Currency and Stock Markets. Daily Insights

[stoch]

Pullback in oil has well-defined support level

The rotation of investors from developed economies with low interest rates to the US continued on Thursday. The core driver of this trend is accelerating growth of real interest rate in the US economy:

The dollar index struggled to extend gains near 94.50 resistance area. Recall that from this level, large-scale dollar dump began in November 2020 after US election and vaccine results were announced i.e., where strong shift in expectations occurred. It means that selling pressure will likely be particularly high near this level:

Speaking on Wednesday, Powell acknowledged that heightened inflation prevents the Fed from using monetary policy to its fullest to stimulate employment growth. Thus, the Fed recognized that temporary inflation turns into permanent and starts to require tighter monetary policy.

The confrontation in the Senate on raising / freezing the public debt ceiling continues and fuels Treasuries sell-off as uncertainty related to possible government shutdown affects US sovereign risk. In case of progress on this issue, selling pressure in US bonds may ease what should have bearish implications for USD price.

Data on Thursday showed that activity in China's factories eased, but services sector returned to recovery. The fact that factories in China are reducing output adds to concerns about global inflation, which is largely caused by delays in production and supply chain disruptions.

Risk aversion due to the threat of default by Chinese developer Evergrande persists. The company's shares plunged another 5.2% on Thursday, as the company was unable to pay interest on its foreign currency bonds on Wednesday.

Oil prices decline ahead of the OPEC + meeting. There are growing signs that supply growth is not keeping pace with demand, so OPEC+ may take the risk and announce a more aggressive output hike. The meeting of oil-producing countries will be held on October 4.

From the technical point of view, current leg of oil decline followed a retest of three-year high. Also, the pullback occurs within the short-term uptrend with its lower border acting as the next potential support. It means that the pullback may be completed near the level of $72 on WTI:

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

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 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.

 

[stoch]

Inflation threat puts central banks on alert


Financial markets are increasingly discussing inflation surge as shortages arising in the commodity markets increase risk of price pressures being far more persistent that policymakers expect. After period of consolidation, commodity prices resumed rally in September and this coincided with major central bank becoming more hawkish in their guidance (including the Fed) with separate members increasingly voicing their concerns about “second round” of inflation effects:

It is clear that it is becoming more and more difficult to argue about temporary nature of inflation, and central banks are forced to adjust their guidance accordingly. The dynamics of exchange rates in the near future will be determined by expectations of how seriously local central banks will take price increases. Those central banks that continue to defend the old point of view (inflation is temporary and does not require policy adjustments) are likely to face more bearish pressure on their currencies.

By the way, the prospect of tighter Fed policy and associated growth in real rates in the US induced a soft downtrend in gold around the beginning of September. This week, expectations for US labor data and the report itself on Friday will most likely allow sellers to test the lower border of the downtrend and the key horizontal level:

On Monday, the ECB official Guindos said that supply disruptions (one of the key supply-side inflation factors) saw emergence of a structural driver, which means there could be more than one "round" of consequences for wages and consumer inflation. Thus, the official hinted that the increased inflation could worry the ECB more than the markets had previously assumed, and perhaps one should expect some policy implications, in particular changes in duration of current asset purchases. The euro gained on the back of hawkish hints of the ECB official, in addition broad correction of the dollar contributed to rebound of EURUSD.

From a technical point of view, the EURUSD rebound from the November 2020 lows is unlikely to develop above 1.17, as key US data are expected this week:

This week's Non-Farm Payrolls report should help the Fed to announce QE tapering at November or December meeting and move to policy tightening later. There is much uncertainty remaining about possible timing of the start of the Fed rate hiking cycle next year, and labor data may affect expectations related to the tightening. A strong Payrolls report may well allow EURUSD sellers to test 1.15 this week.

In the first half of the week, the markets will be focused on the OPEC+ meeting. An increase in production by more than 400 thousand barrels could pull oil prices lower, and NOK and RUB could erase their recent growth.



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

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 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.

