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  1. Tickmill-News

    Consumption slack adds to Chinese problems; industrial data beats estimates on fiscal support The data on Chinese economy released today offered a mixed impression about the government’s attempts to fix inefficiencies and ease recession risks. Slowing retail sales was unexpectedly countered by uptick in industrial output and investment in fixed assets which is quite surprising and worrying at the same time. Together with the data on loans that were released yesterday, Wednesday figures suggest that economy conditions will continue to degrade at least until the end of 2018, since the government was a bit late to come up with stimulus measures. The authorities have increased fiscal support for the manufacturing sector and the population (through taxes), while reducing monetary support, thus avoiding direct pressure on interest rates and weakening the yuan, which in turn leads to capital outflows. The number of fresh loans issued by the banks fell to 697 billion yuan in October, from 1,380 billion in September, i.e., almost halved. The tightening of credit conditions was priced in the market, but at a less rapid pace, at about 904 billion yuan. The growth rate of money supply (aggregate M1) slowed down to 2.7% in annual terms against a 4.2% forecast. The solid signal about shrinking money supply failed to provide substantial support to the yuan, which oscillates in a narrow range around the level of 6.94 per dollar. However, the intensity of the outflow of capital seems to have weakened, since the clear impulses upward in the intraday movement have not been traced since the beginning of this week. One of the key prospective pillars of the Chinese economy is a huge untapped potential for consumption, while it does not allow the authorities to rely on it yet, since it functions poorly in “stressing conditions”. Domestic consumption, which has grown at an accelerated pace since recent times, slowed in October. Retail sales, a less elastic economic indicator to the decline in household income, (unlike, for example, durable goods), slowed down from 9.2% to 8.6% in October, the lowest since May of this year. The prolonged decline in car sales in China has put the world’s largest car market on the verge of downturn for the first time since 1990. Sales of garments reached a two-year low, indicating a decline in consumer optimism. Reduction in consumer spending could be explained by several reasons, such as mortgage debt, which requires an increasing proportion of income, falling welfare due to a decline in the stock market and declining return on investments. Tightening access to credit financing (as we see from the data on new loans) makes it difficult to smooth fluctuations in income. The state’s fiscal support in the form of tax cuts on cars, imports, and an increase in income tax from 3,500 to 5,000 yuan may have arrived a little late, and deterioration in consumer confidence has led the population to save more and spend less. The government has so far managed to “hold onto” the falling production, what we see from the data today. The pace of industrial output rose to 5.9% in October, contrary to forecasts of a slowdown to 5.8%. Positive economic figures are diluted into the fears of escalation of the trade war with the US. And recovery of the Chinese industrial sector is unlikely until the “war” with the US is not over. Recent data on US export orders for Chinese factories pointed to a 30% decline in annual terms. The state is increasing its market participation as key client, focusing on infrastructure projects. For example, production of cement in October jumped by 13.1%. The forward-looking indicator of investment in fixed assets rose unexpectedly in October, although it is unclear whether this indication came from the Administration (again, thanks to the “guarantees” in the form of infrastructure projects) or the corporate expectations really turned out to be more resilient than consumer ones. The main indicator rose by 5.7% in October against expectations of 5.5%, while investments in the private sector grew by 8.8% in annual terms. SHCOMP was not impressed with the economic data, rolling back almost 1% on Wednesday to 2632 points. In the UK, labor market data showed that the economy is recovering at a moderate pace. Salaries rose in line with expectations, while quarterly changes in unemployment were worse than expected. The pound is entirely absorbed by the events of the Brexit, with development being shrouded under a “three-layer fog” of speculations that benefit traders and algos. The political deadlock in which May’s conservative party found itself once again allowed GBPUSD to play below 1.29, but yesterday and today the pair is recovering in response to economic data and speculation about the progress in the negotiations. One of the latest encouraging phrases of the Prime Minister was that “negotiations are in the endgame,” and the fact that the “Brexit draft has been agreed”, although it’s not the first time that such promises are coming out of the mouth of officials. GBPUSD is likely to linger at 1.30, as it is a convenient point to bet on a favorable Brexit outcome. Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
  2. Tickmill-News

    Strengthening of the Democrats sends relief waves over the US stock market US Congress elections were deemed as the main source of “headwinds” for Trump’s somewhat reckless policies, so the market was in no hurry to make guesses on the long-term consequences of the president’s threats and initiatives, betting on the temporary freedom of White House’s power. The division of power in the United States between the two rival parties happened according to the baseline scenario: The Democrats won the House of Representatives, while the Republicans retained control of the Senate. The strengthening of power in the hands of the Democrats identified a bearish outlook for the dollar, which has been extending a signal for rally from the contradictory chain of relationships between US tariffs and the Fed’s actions over the course of the last three months. Today, the US dollar index lost about 0.2% after a short rally in Tuesday’s session. Restoring the balance of power clearly promises to delay the war with China, as Trump will have to overcome the additional resistance of opponents and spend more time on the next steps to escalate the conflict. The dollar could be supported by the Fed on Thursday. Tomorrow, Powell will announce the interest rate decision, but it is likely that during the press conference he will repeat the mantra about the benefits of raising rates to preserve the historically rare state of the economy (low inflation & low unemployment). It will be curious to see the opinion of the regulator about the recent market correction, in particular, how positive feedback can influence the Central Bank’s plans to raise the rate. In my opinion, since the plans for the long-term bear market have failed and the S&P 500 is targeting the main resistance at 2800, the chances for the Fed to slow down become even smaller. According to some estimates, the fall to 2400 could be a trigger for the Central Bank, but with a distance from dangerous levels, one should be inclined to favor a bullish interpretation of the decision on Thursday. Tomorrow there will be a whole series of data on China’s foreign trade (export / import / trade balance), which will probably confirm the recent decline in production rates and a slowdown in export activity. Since the economy has clearly entered a phase of slowdown, the data will probably be interpreted on a scale from “neutral” to “negative”. Unfortunately, there is no chance to talk about positive economic reports now, as structural imbalances in the economy do not have the possibility for a quick elimination and the indisposition may be prolonged. Data on foreign direct investment will probably be able to save the mood. If external support from investors beats expectations, we can expect the leveling effect of this indicator on foreign trade readings. Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
  3. Tickmill-News

