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Market panorama. 4 January 2018

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I. Market focus:

04/01/2018

At the beginning of the Thursday session, market participants’ focus was on the minutes from the December meeting of the Federal Open Market Committee (FOMC), which was released yesterday afternoon. The document showed the Federal Reserve still plans to increase the target range of the federal funds rate three times in 2018, although some FOMC members have expressed concern about such a pace of policy tightening. Overall, the minutes matched the market participants’ expectations that the Fed would take a wait-and-see attitude in January, and the next rate increase would be possible at the regulator’s meeting in March. The Fed funds futures market currently implies that there is a 67.5 percent chance of the Fed hiking interest rates at the March meeting.

Markets await the release of the U.S. labor market data, scheduled for tomorrow.  Economists’ forecasts suggest that the data will show a slower pace of job creation in the U.S. economy in December compared to November. Such expectations were confirmed by the ISM report on the activity in the manufacturing sector, which was published yesterday, and revealed a slowdown in the pace of hiring activity. Today, market participants will monitor the data on employment in the U.S. private sector from ADP (13:15 GMT), which can have a significant impact on the expectations for tomorrow's report.

Apart from the ADP data, investors will also pay attention to the UK’s report on activity in the service sector (09:30 GMT), as well as statistics on crude oil inventories in the U.S. (16:00 GMT).


II. The market highlights are:

  • A report from Institute for Supply Management (ISM) showed Wednesday the U.S. manufacturing sector expanded in December, and the overall economy grew for the 103rd consecutive month. The ISM's index of manufacturing activity came in at 59.7 percent last month, up 1.5 percentage points from the November figure of 58.2 percent, beating economists' forecast for a 58.1 percent reading. That was the highest reading in three months. A reading above 50 percent indicates expansion, while a reading below 50 percent indicates contraction. Subindexes were mostly higher in December. The new orders gauge increased to 69.4 percent last month from 64.0 percent in the prior month, while production measure rose to 65.8 percent from 63.9 percent and prices indicator surged to 69 percent from 65.5 percent. At the same time, the employment index fell to 57 percent in December from 59.7 percent in November. Of the 18 manufacturing industries, 16 reported growth in December. Timothy R. Fiore, Chair of the ISM Manufacturing Business Survey Committee said, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (57.6 percent) corresponds to a 4.5 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for December (59.7 percent) is annualized, it corresponds to a 5.2 percent increase in real GDP annually.”

  • The Federal Open Market Committee (FOMC) on Wednesday released the minutes of its meeting held on December 12-13, at which the committee decided to increase its benchmark interest rate a 0.25 point to 1.25 percent to 1.5 percent. The minutes revealed that most members backed a continued path of gradual rate hikes, noting that this approach helped to balance risks to the outlook for economic activity and inflation. Some FOMC members even saw the possibility for a steeper path of increases in the target range, depending on economic growth resulting from the tax reform. However, a few participants indicated that they were not comfortable with the degree of additional policy tightening through the end of 2018 implied by the median projections for the federal funds rate. They expressed concern that such a path of hikes in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to 2 percent, or that the level of the federal funds rate might already be near its current neutral value. Overall, the minutes showed the Fed policymakers positively assessed the current situation in the U.S. economy as well as its prospects, although some members of the Committee observed that there was a possibility that inflation might stay below the objective for longer than they currently expected.

  • Final data released by IHS Markit showed Thursday activity growth in Japan’s manufacturing sector improved at the sharpest rate for 46 months in December. The Nikkei Japan Manufacturing purchasing manager's index (PMI) came in at 54.0 last month, compared to a preliminary reading of 54.2 and a final reading of 53.6 in November. That was the fastest growth in the manufacturing sector since February 2014. Economists had expected the reading to be unrevised at 54.2. A reading above 50 signals an expansion in activity, while a reading below this level signals a contraction. The growth of the Japanese manufacturing sector was underpinned by a broad-based increase in new orders, which expanded at the sharpest rate since January 2014. Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said: “The Japanese manufacturing sector concluded Q4
    with the highest PMI reading since February 2014. Output growth accelerated for a fifth month in succession, while new business opportunities, both domestic and foreign, rose sharply. Firms took advantage of the robust demand backdrop and raised selling prices for the twelfth month in a row, extending the current run of inflation to the longest seen since a 15-month stint ending in November 2008. This will provide encouragement that the aggressive monetary easing Bank of Japan policymakers have pursued is being effectively transmitted into the economy.”

