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Market panorama. 13 June 2018

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I. Market focus:

The focus of the markets is on the meeting of the Federal Open Market Committee (FOMC), which began yesterday, and its outcomes will be announced today at 18:00 GMT. The June meeting of the Federal Reserve is extended, so it will be accompanied by the update of economic outlooks and the press conference of the regulator’s chair, set to begin at 18:30 GMT. The Fed funds futures suggest a 96.3 percent probability of the Fed hiking interest rates at the meeting, so a further monetary policy tightening will not be a big surprise for the markets. The committee members’ economic forecasts and expectations for the federal funds rate will be more important. Most likely, the Federal Reserve signals that the federal funds target rate will be hiked four times, rather than three, as predicted earlier. If such expectations come true, this will support the dollar, which can resume its growth.

Before the announcement of the outcomes of the FOMC meeting, the movements of the currency pairs are likely to be limited except for the pairs with the British pound, as its volatility may increase after the release of inflation data in the UK (08:30 GMT).


II. The market highlights are:

  • The Labor Department reported on Tuesday the U.S. consumer price index (CPI) increased 0.2 percent m-o-m in May, the same pace as in April. Over the last 12 months, the CPI rose 2.8 percent y-o-y last month, following a 2.5 percent y-o-y increase in the 12 months through April. That was the highest inflation rate since February of 2012. Economists had forecast the CPI to rise 0.2 percent m-o-m and 2.7 percent y-o-y in the 12-month period. According to the report, the seasonally adjusted increase in the headline index was mainly attributable to gains in indexes for gasoline (+1.7 percent m-o-m) and shelter (+0.3 percent m-o-m). Meanwhile, the food index was unchanged over the month. The core CPI excluding volatile food and fuel costs rose 0.2 percent m-o-m in May after gaining 0.1 percent m-o-m in April. In the 12 months through May, the core CPI rose 2.2 percent, accelerating from a 2.1 percent advance in the year through April. That was the highest rate since February 2017. Economists had forecast the core CPI to rise 0.2 percent m-o-m and 2.2 percent y-o-y last month.

  • The U.S. Energy Information Administration (EIA) raised its Brent oil price forecast for 2018 and 2019. It now expects Brent crude oil spot prices to average $71.06/barrel this year and $67.74/barrel next year, compared to its prior forecasts of $70.68/barrel for 2018 and $65.98/barrel for 2019. At the same time, the EIA lowered its 2018 projection for West Texas Intermediate (WTI) crude oil prices to $64.53/barrel from $65.58/barrel in its May’s forecast. However, the EIA’s 2019 view on WTI crude prices improved to $61.95/barrel from $60.86/barrel projected in May. The EIA also increased its 2018 domestic crude production for 2018 by 70,000 million barrels per day to 10.79 million barrels per day, but cut its 2019 output forecast by 100,000 barrels per day to 11.76 million barrels per day.

  • Westpac Bank reported on Wednesday that its gauge for consumer sentiment in Australia rose 0.3 percent m-o-m to 102.2 in June, following a 0.6 percent m-o-m decline in the previous month. A reading above 100 indicates more optimists than pessimists. Three of the five index components increased in June with the measures of the ‘finances vs. a year ago’ (+4.5 percent m-o-m) and the ‘family finances, next 12 months’ (+2.8 percent m-o-m) recording the biggest gains. The ‘time to buy a major household item’ sub-index rose modestly (+1.0 percent m-o-m). At the same time, the ‘economic conditions, next 5 years’ (-3.1 percent m-o-m) and the ‘economic conditions next, 12 months’ (-2.8 percent m-o-m) components declined but remained comfortably above their long-run average levels.


III. Market Situation
Currency Market
The currency pair EUR/USD consolidated near the opening level, as investors were cautious ahead of the announcement of the outcomes of the Fed meeting. Since the interest rate hike by the Fed has already been priced in, the focus of market participants will be on the policymakers’ economic forecasts and expectations for the federal funds rate. Most likely, the Fed officials will signal that the federal funds target rate will be hiked four times, rather than three, as predicted earlier. If such expectations come true, this will support the dollar, which can resume its growth against other major currencies. However, its strengthening against the euro may be limited due to expectations of the outcomes of the ECB meeting, which will be announced tomorrow. Analysts believe the ECB will discuss when and how to end its bond-buying stimulus program at the meeting, marking the biggest step out of crisis-fighting mode. Resistance level - $1.1838 (high of June 7). Support level - $1.1726 (low of June 8).

The currency pair GBP/USD traded slightly lower, as investors adjusted their positions ahead of the release of inflation data on Britain, which were expected to show an acceleration in consumer price growth to 2.5 percent y-o-y in May from 2.4 percent in April. In m-o-m terms, the consumer price index (CPI), according to forecasts, rose by 0.4 percent, the same pace as in the prior month. Apart from the economic data, traders will also focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3492 (high of May 22). Support level - $1.3295 (low of June 4).