 

[stoch]

ISM data may boost chances for hawkish NFP outcome



FX price action on late Monday showed that investors still favor dollar despite recent gains, and the story of China defaults weighs on demand for risk. Among the G10 currencies, NZD has the largest growth potential due to anticipated RBNZ rate hike tomorrow and possible hint of another hike this year. Lagarde's comments are unlikely to move the EUR, and the British pound seems to have become less responsive to the risks related to the UK divorce from the EU.

Yesterday, the US currency retreated on almost all fronts with the equities’ downside providing surprisingly little relief. The source of additional pressure on USD was OPEC+ decision to hike output by 400K b/d which was considered as a bullish outcome as recent energy shortages worldwide stirred market rumors of supply failing to catch up with demand growth. The rapid rise in oil prices was also perceived as a reflection of dwindling world reserves, to which OPEC+ could respond with a more aggressive increase in production and it might look perfectly reasonable move. The decision to modestly boost production pushed prices higher by more than 2% on Monday, limiting demand for risk assets somewhat amid heightened expectations that central banks will rush to tighten policy as commodity markets, especially energy, indicate more cost-push inflation is ahead.

Demand for safe haven assets was also boosted by news that another Chinese developer, Fantasia, was unable to pay $205M on its bonds on Monday. The news was a warning that China's real estate problems could extend beyond Evergrande. China's high yield bond yields posted its biggest jump since 2013, indicating strong investor outflows. In general, the junk debt market in China has become, in a sense, a barometer of the situation associated with defaults, and now correlates with the demand for risk in foreign markets. This also implies that the risks of default by large companies in China is a highly supportive factor for the US currency. Monday USD decline proved to be short-lived with the index rebounding back to 94 handle on Tuesday with a short-term uptrend line staying largely intact:

In terms of eco data, non-mfg. PMI from ISM could revive bullish USD momentum, as a positive reading will boost chances of a strong Payrolls report, which in turn will weigh on Fed confidence in its exit from stimulus programs. It is worth paying special attention to the hiring component of this index, since a large share of employment in the US works in the services sector, and dynamics of the sub-index may shed light on possible direction of surprise of the NFP report on Friday.



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

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 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.

 

[stoch]

Bond markets discount weak NFP, focus is back on inflation


Weaker-than-expected September NFP report put a drag on broad USD rally. On Monday greenback index struggles to resume advance, hovering not far from 94 points, forming a breakout “triangle” pattern. At the same time, the price continues to consolidate near September 2020 highs:

US job growth totaled 194,000 in September, with more than 11 million job openings in the same month. The labor supply deficit continues to restrain employment growth, which should translate into even greater wage inflation. By the way, the growth of wages again exceeded the forecast and amounted to 0.6% instead of the expected 0.4%.

Earlier NFIB reports showed that the share of small businesses with open vacancies and experiencing shortage of skilled workers is at record levels:

The fact that the US government cut the number of jobs at once by 123K in September helped markets to discount the weak Payrolls figure.

The Treasuries market also ignored weak job growth as, after a short-term decline, bond yields began to rise again, signaling that the market was quickly discounting fears of a slowdown in economic activity due to the weak NFP print and again focused on inflation risks:

Chances that the Fed will announce QE tapering in November remain high, supporting the dollar and keeping bonds under pressure.

It is difficult to expect inflation expectations to stabilize or turn into decline when there is a strong uptrend in the oil market and fears of possible deficits are not abating. On Monday, the WTI price tested $ 81.50, the highest since October 2014. Gas storage facilities in Europe are 76% full, with a 5-year average of 91% before the heating season. China is trying to ramp up coal production, but heavy rains in Shanxi are forcing some mines to suspend production.

Considering the recent rally, it was expected to see the growth of long positions of speculators in the COT data. The long position in WTI increased by 18K lots to 316K lots, but if you look at the July high of 426K lots, there is still room to build up long positions. On Brent, the growth in the net-long position of speculators turned out to be more modest - only 3.7K lots.

Also on the agenda of this week are OPEC and IEA forecasts for the growth of oil consumption. Investors will analyze growth forecasts, taking into account the demand that has arisen due to the transition from expensive gas to oil, because the stabilization and decline in gas prices could strongly affect the forced demand for oil and hit the prospects for a rally.




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

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 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.

