Market panorama. 20 October 2017

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I. Market focus:

20/10/2017

At the beginning of Friday’s session, the focus of the markets was on reports that the U.S. Senate has approved a budget resolution for the 2018 fiscal year. The dollar reacted to this news with a sharp increase, as the adoption of the budget is one of the steps forward for the U.S. President Donald Trump’s plan to enact tax cuts, since it allows Republicans to avoid blocking this process by Democrats. The budget resolution was adopted thanks to the Republican Party's majority in the Senate. Lawmakers voted 51-to-49 in favour of the resolution. It is expected that these reports will continue to support the U.S. currency, as well as will have a positive influence on the dynamics of the stock market.

The change of government in New Zealand continued to weigh on the New Zealand dollar. It was reported yesterday that Bill English, the outgoing prime minister and leader of National Party, which won the most votes in the country's general election in September, failed to create a coalition and form a government. Thus, the chance to form a new government came from the Laborites, who successfully used it, setting a coalition with the Green party and New Zealand First party (NZ First). The head of the Labor Party Jacinda Ardern will be the new Prime Minister of the country.

The main scheduled events of the final session of the week will be Canadian statistics on inflation and retail sales at 12:30 GMT and the speech of Fed Chair Janet Yellen at 23:30 GMT. In addition, investors will pay attention to the British data on public sector borrowing (08:30 GMT) and the U.S. report on the existing home sales (14:00 GMT).


II. The market highlights are:

  • The Federal Reserve Bank of Philadelphia announced Thursday its index of current manufacturing activity in the region increased to 27.9 this month from a reading of 23.8 in September. The October reading was the highest reading since May and above economists’ forecast for a reading of 17.2. The details of the report all remained positive, suggesting continued expansion. Both the new orders (-9.9 points m-o-m to 19.6 in October) and shipments indexes (-13.4 points m-o-m to 24.4) remained positive but declined this month. Both the unfilled orders (-6.1 points m-o-m to 10.9) and delivery times (+7.5 points m-o-m to 21.6) indexes were positive for the 12th consecutive month, suggesting longer delivery times and an increase in unfilled orders. The employment index (+24.0 points m-o-m to 30.6) reached a record high this month.

  • The data from the Labor Department revealed Thursday the number of applications for unemployment benefits fell more than expected last week, pointing to a rebound in job growth after a hurricane-related drop in employment in September. According to the report, the initial claims for unemployment benefits dropped by 22,000 to a seasonally adjusted 222,000 for the week ended October 14. That was the lowest figure since March 1973. Economists had expected 240,000 new claims last week. Claims for the prior week were revised upwardly to 244,000 from the initial estimate of 243,000. Meanwhile, the four-week moving average of claims fell by 9,500 to 248,250 last week. It was the 137th straight week that claims remained below the 300,000 threshold, the longest streak since 1970.

  • The Conference Board reported Thursday its Leading Economic Index (LEI) for the U.S. fell 0.2 percent in September to 128.6 (2010 = 100), following a 0.4 percent increase in August. Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board, said that “The US LEI declined slightly in September for the first time in the last twelve months, partly a result of the temporary impact of the recent hurricanes. The source of weakness was concentrated in labor markets and residential construction, while the majority of the LEI components continued to contribute positively. Despite September’s decline, the trend in the US LEI remains consistent with continuing solid growth in the U.S. economy for the second half of the year.” The Conference Board Coincident Economic Index (CEI) for the U.S. edged up 0.1 percent to 115.7 in September, while its Lagging Economic Index (LAG) for the U.S. declined 0.1 percent to 125.2.

  • People’s Bank of China (PBoC) Governor Zhou Xiaochuan stated that China would fend off risks from excessive optimism that could lead to a “Minsky Moment”. A “Minsky Moment” is a collapse of market values of assets after a long period of growth, sparked by debt or currency pressures. The theory is named after economist Hyman Minsky. “If there are too many pro-cyclical factors in the economy, cyclical fluctuations are magnified and there is excessive optimism during the period, accumulating contradictions that could lead to the so-called Minsky Moment,” Zhou said in his speech on the sidelines of China’s 19th Communist Party Congress. “We should focus on preventing a dramatic adjustment,” he added.