    Mid-term elections keep global markets in suspense The index of economic activity in US manufacturing and services sectors came at 60.3 points in October, beating the expectations of 59 points. In September, the indicator hit the local peak at 61.6 points showing that companies are facing a surplus of new orders, as well as a shortage in labor force. The leading nature of the data generated through surveys suggests that companies will likely increase output, as well as maintain high employment rates in November. The dollar is trading in a narrow range against major opponents on Tuesday, as caution dominates the mood and risk appetite with the midterm elections in the US being held today. The American nation will decide whether they like the combination of huge tax cuts and the hostile trade policy of the current administration. The average market outlook assumes that Democrats will take control of the House of Representatives, and the Republicans will remain with the Congress. Trump’s policy largely explains the strong dollar that we are seeing now, so the outcome of the elections will likely be interpreted by investors as follows: if the Republicans succeed in defending the House of Representatives, it will be a big bullish surprise for the dollar and it will have to shoot up; if the Democrats gain control of the House of Representatives, then the dollar will be traded in the red zone for a while. The loss of control over the House of Representatives will make it difficult for Trump to carry out large-scale reforms, including the tax reform “for the middle class”, which may further increase the budget deficit by $2 trillion for 10 years. The confrontation with China may also lose some color, as supporters of liberal trade Democrats will not allow the increase of protectionism, for example, through the introduction of duties on all imports from China. The European currency remains under pressure, as the EU’s appeals to add modesty to Italy’s budget expenditures for the next year did not bring results. The deadline for a deal is set for the next week, but the absence of leverage on populists allows us to expect that the decision will be either postponed or come at the expense of concessions from the EU. Unfortunately, European diplomats cannot object to the manipulation of EU membership by Italy, so they will probably be forced to accept their conditions. The Australian Reserve Bank made the widely expected decision to keep the rate unchanged (1.5%). Most investors believe that the cost of borrowing will remain at 1.5% at least until the middle of 2019. AUD responded weakly to the decision and even strengthened slightly against the dollar. The RBA has no incentive to raise the rate now, as in the real estate market, a problem issue for the Central Bank, there has been some cooling, so the course to stimulus is likely to be maintained without any particular risks. Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
  4. Tickmill-News

    What is a buyback blackout period? Can anything bring the US stock market back to life? Photo 1. The blue line signifies the yearly change in the balance sheets of world central banks. In other words, the waves on the chart are injections of money supply into the economy, i.e. cyclical swings from easing to tightening. Amazingly, every time the yearly change reached zero, central banks resumed buying assets in response to economic challenges. Now that the Fed is in the midst of tightening policies, the ECB is suspending paper purchases, and the Central Bank of Japan is looking for ways out of the vicious circle of deflation, the world economy may again begin to dictate the need for soft policies, and the first signals for this have already been given. Take, for example correction in the US stock market. 10 years of relentless rally turned into a bloodbath in October. Now only 20% of global assets left investors with positive gains. The rest became uneconomic investment: Photo 2. This chart well explains the current strengthening of the dollar, as a humdrum surge in demand for liquidity. That is, now, assuming an overreaction in the stock market in response to the high pace of tightening by the Fed, which goes beyond the fundamentally justified level, there is a certain “panic” bias in favor of liquidity (i.e., the dollar). It can be eliminated as quickly as it appeared with the first signs of calm returning to the stock market. We have to keep this fact in mind, and on the basis of this, shape appropriate expectations for a rally of the American currency. History knows only two times with similar observed “lack” of yielding assets: during stagflation in the United States in 1970 and the financial crisis in 2008. That is, in conditions which were much worse than the current ones. Then, from the historical point of view, the irrationality of the depth of current selloff is the most plausible version of what is happening. On the other hand, if mushrooms grow after rain, no matter how fertile the soil is, it is pointless to wait for them without rain. Cheap credit has long dominated the minds of investors, and after parting with it, the vacant place is not so easy to fill. However, there are several suitable candidates for nomination. The first is a stock repurchase. In one of my September notes I mentioned that in October, companies should have to face time constraints in stock repurchase transactions (buyback blackout period). It was introduced as a measure to counteract the asymmetry of information between managers and shareholders, which reaches its peak a week or a few days before earnings data is released. A party with more access to sensitive information, i.e. managers, is reasonably in a better position when it comes to buying/selling shares before reporting day. For example, a company, knowing that earnings will beat estimates, may urge investors to sell their shares of the firm, thus putting investors in an unfair position. Conversely, if managers believe that reporting will upset investors, they may try to get rid of stocks at a still high price before the data hit the wires. Blackout period has passed its peak and companies will most likely resume purchases, which have been fueling growth of the stock market to considerable extent: Photo 3. Conventional wisdom is that growth catalysts which are clear and understandable to investors should be well covered in the press and also stir attention among investors. It does makes sense and let me show you an example. Here is a growing buzz in media and some data from Google Trends: Photo 4, 5. Now, about candidate number two. This is of course the aggregate demand in the American economy and all the indicators relating to it. You can pay attention to the Friday row of economic data, including Core PCE, consumer optimism and producer prices. The main conclusion is that imbalances in the US economy are likely to become more evident: Photo 6. Consumption and GDP growth outpaced forecasts for the third quarter, but inflation, measured through personal spending, stubbornly remains low. Its growth in the third quarter was only 1.6%. In conventional economic model, an increase in output is usually accompanied by an increase in prices, but the data indicates the opposite. The only explanation that comes to my mind is a combination of the effects of monetary and fiscal policy. Tax reform better targets the consumer, giving him not just the opportunity to get a cheap credit (as in the case of monetary easing), but a real increase in disposable income. This caused an increase in consumption with some inertia, which we observe. At the same time, the tightening of the Fed effectively restrains inflation by holding back plans to expand output. The survey indicator of future capital spending in the US manufacturing sector has been declining 6 months in advance since the beginning of this year: Photo 7. So does growth really keep solely on tax maneuver? Candidate number “two” for supporting stock market rally should be considered transitory? Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
  5. Tickmill-News

