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Market panorama. 10 January 2018

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I. Market focus:

10/01/2018

Like Tuesday, the beginning of Wednesday’s session was marked by the strengthening of the Japanese yen against other currencies. The yen's continued to receive support from the reassessments of the market participants' expectations regarding the Bank of Japan’s (BoJ) further monetary policy, which were triggered by the regulator’s move to trim Japanese government bond (JGB) purchases. Although this was just a one-time adjustment of the operations of the central bank and, usually, such operations do not have a significant impact on markets, this action reminded market participants that sooner or later the BoJ will have to normalize its monetary policy. Previously, the markets were focused only on the processes of policy normalization of the Fed and the ECB, while the possibility the BoJ could start such a process was not considered. The yen has strengthened significantly against the U.S. dollar on the reports about the BoJ’s cuts in debt purchases, and, given the fact the yields on U.S. Treasuries and the currency pair USD/JPY are highly correlated, it seems possible that the exchange rate could start correcting at current levels after a two-day decline.

Overall, the news background was rather limited at the beginning of the European session. Released Chinese inflation data did not have a significant impact on the markets. The events, which can significantly increase volatility in the markets today, include the British data on industrial production (09:30 GMT) and the U.S. report on crude oil inventories (15:00 GMT).


II. The market highlights are:

  • The Canada Mortgage And Housing Corp. (CMHC) reported Tuesday the Canadian housing starts fell to a seasonally adjusted rate of 216,980 units in December from a downwardly revised 251,675 units in November. Economists had forecast housing starts declining to 212,500. According to the report, urban starts dropped by 15.1 percent m-o-m last month to 198,132, as multiple urban starts tumbled by 20.0 percent m-o-m to 135,176, while single-detached urban starts rose by 4.7 percent m-o-m to 62,956 units. At the same time, rural starts were estimated at a seasonally adjusted annual rate of 18,848 units.

  • The Job Openings and Labor Turnover Survey (JOLTS) published by the Labor Department on Tuesday showed the U.S. job openings fell slightly in November compared with October. According to the report, employers posted 5.879 million job openings in November, a decrease of 46,000 (or -0.8 percent) from the October figure of 5.925 million (revised from 5.996 million in original estimate). The job openings rate was 3.8 percent in November, down from 3.9 percent in the prior month. The report showed that the number of job openings was little changed for total private and for government. Job openings rose in retail trade (+88,000) but dropped in other services (-64,000), transportation, warehousing, and utilities (-60,000), and real estate and rental and leasing (-39,000). Meanwhile, hiring declined by 104,000 (-1.9 percent) to 5.488 million in November from 5.592 million in October. The number of hires was little changed for total private and grew for government (+43,000). At the industry level, hires rose in state and local government, excluding education (+29,000) and state and local government education (+18,000). The hiring rate was 3.7 percent in November, down from 3.8 percent in October. The separation rate in November was at 5.202 million (-49,000 or -0.9 percent) or 3.5 percent, compared to 5.251 million or 3.6 percent in October. Within separations, the quits rate was 2.2 percent (3.174 million; flat m-o-m), and the layoffs rate was 1.1 percent (1.686 million; -0.1 pp m-o-m).

  • The National Bureau of Statistics (NBS) reported Wednesday that China’s producer price index (PPI) rose 4.9 percent y-o-y in December, after gaining 5.8 percent y-o-y in the prior month. That was the lowest increase since November 2016. Economists had expected producer inflation would increase by 4.8 percent in December. Costs increased at a slower pace in such sectors as oil and gas exploitation, ferrous and non-ferrous metals, and coal mining and washing. The PPI rose 0.8 percent m-o-m in December, faster than a 0.5 percent gain in November. For the whole of 2017, the PPI increased 6.3 percent, compared to a drop of 1.4 percent in 2016. At the same time, the consumer price index (CPI) increased 1.8 percent y-o-y in December, accelerating from November's 1.7 percent y-o-y rise. However, that was below economists‘ forecast of a 1.9 percent gain. The acceleration was attributable to a much slower decrease in food prices (-0.4 percent y-o-y compared to -1.1 percent y-o-y in November), while the cost of non-food continued to grow. In m-o-m terms, the CPI increased 0.30 percent in December, following a zero change in the previous month. For the whole year of 2017, the CPI rose 1.6 percent, lower than the government's yearly control target of 3 percent and the previous year's reading of 2 percent.


