC) meeting. Following that, overnight there will be a Bank of Japan (BoJ) Policy Board meeting, but that is expected to result in only technical changes to policy at best.

No one expects the FOMC to change rates, but they are expected to announce the details of how they plan to reduce their massive balance sheet, which is nearly 5x as big as it was before they started quantitative easing. That has the potential to move US bond yields and therefore the dollar. However, they’ve been talking about it for months and have pledged to move gradually, so the impact may be limited. 


 
 
Of more importance may be the new “dot plot” giving their estimates for where they expect rates to be in the future. The FOMC’s forecasts are significantly higher than the market’s, as has been the case for some time; will they revise down their forecasts to be more in line with the market, or are they still confident about hitting their targets in the projection period? Along with that, the revised inflation forecasts will also be a focus. 


 
The BoJ Policy Board are unanimously expected to keep rates stable. It’s the one-year anniversary of their “yield curve control (YCC) policy.” During that time, the 10-year JGB yield has largely ranged between -10 bps and +10 bps, meaning that the BoJ has succeeded in its pledge to keep the 10-year JGB yield “around 0%.” However, the BoJ’s bond holdings only increased by ¥66tn over that time, notably lower than the ¥80tn that they had pledged. They could acknowledge that difference at this week’s meeting by either changing the target to a range, such as ¥60tn-¥80tn, or even eliminating it altogether. I don’t think such a technical change would have any impact on the currency, so I expect a fairly low-key reaction to the meeting. 


 
Indicators
 
Aside from those two central bank meetings, Britain announces its retail sales for August. Sales excluding autos and fuel are expected to be unchanged from the previous month, while the year-on-year rate is also expected to slow. With real wage growth negative and consumer sentiment depressed, sluggish retail sales are no surprise. Slowing growth of retail sales suggests less pressure on the diminishing spare capacity in the economy and therefore marginally less need to hike rates soon, which could be negative for the pound.


 
US existing home sales are forecast to rise. While labor shortages and the difficulty procuring land are apparently holding back housing starts, there can be no such excuses with sales of existing homes, except insofar as people can’t sell their home unless they can be reasonably sure that they can find another one to buy. In any event, a rise here would probably be seen as positive for the dollar, even if it does appear that the figure isn’t likely to regain the January highs any time soon.

 
 

 
This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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19 / 09 / 2017 | Market News

Fundemental Analysis 2017.09.19 – ZEW Survey, Japanese Trade Balance

The European day starts off with the ZEW survey. This is a survey of financial analysts and investors, not people actually making or selling things, so it’s more of an investor sentiment gauge than an indicator of the real economy. It’s expected to show a small decline in current conditions – consistent with the expected small decline in the manufacturing PMI later this week – but a rise in expectations as the overall European economy improves. This suggests investors are increasingly optimistic about the outlook for Europe’s biggest economy, which is naturally EUR-positive.


 
US housing starts are expected to be slightly higher, but building permits are expected to be slightly lower. It seems that the market pays more attention to starts than to permits, which would mean the overall message could be positive for the dollar nonetheless.
In fact, given all the headwinds facing the housing market, the figures are quite encouraging. The National Association of Home Builders (NAHB) has mentioned “lot and labor shortages and rising building material costs” as factors restraining housing starts, while the recent Fed Beige Book mentioned “worker shortages in numerous industries, most notably in manufacturing and construction.” Also, the greater Houston area, accounts for 3.5% of the nation’s housing starts and builders would have prepared for Hurricane Harvey by stopping work ahead of time.


 
 
The US current account deficit apparently narrowed in 2Q. However, the forecast would still mean a below-trend figure (below in the sense that in the graph, a wider deficit is below the trend line). The deficit would have to be around -$108bn in order for the 12-month moving average to remain the same. So although the deficit is expected to narrow from the previous month, I would say it’s still USD-negative.


 
 
Overnight, Japan’s trade surplus is expected to be significantly lower on a not-seasonally adjusted basis, but to rise significantly on a seasonally adjusted basis, which is the more important metric in my view (although the market watches the NSA version more closely, for historical reasons). The customs trade data for the first 20 days of the month showed exports up 12.7% yoy vs only a 5.5% yoy rise in imports. I expect a continued strong export showing is likely to be positive for the yen, particularly as the Trump administration continues to put pressure on countries that run a surplus with the US. 
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This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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18 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.18 – Economic Calendar and Upcoming Fed Meeting

This week is shaping up to be an exciting one, the EU CPI for August is coming up today, the BoE Governor’s speech is slated for 15.00 GMT.