 

[stoch]

UK employment report opens the door for Pound’s short-term gains

The pound battles for a place under the sun after release of the latest jobs report. British firms increased hiring at a record pace in August, shortly before the end of the government's furlough scheme. Favorable dynamics of the key macroeconomic parameter for the Bank of England's policy is likely to bring the date of the first rate hike closer, which the Central Bank may hint at the upcoming meeting.

The number of employees in UK companies rose by 207K, while unemployment fell 0.1% to 4.5%. The dynamics of employment may allow the Bank of England to be the first among the large Central Banks to raise the interest rate. This is also indicated by inflation, which is now almost double the target level of 2%. The growth rate of wages, which makes a significant contribution to inflation, has slowed down, but remains at an elevated level (6.0%).

The furlough scheme has been discontinued on September 30 and the key question is how negatively this will affect the level of unemployment. At least 1 million Britons have benefited from the program.

The BoE is rumored to make its first tightening step on December meeting. By this time, the pound has a good opportunity to rise on corresponding expectations especially against EUR. However, in regards to performance against USD, the key piece of the puzzle is the tightening path of the Fed, which will likely be clarified at the key November meeting of the Fed.

Considering GBPUSD technical setup, we can note a positive short-term disposition for the pound and slightly downbeat in the medium term. The chart below shows how the pair bounced from the lower bound of medium-term downtrend (1.345), currently trying to extend its short-term uptrend, with the help of which buyers intend to gain a foothold above 1.36

As part of the current short-term uptrend, there is a chance to make a short movement to the upper border of the channel with a potential spike to 1.37 area. Positive expectations for the upcoming meeting of the Central Bank should contribute to this.
From a technical point of view, this can also be facilitated by the movement of the dollar to the lower border of the current pattern - a triangle:

Nevertheless, the figure in the dollar indicates high chances of an upside breakout, so one should closely monitor the prospect of the dollar moving above the previous resistance zone - 94.50. From the steep slope of the lower bound of the pattern, we can see some solid bullish pressure of USD buyers which supports the outlook for trend resumption.

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

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 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.

 

[stoch]

Stagflation may be soon become the biggest worry for financial markets


Worries about so-called stagflation - a combination of low growth and high inflation - continue to mount among asset managers, the latest BofA report shows. In the last survey, the share of respondents who believe that both inflation and economic growth will be above the long-term trend for some time has decreased, but the share of managers who believe that the global economy will face a combination of high inflation and weak growth rates rose:

In financial markets, these fears are mainly reflected by the flight from longer maturity bonds, which are more sensitive to changes in inflation rates. If, until recently, the United States stood out among the leading economies with this trend, which incidentally supported the dollar, then the rate of sell-off has recently increased as well in the sovereign debt markets of the Eurozone, Great Britain, Switzerland, Japan and other countries with low interest rates.

The source of inflation remains the slow adjustment of supply, coupled with fiscally stimulated demand, as evidenced by the decline in delivery times index and the jump in the indexes of input prices and new orders in the global PMI:

Signs of bond sell-offs extended this week, and the upcoming meetings of the Bank of Canada, the ECB and the Bank of Japan will be viewed in the context of central banks' responses to inflation challenges. Rate hikes are not on the agenda, however, central banks' expectations regarding persistence of inflation and its forecast for the next year are likely to cause volatility in EUR, JPY, CAD.

The ECB seems to be reluctant to make or communicate about any possible tweaks in policy in the near-term. As chief economist Lane recently stated, despite rising price pressures, service sector price increases and wage growth remain weak, so raising rates could simply disrupt economic growth. Christine Lagarde has about the same opinion. Despite this, the bond market prices in one 10bp rate hike by the end of 2022. If the ECB insists on a cautious approach, these expectations are subject to correction, which will have a negative impact on the euro.

