In my opinion, a direct swap leads to an increase in the balance sheet while the reverse swap results in a decline.
The RBA left cash rate unchanged on Tuesday but gave clear-cut indications that it wants to float additional easing measures at the next meeting to stimulate hiring.
âThe Board continues to consider how additional monetary easing could support jobs as the economy opens up furtherâ, the policy statement said.
Three out of four major Australian banks - Westpac, NAB and ANZ expect the central bank to cut the cash rate in November.
The implicit pledge of the RBA to reduce borrowing costs was made just before the release of the governmentâs budget for 2020/21. The government is expected to ramp up borrowing, but accommodative policy of the RBA should help the government bond market to absorb increased supply.
We can also notice a subtle shift in emphasis in the policy statement towards employment goals (instead of routine discussion of inflation targets) which is reminiscent of the Fedâs shift toward flexible average inflation targeting policy.If itâs true, then the RBA may be willing to tolerate higher inflation as well in exchange for lower future unemployment. Of course, this development bodes ill for the national currency, AUD.
From the technical perspective the RBAâs dovish bias helped AUDUSD to complete formation of the double-top reversal pattern in the pullback that started on September 28, which in turn was part of the bearish trend initiated in September:
A breakthrough of the local minimum at 0.7130 should allow us to consider targets at 0.7080 and 0.70 levels.
The AUDUSD decline of more than 5% in September and the episode of âresistanceâ since September 28 were consistent with waves of correction and rally in equity markets, indicating a link between the events. Then a further decline in AUDUSD suggests a nix in the stock markets, which is very likely to happen due to upcoming pre-election volatility. Earlier, retail brokers in the US (such as IB) announced an increase in initial and maintenance margins for some instruments, mentioning the risks of âelevated volatilityâ ahead of the elections.
The trade balance of Australia in August was almost half of the forecast (2.64 billion against 5.15 billion Australian dollars), which indicates a reduction in exports. Business activity in Australia is especially sensitive to the dynamics of foreign trade, therefore, the weakening of exports is an additional blow to Australian assets and hence the demand for AUD.
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 authorâs 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. 75% and 72% 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.
Last Chance for Trump to Narrow the gap
Bidenâs lead in polls declined last week, albeit slightly, which still kept markets under pressure. The event which jumps into the foreground this week is the second presidential debate. It is Trumpâs last big chance before the election to leap forward and narrow the lead. In my opinion, if Trump manages to weaken Bidenâs advantage, it will be a risk-off event since this outcome increases the chance of contested elections (which is a great source of uncertainty). Extension of Bidenâs lead should be a boon for the markets helping them to extend the rally.
Important data on the US economy this week will be new home sales, the Fedâs Beige Book and, of course, the initial jobless claims, which will receive a little more attention as the jobs market exhibited some weakness last week. The rest of the calendar for America is not particularly remarkable.
On Monday, the USD index began to decline aggressively, continuing the downward trend from September 25. Recall that at the same time the probability of Bidenâs victory and the probability of a complete victory for the Democrats began to rise:
The Covid situation in the United States was generally calm in September, but became alarming in early October.
The numbers are not so critical yet to tighten measures (and crash the market), but letâs keep the finger on the pulse.
In my opinion, there are little grounds to expect some surprise in Trump performance on the debates and expectations that Biden will extend or retain its lead should drive USD decline this week. The target for USD index is 93.00 level and 1.1830 - 1.1850 in EURUSD.
The data on Chinese economy left a mixed impression. GDP in the third quarter increased by 4.9% (forecast 5.2%), but the growth of industrial production in September (which is tied to external demand) beat expectations - 6.9% against the forecast of 5.8%. Retail sales jumped 3.3% YoY last month, against a more modest forecast of 1.8%. Unemployment has dropped.
Today, a meeting of the OPEC + joint monitoring commission is scheduled, at which it will be discussed how responsibly the participants are approaching production cuts. Europe has tightened measures due to rising incidence of Covid-19, which curbs fuel demand and OPEC is increasingly aware of the need to adjust supply. Specific decisions, however, may happen at the full OPEC+ meeting due on November 30 - December 1, but todayâs meeting should contribute to the discussion about what OPEC + will do at the full meeting.
COT data showed that long positions of Brent speculators increased by 37,531 lots in the last reporting week. The net position increased to 120,108 lots. Most of the changes occurred in short covering - 28K out of 37K (~ 75%). It looks like speculators were unwilling to stay short ahead of news from OPEC + this week which creates opportunity for prices to test some monthly resistance levels:
SPX and USD Index: What to Expect in the Second Half of the Week?
