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Weekly market wrap

By David Morrison  |  08/06/2018 15:22
”monetary

This article looks at upcoming central bank meetings and recent moves in stock indices, FX, gold and crude oil

Look-ahead


This week sees central bank meetings for the US, Euro zone and Japan. The Fed’s FOMC is widely expected to raise rates by 25%. However, this headline will pale into insignificance compared to the accompanying FOMC statement, Summary of Economic Conditions and Fed Chair Jerome Powell’s subsequent press conference. If there’s any hint of uncertainty about the outlook for economic growth then we should expect a subtle shift towards just one more rate hike in 2018, and away from the possibility of two. This is arguably more important than the FOMC’s inflation outlook as the Fed has made it abundantly clear that it is prepared to see core inflation overshoot its 2% target – perhaps for some time.

Then we have the European Central Bank (ECB) meeting to look forward to. All the signs are that the ECB will finally produce a timetable for winding down its €30 billion per month Asset Purchase Programme (APP). The current betting is that the central bank is preparing for this to run off by the end of this year. But more critically is what this means for the timing of the first ECB rate hike in over 7 years. The expectation is that the central bank will look to raise its main refinancing rate by 25 basis points six months after it finally ends its quantitative easing. That suggests a rate hike in a year’s time. This view is currently supporting the euro. However, traders should be prepared for ECB President to dampen any perceived hawkishness in his subsequent press conference. So, get ready for some FX volatility. It’s worth noting that an end to the ECB’s APP won’t be positive for Italy and is likely to put further pressure on Italian bonds.

Finally, the Bank of Japan meets early Friday morning. The bank isn’t expected to make any changes to its current monetary policy.

Overview

Last week saw a strong start for US stock indices. There were big gains for the S&P 500 and Dow Jones while the NASDAQ 100 and broad-based US-focused Russell 2000 hit record highs. But European and Asian Pacific indices put in a mixed performance and the gloss came off global equities as we headed into the weekend.

Investors trimmed back their exposure to stocks as the annual G7 summit approached. There were distinct signs of discord between the US and other countries ahead of the two-day event which began on Friday. This came as President Trump blasted Canadian Prime Minister Justin Trudeau, French President Emmanuel Macron and the EU for charging “massive tariffs” on US goods. Macron responded by threatening to exclude the US from the G7 joint statement and pointing to the superior values of the remaining members - Canada, France, Germany, Italy, Japan and the UK.

In other news, Bank of America revealed its post mortem on the first quarter earnings season. President Trump’s tax cuts and fiscal stimulus helped US corporates record one the best quarters for earnings growth since 2011. But rather than being ploughed back in to capital expenditure, the extra cash (much repatriated from overseas) saw share buybacks hit their highest level on record for the quarter. There was an increase in capital expenditure but this was at around half the rate of stock buybacks. Dividends were unchanged from the same period last year while spending on acquisitions was down. So, yet again, corporate executives have taken care of shareholders and themselves but appear to have little faith, or interest, in investing for future growth.

There was an interesting observation from Ned Davis Research (The Fat Pitch) which shows that the Russell 2000 index peaks after bull market tops 55% of the time. Bear in mind that the S&P and Dow both hit record highs at the end of January and are currently around 4% and 6% adrift of these levels. The Russell, as noted above, hit an all-time high just a few days ago. Technically, a break above 2,780 on a weekly basis for the S&P could set the index up for a fresh run at the January high. But a failure there suggests that we could see another leg down first. On the downside, we’d have to see 2,700 breached significantly for the index to retest the February crash low of 2,530.
 
FOREX

Last week the EURUSD continued to rally off the 11_month low hit at the end of May. The single currency got a lift as political tensions concerning Italy and Spain eased and following comments from the ECB's Chief Economist Peter Praet. Mr Praet said the bank will discuss at this coming week’s meeting how to wind down its €30 billion per month Asset Purchase Programme. In addition, German Bundesbank chief and ECB Governing Council member Jens Weidmann said that he expects the stimulus package to finish before the end of the year.

But the bounce in the euro was as much about a corrective, profit-taking move in the US dollar which lost ground against most of the majors. Investors were once again anxious to reduce their dollar exposure as Trump said he was pushing ahead with trade tariffs against Canada, the EU and Mexico.

The president’s stance raised tensions ahead of the annual G7 summit. In addition, the week sees central bank rate decisions from the US, Euro zone and Japan and an expected meeting between Mr Trump and North Korean leader Kim Jong-un.

Chart-wise, it looks as if there’s some support for the EURUSD around 1.1600, if the recent slump towards 1.1500 proves to be a false breakout. If the pair manages to recapture and dig in above 1.1800 then the next upside hurdle is 1.2000. But another break below 1.1600 could see the EURUSD retest support around 1.1400 in short order.
 