    China offers little help to solve bad bonds problem, aiming at deflation of the credit bubble Respite on the Chinese stock market has quickly run out of steam after a pledge by the Chinese authorities to solve the trouble with bad private bonds.Respite on the Chinese stock market has quickly run out of steam after a pledge by the Chinese authorities to solve the trouble with bad private bonds. According to the latest data, they are relatively reluctant to directly participate in the rescue of firms, although in 2016 everything was different. On Monday, a “recommendation” to private funds was followed to take part in the bailout of troubled shares that companies used as collateral for loans. 11 brokerage firms have agreed to allocate 21 billion yuan to buy shares, which is basically a drop in the ocean of 3 trillion. yuan of toxic loans, which are now collateralized by a falling stock market. The government was not ready for anything more than putting some straw in the landing spot, what is surprising, as the private sector provides 50% of taxes, more than 60% of GDP, more than 80% of urban employment and 90% of new jobs created. Perhaps the government bets on recovery of credit system with manageable credit bubble deflation (“defaults will start from most inefficient and high-risk which is good”) but at some point, may meddle with the process is something goes wrong. But repairing consumer and corporate sentiments after the downturn of economic expectations is usually much more expensive and longer. The situation is very similar to the 2008 crisis in the US, but instead of “share”, put the word “housing market”. The Fed has come to the rescue in the US, but in China, PBOC will only have to start carrying the can. While the Central Bank is focused on the banking system and the support of the manufacturing sector, which is rapidly losing pace of growth due to disrupted trade ties with the United States. China, though, can’t fully deploy the mechanism of increased consumption to support the economy, despite the growth rate of imports overtaking production. Weakening yuan worsens the outlook for accelerating imports. Here is the data that gives some clue on pledges shares problem in China: · 724 out of 734 technology companies of ChiNext resorted to equity financing practices. The market capitalization of companies is about $580 billion. Since the end of May, the index has lost more than a third – from 1876 points to 1205 points. · 16 percent of the “A” class shares are pledged as collateral for loans. In 2015, this share was 10.3 percent. · In the broad market, 148 companies out of 3,571 have pledged more than 50% of their own equity loans, despite a 50% legal limit, thanks to shadow banking. (data from a national Chinese depositary). · On October 9, value erosion of shares is close to margin call for 780 companies. Positions of 594 companies are approaching forced liquidation, i.e. the time when it comes to paying for loans. Comparing the drop of the Shanghai Composite Index and ChiNext, the difference in the fall may be precisely the difference of risks from using financial leverage, which is higher in the technology index companies. ShComp keeps solid footing after a bullish Monday, although closed today in a modest plus. A sweeping fall below 2,500 is unlikely to happen for some time, the index will mark time at the crucial round level. It is impossible for now to mention any essential drivers for upside correction though. A few words about the past US treasury bond auction. With a progressive increase in placement ($26 billion per one auction in January against $38 billion at the moment), demand for paper remains high, the bid-to-cover ratio was at 2.671, against 2.437 at the last auction, slightly below the 6-month average at 2.75. What’s really curious is a sharp surplus in favour of indirect bid. Their share amounted to 52.6% in the auction, the largest since December 2017, against 40% last month. Direct buyers, something “scared off” this time their share fell to 5.5% versus 13.4% last month. Recall that indirect applications are mainly represented by foreign buyers acting through US intermediaries. The main idea here is that demand for a risk-free security asset has increased from foreign demand. Definitely this trend is guided by the expectations of serious market turbulence ahead.
  6. Tickmill-News

    Oil prices fall as Saudi Arabia assumes a dominant role in energy market Sanctions on Iranian oil and the risks of political isolation of Saudi Arabia after the murder of a journalist have created a ground for reflection about the supply shortage as a new, permanent reality. On Tuesday, Saudi Arabia once again tried to halt the development of such rumors, saying that it completely feels and acts as a stabiliser on the oil market. Moreover, according to the oil minister, the kingdom is about to increase its exports of crude oil in response to a decline in Iranian supplies and will continue to expand its reserve capacity. Oil prices dropped on the statement, with two major grades depreciating unevenly: WTI dropped 1.6% at the time of writing, while Brent lost much more, about 2.4%. Different amplitude of decline allows to establish cause-effect connection between comments of the largest producer of OPEC and the reaction of the market to them. Washington’s sanctions against Iranian oil enter into force on November 4th. Several US allies in Asia, for example, South Korea and Japan, have already struck Iran out of the list of energy suppliers. Already in September, the import of oil from Iran to South Korea was 0, showed the data of the national oil corporation of the country. The Halliburton report, a company serving oil companies, pointed to disturbing trends that are developing in the American oil market. According to the report, in the fourth quarter production volumes on the mainland will go down due to congestion of pipelines in the Permian basin. Due to physical constraints, the pace of production will remain insensitive to price fluctuations, including favourable price moves for producers. The demand for Halliburton services as well as the Schlumberger, according to their own forecasts, will remain moderate, reflected in profit forecasts that didn’t met expectations. Oil production in the United States faced limits in the summer of this year, when the hydrocarbon production pace reached a record level of 11 million barrels. The introduction of new production capacity is slow, firstly, because the US oil companies have accumulated large debts during the low oil prices for 2014-2016 and need to pay them off, and secondly, it is unknown how long will continue the phase of expansion of the world economy (which will provide a stable demand) Thirdly, the strategy of the main competitor (i.e. OPEC) may change from stabilisation measures in favour of the regular competition for a market share, since production quotas have already done their job. As can be seen from the outlook of production in the US, 50% of which is shale production, it is already less actively overcoming past highs, fluctuating around the level of 11 million barrels. It is interesting to trace the change in the futures curve as a result of sanctions on Iranian oil and lagging growth of OPEC production needed to compensate for the decline. Most of the cartel’s contracts are on spot market, and the shortage because of Iran should ideally have a greater impact on spot or near-term contracts. Recall that Trump reintroduced sanctions against Iran in early May. From the chart, we can see that the futures delivery in July was about $ 72 a barrel, and in October, the futures for the same delivery was just over $ 80. Moving to more distant terms of deliveries it is clear that the difference between the purple red line is getting smaller and is quite insignificant on the futures with delivery in 73 months. From this, we can conclude that despite the various political backgrounds in purchasing / refusing to buy Iranian oil, sanctions against Iran really “work” and supply has really diminished. At the same time, OPEC is in no hurry (or cannot) increase supplies with the same pace to compensate for Iranian barrels. Today’s announcement by Saudi Arabia of its intention to stabilize the market has, of course, become an unpleasant news for those who have made a bet on widening market deficit. Looking at the Commitment of Traders data, the link between speculators’ bullish bets and real growth in oil prices disappeared at the end of the second quarter of this year, which is rather unusual. From September last year until April 2018, the recovery of prices corresponded to an increase in long positions of speculators (brown lines). However, starting from April-May this year, speculators cut long positions, possibly wagering on falling prices, but the market continued to grow. The net long position of traders for the period under consideration decreased from more than 700K to less than 500K. That is, it turns out that prices could pull up not on speculative pressure, but due to fundamental shifts, while high uncertainty could make speculators even mistaken. Now focus is on Saudi Arabia’s policy of increasing production. If the increase in production is less than necessary to compensate withdrawal of Iran from the market, then oil will have all the chances to extend gains, despite the weak start this week.
  7. Tickmill-News