Looking at recent volatility, especially vigorous move to the upside, stock markets could rally on hopes that fiscal deal will be approved before the elections. But on Tuesday, much hoped talks fell through once again. House Speaker Pelosi and Mnuchin still âhold hopeâ and continue tense negotiations almost 24/7, but rumors suggest that there is no progress on key differences. Reuters reported that the GOPâs head in the Senate Mitch McConnell would not want to approved aid before the elections.
The SPX was unable to sustain gains, bouncing down from the level of 3500 last week, without much upside impulses this week. The slide was accompanied by a sharp decline of the odds of Democratic sweep outcome:
On the hourly chart we see that 200-day SMA test failed, but on October 19 the market gave up important support.
Now the battle unfolds for the horizontal level of 3420. It has sustained multiple tests so far due to weak sellersâ indecision, but chances are good that we will go lower with 50-day MA on the daily chart (the next important support at 3400) as the next target. Depending on the struggle at the level it will be seen whether the prospects remain to switch quickly to the growth. Accordingly, there is an opportunity for a near-term short trade, and a pause is assumed for buyers, since they can wait for more discount.
The dollar sold heavily in line with the ideas set forth in my Monday post. The tests of 93.00 and 92.76 levels have been successfully complete and, in my view, it is time to correct upwards with potential entries in the 92.70 - 92.45 area. For EURUSD, this should be the zone 1.1890 - 1.19160.
The reason is potential downside in the US stock market.
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 authorâs 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. 75% and 72% 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.
SPX Tests 50-day SMA at 3400 Points. Will the Level Hold?
The âjingleâ from the Congress, Treasury and the US administration about coronavirus aid was hollow again. Controversial messages culminated in Trumpâs trash talk in Twitter that Democrats want to hand out cash to Democratic states - poorly run and with high crime rates. Who would doubt that the fiscal deal is nothing more than a convenient opportunity to please traditional and potential voters and earn extra political points. The horse trading that we observe looks like attempts to hog the covers.
As long as the harm from delaying the aid (i.e. wrath of constituents) does not outweigh the expected political gain from striking a deal with an opposing party, it makes sense to delay it. There is no urgent need, judging by the US labor market data and retail sales, yet. Democrats can deliberately pursue disadvantageous for the GOP channels of cash distribution, based on Bidenâs lead in polls.
It is not entirely clear why futures reacted up yesterday after so many promises and hopes, but awareness came quickly. The test of 3400 level in SPX futures, which we discussed yesterday, is almost complete, the USD is correcting upward, also in line with yesterday post:
SPX sellers werenât especially confident or assertive yesterday, but this is just the first test of important level. 200-hour SMA has flipped down but given that the lead of Biden and Democrats in polls has retraced slightly (which drives up the odds of contested elections i), there is little reason to switch to brisk rally and a slightly larger correction and a second test of the 50-SMA are likely.
The situation with the virus in the US continues to be tense, the news front is filled with reports of some kind of new measures there. Europe also actively dampens optimism. I would not be in a hurry to go into longs on the benchmark, even at 3400 level.
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 authorâs 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. 75% and 72% 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.
EURUSD: Case for Deeper Pullback as Markets Enter Turbulent Pre-election Week
US index futures slipped into negative territory on Monday as the greenback went on a massive offensive (gained both against major and EM currencies). Oil bounced down. US 10yr bond yield dropped indicating some fresh demand for risk-free assets. There are good chances that the last week before the US elections will be marked by risk-off, as by the end of last week there was little confidence that Trump would not resist the outcome of the elections.
Another important theme for the markets is the number of Covid-19 new cases in the US, which has set a new record:
In my view, US government and local authorities currently donât have means to resist other than returning part of restrictions, decreasing mobility and thus increasing social distancing. But they will probably be less severe than in the first wave. Nevertheless, as we have already seen with the example of European assets, these measures weigh heavily on market sentiments. While the US stock market compensated for the fall in September with subsequent rebound, European equities failed to soar in the same fashion, remaining largely in consolidation mode.
In addition, on Friday we saw the indexes of activity in the EU service sector for September, which behaved significantly worse than the manufacturing ones, i.e. services business is suffering again.
The ECB will hold a policy meeting this week, where the focus will be on regulatorâs response to the recent weakening of activity in the service sectors and downgrade of the EU growth forecasts by market experts. Together with increased demand for USD on risk-aversion, I would consider another downside correction in EURUSD this week with targets at 1.178 and 1.17
In addition, the plight of the EU services sector suggests that soon the fiscal or monetary authorities will have to offer some substantial monetary cushion, putting medium-term pressure on the Euro.
