Currency and Stock Markets. Daily Insights

[stoch]

EURUSD eyes test of 1.02, the ECB meeting may be of help


Massive repricing of Fed rate path in 2023 saw dollar index falling to 110 points, EURUSD broke above parity while GBPUSD recovered above 1.15. The rally in the US market increased capitalization of key equity indices by an average of 1.6%. Investors also increased exposure to crypto assets, BTC price rose above 20K.

Rally of risk assets, barring a clear dovish shift in central bank policy stance, is difficult to consider as a sustainable, especially when the Fed acknowledges that the margin of patience for weak incoming data on the economy is quite large, so some market participants have decided to take profits today. European stock indices corrected lower today, futures for US stock indices also pulled back. S&P 500 futures gravitate towards 3800, but it is clear that a shift in market consensus regarding interest rate path will await confirmation/denial by the FOMC in November, so buying pressure at the dips near key round levels is very likely.

EURUSD has finally begun to respond to lower gas prices and improved positions in foreign trade. The pair returned to levels above parity, but a more important signal (in terms of technical analysis) was breakout of the bearish channel, which held the pair in the downside since the start of 2022:

The signal for upside is quite clear, in this regard, the ECB meeting tomorrow is of particular importance. The regulator is expected to raise the rate by 75 basis points and update forecasts for the further rate trajectory, guidance on preferential liquidity for banks (TLTRO) and less important technical policy adjustments. Judging by the technical picture of EURUSD, there is a growing possibility that the decision tomorrow will be positive for the Euro and the pair will be able to develop an upward momentum and test the resistance at 1.02.


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]

Deteriorating EU, China data spur bids on USD


The dollar saw renewed buying pressure at the start of the week, DXY rose by more than 0.7% to 111.50 points. Market participants accumulate their dollar positions in anticipation of a strong NFP report on Friday as well as against the backdrop of weak China and EU economic data. China's manufacturing PMI failed to sustain uptick above 50 points in October, indicating that manufacturing activity declined compared to the previous month. For most of the second half of the year, the index has been staying below 50 points due to severe covid restrictions as part of the CCP’s "zero tolerance" for the spread of the virus, which significantly restrict mobility and cause business disruption:

The Eurozone economy is not approaching recession as quickly as expected, but inflation continues to accelerate. GDP growth in the third quarter slowed to 0.2% YoY, while core inflation accelerated to 5% in October from 4.9% in September, data showed on Monday.

The positive surprise in GDP is due to robust consumer spending in Germany, investment spending in France and rising tourism spending in Spain. However, the impact of these drivers is expected to continue to wane. The leading indicator of consumer confidence is close to historic lows, as is real wage growth. This has a significant impact on the consumption outlook, as evidenced by retail sales growth, which has been gradually declining over the past few months. Together with high interest rates, this leads to lower investment spending, and hence nominal wages and hiring rates are next in line to start to fall. When these two key macro indicators start to deteriorate, we can say that a recession in the EU economy is not far off.

Inflation jumped again in October, from 10.2% to 10.7%. Energy prices were the key sources of upside pressure in CPI. The decline in prices on the wholesale energy market has not yet seeped into the consumer level, any positive effect could be expected only in a couple of months. Food prices also continued to rise, as did the prices of other consumer goods, which rose at a smaller but also significant pace. In the services sector, inflation was 4.4%.

After two 75 bps ECB rate hikes, it's clear that monetary policy fails to quickly suppress import inflation, so the pace of tightening will likely slow down to 50 bps in the next meetings. Expectations of the ECB's stance easing, coupled with the threat of a recession, will keep the Euro under pressure, so extension of the EURUSD downtrend ahead of the NFP and the upcoming Fed meeting looks justified. Against the backdrop of incoming data, the likelihood is rising that the recent breakout of EURUSD bearish channel was false:

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.

 

[Red_Lesta]

So do you think that dollar strength will continue?

 

[stoch]

US CPI report is the only hope for USD this week


The long squeeze in the dollar that began last Friday has continued this week – investors dumped US currency since the opening of European stock exchanges on Monday, which could signal that safe-haven demand for greenback has started to wane and that risk-adjusted yield outlook on European assets improved as well:

Dollar came under pressure after reports appeared that Chinese government was going to ease coronavirus restrictions and generally revise their health policy, reducing the role of lockdowns. Even Powell's hawkish conference and last week's hawkish NFP report could not help - as a result of these two events, market participants shifted the Fed's terminal rate forecast by 5.1% while the divergence in expected pace of tightening by the Fed and other banks increased. In addition to the interest rate differential, large dollar gains were driven by perception of investors that the US is less vulnerable to risks of the energy crisis as well as geopolitical shocks. As soon as messages about easing China Covid stance hit the wires, dollar safe-haven premium began to decline rapidly, temporarily overshadowing the impact of other key drivers.