Later in the week we can expect the ECB monetary policy – which is indicating towards a rate hike after reports of healthy and prolonged economic growth within the EU. The BoJ also has an interest rate decision scheduled for today, although according to this year’s pattern amongst “safe haven” currency bank’s Japan’s central bank is likely to hold interest rates at their current level.

Of course the big macroeconomic elephant in the room will inevitably be the Federal Reserve’s releases on Wednesday which include their Economic Projections, Interest Rate Decision and Press Conference.  
Today we saw Asian shares hit their highest prices in the past decades while the dollar held strong ahead of the FOMC meeting – under the hope of the Fed’s trimming their admittedly overinflated balance sheet – which could contribute to the tightening of monetary policy globally - again if it goes through it.

A secondary contributing factor to this was undoubtedly the lack of new missile tests by Pyongyang – allowing tension to defuse slightly after the last missile which was launched over the North of Japan.
We will have to wait and see the outcome of the Central Banks’ decisions – this might be an extremely mobile week for markets or it could be disappointing for those expecting a tightening of monetary policy since the beginning of the year.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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15 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.15 – Today’s Market

Little is on during the European day. ECB’s Daniele Nouy, head of the ECB’s Supervisory Board, speaks.
Activity is likely to pick up when the US day begins. Right at the opening there are two important indicators:  the Empire State manufacturing index and the retail sales. The latter is the more important.

US retail sales are expected to rise at a slower pace than in the previous month. Gasoline prices rose during the month, but auto sales were down, leaving the headline figure little changed. The control group (which excludes motor vehicles, gasoline and building materials) is also forecast to be lower. The control group is important as it represents nearly 30% of consumer spending in the GDP statistics. The figures as forecast are not only down from July’s relatively strong numbers, but they are also below trend. That’s why I think they are likely to be negative for the dollar, unless of course there is an upward surprise. 


  
The Empire State manufacturing index last month hit the highest level in three years. Given the devastating hurricanes lashing the US, it’s no surprise if it falls back a bit in September. Nonetheless the figure could also be negative for the dollar, especially combined with sluggish growth in retail sales. 


  
Shortly afterwards, US industrial production and capacity utilization are released. Industrial production is also forecast to show a below-trend increase. However, I think there’s the possibility of an upward surprise, given that factory hours worked rose 0.8% in August, while motor vehicle production also appears to have increased. Nonetheless, if the figure does come out as the consensus forecasts, it would simply corroborate the other evidence from the retail sales and Empire State survey about the economy turning more sluggish, and would be dollar-negative.

Capacity utilization is forecast to creep higher yet again, but this doesn’t seem to be a major indicator for the markets.


 
Finally, the U of Michigan consumer sentiment index is forecast to fall slightly. Given the problems with North Korea and the continuing shenanigans in Washington, a fall in confidence wouldn’t surprise me at all; on the contrary, the previous month’s rise in confidence was surprising, in my view. Nonetheless a decline here would probably just add to the day’s dollar-negative news and encourage more selling ahead of the weekend. 


 
 

 
This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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14 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.14 – BoE and SNB Rate Decisions Today

Something worth investors’ attention today is the SNB’s (at 08.30 GMT) and the BoE’s (at 11.00 GMT)  interest rate decision.

In expectation of US inflation data – which could reveal the Fed’s intentions regarding monetary policy, markets are staying risk on the USD. US indices were also trading in the green, with the Dow Jones gaining 0.18% reaching 22,158.18, the S&P 500 reached 2,498.37 after gaining a meager 0.08% and the NASDAQ went up to 6,460.19 after a 0.09% climb.

Markets seem to be upbeat  about Donald Trump’s ability to pass his administration’s proposed tax reform, even though Steven Mnuchin’s, US Treasury Secretary warned about over-confidence in this speculation just the previous day. 
 