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 authorâs 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. 75% and 72% 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.
What can we expect from the EURUSD after the ECB meeting?
As expected, EURUSD crashed after the ECB meeting on Thursday, as policymakers almost openly stated that the central bank will continue to ease credit conditions in December. The only question is what policy instruments will be involved (depo rate cut, increase in QE, expansion of TLTRO or increased asset-purchases within the PEPP). The coronavirus impacts began without warning, causing the ECB to act almost preemptively:
All members of the ECB governing council unanimously supported the need for intervention in December. Recent tightening of social restrictions in Europe threaten to plunge the economy into another recession (this becomes the baseline scenario now!).
ECB President Lagarde announced that all instruments will undergo recalibration. In fact, this means that in December a mix of a rate cut, an increase in QE, etc. can be announced. Amid a pause in the actions of other central banks, yesterdayâs announcement by Lagarde is a very hard blow for the euro . Common currency was sold much faster than expected.
As a result, a noticeable imbalance of statements in favor of the ECB is formed in the central bank policy environment. The virus activity in the US has not yet forced the Fed to announce similar easing of credit conditions, which could balance the pressure on the euro in EURUSD. Also, judging from the dynamics of the disease in the United States, no urgent statements by the Fed are expected
The United States has already âvisitedâ the ~ 70K daily case zone in July, so I think that the US is quite away from the critical point of depletion of healthcare reserves. Therefore, there is no need to impose tougher curbs or introduce lockdowns. This means that there is no need for the Fed to rush to ease monetary policy. Hence, the Central Bank policy imbalance will linger for some time which should be properly priced in the Euro.
I expect that the pressure on the euro will continue in November and most likely we will see a breakthrough of the September low in EURUSD (1.161) after the elections.
Negative Headlines Grab Marketsâ Attention as Equity Rally Stalls
There are convincing signs that the rally on equity markets has stalled in the second half of this week. European indices gained less than 1% on Friday attempting to price in some early positive developments in coronavirus trends. There is not much to rally on in the short term, while increasing number of negative headlines feeds cautious state of the markets. The NYC authorities are mulling over extension of restrictions after closing schools as the mayor of the city de Blasio said that restaurants could be closed within the next week or two. Another heavy blow of economic activity in the US which the markets have not yet fully absorbed.
US Treasury Chief Mnuchin said that the $ 4.5 trillion emergency lending programs, which expire at the end of this year, wonât be extended. The Fed loses significant potential to absorb toxic debt in the event of a new shock, while medium-sized businesses lose access to direct loans from the Central Bank (through the Main Street lending program). However, it is possible that the proceeds will be used by Congress to fund other programs.
Initial jobless claims in the US fell short of forecasts for the first time in four weeks. Really bad signal. The increase in the unemployed amounted to 742K against the forecast of 707K, which likely reflects the impact of coronavirus restrictions, which are increasing in the US:
The negative print in the data point can be an early flare of slack in labor market recovery which warrants more attention to the data update in the next week. To continue the upward trend, equity markets would need a breakthrough in the fiscal deal negotiations which seemed like the only thing that can offer broad-based help to bullish sentiment.
However, it makes sense to expect a breakthrough not earlier than in January 2021 as runoff elections to the Senate in Georgia will take place then and determine who will get majority in the Senate. Based on the following chart, the Republicans should have a negotiating advantage with Democrats.
The growth of existing home sales in the United States left many forecasters bewildered. In October, sales increased by 4.3% versus September (-1.2% forecast), while the monthly growth in September was revised to 9.9%. Thus, in annual terms, sales increased by as much as 26.61%. Interestingly, the median price of home sold also increased - by 15.5%. Demand grew despite pandemic restrictions, falling incomes, high unemployment, to the extent that 2020 turned out to be the best year for the secondary market since 2009.
Obviously, the sales dynamics should offer some prolonged demand for goods and services of companies in home-improvement market.
Expectations of a new Business Cycle Warrant Pressure on USD
US index futures started the week in high spirits, trading in modest positive territory thanks generally supportive fundamental background. Oil prices continue to move higher ahead of the OPEC meeting on November 30 and are likely to hold onto gains after the second test of $43 resistance level. As expectations brew in the markets that global economy enters recovery phase of a new business cycle, the commodity market, in particular energy prices, should be the leading indicator of these expectations. Commodity markets, especially oil tend to outperform in this phase of the cycle.