At its meeting on Wednesday, the Bank of Canada may announce a new cut in the quantitative easing program. The September employment dynamics allowed the latter to reach the pre-crisis level. The forecast for further cuts in stimulus by the central bank will have an impact on the CAD, however, given the monthly weakening of inflation in August and September, the central bank may prefer to refrain from hawkish comments. The net effect for CAD can also be negative with the following technical scenario for the USDCAD pair:

In turn, the Bank of Japan is even further away from the inflation target. In September, it hit only 0.2% YoY and is far from the 2% target. Therefore, the Bank of Japan has the least incentive to do anything in the policy. Considering the technical picture of USDJPY, it can be noted that the correction, after reaching the maximums since 2018 (level 114.50), may come to an end, as the price approached the lower border of the trend channel, from where support is expected:

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

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 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.

 

[stoch]

Bearish signals mount for the European currency

The S&P 500 hit a fresh high on Monday, despite the growing chances of policy tightening by the Fed as investors focus on surprises in US corporate reports and sliding Treasury yields. Tesla's capitalization has exceeded $ 1trillion on the back of the news that car-sharing company Hertz ordered 100K Teslas. Despite incriminating investigations, Facebook has delighted investors with solid user growth and an intention to buy back $50 billion in shares. The momentum may push the US market to a new high, as earnings surprises from Twitter, Alphabet and Microsoft, which are reporting today, are likely to be positive as well.
As of October 20, of the 500 companies included in the S&P 500, 67 companies reported. Earnings of 86.6% of them beat expectations, 11.9% disappointed, indicating potential presence of bullish bias in the US stock market.

In the FX, the dollar is trying to develop an upward movement after breakout of a two-week bearish channel. In the last few sessions, the dollar index consolidated close to the upper border of the channel, in addition, three tests of the support zone 93.50 lacked meaningful continuation:

A potential surge of optimism amid positive reporting by large US companies this week may nevertheless exert short-term pressure on the dollar.

The weakening of the euro amid a price shock in the commodity market will likely force the ECB to revise its short-term inflation forecast, which may become known at tomorrow's meeting. If the ECB does not clarify the timing of the curtailment of the main asset purchase program, in combination with the economic forecast, this could be a blow to the real yields of European bonds and lead to an additional Euro downside.

Yesterday's data showed that Germany's leading indicator of economic activity, the IFO index, declined for the fourth straight month in October

The indices of both the current situation and expectations deteriorated, which increases the risk of stagnation of the German economy in the fourth quarter. Given the slowdown in the bloc's leading economy, the ECB's bias to cut stimulus measures or report upcoming cuts may be small right now, which is definitely a bearish Euro signal.

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

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 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.

 

[stoch]

Key USD bearish threshold remains intact

Eurozone inflation was materially higher than the consensus forecast in October, making it slightly difficult for the ECB to maintain a huge stimulus bias in the monetary policy. The data on Friday showed that the broad rise in prices in October amounted to 4.1% (forecast 3.7%). At the same time, core inflation, which doesn’t include fuel and other goods with volatile prices, also beat the forecast - 2.1% versus the expected 1.7%:

At a meeting on Thursday, the ECB gave a signal that officials are closely monitoring inflation, but still expect it to decay sooner than markets fear. Some officials, though, see a second round of inflationary effects, primarily caused by wage inflation, so they do not exclude that consumer inflation will remain above the target level of the ECB in 2023. In general, we can say that the European Central Bank signaled a reduction in asset purchases in December, which caused widening spreads between sovereign bonds of Eurozone countries and a positive reaction from the euro. The spread between the 10-year bonds of Italy and Germany jumped by 7 bp on Thursday as market participants became more confident that the ECB's artificial support for "second tier" EU sovereign bonds will soon begin to decline. Today this spread has added another 10 bp:

In addition to the factor of December tapering, Eurozone sovereign bonds are declining in price due to the risks of an early start of the ECB tightening cycle. Although Lagarde said it was important not to overreact to temporary supply shocks, the effects of which would soon wear off, market participants shifted their expectations of the ECB's first rate hike to October 2022, i.e. even earlier than previously expected. It is clear that the opinion of market participants regarding persistence of inflation is now very different from the opinion of the ECB, and if inflation risks do not materialize, battered bond prices may quickly recover, since the inflation premium will ultimately unwind. The euro will definitely benefit from this trend.