    VIX collapses to long-term mean indicates return of market bulls VIX virtually collapsed on Tuesday, dropping by 17.28%, indicating how quickly the volatility sellers took up their usual business, betting on halt of the storm in the US stock market. Why invent something new if there is statistical arbitrage and mean-reverse strategies that still work? Now the index is close to 15 level long-term mean level, hovering near 17 points. The relief came after the release of corporate earnings data in the US banking sector (beating forecasts) and the industrial US figures where expansion continued in September. The three major Wall Street indices won back almost 2 percent on Tuesday, after the largest banks in the United States reported an increase in profit ahead of expectations. The profitability of the banking sector is now on the rise due to increasing interest rates, which allows to hike borrowing costs for the firms, while some liabilities have been benefiting from past low interest rates. As a result, bank profits are growing. Data on industrial production in the United States indicated an increase in output for the fourth month in a row. Rumors have been swirling around the input costs, mainly rising oil prices, as well as tariff cap on export prices. The growth led by manufacturing and mining industries, but the growth momentum waned in 4Q. In October, the growth came at 0.3% after rising 0.4% in September. Export prices for US industrial products remained relatively flat in September, while oil imports advanced by 3.5% in the same month. Here we see the direct link between compression of corporate margins of “energy-intensive” industries and widening gap between export and import prices and the inability of producers to transfer inflation to final prices for external consumers. September Fed minutes are due today later, which will once again help to assess the trajectory of the interest rate. Dollar and other relevant assets’ response is likely to be muted, because after Powell’s remarks on the pace of rate liftoff, a soft tone in the protocol, to put it mildly, would be inappropriate. Because of the Fed’s confidence in its policy course, the search for bearish hints will most likely be unsuccessful. The chances of a rate hike in December remain at a fairly high level, about 80%, so for the recent pullback in the US market it is difficult to find a more elegant interpretation than a “brief loss of consciousness”. There is another view which says that the market has a vision of US economy growth diverging with the Fed’s one, but this view should rely on something, at least on fundamental data. While the key parameters of the American economy and corporate reporting does not give cause for disappointment. UK wage growth data helped the Pound to strengthen yesterday, but today it can give up the territory if consumer inflation goes below the forecast. Although the effect of inflation can be interpreted in two ways: on the one hand, weak inflation and strong wages give rise to a combination of increased consumption, on the other hand, we should expect the Bank of England to delay the increase in interest rates in order to support expansion. Consensus view on the impact of the data is not completely clear. It will be useful to look at retail, production and import prices to clarify the prospects of consumption. Regarding the European currency, its further movement can be determined with the release of consumer inflation in the Eurozone for September today. This will be the final data, which will most likely indicate a lack of change, with a key indicator at 0.9%. Together with fuel prices, inflation can accelerate to 2.1%, which of course has a negative effect on European manufacturers. Unlike US companies, they can only count on external demand, as domestic consumption remains weak. After yesterday’s weak indicators of optimism from ZEW, it is difficult to expect a positive surprise from consumer inflation. Therefore, in my opinion, short positions in European currency remain preferable. Gold prices extinguish a jump in panic, as the rollback of US stock indices, stable expectations at the Fed rate, raise the issue of the asset returns. Yesterday, gold was supported by the comments of the Chinese Central Bank, which stated that the Chinese economy is in “good shape.” Prospects for the growth of defensive assets, including gold, remain unclear, especially against the background of a rapid recovery of sentiment in the stock market, therefore shorts with a target of $ 1,210 – $ 1,215 are preferable.
  8. Tickmill-News