Recovery of drilling activity in the US, major OPECâs rival unexpectedly slowed despite rise in the rise prices, which further supported the market on Monday. Baker Hughes reported on Friday that rig count declined from 236 to 231 units.
Consumer confidence in the Eurozone declined took predictable downward path, the corresponding index fell to -17.6 points in November against the forecast of -17.7 points. This is a first indication that the shock to the EU economy from the reimposed lockdowns may be in line with general level of concerns.
Since the start of November, the best performance among major currencies has been shown by currencies tied to business cycle while the currencies where defensive assets prevail underperformed. The greenback turned out to be the main outsider:
The index of US currency (DXY) is expected to play with 92.00 support this week without conclusive movement below the level, thanks to steadily rising optimism in the leading commodity markets, keeping expectations of a new investment cycle high.
Price action in the equity markets is expected to remain muted in the first half of this week, as the US celebrates Thanksgiving on Thursday and the start of shopping season on Friday. Economic calendar this week is relatively uneventful with durable goods orders, US Q3 GDP, Core PCE inflation set to hit the wires Wednesday. Perhaps the most important report this week will be the Fedâs November meeting minutes, which will be scrutinized for clues about possible increase in QE purchases in the next month.
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 authorâs 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. 75% and 72% 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.
Opposition in OPEC+, Fedâs Powell speech: key events to watch this week
EURUSD resumed its movement towards 1.20 on Monday in line with our expectations outlined last week, however buyers are in no hurry to break through the level. Greenback index remains in a mild downtrend and there are no prerequisites for a significant pullback in December. A breakdown of the 1.20 level in EURUSD in the first half of this week will depend on whether OPEC + decides to extend current output cuts. Then the pair will likely pay attention to the macro updates from the US (ADP, NFP, PMI indices) and remarks of the head of the Fed Powell and Treasury Secretary Mnuchin, which are going to speak in the Senate this week.
The minutes of the Fedâs November meeting showed that the question of additional monetary easing in December remains open. Powellâs rhetoric this week is expected to shed light on the Central Bankâs December action. Risks are biased towards the announcement of additional easing (most likely increase in Treasury purchases), which is a factor of pressure on the USD.
The minutes of the ECB meeting and the comments of the chief economist of the Central Bank Lane last week indicated that the Central Bank is reluctant to cut deposit rate or increase QE (due to low efficiency and high costs) and is likely to resort to soft and targeted measures. Expectations of strong monetary easing, which were priced in the euro, are being gradually priced out, removing one of the burdens from EUR.
Oil opened lower as an âinsider factâ leaked to the market ahead of the upcoming meeting that some participants rebelled over the extension of the current production restrictions. The opposition was Kazakhstan and the UAE - the participants, which, fortunately, make up an insignificant share of production in OPEC +. Chances are high that key players, such as Russia and Saudi Arabia, will be able to convince those who disagree to change their stance, or agree to take on part of the obligations (as was the case with Mexico at the last meeting). Moreover, the story with the opposition is a good reason to correct downward. As a result, oil may still jump up on removal of purely âformalâ uncertainty, but medium-term prospects are not clear.
Chinaâs manufacturing PMI rose, indicating that economic activity in the sector was picking up in the controversial month of November, which at least maintains state of relax in key equity markets. The index rose from 51.4 to 52.1 points, beating expectations.
This week, the focus may be on measures to contain Covid-19 in the United States. The United States let Thanksgiving Day pass without tight restrictions, which could trigger a new leg of rise in daily cases after levelling off at the end of the month:
The dollar index is expected to test 91.50 in the first half of the week, with the highest pressure exerted by the European currency.
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 authorâs 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. 75% and 72% 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.
OPEC decision is likely to have short-term impact as focus turns to demand side
Positive update on oil inventories in the US pulled WTI above the key level of $ 45, however, prices have been moving in a narrow box as OPEC is dragging its feet on key output decision:
EIA data unexpectedly indicated US crude oil inventories declined by 679 thousand barrels. Stocks at Cushing decreased by 317 thousand. Drawdown in inventories was an unexpected outcome which produced some upside in the market as it came against the backdrop of an increase in oil imports and a decrease in refinery utilization rate, indicating that increased oil exports in the reporting week made up for this decline. The data showed that oil exports from the US surged by 625 thousand bpd to 3.5 million bpd, which indirectly indicates a rapid recovery in demand from foreign refineries.