III. Market Situation
Currency Market
The currency pair EUR/USD fell sharply, losing all its yesterday’s gains, on the back of the reports that the U.S. Senate has approved a budget resolution for the 2018 fiscal year. This is one of the crucial steps forward for the U.S. President Donald Trump’s plan to enact tax reductions. Lawmakers voted 51 to 49 in favour of the resolution, allowing tax cuts that add up to $1.5 trillion to the deficit over a decade.The approval will unlock a special procedure allowing Republicans to pass a subsequent tax code rewrite without Democratic support. The next step will be for the Senate to work alongside the House to harmonize their budgets. Market participants await the U.S President Trump to announce his decision on a Federal Reserve chair. Politico reported in the late afternoon yesterday that Fed Board Governor Jerome Powell is the leading candidate to become the next Fed Chair. President Trump is expected to make his decision before he leaves for an 11-day trip to Asia on November 3. Today, the focus will be on the U.S data on the existing home sales and the speech of Fed Chair Janet Yellen. Resistance level - $1.1880 (high of October 12). Support level - $1.1773 (low of October 18).

The currency pair GBP/USD fell sharply, responding to the broad strengthening of the U.S. dollar and the news from a  two-day summit of European Union (EU) leaders, which started yesterday. On Thursday, the European leaders rebuffed the British Prime Minister Theresa May’s appeal to break a deadlock in the Brexit talks. At the same time, German Chancellor Angela Merkel suggested that negotiations may move towards UK-EU trade talks in December. Merkel stressed progress that had been made, saying, "despite what the British press says, this is a process that is moving ahead step by step." However, she noted that the progress made was “not enough to start the second phase of negotiations". On the divorce issues dealt with in the first stage, there was "by and large general agreement" on the future status of the Irish border and "headway" was being made on expats' rights after Brexit, but May made no specific new offer on Britain's financial settlement, she said. With almost empty economic calendar in the UK ahead, market participants will focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3337 (high of October 13). Support level - $1.3017 (low of September 6).

The currency pair AUD/USD dropped significantly, updating yesterday's low, due to the broad strengthening of the U.S. dollar. Investors are awaiting the Fed Chair Yellen’s speech at the National Economists Club Herbert Stein Memorial Lecture in Washington. The topic is "Monetary Policy Since the Financial Crisis." It is expected that Yellen will detail the Fed's response to the financial crisis, including conventional and unconventional policies. At the same time, market participants do not anticipate she will talk about further near-term policy rate increases. Most likely, she will stick to the Fed’s narrative that inflation is likely to rise toward the regulator’s 2-percent target over the medium term as growth remains above potential and the labor market tightens further. However, investors will pay attention to her tone on inflation to detect whether the latest CPI readings have introduced any additional uncertainty around this view. Resistance level - AUD0.7897 (high of October 13). Support level - AUD0.7818 (low of October 17-18).

The currency pair USD/JPY traded slightly higher, near the high of October 6, due to the broad strengthening of the U.S. currency in response to the reports the U.S. Senate approved a budget resolution for the 2018 fiscal year. Market participants also avoided opening large positions ahead of Japan’s snap elections on Sunday. Although it is expected that Prime Minister Shinzo Abe's ruling coalition will retain a majority in the election, the surprise outcomes of the recent elections in Britain and other countries make investors to be cautious. The latest poll showed Prime Minister Shinzo Abe's ruling coalition on track to win around 300 of the 465 seats in the Diet's lower house. Investors also await the announcement of new Bank of Japan (BoJ) governor, as Haruhiko Kuroda’s term ends in April. There are high chances that Mr. Kuroda will be reappointed. Resistance level - Y113.43 (high of October 6). Support level - Y112.03 (low of October 17).

