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Market panorama. 5 February 2018

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I. Market focus:

05/02/2018

At the beginning of the new week, global financial markets continued to be influenced by the U.S. labor market data released on Friday. Although these data were much better than expected, they weakened upbeat expectations about the prospects of the U.S. economy. As a result, the stock indexes logged their biggest weekly losses in two years, and the dollar retreated from its lows. The thing was that Friday's report indicated a noticeable increase in the average hourly earnings that directly affects inflation expectations, and the strengthening of this indicator could prompt the Fed to accelerate the process of rising rates. The Fed’s monetary policy tightening will limit inflation, but it will also cause a slowdown in the growth of the U.S. economy, which, according to some economists, will expand at a 1.5 percent annual rate in the coming years, which is half the amount promised by Donald Trump. The observed trend (the weakening of the stock indices and the strengthening of the dollar) will most likely continue in the near future.

Monday’s session will be busy with macroeconomic data releases and events, but most of them are not of high importance. The most significant publications will be the British and the U.S. data on the index of business activity in the service sector (at 09:30 GMT and 15:00 GMT, respectively). In addition, investors will pay attention to the comments of the European Central Bank's (ECB) president Mario Draghi, who will deliver an annual report to the European Parliament at 16:00 GMT.


II. The market highlights are:

  • The Labor Department announced Friday that nonfarm payrolls increased by 200,000 in January after an upwardly revised 160,000 gain in the prior month (originally an increase of 148,000). According to the report, employment continued to trend up in construction (+36,000 jobs in January), food services and drinking places (+31,000), health care (+21,000), and manufacturing (+15,000). Meanwhile, the unemployment rate was 4.1 percent for the fourth consecutive month. Economists had forecast 180,000 new jobs and the jobless rate to be unchanged at 4.1 percent. The labor force participation rate remained at 62.7 percent in January, while hourly earnings for private-sector workers rose by 0.3 percent m-o-m (9 cents) to $26.74, after increasing 0.4 percent m-o-m in December (revised from originally reported a 0.3 percent m-o-m gain). Economists had forecast labor force participation rate to come in at 62.8 percent and a 0.3 percent advance in the average hourly earnings. The average workweek reduced by 0.2 hour m-o-m to 34.3 hours in January, while economists had forecast the reading to remain unchanged at 34.5.

  • The U.S. Commerce Department’s data revealed Friday that the value of new factory orders increased 1.7 percent m-o-m in of December 2017, following a revised 1.7 percent m-o-m growth in November (originally a 1.3 percent m-o-m surge). Economists had forecast a 1.5 percent m-o-m gain. According to the report, nondurables orders boosted 2.8 percent m-o-m in December after jumping 1.7 percent in November. Meanwhile, durables orders rose 0.7 percent m-o-m in December after advancing 1.6 percent in the previous month. Total factory orders excluding transportation, a volatile part of the overall reading, rose 0.7 percent m-o-m, while orders for nondefense capital goods excluding aircraft, a measure of business spending plans, dropped 0.6 percent m-o-m. The report also showed that shipments of manufactured goods grew 0.6 percent m-o-m in December, while inventories of manufactured goods increased by 0.5 percent. For the full year, factory orders rose 6.0 percent compared to total orders in 2016, the best gain in six years.

  • The final reading for the January Reuters/Michigan index of consumer sentiment came in at 95.7 compared to a preliminary reading of 94.4 and the December final reading of 95.9. Economists had forecast the index to be upwardly revised to 95.0. According to the report, the index of the current economic conditions rose to 110.5 from the preliminary reading of 109.2 but fell from December's final reading of 113.8. Meanwhile, the index of consumer expectations increased to 86.3 from the preliminary reading of 84.4 and December’s final reading of 84.3.

  • The weekly report from Baker Hughes, which was released Friday, showed that the number of active U.S. rigs drilling for oil climbed by 6 to 765 during the week ended February 2. In the prior week, the oil-rig count jumped by 12, which was the biggest weekly increase since March 2017. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, fell by one to 946, as the gas rig count decreased by seven to 181 last week. The U.S. rig count is up 217 rigs from this time last year when it stood at 729.