OPEC is making an important decision today about output cuts. Initially, the decision was supposed to be made on December 1, but disagreements arose among the participants and it was decided to postpone the meeting. The market is leaning in favor of a positive outcome of the meeting, but in my opinion, OPEC will opt for balanced solution because recent economic data around the world indicates brisk recovery and oil producing nations may be reluctant to miss this demand opportunity.
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 authorâs 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. 75% and 72% 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.
Oil market appears to be slow to digest OPEC+ new trade-off
The new OPEC+ deal appears to be a massive success both for oil producing nations and the market. Agreeing to boost production in January the group could convince market participants that surplus inventories will nevertheless decline. The deal was somewhere in the middle between the worst and the best possible outcome of the meeting. Oil-producing nations will start to increase output from January 2021, but great flexibility of the new plan was a key to soothe market concerns.
This week was difficult for OPEC as due to disagreements the meeting scheduled for Tuesday had to be postponed to Thursday. The deal participants came to a new agreement, but initial market reaction to it was tepid. OPEC+ plans to increase production from the current level by 500K bpd starting from January 2021, which is less than in the worst-case scenario (1.9 million bpd). In doing so, the organization will monthly assess market conditions in order to better adjust the supply. The deal also included the condition that the members cannot increase output by more than 500K bpd per month.
The best outcome for prices would be to extend current output cuts for another three additional months, however, judging by the market reaction, the market liked the OPEC+ flexible output plan.
At first, the market reacted with a small upward leap, but on Friday spot prices increased by another 1%. A barrel of WTI was trading above $ 46 a barrel, the highest level since early March while Brent was trading above $49 a barrel. An important point was the very fact of the deal - recall that in March prices collapsed due to the fact that among the main producers a short-term situation arose where âeveryone produces as much as they want.â
The parameters of the deal were determined in such a way that implementing it OPEC+ should keep the market in a deficit, thus drawing down inventories and pushing prices up. As a new coronavirus shock becomes less likely to happen, there are no major obstacles for a recovery in demand, so prices have a room to rise. In December, Brent will probably be able to touch $51 per barrel, but it is preferable to wait for a pullback, if we want to bet on this outcome:
However, next year, after Biden moves to the White House, Iranâs return to the market could become a serious threat to the market. In other words, the risk of successful negotiations between the United States and Iran on the nuclear program. If sanctions on Iran are lifted, the market will face a challenge in the form of a potential 1-2 million barrels of additional supply from Iran. However, this risk is not traced on the horizon of 3-4 months.
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 authorâs 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. 75% and 72% 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.
A case for a bearish pullback in S&P 500. What could go wrong?
US job growth fell short of expectations in November, pointing to waning recovery momentum in the US economy. However, it didnât stop the US equities from renewing all-time highs. SPX inched closer to 3700 points, DOW rose above 30,000 mark.
On Monday, equity markets went into a mild retreat while US currency recovered some of the lost ground. The biggest question is the strength of this downside move. In my view, fundamental background and news flow expected this week suggest that the 3700 mark should remain a local resistance for SPX for a week or so and a retracement to 3650 (100-hour SMA support) is likely. The next target that we could then consider is a test of an intermediate trend line at 3620 points:
Letâs look at the arguments.
The NFP report was actually worse than the headline numbers suggested. Job growth calculated on the basis of firmsâ payrolls (so-called establishment survey) slowed to 245K (460K exp.). The same indicator, calculated through the household survey (more precise measure), was -78K. There is a backstory that indicated that we had to expect this kind of a surprise - November dynamics of initial claims for unemployment benefits (which I wrote about here). Unemployment rate decreased by 0.1% but it remains a highly biased indicator - if we look at employment rate (share of employed from working-age population), it is still significantly lower than it was in February:
Over the weekend, the data showed that the US hit a fresh record for daily cases of Covid-19, hospitalizations, and ICU occupancy rate:
In other words, the pressure for local government to tighten restrictions at least for some time, increased, which present a near-term risk for the markets.
Certainty about the vaccine, unfortunately, does nothing to ease the short-term pressure from rising Covid-19 positivity rate. The latter has intensified thanks to lax rules during Thanksgiving and the start of shopping season which led to more crowded shopping places. Therefore, there is a risk that social restrictions in the US could be briefly tightened again, and with the economy losing momentum in November, December could be very weak in terms of employment and economic recovery. It is no coincidence that Congress stirred in December and is going to adopt a $ 900 billion stimulus package within a week or two.
Basically, swift approval of the stimulus bill is a key obstacle for prolonged decline as positive headlines can quickly spur another leg of buying momentum making bearish pullback quickly losing integrity.