    The Fed is waiting for inflation but it’s not here yet The main contribution to the rise in prices for imported goods become fuel price growth. In September, an increase of 3.8% was the most dramatic change since May, when fuel prices recorded a 6.1% increase. If you break the fuel inflation into gasoline and gas, then you can see that the prices for the former product increased by 4.1% and this is only in September. And now we can understand Trump’s oil tweets, as the rise in gasoline prices before the November elections could hit Republican positions. It is noteworthy though, that apart from fuel, prices for imported goods remained virtually unchanged in September. Higher prices for food, food and beverages offset the decline in prices for products for industrial needs, materials and consumer goods. For the American consumer, this is positive news, since wages are rising, and prices are stagnant, so consumer optimism should remain high. From the details of the export price report, it is worth noting the deterioration in the terms of trade with China. At the same time, it is interesting to discern the damage for both sides in the trade data, since rumors have so far been on the side of the United States. First, export prices to China fell by 1.7% last month, which was the largest decline among major US trading partners. In July and August, this figure also declined, and in July the decline was 2.2%. Indices of the terms of trade (purchasing power of exports vs. imports) also changed not in favor of the United States. I note that the fall in export prices to China is stronger than the fall in China’s export prices in the United States (that is, the demand for Chinese exports to the United States has turned out to be more resistant to the trade war). Perhaps this is why we are seeing statistics on changes in the US trade balance with China that are unpleasant for Trump, which points to China’s rising gains in trade to a maximum of six months. On Friday, US consumer optimism data from U. Michigan hit the wires though not as upbeat as expected. The rebound in the indicator is now probably one of the main hopes for the Fed, as in the conditions of tension in foreign trade it is necessary to rely on domestic consumption. In September, this figure was 99 points, which is 1.5 points less than in August. From April to August, the indicator steadily declined, therefore, with a slight pullback in September, an ambiguous impression is taking shape. A weak rise in import prices and control of inflation expectations will most likely be supported by optimism, therefore, from this point of view, the Fed has no reason to deviate from the aggressive course. The growth of the VIX and the resumption of the downward movement of the dollar create the basis for weak buying activity at the opening of the New York session today. The more severe fall of the S&P 500 than expected, namely the breaking of moving averages does not allow buyers to quickly buy back the decline despite the fundamental prerequisites for this, for example, the Fed’s confidence. Therefore, pulling the ropes around the 200-day moving average may continue this week. The US sector was well bought off last week, but things are not so good at premarket. The major stock locomotive i.e. group FAANG dropped at premarket, which points to the weaker start in NY. The best choice in this case is to sit on the fence and wait for the reversal in sentiments Oil prices are gradually turning into a rise on the threat of US sanctions against Saudi Arabia. The disappearance of the Washington Post journalist after visiting the Saudi embassy in Turkey resonated on the Kingdom’s stock markets after Trump promised severe punishment for those involved in the incident. The Saudi King promised to revenge. Of course, the threat is still very weak, and it is unlikely that it will reach sanctions comparable to Iran. But the sudden cancellation of US investment banks on a trip to an investment forum in Saudi Arabia says that the emergence of the conflict between the two countries should be kept on the radar. Speaking about the revenge of the Saudi King, we can recall Trump’s calls to restrain the rise in oil prices. In the event of an escalation, Saudi Arabia can hurt, restraining production so that energy prices soar, and Trump would face an unpleasant surprise in the form of expensive gasoline before the elections.
  9. Tickmill-News

    Will the Fed continue to hike rate aggressively? The stock market crashes, growing trade tensions with China, low growth forecasts from the IMF, and even Trump’s verbal attacks are likely to not be able to stop the “insane” Fed from further rate hikes. There is a serious reason for this – the development of the economy is still in accordance with the forecasts of the central bank. Thursday inflation figures revealed a slowdown in price growth from 2.4% to 2.3%, which nevertheless remains near the target level of 2%. At the same time, the absence of inflationary pressure is accompanied by record-breaking low unemployment, which makes it possible to contain consumer inflation expectations around a long-term equilibrium. All historical periods of high employment were usually accompanied by an out-of-control inflation, which led to a recession. The fact that the economy is in “historically rare” conditions was said by Fed Chairman Powell in his last speech, which is the “core” of the aggressive plans of the regulator to tighten the policy. It is unlikely that the Fed has changed its mind in the last 48 hours, just on the basis of the pullback of the stock market, less upbeat IMF forecasts, and discontent from Trump, who called the Fed’s actions “crazy”. It is curious that the market also does not believe that the Fed will abandon its plans: despite the correction, the probability of the December rate hike, according to the futures market, rose to 81.4% compared to 74.4% last week. Gradual rate hike process up to 3% or higher next year may not allow the economy to grow at an impressive pace, but will take control of inflation, which leads the list of warning tokens before the crisis. On the eve of the 2008 recession, the prices had been growing at 6% pace; in previous periods of crises, the pace was also high. Now when there is a choice between keeping expansion slower but long or impressive but short, Powell won’t repeat the mistakes of his predecessors and will subdue the risks of overheating now. One of them was, of course, the stock market, where the continuous flow of buyers put the rationality of growth in question. However, no one expected the Fed to slaughter the “sacred cow” in such a rough way. In the presidential administration, not everyone shares Trump’s position regarding the Fed. Close Trump aide Larry Kudlow, when asked to comment on Trump’s comments said the central bank is “on target” and the possibility of a rate hike is a sign of “stable economy, which should be welcomed than feared”. Robust hiring in the United States has narrowed the jobless rate to unprecedented levels in the last 50 years. In September, unemployment fell to 3.7% while wages rose by 2.8% in annual terms. The inflation rate of 2.3% means that the growth of real incomes has accelerated, which could give an additional impetus to consumption. The correction in the stock market led to a reversal of the yield curve, which took alarming shape due to the diverging views of the market and the Fed regarding the pace of rate hikes. A part of investors from the stock market flew to short-term Treasury bonds, so the spread began to grow again. The short-term cost of borrowing thus began to change in a more favorable direction. The only cause of concern remains the “welfare effect”, which adversely affects household incomes in the event of a fall in the stock market, as their assets depreciate. Accordingly, a long-term bear market in shares can stifle consumer optimism and business confidence, risking turning firms and households to the “savings” mode. Major US stock indexes closed in the red on Thursday, the S&P 500 broke the 200-day moving average down, which is slightly worse than the situation in February, when the technical level effectively kept the fall. Nevertheless, the current pullback is not something extraordinary, since the history is full of 5% corrections during the expansion leg. Today, data on export and import prices in the US, as well as consumer confidence from W. Michigan, are due to release. The stock market is likely to cover shorts, which should be supported by positive outcomes in the data. In my opinion, the market could be preparing for the New Year rally, as the rollback of the stock market initiated by the Fed is somewhat different from the decline during the recession. Therefore, if the economic data continues to give signals of steady growth, the market panic will be short-lived. Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
  10. Tickmill-News