However, there are two events this week that could trigger a new dollar counter-rally after correction - the CPI report for October and the outcome of the congressional elections. The monthly change in the core CPI is expected at 0.5%, in annual terms - 6.5%, which is 0.1% below the inflation rate in September:

Surprises on the upside will dash hopes of investors for an early pause in the Fed tightening, leading to renewed selling pressure on fixed-income (Treasuries) and likely revaluation of the dollar. If Biden loses Congress, the dollar could face stronger selling as more corporate-friendly Republicans could increase pressure on the Fed to stop raising rates, while Congress's ability to push a fiscal stimulus package would also be severely limited which historically had negative USD implications.


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]

US elections uncertainty prompts bids in Treasuries, dollar selling

Chinese foreign trade data for October, released on Monday, had dovish implications for the broad market as both imports and exports didn’t live up to growth expectations, declining YoY (-0.3% exports, -0.7% imports). Both indicators have been declining for several months in a row:

So far, the reaction to the data was muted as the focus of investors is on two key events in the US - the midterm elections to Congress and October CPI release.

Negative for risk appetite was the information that the daily increase in Covid cases in China amounted to 7,000 cases, a maximum of six months. In light of the fact that the market has been trading unconfirmed messages about the easing of coronavirus restrictions in China over the past few days, it is fairly possible that traders may prefer to dial back those expectations by selling risk assets and, in particular, shorting oil, which has shown its sensitivity to those rumors. Since the beginning of October, Brent quotes have added about $8 per barrel, running into resistance at $94 per barrel, the October high.

Goldman has said earlier that risks to oil prices are skewed to the upside as global reserves are depleted and spare capacity to increase production is limited. In general, the supply side sends positive signals for price growth, while the signals from the demand side continue to act as a deterrent to growth. Key among those is the China’s strategy to tackling Covid epidemic.

The overall market trend is moderately positive: Monday turned out to be a positive day for risk US assets, S&P 500 futures continued to rise on Tuesday, there is a slight upturn on European stock exchanges. Treasury yields nudged lower on US elections uncertainty.

The market held its breath ahead of results of the midterm congressional elections. Their importance to the market is due to the fact that if the Republicans win a majority in the lower and upper houses, the Biden administration will face great difficulties in carrying out its agenda. However, Senate bills can also meet with resistance from executive branch of the government, resulting in a situation known as a split government. With this outcome, the likelihood of new US fiscal stimulus will decrease, which has historically been negative for the dollar and positive for risk assets, as the political deadlock in some way removes uncertainty for investors, as large-scale changes in US policy will be difficult. Polls and asset returns show that the market is increasingly leaning towards an outcome where the Republicans will gain control of the Senate.

As for the dollar, from a technical point of view, the US currency index is consolidating near the key ascending trend line on the weekly timeframe, a breakdown and consolidation below the line may be a signal for further sell-off:

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 Correction may Have Legs as Economic Calendar is Light this Week


The euro and pound sterling pare down the intraday decline that took place during the Asian session as risk appetite remains high while the dollar repositioning continues. EURUSD consolidates around 1.03, GBPUSD trades slightly below 1.18 level. Data on industrial production in the EU for October added optimism; growth in annual terms amounted to 4.9% against the forecast of 2.8%:

The market is sensitive to this indicator, as it correlates well with the overall health of the EU economy. The EU’s share of exports in GDP is about 50%, while the industrial equipment takes about 13% of exports. In addition, the competitiveness of the European industry depends on stable and cheap energy supplies, so the increase in production volumes against the backdrop of the much-discussed energy crisis makes one wonder how much it has affected the economy.

The dollar index corrected 4% last week. The intensity of the correction largely stems from the fact that hoarding USD cash for several months was the most popular and crowded investment in the global community. At the same time, the share of equities in portfolios was at a relatively low level. The combination of a positive inflation report and the measures to support the economy in China became the catalyst for a large-scale short squeeze in risk assets. This week is quite calm in terms of events and reports in the economic calendar, so it cannot be ruled out that the bullish correction in stocks will continue. The dollar may also continue to decline, a move towards 105 on DXY is likely, where the price may find support.