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 authorâs 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. 75% and 72% 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.
Thank you for sharing, I always struggle in evaluating OPEC news.
This broken link between banks and bond markets indicates Central Bank support is the only thing that matters for stocks
Price action in European equities and US futures lack clear direction on Tuesday as markets wait for a âChristmas giftâ in the form of a fiscal deal. In the absence of news headlines signaling about progress in stimulus talks, there is a chance for equity markets to stage a minor pullback (scenario that we discussed yesterday) and the signs of bearish pressure do persist. The greenback remained weak against other majors, trading below the key foothold at 91 points.
While stocks markets trade near all-time highs, sustained by expectations and liquidity backstop from the Central Banks, signaling that the worst is over, the Bank of International Settlements issued a warning, saying that the crisis is moving from liquidity to default phase.
In its quarterly report released on Monday, the âbank of all central banksâ said that while the recent rally in global equity markets was justified by compression of interest rates in bond markets and rotation of investors into risky assets, quick development of vaccine and thus foreseeable end of the pandemic, current market valuations may not fully reflect the risks of defaults. This is better reflected in dynamics of credit spreads in the US and Europe which rapid decline remains out of step with stalling recovery of firm revenues, key measure of quality of a firm as a borrower. It means that bond market valuations may underestimate risks of corporate defaults as well.
In this regard, it is significant how the two major groups of lenders - banks and market investors (indirect and direct channel of financing) changed their lending attitude. If the former has been tightening their credit standards, the latter, on the contrary, has been lowering the credit risk bar:
Bank and bond market assessment of credit risk usually move in sync, but now we a strong divergence which suggests there is a strong factor breaking the interplay. This factor is obviously âunlimitedâ credit facilities offered by Central Banks and it means that complacency in bond markets may hinge heavily on the Central Bank backstop.
Anyway, current focus remains on the stimulus talks in the US. In addition to disagreements between parties, there is another obstacle on the way to a fiscal deal - a Christmas shutdown. The work of Congress is funded until December 11, so in order not to interrupt negotiations, legislators will first have to approve a bill that will finance another week of work and bring fiscal negotiations to their logical conclusion. Therefore, the focus of the markets is primarily on whether Congress will succeed in approving funding bill. The voting on the bill is due on Wednesday.
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 authorâs 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. 75% and 72% 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.
US stocks dodge correction as new US stimulus plan seems to suit both parties
US stock market once again dodged looming bearish pullback on Tuesday thanks to positive news on the stimulus package.
Treasury Secretary Mnuchin presented a new stimulus plan on Tuesday that takes into account the priorities of both Democrats (funds for federal and local authorities) and Republicans (liability protection for businesses). The news immediately had an effect on the markets - the S&P interrupted the onset of a slump and swiftly climbed above the 3700 mark:
European stocks and oil prices rose on positive news from the US on Wednesday emerging market and commodity currencies strengthened against the USD. The move is very common to risk-on environment, which so far is based only on positive expectations from fiscal aid and start of a new economic cycle in 2021.
We hold our bearish view on USD and bullish on US stocks in December because US fiscal stimulus remains key theme that drives equity valuations and the potential from it is still untapped due to lack of conclusive information.
On the bearish side, the US credit agency Fitch said on Tuesday that itâs not planning to upgrade credit rating of any advanced economy for 2021, despite positive vaccine developments and favorable economic outlook. Fitchâs chief economist told Reuters that the first positive changes in economic growth are shifting to 2022 due to downbeat impact of the second wave of social curbs in developed economies. Also, mass vaccinations in emerging market economies will begin later than previously thought due to logistics problems, as well as modest volume of pre-orders of the vaccine.
ZEW Expectations Index, the leading indicator of economic activity in Germany, significantly exceeded expectations in December. Key leading gauge of business conditions printed significantly higher, rising by 16 points to 55 points:
In the Eurozone, the index of economic expectations made a huge jump by 21.6 points to 54.4.
The uptick suggests that economic expectations in Germany almost fully recovered after a sharp decline in the previous month (against the background of lockdowns). Itâs a very good sign for Eurozone that economic expectations responded to vaccine news as this suggests that everything is fine with forward-looking indicators, which include investment spending. If propensity of spending remains high, the only thing that Eurozone government needs to do to protect future recovery is to offset short-term transient impact from lockdowns on consumption.