Stock Market

Index

Value

Change

S&P

2,562.10

+0.03%

Dow

23,163.04

+0.02%

NASDAQ

6,605.07

-0.29%

Nikkei

21,457.64

+0.04%

Hang Seng

28,487.24

+1.17%

Shanghai

3,379.50

+0.28%

S&P/ASX

5,906.99

+0.18%


U.S. stock indexes closed mainly higher on Thursday, with the S&P 500 and the Dow both notching new records thanks to a push higher in the final minutes of the session. Investors assessed a mixed bag of quarterly earnings/guidance from the U.S. companies and reports that orders for Apple’s (AAPL) iPhone 8 are weaker than expected. The focus was also on the weekly data from the Labor Department, which revealed that the number of applications for unemployment benefits fell more than expected last week, pointing to a rebound in job growth after a hurricane-related drop in employment in September. According to the report, the initial claims for unemployment benefits dropped by 22,000 to a seasonally adjusted 222,000 for the week ended October 14. That was the lowest figure since March 1973. Economists had expected 240,000 new claims last week. It was the 137th straight week that claims remained below the 300,000 threshold, the longest streak since 1970. At the same time, the Federal Reserve Bank of Philadelphia announced its index of current manufacturing activity in the region increased to 27.9 this month from a reading of 23.8 in September. The October reading was the highest reading since May and above economists’ forecast for a reading of 17.2.
Asian stock indexes closed higher on Friday, as investors’ sentiment was lifted by news the U.S. Senate adopted a budget resolution, which bolstered optimism about the chances for tax reform. Despite the fact the yen weakened against the dollar, Japan’s Nikkei closed only marginally higher, as market participants were cautious ahead of Japan’s election this weekend. Overall, the Japanese market’s benchmark tallied a 14-straight session gain.That was the longest winning streak in over 50 years.

European stock indexes are expected to trade mixed in the morning trading session.


Bond Market
Yields of US 10-year notes hold at 2.36% (+4 basis points)
Yields of German 10-year bonds hold at 0.42% (+2 basis points)
Yields of UK 10-year gilts hold at 1.28% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in November settled at $51.49 (+0.39%). The crude oil prices rose slightly, correcting after yesterday's decline, which was caused by partial profit-taking by investors after rallying 3 percent in the previous four sessions. Market participants are awaiting weekly data on the U.S. oil rig count from Baker Hughes. Recall, the report released by Baker Hughes last week showed that the number of active U.S. rigs drilling for oil fell by five to 743 during the week ended October 13. That followed a decrease of two rigs in the prior week. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, dropped by eight to 928, as the gas rig count also decreased by two to 185 last week, while and the miscellaneous rig count declined by one to 0. The U.S. rig count is up 389 rigs from this time last year when it stood at 539.

Gold traded at $1282.50 (-0.58%). Gold prices fell as the U.S. currency demonstrated a broad strengthening. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.26 percent to 93.51. Since gold prices are tied to the dollar, a stronger dollar makes the precious metal more expensive for holders of foreign currencies.

IV. The most important news that are expected (time GMT0)


08:00

Eurozone

Current account, unadjusted

08:30

United Kingdom

PSNB

12:30

Canada

Retail Sales

12:30

Canada

Retail Sales ex Autos

12:30

Canada

Bank of Canada Consumer Price Index Core

12:30

Canada

Consumer price index

14:00

U.S.

Existing Home Sales

17:00

U.S.

Baker Hughes Oil Rig Count

18:00

U.S.

FOMC Member Mester Speaks

23:30

U.S.

Fed Chairman Janet Yellen Speaks



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Focus market

  • Euro Area trade balance surplus declined significantly in August
  • Consumer prices in China were up 1.6 percent on year in September,
  • US consumer sentiment surged in early October, reaching its highest level since the start of 2004 says UoM
  • Earnings Season in U.S.: Major Reports of the Week
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