Today, the data is due on US inflation and consumer sentiment from U. Michigan for October, key for the Fed's policy. A higher-than-expected rate of inflation, measured in terms of percentage growth of consumer spending, could mean a more aggressive pace of phasing out the Fed's asset purchases, which it is likely to announce in November. Next week, market participants will focus on the October Non-Farm Payrolls report, which will additionally help to improve expectations about the Fed’s policy move in the near future. Risks for the dollar are biased towards further growth next week as this week's correction appears to have been run out of steam. If DXY manages to close above 93.50 mark, this should be another strong technical signal for recovery next week, since a key bullish trendline will remain intact:

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

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 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.

 

[stoch]

USD may extend the rally on the FOMC hawkish surprise


The dollar rose sharply on Friday, breaking through a corrective channel and bouncing off a key bullish support line (scenario discussed on Friday):

One of the key drivers of the rally was US inflation report. Despite the fact that consumer inflation (Core PCE) rose by 3.6%, falling short of the forecast of 3.7%, the market was more concerned about dynamics of the labor cost index in the US - in the third quarter it rose by 1.3% against the forecast of 0.9%. Recall that both the Fed and the ECB have repeatedly said that a "second round" of inflationary effects may occur if inflation seeps into wages, since in this case further growth in consumer demand and accompanying inflation can be expected. By the way, the annual growth rate of labor costs in the United States is now at its highest level in more than 15 years:

Today, the US Dollar index is consolidating around 94 points ahead of the release of two important news this week - the decisions of the Fed and the NFP. After the latest update on labor costs data, chances are high that the Fed will announce the start of QE rollback on Wednesday. Further dollar upside will undoubtedly depend on pace of bond purchase tapering. The closest target for USD index is the previous resistance at 94.50-94.75, which the dollar is likely to test on Wednesday before the Fed decision.
It should also be noted that along with increased chances of imminent tightening of the Fed's policy, long-dated US Treasury bonds are beginning to price in future slowdown in inflation, possibly pricing in Fed policy error (i.e., that Fed starts to tighten too early, harming growth and inflation). This translates into decline of the spread between 10 and 2-year US Treasury bond yields:

Nevertheless, USD retains its short-term bullish prospects.


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

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 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.

 

[stoch]

Dollar consolidates after a pullback, traders eye US CPI report


High inflation and central banks’ reaction function to it continue to remain the major trading themes this week. On Wednesday, bond and FX USD markets will zero in on October US CPI report, where an upside surprise (inflation of 6% or higher), may add bearish pressure to Treasury market and lift greenback. Today, Richard Clarida will comment economic expansion and possibly express some views on current and near-term Fed policy, which will be scrutinized for hints about what the Fed will do after it completes QE next year. Rising oil prices favor resumption of USD and commodity currencies rally.

The relatively strong US labor market report for October helped greenback to flirt again with the highs of this year (94.50) on Friday, however conclusive breakout didn’t follow. It’s worth to note that November looks to be a better month for an upside breakout as seasonal headwinds increase for USD in December.

Nevertheless, greenback may breach the key resistance area as early as this week. The move may be triggered with the release of US October CPI report. Consumer Prices are expected to rise by 5.8-5.9% YoY in October, however preliminary data such as PMI in services and manufacturing, data from the US labor market showed that input prices, wages rose in October at a faster pace compared to September. It means that slow supply adjustment to demand continues and likely exerted more pressure on consumer prices.

The Atlanta Fed, which calculates its own estimate of US GDP growth based on high-frequency data, has updated its forecast and assumes growth at solid 8.5% in the fourth quarter:

With such prospects for GDP growth and the Fed's shift to asset purchase tapering, the fixed income market, especially Treasuries with longer maturity could be hit again. Earlier, some Fed officials said about the risks of a slow unwinding of QE and comments of today's centrist Clarida in a similar vein may further put pressure on short-term bonds and support the dollar.

The technical picture for the dollar index (DXY) indicates high breakout potential:

OPEC's decision to gradually increase production helped oil prices rise a little more. Bullish momentum is gas prices in Europe is also gaining attention given the impact of this trend on oil prices. The upward movement of oil heats up the topic of the impact of commodity inflation on consumer prices and, accordingly, pressure on central banks to move to a tougher policy.



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

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 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.