    Yuan starts to feel the pain of the Chinese economy’s slowdown Chinese authorities hiked the exchange reference rate of USDCNY to 6.9019 yuan on Tuesday. From the perspective of traders this became the guidance to short yuan further, which they actually did. This also stirred more concerns about the growing weakness of the Chinese economy. Asian stocks fell to a 17-year low on Tuesday as the slowdown of the stock market in China spreads to neighbouring regions. PBOC’s move to softer credit policy has become even more worrying after the state newspaper confirmed concerns by releasing an article about why government should push stimulus pedal to shore up economic expansion. Growth forecasts for the IMF added gloom to the market mood which suggested that the global trade tensions do not bode well for growth and economic activity in the United States, Europe and China may soon slow down. Traders pushed yuan to 6.9320 against the dollar on Tuesday, taking advantage of the fact that China is ready to cede ground in the foreign exchange market. The devaluation can have a positive effect on exporters though, so ShCOMP edged higher on this assumption, but this was a rather cautious move. The nature of the bullish rushes in Chinese stock market, against the backdrop of capital outflows from the Chinese economy, should be attributed to technical corrections rather than growth attempts. This Monday, China’s largest stock index collapsed by 4.3% (“mini-black Monday”), which was the most severe reaction of investors in the past two years. Asian indices as a whole are also experiencing a decline, the broad MSCI Asian index continued to fall, closing Monday at a minimum of 15 months. It is highly likely that Trump’s threats to punish China for currency manipulation will start to appear soon, given that one of US Treasury official expressed concern about how rapidly the yuan is losing ground. There are also rumors that this week, the head of the US Treasury Department, Mnuchin may meet with his Chinese colleagues which may help contain the wave of sales. Obviously, the main threat to growth comes from the outflow of capital from the bond market, as it increases the cost of borrowing, which may weigh on capital expenditures. The whole process unfolded with a new force after Fed Chairman, Powell, took a very aggressive verbal position last week, unexpectedly saying that investors were lagging behind the Fed’s rate hike forecasts. The yield on US T-bills on Tuesday reached 3.24, a maximum of seven years. The VIX volatility index jumped by almost 6% on Tuesday to a level of 15.7. The volatility sellers are finally taking a break, as this creates the right moment in the form of uncertainty in the Chinese economy. The scope and speed of the bearish impulse in the bond market may mean a shift in the “collective assumption” of the market about the outlook of US economy and the implications of Fed policy. To do this, just look at the change of futures for the Fed rate, which reflects the change in expectations from 2 to 2.5 rate hikes in the next year. Euro remains fragile frustrated by the separatist penchants of the Italian government also another emerging risk is the slowing growth which can be spread from China to the Europe. There is a risk that the pair will go below 1.14 by the end of the week, since October 15 will be the deadline for Italy to submit a budget plan to the European Commission. Despite the contradictory statements, the market has no clear signals about a possible compromise. Gold got completely knocked out on Tuesday, dropping to 1182, but was quickly bought off. China troubles and the risk of rising yields in the United States make the yellow metal even less appealing for long. The target for gold is to re-test levels below, in particular the August lows at 1160 per troy ounce. Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
  11. Tickmill-News

    PBOC RR illustrates deepening problems in the Chinese economy The employment situation in the United States continued to develop in September in accordance with the definition of a healthy labor market. The unemployment rate fell by 0.2% to 3.7%, wages increased by 0.3% compared to August. The number of new jobs increased by 134K, which did not meet expectations, but the stability of the dollar after the report proves that the market attributed weakness to the deterioration of weather on the East Coast. Revised readings of the job gain for July and August changed in a positive direction, which partly offsets the decline in September. The change in jobs in July was revised from 147K to 165K, the demand for labor in August increased by 270K, instead of 201K, which was the previous estimate. Thus, the refined number of jobs for July and August was 87K more than the value of previous estimates. The average number of job gains for three months increased from 180 to 190K. The market may have paid particular attention to labor demand in the manufacturing sector, which is now the center of attraction for pessimistic views on the American economy. Recall that the manufacturing, in particular export-oriented companies, faced with rising costs, higher Fed rates, lower export prices, were expected to offset the blow by lowering labor costs, i.e. reducing the pace of hiring. September NFP report showed that such assumptions are at least premature, since the job gains in the sector was positive and amounted to 18K. The main contribution to the slowdown in jobs was made by the leisure and hospitality sector, which most likely has been affected by hurricane Florence that lashed onto South and North Carolina. In September, the sector lost about 17K jobs. Retail trade sector, in turn, declined by 20K jobs. Summary of the report: all eyes were turned to the wage growth change, since it is the harbinger of changes in consumer inflation and thus the Fed’s policy shifts. Salaries in September increased by 0.3% and by 2.8% in annual terms, which corresponds to the lower limit of market expectations (0.3 – 0.4%). Unemployment has already reached the Fed’s target level of 3.7%, somewhat faster than the projected end of the year. Regarding the pace of overall economic expansion, the report turned out to be neutral, as it was more likely to be its confirmation, rather than the basis for expectations on its changes. Meanwhile PBOC announced fresh steps toward monetary easing, cutting the reserve requirement by 1%, which will additionally deliver 750 billion yuan to the ailing economy. The Chinese Central Bank also reported a decline of $23 billion in currency reserves in September and $8 billion in August. This has already exceeded modest market expectations that the reserves would drop by only $500 million to 3.105 trillion. The only time that China lost reserves faster than this was in 2016. Unlike recent months, when the yuan sharply lost in value, USDCNY rate was much more stable in September. Apparently, they had to pay for this by selling reserves, which were also devaluated because of the growth in yields of US Treasury bonds and the strengthening of the dollar. Prior to the announcement of easing measures, it was difficult to assess the intensity of capital outflow from the Chinese economy, hence it was done through an attempt to draw a link between the FX reserve changes and the exchange rate. But now with PBOC’s concrete actions it becomes clear that the depreciation of USDCNY to 7 yuan per dollar becomes a very realistic goal. Already on Monday, the dollar strengthened against the yuan by 0.64%, exceeding the level of 6.91. The preparation of the Chinese authorities for further yuan diving has been probably completed, as seen from the period of strengthening of the yuan from August 15 to August 27. While the manufacturing sector in China is trying to recover from a blow in foreign trade, the service sector is growing at a very fast pace. The Caixin report, which focuses on private enterprises, showed that activity in the sector grew at the highest rate in three years. The main indicator rose to 53.1 points in September. The surge in activity in the services sector will definitely be a favorable signal for the authorities trying to shift the center of gravity in the economy from production to consumption. However, a sharp contraction of employment in this sector can speak about increasing stress, in particular, an increase in costs for enterprises. Thus, the subcomponent of employment fell to 49 points in September, which is below 50 points separating growth and slowdown. Oil prices post rapid pullback today, as the US administration decided to introduce relief measures regarding oil sanctions, allowing some countries to keep buying Iranian oil in a small amount. Saudi Arabia, in turn, said that it would be able to cover the market deficit driven by the blockage of Iranian exports. Thus, there is some overbought on the market, as recent purchases were based mainly on expectations of a strong deficit due to Iran’s withdrawal from the market. The lack of positive drivers will probably allow the bears to seize the initiative and further pullback of Brent will be the topic of trade this week. Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
  12. Tickmill-News

