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Weekly Market Wrap

By David Morrison  |  15/06/2018 15:22

This article considers the tariff-catalysed sell-off in risk assets and next week’s OPEC meetings along with FX and precious metals

Round-up and look-ahead

There was a broad-based sell-off across risk assets on Friday after the Trump administration announced another round of trade tariffs aimed at imports of Chinese goods. A 25% tariff is set to be imposed on over 1,000 product lines worth $50 billion. China said it would respond in kind.

Global stock indices were already on the backfoot first thing. Traders were jittery as they reacted to news of a possible split in German Chancellor Merkel’s fragile coalition government over immigration policy. This came on top of the quarterly expiry of US stock index futures and options – something that can often lead to a spike in volatility.
Meanwhile, investors continued to digest the messages sent out by the ECB and Federal Reserve. There can be little doubt that the Fed is ready to tighten monetary policy further with the likelihood of another two 25 basis-point rate hikes this year and a continued reduction in the central bank’s balance sheet. On top of this the ECB has now produced a timetable for ending is Asset Purchase Programme which means a further reduction in monetary stimulus. Perhaps the only reason why markets aren’t weaker is Mario Draghi’s insistence that bond purchases could continue if the ongoing pick-up in Euro zone inflation looks unsustainable while the first hike in interest rates won’t come until after next summer.

The European Central Bank Forum on Central Banking takes place in Portugal this coming week. This means speeches from the likes of Jerome Powell, Mario Draghi and Haruhiko Kuroda. Our very own Mark Carney will be busy with the Bank’s monetary policy meeting (no action anticipated) and his Mansion House speech on Thursday night (moans about Brexit likely). There’s also a rate decision from the Swiss National Bank and minutes from the Reserve Bank of Australia and Bank of Japan.

Then we have the OPEC+ and official OPEC meetings in Vienna on Thursday and Friday respectively. There is an expectation that Saudi Arabia and Russia will push for a supply increase of around 1 million barrels per day. However, Iran and Venezuela are bound to push back against this, especially given the US’s role in encouraging the production increase. Things are complicated following Friday’s sell-off in crude which was triggered by additional US tariffs on Chinese goods. Taken all together, it’s set to be an eventful week.

Stock indices

US stock indices put in another strong performance at the beginning of last week with the tech-heavy NASDAQ 100 and broad-based US-focused Russell 2000 both hitting new highs. The Dow and S&P 500 hit their highest levels since mid-March while the major European indices were mixed and struggled to break out of recent trading ranges. Until that is, Thursday’s post-ECB slump in the euro saw buyers rush in to hoover up European equities.

There had been a modest sell-off on Wednesday evening following a hawkish Fed meeting. As expected, the Federal Open Market Committee (FOMC) raised the headline fed funds rate by 25 basis points to a target band of 1.75-2.00%. However, there was also an upward shift in the Committee’s forecasts for future hikes with an increased likelihood of two further moves this year.

On top of this, the Fed is continuing to reduce its balance sheet by no longer reinvesting the proceeds of maturing securities. This process of ‘quantitative tightening’ is expected to continue, effectively on autopilot, until the Fed’s balance sheet is reduced from near $4.5 trillion to nearer $2.5 trillion. However, ahead of last week’s meeting there had been some speculation that the Fed would indicate that its eventual balance sheet target could be higher, perhaps around $3.5 trillion. If so, that would offer some relief to investors who worry that the US central bank is removing too much stimulus, reducing the availability of dollars and thereby threatening global financial stability. However, it appears that the Fed is happy to continue with reduction at its current rate and made no mention of a target for the size of its balance sheet. This contributed to yet another fevered bout of selling in emerging market FX which saw steep declines for the Argentine peso, Brazilian real, Mexican peso, South African rand and Turkish lira, amongst others.

Looking at the technical picture for a few key indices: at the beginning of this month the S&P 500 broke above 2,744 which is the 61.8% Fibonacci Retracement of the Jan-Feb sell-off. Last week the index was running into resistance at the 76.4% Fib retracement of the same move. A move above here suggests the S&P is on course to take out its all-time high while a failure could see it pull back to support around 2,700.

The first line of resistance for the German DAX is 13,200 with support around 12,800. The FTSE 100 is currently ranging between 7,800 and 7,600.

The US dollar was on the back foot going into the weekend as traders fretted about the implications of another round of US tariffs directed at China.
The EURUSD began last week knocking up against 1.1800, holding on to gains made since the end of May. The euro even managed to recoup losses following Wednesday night’s Fed meeting. While the 25-basis point rate hike was expected, traders were taken by surprise by the hawkishness of the FOMC’s quarterly Summary of Economic Projections. The FOMC forecast saw the probability of two more rate hikes this year increase when compared to the last summary back in March. The dollar rallied initially but promptly reversed direction as traders interpreted the Committee’s ‘dot plot’ as indicating an end date for future rate hikes, leaving the euro in positive territory by the end of the session.

