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Market panorama. 10 January 2019

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I. Market focus

The U.S. dollar remained under pressure at the beginning of Thursday’s session. The performance of the U.S. currency continued to be weighed down by the Fed minutes from its December policy meeting, which were released on Wednesday afternoon. In December, the regulator expectedly raised its target range for the federal funds rate for the fourth time in 2018 by 25 basis points to 2.25 percent to 2.50 percent and also slightly increased forecasts for GDP growth and inflation. But more important was the fact that the Fed signaled a slowdown in the process of monetary policy tightening in 2019, although not as much as the investors in the stock market would like. The minutes released yesterday confirmed the propensity of members of the Federal Open Market Committee (FOMC) to slow the pace of rate hikes. Thus, the minutes noted that “the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier”. This is consistent with the expectations of officials that the rates will be raised only twice during 2019, although previously three increases were expected. In addition, it is noteworthy that some FOMC members did not support the latest hike. Overall, the tone of the minutes was rather dovish, but it should be noted that the information contained in the document is already partially outdated, since the time of the meeting the representatives of the central bank have already voiced new statements that indicate a further increase in the propensity to slow the tightening process.

No specific information was provided on the last round of trade negotiations between the U.S. and China. China's Commerce Ministry said the three-day negotiations "promoted mutual understanding and laid the foundation for solving problems of mutual interest." That's all the information. Given the complexity of the issue and disagreements, it was hardly worth expecting more, but many apparently expected, since the session in the global stock markets began negatively on Thursday.

Partly, the rise in negative sentiment in the markets was due to the fail of Donald Trump’s meeting with Congress leaders. The U.S. president expected concessions from the Democrats on funding the construction of a wall on the border with Mexico, which would end a partial government shutdown. But such concessions have not been made, and the shutdown continues. Earlier, sources at the White House reported that President Trump was considering the possibility declare a national emergency that would empower him to construct a border wall without congressional approval and to use the military to build the wall on the southern border.

Thursday will be rather busy with data and events, the most important of which may be statements by the Fed’s representatives Bullard (17:40 GMT), Powell (17:45 GMT) and Evans (18:00 GMT).


II. The market highlights are:

The Canada Mortgage And Housing Corp. (CMHC) reported on Wednesday the seasonally adjusted annual rate of housing starts was 213,419 units in December, down from an upwardly revised 224,349 units in November (originally 215,941). Economists had forecast an annual pace of 205,000 for December. According to the report, urban starts decreased 5.8 percent m-o-m last month to 194,594, as multiple urban starts declined by 6.8 percent m-o-m to 144,728 units, while single-detached urban starts fell by 2.6 percent m-o-m, to 49,866 units. At the same time, rural starts were estimated at a seasonally adjusted annual rate of 18,825 units (+5.6 percent m-o-m).


The Bank of Canada (BoC) left its benchmark interest rates unchanged at 1.75 percent on Wednesday, as widely expected. At the same time, the regulator lowered its forecasts for GDP growth for the current year due to lower oil prices. In its statement, the BoC noted that the Canadian economy that has been performing well overall. “Growth has been running close to potential, employment growth has been strong and unemployment is at a 40-year low,” it said. However, “the drop in global oil prices has a material impact on the Canadian outlook”. Meanwhile, the Bank reiterated the need to raise the policy interest rate over time into a neutral range to achieve the inflation target. The BoC lowered its GDP growth forecast for 2019 to 1.7 percent, down 0.4 percentage points from its October estimate. “ Nevertheless, indicators of demand should start to show renewed momentum in early 2019, leading to above-potential growth of 2.1 percent in 2020,” the Bank added.


The U.S. Energy Information Administration (EIA) revealed on Wednesday that crude inventories fell by 1.7 million barrels to 439.7 million barrels in the week ended January 4. Economists had forecast a decrease of 2.8 million barrels. At the same time, gasoline stocks surged by 8.1 million barrels to 248.1 million barrels, while analysts had expected a build of only 2.2 million barrels. Distillate stocks climbed by 10.6 million barrels to 140.0 million barrels last week, while analysts had forecast an increase of 1.2 million barrels. Meanwhile, oil production in the U.S. was unchanged at 11.700 million barrels per day. U.S. crude oil imports averaged 7.8 million barrels per day last week, up by 454,000 barrels per day from the previous week.