III. Market Situation
Currency Market
The currency pair EUR/USD rose slightly at the beginning of the session but then retreated to the opening level, as the yields on 10-year U.S. Treasuries climbed to the highest level in about 10 months. The pair was also helped by the expectations of the further monetary policy tightening by the Fed. Since Wednesday’s economic calendar for the euro area is empty, while the U.S. economic data will be limited to import price index and oil inventories, investors will focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. The next important event, which will test the strength of the U.S. dollar, and may affect the likelihood of an increase in the Fed's interest rate in March, will be the U.S. data on the consumer price index (CPI) and retail sales, scheduled to be released on Friday. It is expected that consumer prices in December rose by 0.2 percent m-o-m and 2.1 percent y-o-y, while retail sales grew by 0.5 percent m-o-m. Resistance level - $1.2088 (high of January 4). Support level - $1.1816 (low of December 22, 2017).

The currency pair GBP/USD traded slightly lower, due to the strengthening of the U.S. dollar in response to the higher bond yields. Investors also adjusted their positions ahead of the release of the official data on the UK industrial production for November, which could help to clarify how the sharp drop in the pound, triggered by the Brexit vote, and strong global demand are reflected in the manufacturing sector’s growth. According to economists’ forecasts, industrial production rose by 0.4 percent m-o-m in November after a flat m-o-m performance in October. Meanwhile, manufacturing production is projected to show an acceleration to 0.3 percent m-o-m for November from 0.1 percent m-o-m in October. In y-o-y terms, the industrial production is expected to record a 1.8 percent growth (compared to +3.6 percent in October), while the manufacturing production is projected to post a 2.8 percent gain (compared to +3.9 percent in October). Resistance level - $1.3611 (high of January 3). Support level - $1.3493 (low of January 3).

The currency pair AUD/USD traded in a narrow range, near the opening level. The pair’s performance was little impacted by the data from China, Australia’s largest trading partner. The National Bureau of Statistics (NBS) reported that China’s producer price index (PPI) rose 4.9 percent y-o-y in December, after gaining 5.8 percent y-o-y in the prior month. That was the lowest increase since November 2016. Economists had expected producer inflation would increase by 4.8 percent in December. For the whole of 2017, the PPI increased 6.3 percent, compared to a drop of 1.4 percent in 2016. At the same time, the consumer price index (CPI) increased 1.8 percent y-o-y in December, accelerating from November's 1.7 percent y-o-y rise. However, that was below economists‘ forecast of a 1.9 percent gain. For the whole year of 2017, the CPI rose 1.6 percent, lower than the government's yearly control target of 3 percent and the previous year's reading of 2 percent. Resistance level - AUD0.7897 (high of October 13, 2017). Support level - AUD0.7765 (low of December 28, 2017).

The currency pair USD/JPY fell sharply, continuing the yesterday's trend, and reaching a low of January 3. The pairs continued to remain under pressure due to yesterday’s reports the Bank of Japan (BoJ) reduced the amount of the purchases of the long-dated Japanese government bonds (JGBs). On Tuesday, the Japanese central bank cut its purchases of JGBs with 10 to 25 years left to maturity and those with 25 to 40 years to maturity by JPY 10 billion each, from its previous operations with such bonds, when it bought out JPY 200 billion of JGBs with 10 to 25 years of maturity left, and JPY 90 billion of 25 to 40 year JGBs. Although this was just a one-time adjustment of the operations of the central bank and, usually, such operations do not have a significant impact on markets, this action reminded market participants that sooner or later the BoJ will have to normalize its monetary policy. Previously, the markets were focused only on the processes of policy normalization of the Fed and the ECB, while the possibility the BoJ could start such a process was not considered. Resistance level - Y113.38 (high of January 8). Support level - Y111.98 (low of December 6, 2017).