The currency pair AUD/USD declined moderately at the beginning of the session, but then recovered to the opening level, supported by positive data from Australia and statements by the Reserve Bank of Australia (RBA) governor Philip Lowe. Westpac Bank reported on Wednesday that its gauge for consumer sentiment in Australia rose 0.3 percent m-o-m to 102.2 in June, following a 0.6 percent m-o-m decline in the previous month. A reading above 100 indicates more optimists than pessimists. Mr. Lowe said that strong GDP growth in the first quarter indicates that the Australian economy “is moving in the right direction,” and “if this continues to be the case, it is likely that the next move in interest rates will be up, not down”. However, he added that increase in interest rates “still looks to be some time away” as the policymakers will want “to have reasonable confidence that inflation is picking up to be consistent with the medium-term target and that slack in the labour market is lessening”. Resistance level - AUD0.7623 (high of June 12). Support level - AUD0.7513 (low of June 1).

The currency pair USD/JPY traded moderately higher, nearing the three-week high, as the demand for safe-haven assets faded and the U.S. currency strengthened ahead of the announcement of the Fed's monetary policy decision. The U.S. dollar growth is likely to accelerate if the Fed hints a faster rate hike and raises its economic forecasts. On the contrary, the dovish tone of the Fed statements can trigger a broad decline in the US dollar. Resistance level - Y111.39 (high of May 21). Support level - Y109.19 (low of June 8).

Stock Market

Index

Value

Change

S&P

2,786.85

+0.17%

Dow

25,320.73

-0.01%

NASDAQ

7,703.79

+0.57%

Nikkei

22,966.38

+0.38%

Hang Seng

30,715.37

-1.25%

Shanghai

3,049.80

-0.97%

S&P/ASX

6,023.50

-0.51%


U.S. stock indexes closed mostly higher on Tuesday, as investors focused on the meeting of the Federal Reserve, while their reaction to the outcome of Trump-Kim summit was muted. Market participants also digested data on consumer price index (CPI) for May. The Labor Department reported the U.S. CPI increased 0.2 percent m-o-m in May, the same pace as in April. Over the last 12 months, the CPI rose 2.8 percent y-o-y last month, following a 2.5 percent y-o-y increase in the 12 months through April. That was the highest inflation rate since February of 2012. Economists had forecast the CPI to rise 0.2 percent m-o-m and 2.7 percent y-o-y in the 12-month period. Meanwhile, the core CPI excluding volatile food and fuel costs rose 0.2 percent m-o-m in May after gaining 0.1 percent m-o-m in April. In the 12 months through May, the core CPI rose 2.2 percent, accelerating from a 2.1 percent advance in the year through April. That was the highest rate since February 2017. Economists had forecast the core CPI to rise 0.2 percent m-o-m and 2.2 percent y-o-y last month.

Asian stock indexes closed mostly lower on Wednesday, as investors were cautious ahead of the Federal Reserve rate decision. The Japanese benchmark recorded a moderate gain as the yen weakened against the U.S. dollar, providing support to the Japanese large 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 2.97% (+1 basis points)
Yields of German 10-year bonds hold at 0.47% (0 basis points)
Yields of UK 10-year gilts hold at 1.40% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in July settled at  $66.06 (-0.45%). The crude oil prices fell moderately, on the back of a strengthening in the U.S. dollar, the updated 2018 forecast for domestic oil output from the U.S. Energy Information Administration (EIA) and the latest data from the American Petroleum Institute (API). The API revealed the U.S. crude supplies rose by 833,000 barrels for the week ended June 8. At the same time, gasoline stockpiles climbed by 2.3 million barrels, and inventories of distillates surged by 2.1 million barrels. Market participants are now awaiting weekly data on U.S. crude inventories from the EIA.

Gold traded at $1,295.30 (-0.01%). Gold prices consolidated near the opening level, as investors waited for the outcomes of the Fed meeting, set to be announced later today. Experts note that the Federal Reserve's rate statement and its chairman’s press conference could push gold prices out of a narrow range of about $1,290 to $1,305, in which it has been traded since mid-May. It is expected that the Fed will raise interest rates for the second time this year. Gold is sensitive to higher interest rates which can cause a rise in bond yields, making non-yielding bullion less attractive to investors, and could strengthen the dollar, making the precious metal more expensive for holders of foreign currencies.

IV. The most important scheduled events (time GMT 0)


07:15

Switzerland

Producer & Import Prices

08:30

United Kingdom

Producer Price Index - Output

08:30

United Kingdom

Retail Price Index

08:30

United Kingdom

Producer Price Index - Input

08:30

United Kingdom

HICP ex EFAT

08:30

United Kingdom

HICP

09:00

Eurozone

Employment Change

09:00

Eurozone

Industrial production

12:30

U.S.

PPI excluding food and energy

12:30

U.S.

PPI

14:30

U.S.

Crude Oil Inventories

18:00

U.S.

Fed Interest Rate Decision

18:00

U.S.

FOMC Economic Projections

18:00

U.S.

FOMC Statement

18:30

U.S.

Federal Reserve Press Conference



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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