    Powell’s unusual “verbal stimulus” creates storm on the global bond markets Heads of the central bank have been probably envying Powell’s clarity in recent communication. Dollar sellers hardly believed that the hawkish leg of Fed’s course was over; the chairman made an unusual move signalling it’s too early to relax while speaking yesterday with in an extremely frank fashion regarding the policy of interest rates. And if market participants presumed earlier that the Fed’s rate hike path takes into consideration both pros and cons in terms of impact on economic growth, yesterday Powell offered to leave only the advantages. In Powell’s remarks, not only the rationale for a cautious approach didn’t exist, that is a somewhat traditional part of the speech of any central banker, but there was also a conscious bias towards excessive optimism. For example, as in Boston, Powell noted that “remarkably positive circumstances” have developed in the economy, and that “there is no reason to believe that this won’t last for quite some time” Describing behaviours of the wages, Powell said that some important components began to get out of stagnation and that “the Phillips curve is not dead, it’s just resting.” Since real interest rates have left negative territory for the first time in a long time and are barely above zero, the Fed chief believes that for the time being they should be considered as accommodative. Hence, we conclude that the policy of tightening is still in full swing. But what caused the storm for short positions on the dollar: Powell said that the rates are not only far from the neutral level, but the fact that the rates can overcome this level and remain there for some time. “The rates still remain characteristic of the accommodation policy, but we are gradually moving towards the neutral point and we can overcome it. But up to this point it’s probably still far away” Powell’s words stirred sharp strengthening of the dollar against other major currencies on Wednesday, while Eurodollar bears triggered stops 1.15. But already on Thursday, the rally ran into resistance and the US currency pulled back to the level of 95.50. The combination of Powell’s remarks and heightened sanction risks became a painful combination for the Ruble, which lost more than 1% on Thursday. And this despite the fact that oil prices rushed sharply upwards, targeting next “checkpoint” in the area of $90 per barrel. In light of the Fed’s move to more aggressive rhetoric, labor market data due on Friday is losing some of its significance, as it can be said that the market shifted exclusively to Powell’s words, which significantly expanded the horizon of confidence in the yields of American assets, and therefore in dollar. The yield on 10-year Treasury bonds rose to new local highs, holding above the 3.2% mark. The sovereign debt of other developed and developing countries also sank in price, and in the light of this, it is interesting to draw attention to countries where the Central Bank targets yields, i.e. in Japan. The yield on 10-year securities rose to 0.16%, but in June the Central Bank kept it at about zero percent. The Bank of Japan, judging by the JGB sell-off is calling off the intervention, but as soon as it announces the next round of “unlimited buying”, we can expect a strengthening of the bearish trend in the yen. In light of the significant deviation of the yield from the target, it may be worth to consider buying USDJPY with a target of 115 yen per dollar. Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
  13. Tickmill-News

    Italy folds to EU’s pressure but the war of words seems to not be over After two days of heavy sell-off on the euro and Italian bonds as a sign of market dissent with the fiscal course the Italian government, the latter finally came to their senses. As expected, the Italian populists made concessions and announced that they are ready to reduce the budget deficit to 2% in the near future. By 2019, it should be reduced to 2.2% and by 2020 to 2.0%. Of course, this hardly comes in line with EU expectations, although it seems to be a solid argument for euro sceptics to pause pressure on the euro. Yesterday, EURUSD made a technical pullback holding the support at 1.15, and on early Wednesday jumped to the level of 1.1580, just on the Italian news. Specific nature of shorts on the euro, i.e. based on particular political risk probably suggest the same rapid recovery when the catalyst charge changes sign. But this does not mean that we should immediately expect a global U-turn. The sustainability of the current rollback of EURUSD depends on what the European Commission responds to the proposal of the Italian government. I recall that, according to EU budget directives, the structural deficit can reach 3%, provided that the country has accumulated a small government debt (about 60% of GDP). It is clear that Italy has gone somewhat beyond the line. The problem is also exacerbated by the fact that Italian debt is losing its main buyer – the ECB. The regulator expects to complete the asset purchase program by the end of 2018. Other investors will demand a higher risk premium, so in the long run the cost of servicing the debt will increase significantly and the depth of the problem may become comparable to the Greek one. As in the case of Greece, the EU will probably have to make concessions, but it is better to do it now, when their price is not so high. From the Fed’s Chairman, Jeremy Powell speech yesterday in Boston, there are several points that seemed interesting to me: · The economy boasts a remarkably positive outlook; · The Fed has not yet seen signs of inflationary pressure due to tariffs; · The fiscal policy of the government is not stable; · The economy is in a historically rare position, when long-term unemployment is at record low levels and wage pressure is not transmitted to consumer inflation. · The Fed is aware that inflation can take revenge backfiring the later, so the regulator is on the alert and ready for appropriate measures. · Interest rate is the core thing in the Fed’s toolbox. The main conclusion is that the Fed does not see significant risks that can potentially change the monetary course. Since the pace of rate increases announced by the Fed has already been priced in the dollar, the prospects for its strengthening are earthy (but lets’ wait for NFP data). That’s why I would consider adding more longs on the currencies of emerging markets, especially the USDRUB pair. Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
  14. Tickmill-News