The National Bureau of Statistics (NBS) announced that China’s producer price index (PPI) rose 0.9 percent y-o-y in December, after gaining 2.7 percent y-o-y in the prior month. That was the lowest producer inflation since September 2016. Economists had expected PPI would increase by 1.6 percent y-o-y in December. Compared with a month ago, costs increased at a slower pace for both production materials (+1.0 percent y-o-y in December versus +3.3 percent y-o-y in November), while consumer goods (+0.7 percent y-o-y in December versus +0.8 percent y-o-y in November). The PPI dropped 1.0 percent m-o-m in December, following a 0.2 percent m-o-m decline in November. For the full 2018, China’s PPI was registered at 3.5 percent. Meanwhile, the consumer price index (CPI) increased 1.9 percent y-o-y in December, following a 2.2 percent y-o-y advance in November. That was the lowest rate since June and was below economists’ forecast for a 2.1 percent y-o-y increase. The food prices rose 2.5 percent y-o-y in December, the same as in November, while non-food costs increased 1.7 percent y-o-y, following a 2.1 percent y-o-y growth a month ago. On a monthly basis, consumer prices were unchanged. The 2018 full-year CPI was up 2.1 percent, well below Beijing's inflation target of 3 percent.


III. Market Situation
Currency Market

The currency pair EUR/USD rose slightly, refreshing its three-month high, helped by the further weakening of the U.S. currency, following the release of the Fed minutes from the December policy meeting. The minutes indicated that the policymakers made it clear that they might be close to the end of the current cycle of interest rate increases. The minutes also noted that “the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier”. According to the minutes, the Fed officials considered “concerns over escalating trade tensions, global growth prospects, and the sustainability of corporate earnings” as “the factors that appeared to contribute to a significant drop in U.S. equity prices” in the final months last year. Today, investors will be focused on the comments of the Fed representatives Bullard, Powell and Evans, which may provide new clues on the future path of rate hikes. Resistance level - $1.1580 (high of October 17, 2018). Support level - $1.1421 (low of January 8).

The currency pair GBP/USD traded slightly lower due to partial profit-taking after the previous day’s rally. The pair remained under pressure because of uncertainty around Brexit. The UK’s Prime Minister Theresa May suffered an early defeat to her Brexit plan on Wednesday, as lawmakers voted for the government to come up with a plan B within days in case her deal does not get enough votes next week. With less than three months before Britain is due to leave the EU, parliament kicked off a five-day battle over May's Brexit plan with a show of force. May has refused to retreat from her unpopular plan, which envisages close trading ties with the EU after the exit in March, pressing ahead with the vote that she looks set to lose after failing to win over her nominal Northern Irish allies. With an empty economic calendar in the UK ahead, traders will focus today on the dynamics of the U.S. currency, the general market sentiment toward risky assets, and Brexit-related news as well. Resistance level - $1.2810 (high of December 6, 2018). Support level - $1.2705 (low of January 8).

The currency pair AUD/USD dropped sharply at the beginning of the session in response to the release of Chinese data, but soon recovered and neared the previous day’s high. The pair was supported by the weakness in the U.S. dollar as well. Regarding the data, the National Bureau of Statistics (NBS) announced that China’s producer price index (PPI) rose 0.9 percent y-o-y in December, after gaining 2.7 percent y-o-y in the prior month. That was the lowest producer inflation since September 2016. Economists had expected PPI would increase by 1.6 percent y-o-y in December. The PPI dropped 1.0 percent m-o-m in December, following a 0.2 percent m-o-m decline in November. For the full 2018, China’s PPI was registered at 3.5 percent. Meanwhile, the consumer price index (CPI) increased 1.9 percent y-o-y in December, following a 2.2 percent y-o-y advance in November. That was the lowest rate since June and was below economists’ forecast for a 2.1 percent y-o-y increase. On a monthly basis, consumer prices were unchanged. The 2018 full-year CPI was up 2.1 percent, well below Beijing's inflation target of 3 percent. Resistance level - AUD0.7203 (high of December 18 and 19, 2018). Support level - AUD0.7116 (January 8).

