US GDP and Price Index
The US economy’s third quarter results were released last Friday alongside the preliminary GDP Price Index figures. Both pieces of data generated a great deal of interest from market participants keeping an eye out for any information that might suggest a Fed rate hike. GDP growth slowed significantly, down to 3.5% from the previous quarter’s 4.2%. In spite of that, this result was still 0.2-0.3% higher than expected. Even more surprising was the GDP Price Index result, which showed a 1.4% GDP price increase, less than half of the previous quarter’s 3.3% result. This means the US economy achieved it’s Q3 growth with significantly less inflation than expected. Many investors still suspect that the GDP Deflator’s low level won’t dissuade the Fed from continuing to aggressively raise interest rates. This question had a significant effect on USD currency pairs, causing the dollar to weaken at first, then partially recover by the day’s end.
Fragile Markets
The stock market’s volatility has noticeably gone up last week, due to investors becoming increasingly nervous. The CBOE Volatility Index (VIX) used to measure the S&P 500’s volatility rose from 11-12 points in early October to 25-26 points, approaching levels similar to those seen during the index’s massive decline back in February. Following the US markets’ 1-2% decline most of Asia followed suit. Nikkei only declined by a marginal 0.16%, while the Shanghai Composite dropped a considerable 2.18%. Australia on the other hand closed in the positive by over 1%. The European session started our promising due to HSBC, the largest bank in Europe, reported 28% higher profits, causing their stocks to rise by 5% and lifting up other stocks along with it.
Nasdaq
Following the panic of the initial plummet, the Nasdaq is now taking on a more systematic downwards trend. For now the bottom of the market seems to be around the 1000 point area, although there’s a growing possibility that it may go even lower in the near future. Whether or not it does may depend on the result of this week’s Flash Reports. Facebook’s report tomorrow in particular could potentially confirm which direction the market might move. The upcoming reports by eBay and Electronic Arts are also both equally highly anticipated by investors.
The long term charts for the index seem to be forming a double top pattern, which implies a continued decline. The pattern’s upper limit is at approximately 7700 points. Its price made two unsuccessful attempts to break this line, shaping into the current downwards trend after the second one. Looking at the short term charts, despite the bearish market, the Commodity Channel Index (CCI) doesn’t appear especially low, which indicates the asset is still not overbought yet. Just for comparison, right now CCI is at 18 points while back in early October, when price was in heavy decline, it was below -600. The strongest support line is at approximately 6745 and it’ll likely be retested soon.
USDJPY
China and Japan signed a 30 billion dollar currency swap agreement to help facilitate trade between the two countries. This puts Tokyo at the center of the trade war between China and the USA. Japan’s GDP figures from last quarter clearly indicate how the country’s 1% growth is primarily due to the expansion of their exports to China. As the terms of trade with the US grow increasingly uncertain, many of it’s trade partners have started looking for alternatives. For Japan, China seems like an obvious solution due to its geographic proximity and China has welcomed their attempt to forge closer economic ties. Relations between China and Japan are primarily economic in nature, as the political climate between the two is still somewhat antagonistic even today. Meanwhile the USA’s role as one of Japan’s trade partners has been declining over the past 10 years and this year China became Japan’s largest trade partner. Japanese Prime Minister Shinzo Abe, has backed Trump and his policies on matters of Taiwan, North Korea and the South China Sea, trying to strengthen his relationship with Washington. In effect he’s trying to find a balance between his country’s two trade partners and remain impartial.
Nothing illustrates the special relationship between Japan and the USA quite like the USDJPY. The dollar has a basic tendency to strengthen against other currencies, however, when paired with the yen its predisposition changes to a sideways ranging movement. The range between 112.75 and 111.65 has defined the pair’s movements for most of October. The dollar may have weakened as a result of last Friday’s USA GDP figures, however, it still wasn’t enough to breach the range’s lower limit for more than a brief sting. Friday’s wave of dollar sales has come to a halt and price is on the rise again today. Due to where the lines are drawn, there may be a spike in the number of short positions above 112.50.
Sincerely,
Laszlo | Market Analyst
Disclaimer:
Leveraged trading is high risk and may not be suitable for everyone as your losses may exceed your investment. We advise you to consider whether trading is appropriate for you in light of your experience, objectives, financial resources, risk tolerance and other relevant circumstances. Ensure you fully understand all of the risks involved and seek independent advice if necessary. Please refer to our full disclaimer for more details. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. Trading through an online platform carries additional risks.