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Market panorama. 3 January 2018

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I. Market focus:

03/01/2018

Financial markets are returning to normal operation after the New Year holidays and the main event of the first full session of 2018 are reports about North Korea's offer to conduct a dialog with its southern neighbor. In the morning, Reuters reported that the leader of the DPRK Kim Jong Un ordered to open a long-closed border hotline with South Korea for talks. In response to these reports, gold fell sharply, indicating a decrease in demand for safe-haven assets and an increase in risk appetites.

Wednesday’s session will not be very busy with scheduled events. The focus of market participants is the minutes from the December meeting of the Federal Open Market Committee (FOMC). The document will be released at 19:00 GMT. At the last meeting, the regulator expectedly tightened its monetary policy. At the moment, market participants expect the Federal Reserve will hike its interest three times in 2018, and they will closely scrutinize the minutes for any clues that could confirm such expectations. Important details will also be the Fed’s forecast for inflation, which was slightly weaker than expected in the last reporting period.

Apart from the FOMC minutes, investors will also pay attention to the publication of the ISM report on activity in the non-manufacturing sector of the U.S. economy (15:00 GMT). A report on the U.S. employment situation will be released at the end of this week, and today's data from the ISM can significantly affect the expectations for it.

In the first half of the Wednesday session volatility in the foreign exchange market could be boosted by the UK’s report on activity in the construction sector (09:30 GMT).


II. The market highlights are:

  • Final data released by IHS Markit on Tuesday indicated a marked improvement in the US.. manufacturing operating conditions in December. According to the report, the seasonally adjusted IHS Markit final U.S. manufacturing purchasing managers’ index (PMI) came in at 55.1 in December, up from 53.9 in November and a preliminary estimate of 55. That was the highest reading since March 2015 and pointed to a solid improvement in the health of the sector, the report said. The latest upturn was supported by faster increases in output and new orders. Commenting on the final PMI data, Chris Williamson, Chief Business Economist at IHS Markit noted: “Prospects for the upturn also look good. With business optimism about the year ahead running at its highest for two years in the closing months of 2017, companies are clearly expecting to be busier in 2018... The combination of strengthening growth, a solid labour market and rising prices will add to expectations that the Fed will remain on track for another rate hike in the near future, with March looking a likely possibility.”

  • Moody's Investors Service (Moody's) released its 2018 credit trends report for the global oil and gas industry on Tuesday. In the report, the ratings agency said it expected oil prices would remain at $40-$60 per barrel in 2018 despite the extension of OPEC-led crude oil production cuts through the end of the year. According to the report, higher prices within or above that range will see supply increases as countries lessen their compliance with output quotas and the U.S. shale production continues to grow. Meanwhile, abundant supplies of the U.S. natural gas will constrain prices, even while demand raises. "Political unrest in the Middle East, alongside assumptions of OPEC extending its agreement to cut production, helped to bolster oil prices in late 2017," noted Terry Marshall, a Moody's Senior Vice President. "Yet even with these factors offering a boost, prices will likely remain range-bound, and possibly volatile, on a combination of increasing US shale production, reduced but still significant global supplies, and potential non-compliance with agreed production cuts - especially if demand growth is more tepid."


III. Market Situation
Currency Market
The currency pair EUR/USD fell slightly at the beginning of the session, but then recovered to the opening level. The U.S. dollar remains under pressure due to expectations that the Fed could slow the pace of interest rate increases this year amid weak inflation. The outcomes of the FOMC’s December meeting signaled the regulator plans three interest-rate hikes in 2018, matching 2017's pace. However, investors’ expectations may change after today's publication of the minutes from the Fed’s December meeting. Experts note that the document can reduce the chance of a slowdown in the pace of expected fed funds target increases, supporting the U.S. dollar. In addition, the focus today will be on the ISM’s data on the activity in the U.S. services sector, which could affect the forecasts for the key report on the U.S. labor market, set to be released on Friday. If Friday's employment data show an increase in earnings, this could raise the chances of further increases in interest rates by the Federal Reserve. At the moment, it is expected that the nonfarm payroll employment increased by 188,000 in December, while the unemployment rate remained at 4.1 percent, and the average hourly earnings rose by 0.3 percent m-o-m and by 2.8 percent y-o-y. Resistance level - $1.2091 (high of September 8). Support level - $1.1817 (low of December 22).

The currency pair GBP/USD continued its yesterday's rally, and approached the high of September 20, on the back of the broad weakening of the U.S. dollar, as well as technical factors (a breakout of an important resistance level of $1.3550 the day before). In addition, market participants are preparing for today's publication of the UK’s data on the index of business activity in the construction sector for December. According to the economists’ forecasts, the PMI index fell to 52.5 points compared to 53.1 points in November. Apart from the statistics, investors will focus on the news on the Brexit negotiations, as well as the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3656 (high of September 20). Support level - $1.3331 (low of December 19 and 21).