US producer prices showed accelerated growth surpassing expectations set for August. Encouraging macroeconomic data, confidence in Trump Administration’s ability to reform policy and an a more risk-on sentiment helped the growth  of US 10-year yield to 2.20%  its highest in the past three weeks. Investors will also be on the lookout for today’s release of the US CPI (scheduled at 12.30 GMT). If the figures exceed expectations USD should continue its current upward trend.
 
As markets became more risk-on commodity currencies – safe havens, fell. Gold lost -0.03% currently trading at $1,322. If the USD and US yields continue in their upward vector, then this might cause safe-haven metals to slip even further. An important support level after the conclusion of two months of growth, is set at $1,300.
 
The Asian Trading session showed a drop of the Nikkei and Topix. USDJPY seems to be continuing its bullish trend. The currency pair is pushing towards 110.80/110.90 50-day moving average is included within this range and the 50% Fibonacci level  of its July- September slip.
AUDUSD climbed after the release of positive Australian employment data. Australia saw a 54,200 job additions in August, of which full-time jobs accounted for 74%. Chinese data came in mixed and depreciated futures on iron ore (-1.50%) could create a upside cap at 0.8060.
 
China’s industrial production came in under expectations at 6.0% YoY in August compared to the expectation of 6.6% and last month’s 6.4%. The retail sales growth also slowed down to10,1% from the previous 10.4% YoY . Foreign direct investments in China saw an unexpected increase jumping to 9.1% from 2.3% on YoY for August, justifying hedge funds’ recent  move away from their short positions in China. This should turn markets towards Chinese assets. 
Industrial metals traded lost due to USD’s growth and the sluggish Chinese industrial growth might have contributed to this effect.
 
FTSE also saw a slip – in the area of 0.14%.
 
WTI crude oil was trading higher after the news that OPEC forecasted increased demand in 2018 with the largest consumers/importers of fossil fuels being Europe and China. WTI reached $49.80. The commodity might see resistance as it approaches the $50 price level.
 
 The pair yielded to the growing USD at 1.1871. The most proximate support is estimated at 1.1815, if this level is surpassed, it could move the price towards mid-term support set at 1.1730
EURGBP is in consolidation at 0.90. The D1 MACD (Moving Average Convergence Divergence) stepped in the negative territory, meaning that the downside correction could accelerate toward 0.8957 (major 61.8% retrace on July – September rise) and 0.8920 (200-day moving average). The Bank of England (BoE)’s policy verdict is an upside risk to the actual negative trend in EURGBP. A distinct BoE dovishness could prevent the EURGBP from developing below the 0.90 mark and trigger a U-turn toward 0.9076 (50-day moving average).
 
The BoE’s Monetary Policy Committee (MPC) will meet today and there is a mixed-bag of expectations regarding the MPC’s policy stance following the recent economic data. The GBPUSD fell hard after the UK wages growth stagnated at 2.1% on year-to-July versus 2.3% expected by analysts. The soft wages growth rose expectations that a faster deterioration in British households’ purchasing power could temper the inflation before it surpasses the 3% level. This would eventually prevent Governor Mark Carney from writing an open letter to the Chancellor explaining why the BoE didn't hike rates to avoid high inflation. The main highlight of today’s MPC meeting will be the hawk-to-dove ratio. At least two MPC members are expected to vote in favour of a rate hike at today’s meeting. If three or more members opt for higher rates to divert the inflation from the 3% level, the pound could rally significantly. In this scenario, the next important technical level stands at 1.3420 (50% retrace on post-Brexit decline). If however the policymakers agree to stay pat for a longer period despite the rising inflation, the pound could retrace gains against the US dollar and Cable-shorts could challenge the key technical support to the August – September rise, 1.3115 (major 38.2% retracement).

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
 
 
 
 
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13 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.13 – Wall Street, Asian Shares and Japanese Wholesale Prices at Record Highs

It seems that markets are responding to a slew of good news – and prices around the world are proving it. Asian stocks continued the previous days’ upward trend, even though yesterday was a bit shaky – reaching a 10 year high, possibly a response to Wall Street’s positive return. The Apple stockholder’s excitement over the 1.81% climb of the tech giant’s stock was unjustified as its stock fell 0.42% reaching 160.82 from the previous 161.50 in hours preceding the iPhone 8 release. This was probably due to mixed consumer response, as once again Apple preferred to invest in innovative technology but not assess and amend customer concerns regarding the previous iteration of their technology.  