Crude oil

Crude oil continues to consolidate following last month’s dramatic sell-off. Traders cut back on their long-side exposure after Saudi Arabia and Russia revealed that they were considering adding back some supply to the market. They are thought to be discussing a reduction of the OPEC/non-OPEC (or OPEC+) production cut to 800,000 barrels per day (bpd) from the 1.8 million agreed at the end of 2016. This should do much to offset the loss of OPEC output due to the resumption of US-led sanctions on Iran and supply outages from Venezuela. There’s also a danger that keeping the current production cuts in place could see oil prices run up towards or beyond $100 per barrel. This could contribute to an economic slowdown which in turn risks oil prices falling back uncontrollably and undoing all the hard work done by the November 2016 output cut agreement. 
 
But there are also concerns that any additional supply will come as analysts downgrade their previously bullish forecasts for global oil demand growth. Last month the International Energy Agency (IEA) revised down its forecast for demand growth for 2018 to 1.4 million barrels per day (bpd) from 1.5 million bpd. So OPEC+ risks the danger of raising production into an economic slowdown, again leading to another sharp slump in prices. Oil ministers will have to be careful how they approach their meeting on 22nd June and hope that there’s no downturn in global growth.
 
Oil fell on Wednesday following the latest US inventory update from the Energy Information Administration (EIA). This showed the biggest build in stockpiles since 2008 with crude showing an increase of 2 million barrels for the week ending 1st June against an expected 2.1 million draw-down. WTI was worst hit by the news, helping to keep its discount to Brent over $10. There were also bigger-than-expected builds in gasoline and distillates.

Looking at the chart for WTI, prices on the front month contract are clustering around $65.50. This level marks the convergence of the 100-day Simple Moving Average, the 23.6% Fibonacci Retracement of the June 2017-May 2018 and the lower support line of the upward-sloping trend channel which has been building since last summer. At some stage we’ll either see a continuation of the upward trend or a sharp downside break. But this may not be resolved until the OPEC+ meeting later this month.
 
Gold

Gold marked time last week, repeatedly running into resistance around $1,300 while making a series of higher lows. Looking at the weekly chart we can see that gold has been in an uptrend since the beginning of this century. Zooming in, a triangle has been forming over the last couple of years with a series of higher lows and lower highs as price ranges compress. This suggests that gold may be about to break out and it is generally thought that the direction of the break will be in the direction of the long-term trend. However, that’s not always the case so care must be taken. Shorter term, gold is finding support around $1,285 (the 61.8% Fibonacci Retracement of the Dec 2017-Jan 2018 rally). There’s minor resistance around $1,300, marking the 50% retracement of the same move, followed by $1,308 – the 200-day Simple Moving Average.

The Dollar Index has pulled back from the six-month high made at the end of last month. Following the upside breakout at the end of April, the Index was unable to hold above 94.00. If we see the dollar continue to give back some of its recent gains then this should support gold going forward. Much will depend on the upcoming Fed and ECB meetings. The Fed is expected to hike rates by another 25 basis points. But any signal from FOMC members that they’re becoming cautious about the economic outlook will heighten speculation that the Fed could go into ‘wait and see’ mode for the next three months. This would be negative for the dollar. Meanwhile, if the ECB finally produces a timetable for exiting its Asset Purchase Programme then expect the euro to strengthen. But watch out for any dovish comments from Mario Draghi at his subsequent press conference. He has a history of damping expectations of monetary tightening and he may wrong-foot markets again. 
 
Key events next week

Monday -             CNY New Loans, M2 Money Supply; GBP Manufacturing Production, Goods Trade Balance, Construction Output, Industrial Production

Tuesday -             GBP Claimant Count, Unemployment Rate, Average Earnings; EUR German and euro zone ZEW Economic Sentiment; USD CPI, Federal Budget Balance

Wednesday -     GBP CPI, RPI, HPI; EUR Industrial Production, Eurogroup Meetings; USD PPI, Crude Oil Inventories, Fed Funds Rate, FOMC Statement and Press Conference

Thursday -           AUD Unemployment Rate, Employment Change; CNY Fixed Asset Investment, Industrial Production, Retail Sales; GBP Retail Sales; EUR ECB Rate statement and Press Conference; USD Retail Sales, Weekly Jobless Claims, Business Inventories

Friday -                 JPY BOJ Rate Statement and Press Conference; EUR Final CPI; USD Empire State Manufacturing Index, Capacity Utilization, Industrial Production, Consumer Sentiment, Inflation Expectations.
 
 
 
Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and GKFX accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.
 

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