  • The Australian Industry Group (AiG) reported Sunday that its services index for Australia rose 2.9 points to 54.9 points in January, indicating a faster rate of expansion from December 2017. A reading above 50 indicates expansion, while a reading below 50 signals a contraction in activity. According to the report, all five of the activity sub-indexes expanded in January. The employment sub-index was especially strong, surging 5.4 points to 58.1 points, its highest monthly result since December 2004. The sales sub-index rose 4.8 points to 53.9 points in January, recovering after a mild contraction in December. The new orders sub-index jumped 3.5 points to 54.5 points, recording the 17th month of positive results. The inventories sub-index rose by 1.7 points to 52.5 points. At the same time, supplier deliveries decelerated in January, with this sub-index falling 4.8 points to 53.7 points, indicating a slower pace of growth.

  • Markit/Caixin’s survey revealed Monday that the Chinese services sector’s activity in January rose at the quickest pace since May 2012. The Caixin/Markit services purchasing managers' index (PMI) came in at 54.7 last month on a seasonally adjusted basis, up from 53.9 in December of 2017. The 50 mark divides contraction and expansion. According to the survey, new order growth accelerated to a 32-month record across the service sector, while the rate of job creation in the sector edged up to a five-month high. Meantime, service providers’ sentiment dropped to its lowest in four months. The Caixin China Composite PMI, which covers both manufacturing and services, rose to 53.7 in January from 53.0 in December. Thar was the highest reading since January 2011. Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group noted: Caixin PMI readings in January showed that the Chinese economy had a good start to 2018. Looking forward, we should watch for stability of demand in the manufacturing industry and the impact of growing costs on the profitability of service providers.”


III. Market Situation
Currency Market
The currency pair EUR/USD consolidated near the opening level, due to the lack of new drivers. Investors continue to digest stronger than expected the U.S. labor market data, which offered a reasonable basis for the Federal Reserve to move ahead with a rate hike at its March meeting and pushed the 10-year Treasury yield to 2.85 percent, its highest level since January 2014. Recall, the Employment Situation report for January showed a solid growth in employment and the biggest wage gain in more than 8-1/2 years. Today, market participants will focus on the Eurozone’s retail sales data for December, as well as on the U.S. statistics on ISM non-manufacturing business activity index for January.According to economists’ estimates, Eurozone’s retail sales decreased by 1.1 percent m-o-m in December but rose 1.9 percent y-o-y. The ISM non-manufacturing PMI is forecast to show an increase to 56.5 points in January from 55.9 points in December. Resistance level - $1.2569 (high of December 16, 2014). Support level - $1.2335 (low of January 29/30).

The currency pair GBP/USD traded in a narrow range, near the opening level, as investors were cautious ahead of the release of the British services PMI. It is expected that the index fell to 54.1 points in January from 54.2 points in December. In addition, market participants adjusted their positions in anticipation of the Bank of England’s (BoE) meeting, set to be held on Thursday. Analysts believe that the Bank will leave its interest rates unchanged, but its statement may provide clues of a possibility of more aggressive monetary policy tightening. In view of the good economic recovery and improvement in the labor market situation, the policymakers may find it reasonable to damp accelerating inflation to the BoE’s 2 percent target. Recall, consumer price inflation accelerated sharply as the pound fell dramatically after the Brexit vote. It eased to 3 percent in December 2017 from a near six-year high of 3.1 percent in the previous month, remaining more than a percentage point above the regulator’s target. Resistance level - $1.4343 (high of January 25). Support level - $1.3977 (low of January 30).

The currency pair AUD/USD declined moderately at the beginning of the session, but then erased all losses, helped by the publication of upbeat data in Australia and China. The Australian Industry Group (AiG) reported its services index for Australia rose 2.9 points to 54.9 points in January, indicating a faster rate of expansion from December 2017. A reading above 50 indicates expansion, while a reading below 50 signals a contraction in activity. According to the report, all five of the activity sub-indexes expanded in January. Markit/Caixin’s survey revealed that the Chinese services sector’s activity in January rose at the quickest pace since May 2012. The Caixin/Markit services purchasing managers' index (PMI) came in at 54.7 last month on a seasonally adjusted basis, up from 53.9 in December of 2017. The 50 mark divides contraction and expansion. The Caixin China Composite PMI, which covers both manufacturing and services, rose to 53.7 in January from 53.0 in December. Thar was the highest reading since January 2011. Resistance level - AUD0.8134 (high of January 26). Support level - AUD0.7847 (low of January 12).