  • Markit/Caixin’s survey revealed Thursday that the Chinese services sector’s activity in December rose at the quickest pace since August 2014. The Caixin/Markit services purchasing managers' index (PMI) came in at 53.9 last month on a seasonally adjusted basis, up from 51.9 in November. The 50 mark divides contraction and expansion. According to the survey, the improved growth of services activity was mainly linked to greater volumes of new business. The services companies saw the strongest upturn in new orders since May 2015, while the rate of job creation in the sector was similar to that seen in November and moderate. Services companies also expressed the greatest degree of optimism since June. The Caixin China Composite PMI, which covers both manufacturing and services, rose to 53.0 in December from 51.6 in November, indicating the fastest rate of activity growth for a year. Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group noted: “The Caixin China Composite Output Index rose 1.4 points from November to 53.0 in December, with both manufacturing and service sectors seeing stronger rates of growth. The December readings of the Caixin PMI surveys also point to improving economic sentiment. Expansions in total new orders and new export business supported optimism among manufacturers and service providers towards the business outlook for next year. Although China’s economic growth remains under downward pressure, it is still resilient. However, special attention should be paid to whether future policies will become tighter than expected.”


III. Market Situation
Currency Market
The currency pair EUR/USD traded slightly higher, as the U.S. dollar corrected after yesterday’s surge, which was powered by upbeat economic data from the U.S. and the minutes from the December FOMC meeting, which showed that most members positively assessed the prospects of the U.S. economy and backed a continued path of gradual rate hikes. Moreover, some FOMC members even saw the possibility for a steeper path of increases in the target range, depending on economic growth resulting from the tax reform. However, a few participants indicated that they were not comfortable with the degree of additional policy tightening through the end of 2018 implied by the median projections for the federal funds rate. They expressed concern that such a path of hikes in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to 2 percent target. The pair was also helped by the adjustments of positions in the U.S. dollar ahead of the publication of the employment report prepared by ADP, which can have a significant impact on the expectations 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 rose slightly, due to a partial profit-taking by investors after a significant fall in the pair the day before,  which was caused by the UK’s disappointing data and the resumed strengthening of the U.S. currency.  In addition, market participants are preparing for today's publication of the data on the index of business activity in the UK’s services sector for December. According to the economists’ forecasts, the services PMI rose to 54.1 points last month from 53.8 points in November. Apart from the statistics, investors will focus on the U.S. statistics, 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 rose strongly, hitting its high of October 20, helped by resumed weakening in the U.S. currency and upbeat data from China, Australia's largest trading partner. Markit/Caixin’s survey revealed that the Chinese services sector’s activity in December rose at the quickest pace since August 2014. The Caixin/Markit services purchasing managers' index (PMI) came in at 53.9 last month on a seasonally adjusted basis, up from 51.9 in November. The 50 mark divides contraction and expansion. According to the survey, the improved growth of services activity was mainly linked to greater volumes of new business. The services companies saw the strongest upturn in new orders since May 2015, and the greatest degree of optimism since June. Meanwhile, the Caixin China Composite PMI, which covers both manufacturing and services, rose to 53.0 in December from 51.6 in November, indicating the fastest rate of activity growth for a year. Resistance level - AUD0.7897 (high of October 13). Support level - AUD0.7637 (low of December 15).