It is rather difficult to estimate how far the correction can go, however, in the currency market, some movements look excessive. For example, the USDKRW has lost almost half of its rally in several sessions, even though the Fed has not yet signaled that it is starting to consider a pause in rate hikes. Fed official Waller said recently that it is too early to think about the end of the tightening cycle. This stopped the decline in Treasury yields. Overall, since the CPI report, Treasury yields have corrected only 20-30 basis points - not much by the standards of this year.

The focus of the market is the meeting of the US and Chinese presidents in Indonesia, as well as speeches by Fed officials Brainard (dove) and Williams (moderate hawk).

The dollar index is likely to wander in the range of 105.50-107.50 this week. EURUSD may test 1.05 given that the correction of excess shorts on the pair, which have been accumulating since the start of the year, continues. Nevertheless, it is premature to consider an upside correction as the beginning of a new rally. So, for example, ECB official Guindos said that the market reaction to CPI was probably excessive, hinting that it won’t be easy to persuade the Fed with incoming favorable inflation surprises.

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]

Another dovish surprise in US PPI boosts stocks and bonds, pressures USD


OPEC, citing significant economic uncertainty in the coming months, has lowered its oil consumption growth forecast for the 5th consecutive time since April. The adjustment was -100K b/d for 2022 and 2023. The last time OPEC revised its forecast at the last meeting, when it was decided to increase production by 2 million barrels per day. Among the main reasons for the negative change in the forecast, OPEC mentioned economic challenges in Europe and the still tight covid restrictions in China, which makes quite uncertain the path of economic recovery in China.

At the same time, OPEC believes that the weakening of inflation faster than expected will lead to a rebound in demand, as central banks will experience less pressure to tighten policy, and thus restrain the expansion of economies.

Data on Tuesday showed retail sales in China fell 0.5% year-on-year, while industrial production growth fell short of expectations:

Together with weak foreign trade data (YoY contraction of imports and exports in October), this raises the likelihood that the CCP will prepare new economic stimulus measures and move towards a systematic easing of covid restrictions. Upside potential on positive stimulus news from China remains high, in my view.

Japan's GDP unexpectedly contracted in the third quarter, which added to the negative for the yen. However, a broad dollar retreat took over and USDJPY is down half a percent today.

European markets rose moderately, futures for US indices advanced through key resistance levels. The S&P 500 futures topped 4,000 after dovish US PPI report, which, like consumer inflation, surprised on the downside. The dollar collapsed on the data, indicating high sensitivity of the market to data on inflation pressures in the US:

Producer prices rose by only 0.2% m/m against the forecast of 0.4%, which was another argument in favor of the fact that the general trend of inflation in the US is now downward and the US Central Bank will soon move to softer rhetoric and policy actions.

For the British economy, the unemployment report came in worse than expected, the increase in the number of unemployed in October was twice as high as the forecast, while the average wage accelerated to 6% YoY (5.9% forecast).

The index of economic sentiment from ZEW in Germany turned out to be higher than expected, the index in October amounted to -36.7 against the forecast of -50 points. In the previous month, the reading was near all-time low at -59.2 points.

The markets continue to price in inflation slowdown in the US and cut excessive dollar cash longs on the US dollar, anticipating dovish policy tweak by the Fed in December. Bullish momentum in risk assets and bonds and downward pressure in USD will likely be extended in the run up to the upcoming FOMC decision.


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]

As market dials back Fed Pivot expectations, greenback has some room to rally


After shedding 4% last week, greenback was offered support near 106 level on DXY in the first half of this week and eventually rallied on Thursday:

The rally was likely driven by US October retail sales report. Headline reading beat estimates (+1.3% MoM), core sales also rose faster than expected (+0.9% MoM). The solid increase in consumption was combined with slowing price growth in October, which means that the chances of a “soft landing” for the US economy have increased. Treasury yields rose across all maturities, with a particularly clear uptick in short-dated 2Y bills, which are more sensitive to Fed policy expectations. It looks like the retail sales report has finally convinced the market that easing of inflation in October will not be a convincing argument for the Fed to soften the pace of tightening:

ECB top manager De Guindos also hinted at this earlier, saying that the market could have overreacted to the data.

If current uptick in yields and dollar rebound are driven by the traders dialing back their Fed easing expectations, general trend will likely become clear only after the FOMC decision in December, which will shed light on the key question whether October inflation print was a “turning point” for data-dependent Fed or more data is needed. This implies that upside and downside potential in greenback and equities is limited before the Fed meeting. The 105.50-106 zone on the dollar index (DXY), as the first half of the week showed, acted as a support area, now a short-term dollar rally may form the upper limit of the range. The resistance zone is likely to form at 107.20-107.50, which will correspond to 1.025-1.0275 support area in EURUSD.