The currency pair USD/JPY demonstrated a slight decline, due to the broad weakness in the U.S. dollar. A certain influence on the yen was exerted by the reports the Bank of Japan (BoJ) maintained an optimistic view on regional economies but warned that “a gradually increasing number of firms is pointing to some effects” of “the trade friction between U.S. and China.” In its quarterly regional economic report, the BoJ raised its assessment for two of Japan's nine regions and maintained its view for the remaining seven. “All regions were seeing their economies expand or recover” as exports increase as a trend and private consumption rises moderately, the BoJ noted in the report. Resistance level - Y109.08 (high of January 8). Support level - Y107.11 (low of January 3).


Stock Market

Index

Value

Change

S&P

2,584.96

+0.41%

Dow

23,879.12

+0.39%

NASDAQ

6,957.08

+0.87%

Nikkei

20,163.80

-1.29%

Hang Seng

26,521.43

+0.22%

Shanghai

2,535.10

-0.36%

S&P/ASX

5,795.30

+0.29%


U.S. stock indexes closed higher on Wednesday on the back of improved sentiment surrounding U.S.-China trade relations, the Fed’s monetary policy, as well as growing oil prices.

Asian stock indexes closed mixed on Thursday, weighed down by weaker-than-expected Chinese inflation data. Market participants also continued to await details from the latest round of U.S.-China trade talks. Japan’s Nikkei underperformed, as the yen firmed against the U.S. dollar, putting pressure on Japanese export-oriented companies.

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


Bond Market
Yields of US 10-year notes hold at 2.69% (-2 basis points)
Yields of German 10-year bonds hold at 0.22% (0 basis points)
Yields of UK 10-year gilts hold at 1.15% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures
traded lower. Crude oil for delivery in February settled at $51.77 (-1.13%). The crude oil prices fell correcting after the previous day’s climb. Investors also continued to digest the latest data from the U.S. Energy Information Administration (EIA), which revealed that crude inventories fell by 1.7 million barrels to 439.7 million barrels in the week ended January 4. Economists had forecast a decrease of 2.8 million barrels. At the same time, gasoline stocks surged by 8.1 million barrels to 248.1 million barrels, while analysts had expected a build of only 2.2 million barrels. Distillate stocks climbed by 10.6 million barrels to 140.0 million barrels last week, while analysts had forecast an increase of 1.2 million barrels. Meanwhile, oil production in the U.S. was unchanged at 11.700 million barrels per day. U.S. crude oil imports averaged 7.8 million barrels per day last week, up by 454,000 barrels per day from the previous week.


Gold traded at $1,295.70 (+0.17%). Gold prices rose slightly, o the back of broad weakness in the U.S. currency in response to the release of the minutes of the U.S. the Federal Reserve's December meeting. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell 0.10 percent to 95.13. 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 scheduled events (time GMT 0)


07:45

France

Industrial Production

12:30

Eurozone

ECB Monetary Policy Meeting Accounts

13:30

Canada

Building Permits

13:30

Canada

New Housing Price Index

13:30

U.S.

Continuing Jobless Claims

13:30

U.S.

Initial Jobless Claims

13:35

U.S.

Fed Barkin Speech

17:30

U.S.

FOMC Member James Bullard Speaks

17:45

U.S.

Fed Chair Powell Speaks

18:00

U.S.

FOMC Member Charles Evans Speaks

21:45

New Zealand

Building Permits

22:30

Australia

AiG Performance of Construction Index

23:30

Japan

Household spending

23:50

Japan

Current Account


Market Focus

  • France households confidence has increased again in June
  • German consumer sentiment set to weaken in july - Gfk
  • Employer confidence in UK beginning to show signs of improvement - REC
  • U.S. consumer confidence declines more than forecast in June
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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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