Japan saw its August wholesale prices develop with its highest pace in the past 9 years. A substantial increase of demand from China was one of the primary contributing factors. This also bolstered the speculation that Japan will also experience a consumer inflation increase pushing it closer to the BoJ’s target of 2%. This is the eighth consecutive climb the index has experienced since the beginning of the year.

The GBP saw a marked increase after the release of very positive inflation data – putting further pressure on the BoE to revise their dovish monetary policy. In fact the GBP price rally pushed the currency up to its highest level this year.

Although US stock was up, the USD slipped against other major currencies. This of course was more an affect of the EUR strengthening than the weakening of the dollar. In fact US Census reports yesterday should have been dollar positive – showing that middle-class income reached its highest levels in history and that sluggish growth post-“Great Recession” is now observable – but it seems that markets are still risk-off the US currency. The reason being that after the enforcement of the UN Sanctions against N. Korea, President Trump went on record promising that the aforementioned sanction would pale in comparison to what “ultimately will have to happen” to stop the country’s nuclear program.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
 
 
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12 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.12 – USD Recovers from Hurricane Irma

This may be a misnomer, as actually the damage incurred by Hurricane Irma was much less than the actual damage that was estimated. This bolstered the USD and the assumption that the US economy is in a pattern of growth. The S&P 500 saw a significant increase in the area of 1.1% as a result.

Asia stocks also saw a jump – reaching a 10 year high yesterday after the threat of N. Korea’s continued aggression abided. This might not have longevity though – as the UN decided to increase sanctions against N. Korea, an action Kim Jong Un said would force retaliation. Luckily, Pyongyang seems to quiet at the moment.

 Of course all of this fundamental data resulted in markets being more risk-on and offloading safe-havens they ran to during the volatility of the previous week. This caused JPY, CHF, Gold and Silver to drop. Although CHF and JPY lost infinitesimal Gold experienced a 0.31% drop and silver a 0.19% drop.

Something going around the market news networks is Apple’s announcement of a new iPhone 8 today. The reason is that Apple seems to have a heavy influence on the electronics market, with enough heft to actually effect specialty electronic component manufacturing companies’ stock price. In anticipation of today’s release AAPL stock (Apple Inc.) went up a very substantial 1.81% and is currently trading 161.50.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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11 / 09 / 2017 | Market News

Fundamental Analysis 2017.09.11 – USD Recovers After Two Year Record Low

After yet another week of the USD experiencing a controlled free-fall as a result of Hurricane Harvey being succeeded by Hurricane Irma, a renewal of frictions and threats between the US and N. Korea after Pyongyang’s continued missile tests, the dollar finally started recovering.

The abiding of the N. Korean threat, Hurricane Irma being less destructive than forecasted – which in turn allowed refineries in the Gulf Region to continue rebuilding and recovery after the destruction experienced during Hurricane Harvey – all contributed to the USD seeing a marked increase.

Along with the US currency Asian Stock also slightly climbed – a secondary or auxiliary victim of Kim Jong Un’s threats, due to region’s geographic proximity to N. Korea – something we saw when missiles launched by Pyongyang’s administration, flew over northern Japan. But as market sentiment relaxed so did the risk-off that was adopted during last week’s trading.

Oil also saw a boost as news that Saudi Arabia intends a continuation of their oil production cuts beyond the predetermined March 2018. Oil took a significant hit after the Hurricane Harvey caused refineries in the Gulf Region to stop production – thus demand for crude dropped as a result – causing crude prices to slip slightly. After refineries started producing again, Harvey was downgraded to a tropical storm and the drop in refined products were off-set by other refineries outside the states, the commodity’s price stabilized and increased.

Today’s economic calendar seems a little lean of economic news with the most significant being Canada’s Housing Starts for August (YoY).
Tomorrow Sept. 12th we can expect the UK CPI for August (YoY)

Sept. 13th see the US Producer Price Index for August

Sept. 14th Australia’s Unemployment Rates will be released, along with the SNB’s Interest Rate Decision, BoE’s Interest Rate Decision, its Monetary Policy Summary and the US’s Consumer Price Index – so Thursday seems like an especially significant day to watch for market movements.

The US Retail Sales for August are slated for release on the 15th of Sept. 

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
 
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