But the real fun and games came after Thursday’s ECB meeting. Again, this looked hawkish at first glance after the central bank produced a roadmap for tapering its bond purchase programme. The Governing Council also agreed that its Asset Purchase Programme would conclude at the end of this year, assuming the data continued to show that progress towards a sustained adjustment to inflation had been made. But it quickly became apparent that there was a dovish element which trumped the ECB’s timetable for the reduction in monetary stimulus. For a start, the ECB intends to keep all its key interest rates unchanged “at least” through the summer of 2019. Secondly, the ECB will continue to reinvest the proceeds of maturing debt instruments, which means it won’t be reducing its balance sheet as the Fed is doing. Thirdly, Mario Draghi emphasised the risks to the central bank’s positive economic outlook, effectively providing an escape hatch from tighter monetary policy. This was reinforced when the ECB revised down its forecast for 2018 GDP to 2.1% from 2.4%, although 2019 and 2020 were kept unchanged.

The euro responded by plunging against all the majors in a move which saw the EURUSD crash below 1.1600 for a loss of over 2 cents in two-and-a-half hours.
Meanwhile, cable is still struggling to make any serious headway following the plunge which began mid-April. It found some support at 1.3200 but has repeatedly tried, and failed, to break and hold above 1.3400 – despite the UK government managing to evade Commons defeat on the Lords amendments to the EU Withdrawal Bill.
Crude oil

Crude oil was on track to end the week modestly higher as both WTI and Brent continued to consolidate following last month’s dramatic sell-off. Prices looked likely to move sideways ahead of the OPEC+ and official OPEC meetings this Thursday and Friday respectively. However, both contracts plunged over 2% soon after Friday’s open. The sell-off came after the Trump administration announced another round of trade tariffs aimed at imports of Chinese goods. A 25% tariff is set to be imposed on over 1,000 product lines worth $50 billion. China said it would respond in kind. The fear is that there’s a growing prospect of an all-out trade war which will could have a devastating effect on global growth going forward. It’s therefore reasonable to assume that demand for oil could fall accordingly.
The question now is whether Saudi Arabia and Russia could now have second thoughts about adding back supply to the market. For a while now both major oil producers have been 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. Oil prices have risen sharply over the past year as the output reduction together with strong global demand have returned developed-world inventories back to five-year averages. The fear has been that a continuation of the cuts could see the oil price head back above $100 per barrel leading to a spike in inflation and a pull-back in economic activity.
The resumption of US-led sanctions on Iran and supply outages from Venezuela have added to concerns.
Gold fell sharply on Friday for its biggest one-day slide in a month. Traders, or rather computer algorithms, rushed to dump all dollar-denominated commodities on fears that an all-out trade war was breaking out after the Trump administration announced another round of tariffs on Chinese imports. The move took the precious metal down to trendline support around $1,285 that’s been building since the end of 2016. This level also marks the 61.8% Fibonacci Retracement of the Dec 2017-Jan 2018 rally. This sudden sell-off ended what had been quite a positive week for gold. The yellow metal edged steadily higher, managing to push back above $1,300. It had been an even better week for silver which flew past resistance at $16.80, going on to break above $17.00 to hit its highest level since mid-April.

Chart-wise, both metals appeared to be on the verge of a breakout and going into Friday it looked as if this would be to the upside. While the sudden reversal hasn’t wiped out all hopes of decent rallies in the two precious metals, it does look as if these will be postponed for now. Bulls will be despairing that all their hard work and patience in building an apparently solid launchpad for an upside run has been taken apart in just a few minutes of frenzied selling.
Stepping back and looking at the charts now, last week we saw gold back away after testing the 200-day simple moving average (SMA) around $1,310. But its failure to hold $1,300 meant the path of least resistance was a retest of support around $1,285. If gold is unable to hold above here then there’s a very real danger that it has another run towards last December’s low of $1,240. But if the bulls can defend $1,285 then the first line of resistance comes in at $1,300.
As far as silver is concerned, given the speed of last week’s spike we shouldn’t be surprised that there was a significant pull-back towards. If silver can dig in and push above $16.80, then this previous resistance level could now act as support. If it can then move back above $17 (or even better the 100-day SMA around $17.25) then next resistance comes in around $17.60.
Key events next week

Monday -             CNY Bank Holiday; EUR German Bundesbank Monthly Report

Tuesday -             AUD Monetary Policy Meeting Minutes; USD Building Permits, Housing Starts

Wednesday -     GBP CBI Industrial Order Expectations; USD Current Account, Existing Home Sales, Crude Oil Inventories

Thursday -           OPEC+ meetings; CHF SNB Financial Stability Report, SNB Press Conference; GBP Public Sector Net Borrowing, MPC Official Bank Rate and Monetary Policy Summary; USD Weekly Unemployment Claims, Philly Fed Manufacturing Index, Bank Stress Test Results

Friday -                 OPEC meetings; EUR French, German, Euro zone Manufacturing and Services PMIs, ECOFIN Meetings; GBP BoE Quarterly Bulletin; CAD CPI, Retail Sales; USD Flash Manufacturing and Services PMI.
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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