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]

Oil prices plunge on hints OPEC may raise output

European bourses are down, STOXX 50 losing 0.6% amid reports of increased covid measures and new lockdowns in China, which increased market risk aversion. The yuan weakened again, USDCNY rate increased from 7.02 to 7.16 over the week. The Japanese yen cedes ground as well, USDJPY was up more than 1% today rising to 142 level. Liquidity will be less than usual this week, as the US market will be closed on Thursday and Friday due to Thanksgiving, so one should expect more than usual range of market moves.

Among the positive updates, we can note release of the PPI in Germany for October, which indicated a decrease in pipeline inflation pressure. On a monthly basis, producer prices decreased by 4.2% (forecast +0.9%):

Producer inflation is the leading indicator of consumer inflation for locally produced goods, as producers typically pass on cost increases or decreases to consumers with a lag. The decline in producer prices suggests that firms may lower final prices, which will favorably affect EU consumer price dynamics in the coming months.

Oil quotes fell almost 5% on Monday after a brief period of consolidation on reports that Saudi Arabia and other members of OPEC are considering output hikes by 500,000 b/d. Last week, the drop was almost 10%:

Goldman lowered its fourth-quarter oil price forecast by $10 to $100 a barrel, citing concerns about the COVID-19 measures in China. However, UBS forecasts oil prices to rise to $110 per barrel in 2023, expecting the pace of demand recovery to exceed market consensus.

Market risk aversion is also accompanied by a negative trend in Treasury yields, with yields falling across all maturities. This suggests that fears of a recession in the global economy are on the rise again. Nevertheless, central bank officials, in particular the Fed and the ECB, continue to insist that rates need to be raised. Fed spokesman Bostic said that the pace of the rate hike in December could be reduced to 50 bp and more tightening by 75-100 bp is required to achieve a level of restrictive policy that is sufficient to bring inflation back to the target level. Another Fed spokesman James Bullard expects the terminal rate to be somewhere in the range of 5-5.25%.

The upward correction of the dollar broke through the short-term range and rested on the bearish trend line. In case of breakout and consolidation above the line, we can expect a rally to develop to the previous medium-term support (109-110) which will now play the role of resistance:

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]

Hunt for yields pressures dollar as S&P 500 reclaims key 4000 level

Composite PMI index in EU remained in the zone of depression in November (47.8 points), slightly better than in October, but still pointing to a reduction in activity in the European economy. The good news is that inflationary pressures are fading as supply crunches ease, and the depth of expected recession may not be deep.


Although third quarter GDP data indicated a slight expansion (+0.2%), data such as PMI already suggests that a recession in the European economy is in full swing. The composite index for November slightly increased compared to the previous month (45.7 vs. 43.8 points), however, the index is below 50 points, which means there is a reduction in activity, only slightly less strong than last month:

New orders continued to decline, which means that the current volume of production is formed due to the backlogs of orders formed in previous months and in the following months this sub-index will likely disappoint with a low figure. In the services sector of the Eurozone, the decline in activity was approximately the same as in October, by historical standards, quite seriously. Here, too, new orders have been falling, meaning firms may be reluctant to increase demand for labor.
The only positive side of the report was the data on inflation. Weak demand, easing price pressure in the energy market and the normalization of supply chains have contributed positively to pipeline price pressures.


British PMI indices also pointed to the onset or development of a recession in the economy. The composite index rose from 48.2 to 48.3, which, however, is below the neutral level of 50 points.


Data on the US real estate market and orders for durable goods in October exceeded expectations, indicating a good pace of expansion of the US economy in the past month. The combination of declining inflation and strong demand and consumption data allowed the market to price growth in firms' revenues, which was reflected in the rally of US stock indices. U.S. durable goods orders are on the rise for the third month in a row, with growth accelerating:

The search for yield picks up on Wednesday after the US market sent a favorable signal to close higher on Tuesday. The S&P 500 crossed 4,000 points. The dollar index turned into a large-scale decline on Wednesday, the largest gain among the major currencies is observed in the GBPUSD (+0.8%). Investors price in the decline in British bond yields. Oil quotes fell by 3% as speculations that OPEC will increase production are gaining momentum. Market participants are also penciling in the idea that lower prices in the energy market will also have a positive effect on cost inflation and oil-importing economies will finally be able to “breathe”.

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.