Robust expectations tell us that the investment component of Eurozone GDP will likely show quick recovery in the first quarter of 2021, as investment spending depends on perception of future economic conditions like level of uncertainty and consumer demand and is highly correlated with economic expectations.
The index of current conditions remained in a deeply negative zone (-66 points) but markets mostly likely ignored it as near-term lockdown impact has been priced already before lockdowns were introduced.
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 authorâs 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. 75% and 72% 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.
Is there anything to stop stocks decline except fresh fiscal headlines?
The ECB meeting had little chance to send Euro lower: recall that on November meeting, Lagarde warned investors that they should expect a major policy adjustment in December, but since then various ECB officials have been steering market expectations towards much less easing. Which, in fact, happened on Thursday - the bank just raised the limit of the pandemic asset purchase program by 500 billion euros (which in no way obliges the bank to ramp up asset purchases) and increased long-term cheap financing to banks (the so-called TLTRO program). The ECB did not increase the monthly QE purchases which of course was a major disappointment. We discussed such an outcome in our previous analyses and likely impact on the euro (mainly bullish).
The second important point, which at the same time surprised and upset, is that EURUSD is already above 1.20, and the ECB did not even blink an eye. There was something like usual phrase âclosely monitoring Euro exchange rateâ, which is of course not enough to contain Euro rise. Furthermore, the statement like equals acknowledging that exchange rate is fair and there is nothing super-speculative in it that needs to be suppressed.
EURUSD uptick in response to the ECB meeting is completely justified and indicated that the ECB was definitely underdelivered to easing expectations. Of course, it is bullish sign for the common currency:
Friday pullback is, in my opinion, a decent opportunity to consider medium-term long positions on the pair. Corrective pressure was caused by a decline in US futures and weakness in European markets (not the euro). As soon as this correction runs out of steam, we will probably see 1.22+ on the pair.
Considering other European currencies, such as SEK, NOK, which are also sensitive to the ECBâs policies, the outcome of yesterdayâs meeting will probably also add weight to them and purchases against major outsiders in major currencies such as USD are most justified.
Regarding the stimulus in the US, there was yet another disappointment - the final decision on fiscal aid may not be made until Christmas. Speaker of the House of Representatives Pelosi hinted at this. The main catalyst of growth has been taken away from the stock markets and itâs clear that there is little to stop the decline except fresh clues about the fiscal deal.
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 authorâs 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. 75% and 72% 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.
Explaining 10yr-2yr spread and Fedâs meeting baseline scenario. Near term USD outlook
Decline of US Dollar accelerated on Wednesday before the Fed meeting as the consensus strengthened that the US Central Bank will float additional monetary easing measures today. On Monday we discussed the possible forms of this easing - an increase in the duration of the Treasury portfolio, or an outright increase in QE (which is less likely). QE is when the central bank tries to adjust basic risk-free market rates - government bond yields, through guaranteed monthly asset purchases of some volume. By adjusting risk-free rates, the Fed expects other interest rates (including lending rates) to adjust as well. An increase in portfolio duration is when the central bank decides to buy more long-term bonds than short-term bonds in order to lower the long-term borrowing costs.
And here is the key argument why the Federal Reserve may need to increase duration of its bond purchases:
This âsomewhat forgottenâ chart of the spread between 10-year and 2-year Treasury yields is a well-known âharbingerâ of recessions and booms. Recall that from the summer of 2019 this chart was a popular âworkhorseâ for gloomy forecasts of some market doomsayers. When the spread is at its minimum, the market, roughly speaking, expects stagnation or recession, and vice versa, when the spread grows, it expects a rise. Surprisingly, the market was not wrong about the latest recession, despite its completely non-obvious and sudden origin.
The chart now shows that the demand of long government bonds relatively bonds with shorter maturity is rapidly declining. In other words, the near-term outlook for a return on capital looks more promising than the long-term one. At least thatâs what the market thinks. Because of this, long-term rates rise as the market demands ever higher returns in order to invest in a âless promisingâ, long period of time. The Fed may intervene today if it considers that such an increase in long-term rates is not good for long-term borrowers and will slow down the economic recovery. An increase in QE for this purpose looks like overkill, therefore, changes in the composition of purchases within the current volume are more likely - which is what the US stock market and US Dollar are trying to price in.
Short-term USD technical setup:
As for the dollar index, several attempts to break the key 90.50 support ended with a breakout of the range (90.50-91.10), which, in my opinion, is a clear signal of resumption of downside pressure. At the same time, the downward movement today brought the price beyond the short-term descending channel, which sets the stage for a test of the channelâs lower border on a higher timeframe (89.75) and only then a somewhat significant correction (to 90.50).