The currency pair USD/JPY traded slightly lower. The pair was under pressure due to partial profit-taking and as risk-averse mood increased demand for the yen. At the same time, the further fall in the pair was limited by the comments of the Bank of Japan’s (BoJ) governor Haruhiko Kuroda. Mr. Kuroda reiterated his view that the regulator should maintain its ultra-loose monetary policy as inflation remained distant from its 2 percent target. “Still, it’s extremely important to achieve our 2 percent inflation target,” Kuroda said. “Japan’s inflation remains distant from our target, so we need to patiently continue with powerful monetary easing.” Resistance level - Y111.46 (high of January 18). Support level - Y108.28 (low of January 26).

Stock Market

Index

Value

Change

S&P

2,762.13

-2.12%

Dow

25,520.96

-2.54%

NASDAQ

7,240.95

-1.96%

Nikkei

22,682.08

-2.55%

Hang Seng

32,245.22

-1.09%

Shanghai

3,487.38

+0.73%

S&P/ASX

6,026.20

-1.56%


U.S. stock indexes closed noticeably lower on Friday amid mixed quarterly corporate earnings reports, worries about the impact of a tightening job market on the prospects for inflation and a surge in bond yields. The Labor Department announced that nonfarm payrolls increased by 200,000 in January after an upwardly revised 160,000 gain in the prior month (originally an increase of 148,000). According to the report, employment continued to trend up in construction (+36,000 jobs in January), food services and drinking places (+31,000), health care (+21,000), and manufacturing (+15,000). Meanwhile, the unemployment rate was 4.1 percent for the fourth consecutive month. Economists had forecast 180,000 new jobs and the jobless rate to be unchanged at 4.1 percent. The labor force participation rate remained at 62.7 percent in January, while hourly earnings for private-sector workers rose by 0.3 percent m-o-m (9 cents) to $26.74, after increasing 0.4 percent m-o-m in December (revised from originally reported a 0.3 percent m-o-m gain). Economists had forecast labor force participation rate to come in at 62.8 percent and a 0.3 percent advance in the average hourly earnings. The average workweek reduced by 0.2 hour m-o-m to 34.3 hours in January, while economists had forecast the reading to remain unchanged at 34.5.  The reported wage gain (the biggest in more than 8-1/2 years) fueled expectations that inflation is on the rise, which could prompt the Federal Reserve to take a more aggressive approach to rate hikes this year.

Asian stock indexes closed mostly lower on Monday, following Friday’s biggest daily decline on Wall Street since September 2016. Investors worried about a surge in global bond yields and prospects of higher interest rates.

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


Bond Market
Yields of US 10-year notes hold at 2.87% (+2 basis points)
Yields of German 10-year bonds hold at 0.77% (0 basis points)
Yields of UK 10-year gilts hold at 1.58% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in March settled at $64.97 (-0.73%). The crude oil prices fell, continuing Friday's dynamics. Investors’ focus remained on the latest report from Baker Hughes, which showed that the number of active U.S. rigs drilling for oil climbed by 6 to 765 during the week ended February 2. In the prior week, the oil-rig count jumped by 12, which was the biggest weekly increase since March 2017. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, fell by one to 946, as the gas rig count decreased by seven to 181 last week. The U.S. rig count is up 217 rigs from this time last year when it stood at 729.


Gold traded at $1,332.30 (-0.07%). Gold prices were little lower as better-than-forecast U.S. labor market raised the odds for a March rate hike. According to the CME Group's FedWatch tool, the chances of an interest rate increase at the Fed’s meeting in March rose to 77.5 percent from 70.9 percent a week ago. Hikes in interest rates are negative for gold prices.


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

Eurozone

Sentix Investor Confidence

09:30

United Kingdom

Purchasing Manager Index Services

10:00

Eurozone

Retail Sales

14:45

U.S.

Services PMI

15:00

U.S.

ISM Non-Manufacturing

16:00

Eurozone

ECB President Mario Draghi Speaks


Market Focus

  • Irish PM Varadkar: Ideally Would Get Brexit Deal By Year End
  • The sentix overall index for Euro Area fell again in November from 11.4 to 8.8 points
  • UK consumer credit increased by £0.8bn in September
  • Spanish unemployment continues at its lowest levels in the last 9 years
February 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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