    Italian rumors – the only source of pressure on the euro? So what’s happened on the economic front since yesterday: – ISM survey in the US manufacturing sector indicated activity levelling off at a 14-year high. The key indicator in September was 59.8 points with expectations of 60. The growth rate of new orders slowed down significantly, the corresponding subindex decreased from 65.1 to 61.8 points. Assessment of employment in manufacturing sector maintains upbeat outlook on the expansion of the economy (but with a lag as layoffs increase after firms face the slack in consumer demand), the sub-index of employment has grown from 58 points to 58.8. – ISM survey on prices paid declined compared with the previous reading. This change in the index indicates that companies are gradually catching up with demand by increasing output. In addition, the jolt effect following the US administration-initiated tariff war is also fading away, as companies become abundant with resources. Relieving supply strains is also reflected in the supply deliveries index, which also cooled in September. Generally speaking, the dip in price pressure on the resource market provides, in my opinion, an insight into how the manufacturing sector responded to inflation outbreak by slowly increasing output which helped to dissipate price pressure which occurred in a discreet fashion. The fact is that firms seeing the swift rise in the price level, faced a choice: consider it a result of increased demand or a consequence of monetary inflation (in our case, the effect of fiscal stimulus in the US). If a firm makes a mistake with a source of price pressure, the increase in output may not pay off, hence it explains the delay in responding to market signals. The case was complicated by the effect of tariffs, which spurred cost inflation and subdued growth of export orders, so the decision to sharply increase production in response to price increases was even more difficult to take. In short, the retreat of the Prices Paid index says that the adjustment of firms to the economic recovery is most likely completed. Now, on the basis of the nature of crises, the delay is due to an adjustment to the economic downturn. But it will take time since clearly US economy is in a phase of healthy expansion. The rise in employment component also suggests that manufacturing payrolls will make up for August slowdown in September, which will be reflected in the Friday report. Nevertheless, the manufacturing sector takes modest place in NFP report. The growth rate of construction costs, an indirect indicator of housing demand, slowed down in August; government infrastructure projects are holding back the decline, while private construction is shrinking. The overall figure rose by 0.1% compared to July, with expectations of 0.4%. In the previous review I had considered the situation with the real estate market in the US and weak demand continues to restrain activity. The situation in Italy remains disturbing, the government is actively engaged in blackmail in order to solicit another sop from a big brother. On Tuesday, the government received a statement that it would be nice to have its own currency to solve problems within the country. From this position, the risks in the bond increases as a result of their sale continued today. The yield jumped to a level of 3.4%, higher than it was in a panic in May when the market also began to question the membership of Italy in the EU. The government has so far submitted a draft plan, which should be sent to the European Commission before October 15. In my opinion, this hype and loud statements by the government are purely a political step to maintain ratings. What will be in the final plan may differ from the suggestions made. It is logical to assume that the government understands how dangerous the policy of uncontrolled debt can be, which will not leave anything of their reputation after the debt stimulus runs out. I remain convinced that the European currency remains an excellent candidate for longs, since the source of pressure is now exclusively speculation about Italy. It remains only to see and carefully watch the news where the information about compromises will gradually be included. Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
  15. Tickmill-News

    Fed’s hawkish policy keeps the Dollar fit Fed’s eight rate hike had probably been anticipated since the start of policy tightening in 2015 and Powell did not disappoint investors this time. However, the Fed’s statement and Powell’s remarks were in contradiction with each other, which led to a racy price action of the FX market and bonds. 1-6-1024x613.png 2-5-1024x607.png Since the market was sufficiently prepared for the rate hike, the focus was on dot plot and wordings in the statement. Accordingly, the market prepared two questions for the Fed before the meeting: – “Is it possible to discuss the December decision now or is it better to wait until we are closer to it?” (actually the question of the policy of accommodation) – “What is the optimal rate trajectory with the approach of the neutral level?” The Fed responded as follows: – The sentence mentioning the accommodation policy was removed from the statement. – The review of economic conditions basically did not change compared to the August statement. The labor market “continued to strengthen,” economic activity remains “strong”, etc. Of course, the decision to end the usage of the phrase “accommodative policy” means a shift in the approach to decision-making, although Powell at the meeting tried to reassure markets that this will not affect the Fed’s decision. I got the impression that Powell tried to prevent an overly bullish interpretation of the meeting, stressing on neutral effects of the exit from accommodation. Therefore, his speech was somewhat inconsistent with the way it was stated in the statement. The change in dot plot, together with the Fed statement, indicates that the regulator has gained “cruising speed” and is ready to make four rate increases this year and three in the next. The December rate increase is already expected by 12 officials compared to 8 in a meeting in June. Next year, the level of the rate of 3.375% is expected by four officials, against three at the previous meeting. In 2020, dot plot shows doubled confidence on the appropriate rate of 3.675% (6 votes against the previous three). The median estimate of the long-term neutral rate increased from 2.875% to 3%. Other changes in dot plot are less significant. 4-2-1024x510.png Updates of economic forecasts In September, the Federal Reserve raised its GDP forecast from 2.8% to 3.1% in 2018, with fiscal stimulus and good wage dynamics becoming the main factors. Interestingly, the tariffs, in the context of medium-term growth forecasts of the Fed, have virtually no weight: in 2019, GDP is expected to reach 2.5%, after 2.4% of the forecast in July. That is, the tension in foreign trade practically does not affect the prospects for the economy. 3-5.png Long-term GDP remained at 1.8%, another stone in the garden of Trump, who hoped to increase the productivity and growth of the US economy in the long run. Dampening inflation pressure through fairly aggressive rate hikes has prevented US companies from transferring pressure from input costs and wages to end prices. So the fairness of the current market valuation again raises doubts as company profits may not live up to projections next year. Powell in his comments finally drew attention to overbought in the stock market but did so very carefully. He said that prices for some assets are in the range of historically maximum values, hinting that further continuation of the rally can draw close attention from the regulator. Stock markets fell on Powell’s comments. The Fed tried to look as neutral as possible, but a change in wording in line with bullish market expectations will help the dollar to stay on the growth track. The target for EURUSD is level 1.16 – 1.1550, which is likely to be reached next week. Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
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