The currency pair USD/JPY lost almost all earlier earned positions, and returned to the opening level. Overall, the market was focused on geopolitical issues, and the main concerns included possible tests of North Korean missiles, growing unrest in the Middle East, and the dynamics of oil prices as well. The pair’s performance was also impacted by the final data released by IHS Markit, which showed that activity growth in Japan’s manufacturing sector improved at the sharpest rate for 46 months in December. The Nikkei Japan Manufacturing purchasing manager's index (PMI) came in at 54.0 last month, compared to a preliminary reading of 54.2 and a final reading of 53.6 in November. That was the fastest growth in the manufacturing sector since February 2014. Economists had expected the reading to be unrevised at 54.2. A reading above 50 signals an expansion in activity, while a reading below this level signals a contraction. The growth of the Japanese manufacturing sector was underpinned by a broad-based increase in new orders, which expanded at the sharpest rate since January 2014. Resistance level - Y112.96 (high of December 29). Support level - Y111.98 (low of December 6).

Stock Market

Index

Value

Change

S&P

2,713.06

+0.64%

Dow

24,922.68

+0.40%

NASDAQ

7,065.53

+0.84%

Nikkei

23,506.33

+3.26%

Hang Seng

30,736.48

+0.57%

Shanghai

3,386.50

+0.52%

S&P/ASX

6,077.10

+0.11%


U.S. stock indexes closed higher on Wednesday, notching new all-time highs, as technology equities climbed amid signs of robust economic growth. A report from Institute for Supply Management (ISM) showed the U.S. manufacturing sector expanded in December, and the overall economy grew for the 103rd consecutive month. The ISM's index of manufacturing activity came in at 59.7 percent last month, up 1.5 percentage points from the November figure of 58.2 percent, beating economists' forecast for a 58.1 percent reading. That was the highest reading in three months. A reading above 50 percent indicates expansion, while a reading below 50 percent indicates contraction. Stocks extend gains after the afternoon release of the minutes from the Federal Reserve’s December policy meeting, which showed the U.S. central bank would likely stick to gradual interest rate hikes this year.

Asian stock indexes closed higher on Thursday, tracking solid gains seen on Wall Street overnight and a growth in oil prices to their best levels since December 2014. The Japanese equity benchmark, the Nikkei, surged 3.3 percent on its first trading day of the year, hitting its highest level in a quarter of a century.

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


Bond Market
Yields of US 10-year notes hold at 2.46% (+1 basis points)
Yields of German 10-year bonds hold at 0.44% (0 basis points)
Yields of UK 10-year gilts hold at 1.22% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in February settled at $62.11 (+0.78%). The crude oil prices rose, helped by the broad weakening of the U.S. dollar, unrest in Iran, as well as the latest data from the American Petroleum Institute (API), which revealed that U.S. crude inventories fell by 5 million barrels for the week ended December 29. The API data also showed a build of 1.9 million barrels in gasoline stockpiles and a surge of 4.3 million barrels in inventories of distillates. Market participants are now awaiting weekly data on U.S. crude inventories from the U.S. Energy Information Administration (EIA).

Gold traded at $1309.40 (-0.28%). Gold prices fell moderately, due to partial profit-taking after the recent growth, as well as an increase in risk appetites on the back of the rally in global stock markets. 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 0.07 percent to 92.10. 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)


08:50

France

Services PMI

08:55

Germany

Services PMI

09:00

Eurozone

Services PMI

09:30

United Kingdom

Net Lending to Individuals

09:30

United Kingdom

Consumer credit

09:30

United Kingdom

Mortgage Approvals

09:30

United Kingdom

Purchasing Manager Index Services

13:15

U.S.

ADP Employment Report

13:30

Canada

Industrial Product Price Index

13:30

U.S.

Continuing Jobless Claims

13:30

U.S.

Initial Jobless Claims

14:45

U.S.

Services PMI

16:00

U.S.

Crude Oil Inventories

18:30

U.S.

FOMC Member James Bullard Speaks


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
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Quotes

All posted material is a marketing communication solely for informational purposes and reliance on this may lead to loss. Past performance is not a reliable indicator of future results. Please read our full disclaimer.

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