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Market panorama. 6 February 2018

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I. Market focus:

06/02/2018

The outcomes of the Reserve Bank of Australia’s (RBA) first meeting of 2018 were the main event of the Tuesday morning session. The regulator expectedly did not make any changes to the parameters of its monetary policy, leaving its cash rate unchanged at 1.5 percent. The RBA said that despite positive business conditions and improving business investment, household consumption remains "continuing source of uncertainty." Overall, the Australian central bank did not provide any new information and the conclusion of its meeting had a very neutral impact on the Australian dollar. The Australian currency was hurt more by worse-than-expected data on retail sales and trade balance released a few hours earlier.

Global stock markets continue to decline. The major U.S. stock indexes tumbled nearly 4 percent, and the market suffered its worst day in over six years. The reason for the sell-off was the weakening of upbeat expectations for the prospects of the U.S. economy. Friday's report on employment situation indicated a noticeable increase in the average hourly earnings that directly affects inflation expectations, and the strengthening of this indicator can 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. Along with the declines in the stock indices, the dollar corrected after its recent drop on the prospects of Fed interest rate hikes. The observed trend (the weakening of the stock indices and the strengthening of the dollar) will most likely continue in the near future.

Today, the main scheduled event will be the release of the data on the New Zealand labor market (21:45 GMT). In addition, attention should be paid to the U.S. statistics on job openings and labor turnover (the JOLTs report; 15:00 GMT) and the index of business activity in Canada (15:00 GMT). Reports on the U.S. and the Canadian trade balances will be published at 13:30 GMT.

The stock market participants continue to assess the quarterly reports of companies, as the fourth-quarter earnings season rolls. Today, the focus will be on the quarterly reports from General Motors (GM) and Walt Disney (DIS). The former will unveil its quarterly results before the market opens, while the latter will publish its earnings after the close of today's trading.


II. The market highlights are:

  • The Institute for Supply Management (ISM) announced Monday its non-manufacturing index came in at 59.9 in January, which was 3.9 percentage points higher than a revised December figure of 56.0 (originally 55.9). That pointed to the strongest expansion in the services sector since August of 2005. Economists forecast the index to increase to 56.5 last month. A reading above 50 signals expansion, while a reading below 50 indicates contraction. 15 of the non-manufacturing industries reported growth in January, while three recorded decline, the ISM said. According to the report, the ISM’s non-manufacturing business activity measure 59.8 percent, 2 percentage points higher than the December reading of 57.8 percent That reflected growth for the 102nd consecutive month, at a faster rate in January. The ISM’s new orders gauge surged 8.2 percentage points to 62.7 percent last month, while the employment index increased 5.3 percentage point to 61.6 percent. The price gauge rose 2 percentage points percentage point to 61.9 percent, indicating that prices increased in January for the 23rd consecutive month.

  • The European Central Bank (ECB) president Mario Draghi said the members of the European Parliament on Monday that the recent volatility in the exchange rate raised new headwinds for the policymakers, adding that it is necessary to closely monitor the situation in the foreign exchange market. Draghi also mentioned the inflation, saying that “we cannot yet declare victory on this front.” “Overall, while we can be more confident about the path of inflation, patience and persistence with regard to monetary policy is still warranted for underlying inflation pressures to build up and inflation to converge durably towards our objective,” Draghi noted.

  • The Australian Bureau of Statistics’ (ABS) report showed on Tuesday that Australia’s trade balance unexpectedly turned negative in December. According to the ABS, a gap of AUD1.358 billion was recorded in seasonally adjusted terms in December compared to a revised AUD0.036 billion surplus in November (initially a gap of AUD0.628 billion). That was the first trade gap in eight months and the biggest since August 2016. Economists had expected a surplus of AUD0.250 billion. According to the report, the value of exports rose 1.6 percent m-o-m at AUD32.456 billion in December, after gaining 0.5 percent m-o-m in November. Imports surged 6.0 percent m-o-m to AUD33.823 billion in December, following a 1.0 percent m-o-m increase in the prior month. For full 2017, the trade balance recorded a surplus of AUD11.286 billion, compared to a deficit of AUD14.624 billion in 2016.

  • The Australian Bureau of Statistics (ABS) also reported Tuesday that Australia’s retail sales fell 0.5 percent m-o-m in December, following a revised 1.3 percent m-o-m increase in November (originally a 1.2 percent advance). Economists had forecast retail sales would fall 0.2 percent m-o-m in December. That was the first drop since August of 2017. According to the ABS, the declines were led by household goods retailing (-2.6 percent m-o-m) and other retailing (-1.8 percent m-o-m), which corrected after strong rises in the November month. Department stores (-0.6 percent m-o-m), cafes, restaurants and takeaways (-0.1 percent m-o-m), and clothing, footwear and personal accessory retailing (-0.1 percent m-o-m) also fell. At the same time, food retailing rose (+0.7 percent m-o-m) in December.

  • The Reserve Bank of Australia (RBA) decided to leave the cash rate unchanged at 1.50 percent at its January monetary policy meeting. The move was widely expected by the markets. In the statement accompanying the decision, the governor of the policymakers noted that despite positive business conditions and improving business investment, household consumption remains "continuing source of uncertainty." Household incomes continue to demonstrate a slow growth and debt levels remain high. In regard to the consumer prices, the regulator noted that “inflation is low, with both CPI and underlying inflation running a little below 2 percent… A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 percent in 2018.” Overall, the Australian central bank did not provide any new information.