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 authorâs 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. 75% and 72% 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.
Key near-term risks for risk-on. USD targets for the next week
Risky assets saw modest losses on Friday amid the emergence of a new roadblock in the stimulus package negotiations - Republicansâ proposals to restrict the Fed and the Treasury to use credit facilities created in response to the pandemic. In particular, this concerns the Main Street program (direct lending by the Federal Reserve to small and medium-sized enterprises), which expires at the end of this year.
Democrats see this as an attempt to tie the hands of the Biden administration (in terms of ability to respond to possible economic shocks) and, of course, will not easily back down on this issue.
Senate Republican leader McConnell said the talks could drag on over the weekend. It seems that politicians are trying to hold out until Januaryâs Senate run-off elections in Georgia where representatives from the two parties will compete for key seats that will determine whether the Republicans will receive a majority in the Senate.
While the pandemic has lost some of its news coverage, data shows it continues to wreak havoc on key economies:
At the end of November, the curve seemed to be drawing a peak, however, as we are now seeing, it was only a pause before new highs. And if the United States is trying to cope without lockdowns, then Europe is more conservative in this regard. The data shows that the path is open for greater social constraints.
From the fundamental statistics, it is worth paying attention to the update on applications for unemployment benefits, which indicated that worrying trends in labor market gain momentum. Regarding to initial claims, consensus was + 800K but the indicator printed + 880K. Initial claims have sped up sharply in the past two weeks:
As the US labor market began to show weakness in November, jobless claims have become more significant in understanding how quickly the recovery wanes and how much the economy needs new stimulus. Judging by the data, December promises to be very weak in terms of US employment growth and the NFP in January is likely to show a negative surprise.
In my opinion, unless we get a breakthrough in fiscal negotiations over the weekend, next week will be a correction week for the dollar index in line with the technical idea I described on Wednesday. The target of bullish retracement is 90.50 mark.
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 authorâs 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. 75% and 72% 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.
Two reasons to sell USD in January
The beginning of the new year was not distinguished by any surprising moves in FX space. USD remains under heavy pressure, ceding ground to majors, comdollars and EM currencies. It was though unusual to see that USDJPY and USDCHF (i.e. safe-haven vs. safe-haven pairs) also saw sharp downside moves.
There are two ideas of why the USD can test new lows in the first half of January.
The first idea (the macro one) which drives USD fall is that no global central bank can beat the Fed in easing monetary policy. Recall that following the Fed meeting in December, all voting members of the Fed, with the exception of one, expect that the first rate hike will take place no earlier than 2023. No other central bank has dared to provide such strong forward guidance about interest rate path. And they wonât dare, because if we assume that the worst is over in the latest economic downturn, then it is reasonable to expect that central banks (except for the Fed) will gradually move towards normalization of interest rates, which will only widen the gap in policy easing between the Fed and other central banks. This is a strong factor of weakening of US currency.
Only a rapid acceleration of inflation in the United States (first of all, its âprecursorâ - inflationary expectations) can prevent the realization of such a scenario, which will require an urgent increase of the interest rate. However, given the Fedâs new inflationary concept, it wonât be easy for inflation to scary the Fed. It would need, for instance, to accelerate to 2.5% -3.0%, and do it in a short time. Over a timespan of next quarter - six months, such an outcome can be safely considered a tail risk.
Technically, the US currency was held in a downward sloping channel despite some attempts to break higher over the Christmas holidays. Earlier, we discussed that short positions should be a priority, and given that upward correction from 89.50 has been completed, the next targets are 89.00 and 88.75 horizontal levels, and then, after a rebound, the lower border of the bearish channel in the range of 88.75-88.50. The big question is about the timing of realization of this scenario.
The second idea for shorting USD, especially over the next week or two, is sharply increased chances that Democrats will be able to strip Republicans of the Senate majority:
Recall that the second round of elections in Georgia will take place in mid-January, where Democrats and Republicans will compete for two seats that will play pivotal role in determining which party will control the Senate.
If Republicans lose their majority, their opponents effectively gain control of the Senate despite the tie in seats distribution. Economic initiatives of Democrats, as we saw from the battle over the fiscal deal in October-December, are often associated with a more aggressive accumulation of national debt (and most likely the money supply, since the Fed will be forced to join), which is likely to result in faster USD devaluation. In my opinion, âsell USD on the rumorsâ idea will likely grab marketsâ attention this 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 authorâs 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. 75% and 72% 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.