Stock Market

Index

Value

Change

S&P

2,751.29

+0.13%

Dow

25,385.80

+0.41%

NASDAQ

7,163.58

+0.09%

Nikkei

23,788.20

-0.26%

Hang Seng

31,073.72

+0.20%

Shanghai

3,422.14

+0.24%

S&P/ASX

6,096.70

-0.64%


U.S. stock indexes closed higher on Tuesday, notching fresh highs, on investor optimism ahead of quarterly earnings season, which would kick off on Friday with reports from JPMorgan Chase (JPM), BlackRock (BLK) and Wells Fargo (WFC). The focus also was on the Job Openings and Labor Turnover Survey (JOLTS), which showed the U.S. job openings fell slightly in November compared with October. According to the report, employers posted 5.879 million job openings in November, a decrease of 46,000 (or -0.8 percent) from the October figure of 5.925 million. The job openings rate was 3.8 percent in November, down from 3.9 percent in the prior month. Meanwhile, hiring declined by 104,000 (-1.9 percent) to 5.488 million in November from 5.592 million in October. The hiring rate was 3.7 percent in November, down from 3.8 percent in October. The separation rate in November was at 5.202 million (-49,000 or -0.9 percent) or 3.5 percent, compared to 5.251 million or 3.6 percent in October. Within separations, the quits rate was 2.2 percent (3.174 million; flat m-o-m), and the layoffs rate was 1.1 percent (1.686 million; -0.1 pp m-o-m).
Asian stock indexes closed mixed on Wednesday, as investors took a breather after yesterday’s surge. The focus also was on the Chinese inflation data. The National Bureau of Statistics (NBS) reported that China’s producer price index (PPI) rose 4.9 percent y-o-y in December, after gaining 5.8 percent y-o-y in the prior month. That was the lowest increase since November 2016. Economists had expected producer inflation would increase by 4.8 percent in December. For the whole of 2017, the PPI increased 6.3 percent, compared to a drop of 1.4 percent in 2016. At the same time, the consumer price index (CPI) increased 1.8 percent y-o-y in December, accelerating from November's 1.7 percent y-o-y rise. However, that was below economists‘ forecast of a 1.9 percent gain. For the whole year of 2017, the CPI rose 1.6 percent, lower than the government's yearly control target of 3 percent and the previous year's reading of 2 percent. Japanese equity benchmark, the Nikkei, fell, as the yen continued strengthening in response to the Bank of Japan (BoJ) decision to scale back its monthly bond purchases. A firm yen is seen as unfavorable factor for the Japanese export-oriented companies.

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


Bond Market
Yields of US 10-year notes hold at 2.57% (+1 basis points)
Yields of German 10-year bonds hold at 0.47% (0 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 February settled at $63.42 (+0.73%). The crude oil prices rose, helped by the latest report from the American Petroleum Institute (API), which revealed the U.S. crude supplies fell by 11.2 million barrels for the week ended January 5.  Analysts had expected a much smaller drop of 3.89 million barrels in crude oil. At the same time, gasoline stockpiles rose by 4.3 million barrels, while inventories of distillates surged by 4.7 million barrels, the API reported. Market participants are now awaiting weekly data on U.S. crude inventories from the U.S. Energy Information Administration (EIA).


Gold traded at $1,310.10 (-0.20%). Gold prices fell moderately on the back of a surge in the U.S. Treasuries yields and the positive dynamics of the U.S. currency. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.02 percent to 92.55. 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)

07:45

France

Industrial Production

09:30

United Kingdom

Industrial Production

09:30

United Kingdom

Manufacturing Production

09:30

United Kingdom

Total Trade Balance

13:00

United Kingdom

NIESR GDP Estimate

13:30

Canada

Building Permits

13:30

U.S.

Import Price Index

14:00

U.S.

FOMC Member Charles Evans Speaks

15:00

U.S.

Wholesale Inventories

15:30

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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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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