III. Market Situation
Currency Market
The currency pair EUR/USD traded in a narrow range, near the opening level, due to the lack of new drivers. At the same time, yesterday's statements of the  ECB president Mario Draghi continue to weigh down the pair. Mr. Draghi said the European Parliament that "new headwinds have arisen from the recent volatility in the exchange rate, whose implications for the medium-term outlook for price stability require close monitoring." Today, the focus will be on the speech of Bundesbank president Jens Weidmann, who can comment on the inflation outlook. In addition, attention will be given to the U.S. data on international trade for December and the JOLTs report. Resistance level - $1.2536 (high of January 25). Support level - $1.2335 (low of January 29/30).

The currency pair GBP/USD consolidated near the opening level, as investors took a breather after a sharp decline in the pair in the previous session, which was caused by disappointing economic data in the U.K., the appreciation of the U.S. currency and warning message from global ratings agency S&P Global that a disorderly Brexit could lead to a further downgrade of the UK's sovereign credit rating. With an empty economic calendar in the UK ahead, investors will focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. In addition, market participants will continue to adjust 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 - $1.4277 (high of February 1/2). Support level - $1.3838 (low of January 19).

The currency pair AUD/USD declined moderately, continuing yesterday's trend and reaching its low of January 11, due to the release of the weak data in Australia. underlying inflation pressures to build up and inflation to converge durably towards our objective,” Draghi noted.
The Australian Bureau of Statistics’ (ABS) report revealed that Australia’s trade balance unexpectedly turned negative in December. According to the ABS, a gap of AUD1.358 billion was recorded in seasonally adjusted terms in December compared to a revised AUD0.036 billion surplus in November (initially a gap of AUD0.628 billion). That was the first trade gap in eight months and the biggest since August 2016. Economists had expected a surplus of AUD0.250 billion. In a separate report, the ABS also reported that Australia’s retail sales fell 0.5 percent m-o-m in December, following a revised 1.3 percent m-o-m increase in November (originally a 1.2 percent advance). Economists had forecast retail sales would fall 0.2 percent m-o-m in December. That was the first drop since August of 2017. Resistance level - AUD0.7953 (high of February 5). Support level - AUD0.7806 (low of January 9/10).

The currency pair USD/JPY fell sharply at the beginning of the session amid growing demand for safe haven assets but then erased almost all losses, reacting to the comments of the Bank of Japan’s (BoJ) governor Haruhiko Kuroda. Mr. Kuroda ruled out the possibility of raising interest rates anytime soon despite his optimism over the economic outlook, stressing that inflation remained too low to justify withdrawing stimulus. Resistance level - Y110.46 (high of February 2). Support level - Y108.28 (low of January 26).

Stock Market

Index

Value

Change

S&P

2,648.94

-4.10%

Dow

24,345.75

-4.60%

NASDAQ

6,967.53

-3.78%

Nikkei

21,610.24

-4.73%

Hang Seng

30,595.42

-5.12%

Shanghai

3,369.71

-3.38%

S&P/ASX

5,833.30

-3.20%


U.S. stock indexes closed noticeably lower on Monday, erasing gains for the year, amid worries about the impact of a tightening job market on the prospects for inflation and a surge in bond yields. Focus also was on the ISM’s report on business activity in the U.S. non-manufacturing sector for January. The ISM announced its non-manufacturing index came in at 59.9 in January, which was 3.9 percentage points higher than a revised December figure of 56.0 (originally 55.9). That pointed to the strongest expansion in the services sector since August of 2005. Economists forecast the index to increase to 56.5 last month. A reading above 50 signals expansion, while a reading below 50 indicates contraction. 15 of the non-manufacturing industries reported growth in January, while three recorded decline, the ISM said. According to the report, the ISM’s non-manufacturing business activity measure 59.8 percent, 2 percentage points higher than the December reading of 57.8 percent That reflected growth for the 102nd consecutive month, at a faster rate in January. The ISM’s new orders gauge surged 8.2 percentage points to 62.7 percent last month, while the employment index increased 5.3 percentage point to 61.6 percent. The price gauge rose 2 percentage points percentage point to 61.9 percent, indicating that prices increased in January for the 23rd consecutive month.
Asian stock indexes closed sharply lower on Tuesday, tracking massive losses posted by U.S. stocks on Monday. The Japanese equity benchmark, the Nikkei, recorded its worst fall since November 2016, as the yen strengthened against the dollar, putting pressure on export-oriented companies.

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


Bond Market
Yields of US 10-year notes hold at 2.72% (+1 basis points)
Yields of German 10-year bonds hold at 0.74% (0 basis points)
Yields of UK 10-year gilts hold at 1.56% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in March settled at $63.45 (-1.09%). The crude oil prices fell, as a sell-off in global equities triggered losses in the commodities market. The correction in oil also reflects a seasonal downturn to the oil demand as the U.S. refiners shut down operations for annual maintenance between January and April. 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 $1,342.60 (+0.24%). Gold prices rose, as investors fled to safe-havens. A further growth of the gold prices was limited by investors’ concerns that the Fed can increase its rates more aggressively after strong data on the U.S. labor market. Hikes in interest rates are negative for gold prices.


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


09:00

Germany

German Buba President Weidmann Speaks

13:30

Canada

Trade balance

13:30

U.S.

International Trade

15:00

Canada

Ivey Purchasing Managers Index

15:00

U.S.

JOLTs Job Openings

21:45

New Zealand

Unemployment Rate

21:45

New Zealand

Employment Change

22:30

Australia

AiG Performance of Construction Index



Market Focus

  • ECB's Weidmann says first ECB rate hike could follow the end of QE more closely than in the U.S
  • Industrial producer prices rose by 0.1% in the euro area (EA19) and by 0.2% in the EU28
  • European Commission forecasts Euro Zone inflation will accelerate to 1.6 pct y/y in 2019 from 1.5 pct y/y seen in 2018
  • UK service providers signalled a modest rebound in business activity - Markit
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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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