The currency pair AUD/USD traded slightly lower, due to partial profit-taking by investors after the pair’s significant increase since mid-December. A certain pressure on the pair also had data from Australia. CoreLogic, the Australian property data, information, analytics and services provider, reported that house prices in Australia declined at the end of the year, setting the scene for a weaker housing market in 2018. According to the report, the national dwelling price index fell 0.3 percent m-o-m in December. "The transition towards weaker housing market conditions has been clear but gradual and is likely to continue throughout 2018," CoreLogic’s head of research, Tim Lawless, noted. Sydney and Darwin were the weakest housing markets in December, dropping by 0.9 percent m-o-m each. Resistance level - AUD0.7834 (high of October 23). Support level - AUD0.7637 (low of December 15).

The currency pair USD/JPY traded mixed, but eventually returned to the opening level. The demand for the yen, which is considered a safe haven asset, weakened somewhat after reports that North Korea offered to conduct a dialog with its southern neighbor. In the morning, Reuters reported that the leader of the DPRK Kim Jong Un ordered to open a long-closed border hotline with South Korea for talks. Meanwhile, the pair was weighed down by the negative dynamics of the U.S. currency amid doubts whether the Federal Reserve will be able to raise interest rates this year in accordance with its plans. Resistance level - Y112.96 (high of December 29). Support level - Y111.98 (low of December 6).

Stock Market

Index

Value

Change

S&P

2,695.81

+0.83%

Dow

24,824.01

+0.42%

NASDAQ

7,006.90

+1.50%

Nikkei

-

-

Hang Seng

30,548.44

+0.11%

Shanghai

3,370.10

+0.65%

S&P/ASX

6,070.40

+0.15%


U.S. stock indexes closed higher on Tuesday, with the Nasdaq and the S&P500 notching new record highs, as investors were optimistic that 2018 will bring more gains for the market. The focus also was on the final PMI data from IHS Markit, which indicated a marked improvement in the US.. manufacturing operating conditions in December. According to the report, the seasonally adjusted IHS Markit final U.S. manufacturing purchasing managers’ index (PMI) came in at 55.1 in December, up from 53.9 in November and a preliminary estimate of 55. That was the highest reading since March 2015 and pointed to a solid improvement in the health of the sector, the report said. The latest upturn was supported by faster increases in output and new orders.

Asian stock indexes closed higher on Wednesday, tracking gains seen on Wall Street overnight, growth in commodity prices and optimism over the prospects of the world economy. Japanese equity market remains closed due to Bank Holiday.

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


Bond Market
Yields of US 10-year notes hold at 2.46% (0 basis points)
Yields of German 10-year bonds hold at 0.47% (0 basis points)
Yields of UK 10-year gilts hold at 1.29% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in February settled at $60.38 (+0.02%). The crude oil prices rose marginally, helped by the broad weakening of the U.S. dollar. Market participants are awaiting data on oil inventories in the U.S. Today, the American Petroleum Institute (API) will publish its weekly data on the U.S. crude oil stockpiles. Tomorrow, the focus will be on official report on crude inventories in the U.S. from the U.S. Energy Information Administration (EIA).


Gold traded at $1,313.20 (-0.32%). Gold prices fell, as demand for safe-haven assets reduced after reports North Korea offered to conduct a dialog with its southern neighbor. At the same time, the gold prices were supported somewhat by the dynamics of the U.S. currency. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell 0.03 percent to 91.85, the lowest level since September 22. Since gold prices are tied to the dollar, a weaker dollar makes the precious metal cheaper for holders of foreign currencies.


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


08:15

Switzerland

Retail Sales

08:30

Switzerland

Manufacturing PMI

08:55

Germany

Unemployment Rate s.a.

08:55

Germany

Unemployment Change

09:30

United Kingdom

PMI Construction

15:00

U.S.

Construction Spending

15:00

U.S.

ISM Manufacturing

19:00

U.S.

FOMC meeting minutes

20:00

U.S.

Total Vehicle Sales

22:30

Australia

AIG Services Index


Market Focus

  • U.S consumer sentiment slipped in early July but remained nearly equal to the average in the prior twelve months
  • Earnings Season in U.S.: Major Reports of the Week
  • Fed's Kaplan: Could be convinced of need for fourth rate hike in 2018 depending on outlook
  • Fed: Prospective economic conditions call for further gradual removal of monpol accommodation
January 2018
  • 2018
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  • 2014
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