Saturday, 13 January 2018

Week to Jan 12th

This week we had the usual all-time highs, but for the first time for a long time, the story of the week was fixed income.

There seems no end (a figure of speech, not a prediction!) to the equities rally, as on Monday, SPX made another all-time intraday and closing high, and the Euro Stoxx 600 finished just under 400, a price not seen since August 2015, and DAX was up. NKY futures (Japan was closed again) made a new high for this century. Only FTSE failed to join the party, closing slightly down after some GBP appreciation, the only currency to gain against the dollar. EUR was down 0.6%, pulling back from the psychological 1.20 roundpoint, despite beats on the Eurozone sentiment indicators and Retail Sales at 1000. Other currencies were broadly flat, as was Gold. Oil advanced slightly, with, as you can see, no inter market effect. US 10-year Bond yields continued their advance from last week.

The big story on Tuesday was not scheduled and from an unexpected corner. The BoJ made a surprise announcement that they were scaling back their monthly bond purchases (QE), which immediately advanced JPY by 0.57%, and by 0.71% during the next 24 hours. NKY fell in line. DAX put in a flat day as EUR continued to fall, and FTSE and GBP had a Turnaround Tuesday, the index recovering Monday’s losses, just as the currency gave up its gains.

The BoJ move sparked speculation amongst traders that if conservative Japan was suddenly tapering, then the US might accelerate their tightening programmes and rate hikes. US Bond yields were therefore sharply up by 7bp to a 10-month high. The German Bund and the UK 10-year gilt yields rose 3bp and 4bp respectively, and EURJPY and GBPJPY fell 0.7% and 0.6% respectively, which is more than the USDJPY decline of 0.4%, so the net effect was that USD was up against all currencies except JPY itself. Gold was down in line with the USD position. Oil advanced sharply by 1.5 cents (2.54%) to post a marubozu candlestick. As the strong API stock beat came at 2130, after the pit closes, one can only assume that traders were anticipating it, or possibly it was a consequence of the  bullish Japanese outlook. (Japan imports 85% of its energy resources, and is the largest importer in the world after China).

None of this affected equities other than NKY. SPX, DJIA, NDX and FTSE all made all time highs, and DAX was up again touching a two-month high.

You wait ages for a surprise central bank reduced bond buying announcement from Asia, then two come along at once. At 1030 on Wednesday, the rumor on the wires was that Chinese officials were recommending slowing or halting the buying of US Treasuries. The effect was instant. Yields put 4bp immediately (that’s a 0.41% drop in the bond, the kind of move you get at FOMC or NFP on USD), and DXY dropped 0.52%. Gold shot up as well. Without any official confirmation, the bond price fully recovered, but DXY ended down.

This was also do to with rhe fallout from Tuesday’s BoJ announcement. Unlike GBP, JPY did not fade the China spike but carried on rising all day. A great demonstration of the difference between Japan and China. One is tapering their own bonds, the other is tapering USD bonds.

The next surprise of the day was a report from Reuters suggesting that Canada was increasingly convinced that President Trump will withdraw from NAFTA. The release, at 19:07 caused an immediate 95 pip drop in CAD, which largely held into the next day. 

The overall effect for the day was that USD was down against all currencies except GBP. Oil had a very flat day, only moving 2 cents, despite the EIA beat at 1530 (which was less than the API beat the day before).

Also we saw the equity advance take a rest, perhaps on the vote of no confidence from China. SPX was flat, NKY was sharply down in line with USDJPY, DAX was similarly sharply down, as EUR stayed up. In a reverse of Monday, FTSE was up as GBP was down on the day.

The equity rally resumed in earnest on Thursday, and SPX, DJIA and IXIC (COMPQ, the Nasdaq All-Share, not the Tech 100), and FTSE all touched all-time highs again. DAX fell because of a sharp rise in EUR after the ECB minutes suggested that QE will end in September without any taper, an outcome we highlighted last week.

EUR put on 83 pips (0.70%) on the ECB statement, JPY continued up from Tuesday’s BoJ announcement, but in any event, all the other currencies were up, helped by beats on Australia Retail Sales at 0030, Japan Leading Economic Index at 0500, and Eurozone Industrial Production, and a miss on US PPI and Initial Jobless Claims at 1330.

China announced that Wednesday’s rumor was ‘fake news’, but this did nothing to help DXY (still falling) or yields (flat on the day). Gold was also up. Oil had a brief rally to $64.77, a three year high, before fading to end the day flat. 

Friday’s important news was US Retail Sales and inflation, both at 1330. But they both came in as estimated, with only the ‘ex food and energy’ CPI making a the smallest (0.1%) of beats. So it wasn’t important. But anyway, it didn’t matter. Once again SPX, DJIA, IXIC and FTSE all made record intraday and closing highs, and posted near-perfect marubozu candles (the open is the low, the close is the high). We must remember that FTSE is to some extent an oil proxy, so some of these gains come from the strong rally in oil, whether or not GBP moves. Despite the EUR ramp, DAX managed to stay flat, which was a good result in the circumstances.

DXY had its worst day since June 27th, and fell 0.96% to finish at 90.90, the lowest for three years. EUR breached $1.22 to hit a three year high as Angela Merkel announced a coalition deal, GBP hit a post-Brexit high amid hopes for a ‘soft’ version. However, this was only part of it as AUD was up 0.29%  after dipping on China’s miss on non-CNY imports (the only miss in a raft of beats), and CAD was up 0.51%, in line with Oil, and despite NAFTA concerns and an increased Rig Count (bearish for Oil) at 1800. The weak dollar helped Gold shoot up $16 to a four-month high, continuing the curious dual rally of stocks and Gold.

Next Monday is Martin Luther King’s birthday, a holiday in the US. US Futures, and all other markets are open as normal.


WEEKLY PRICE MOVEMENT

These are the prices movements for the week on the instruments we cover, with USD pulling back for a fifth week. The only currency to recede against the dollar was CAD, so the best forex trade would have been to sell CADJPY, down 2.18%. The top index was SPX, and overall, once again Oil, up 4.73%

Bitcoin gave up last week’s gains, and was down 12.78% to finish roughly where it was at Christmas.

AUDUSD 0.7914 (+0.70%)
EURGBP 0.8881 (+0.20%)
EURUSD 1.2203 (+1.46%)
GBPUSD 1.3727 (+1.20%)
NZDUSD 0.7253 (+1.19%)
USDCAD 1.2455 (+0.35%)
USDJPY 111.00 (-1.79%)
DAX     13245 (-0.68%)
FTSE     7719 (+0.78%)
NIFTY   10681 (+1.16%)
NKY     23827 (+0.10%)
SPX    2788.9 (+1.70%)
GOLD  1338.23 (+1.36%)
OIL     64.40 (+4.73%)


NEXT WEEK (all times are GMT)

Monday is Martin Luther King Day, a holiday in the US, although European and Asian markets are open. BoJ Governor Kuroda speaks. Interest in Japan is heightened now they are engaged in a program of tightening. New BoE member Tenreyro (neutral) speaks in London at 1815.

Tuesday sees UK inflation, and also the Brexit (EU Withdrawal) bill returns for Report Stage in the UK House of Commons. The CPI estimate of 3.2% would be a new five-and-a-half year record. We also get a rare speech from the Swiss National Bank.

Wednesday is the main event, the BoC Rate Decision. A 25bp hike is expected, so expect CAD to move sharply whether we get it or not. The markets have started to price this in following the excellent jobs reports, but NAFTA looms on the horizon. Elsewhere we have Eurozone CPI, not normally a market mover, as the individual countries have already reported, and some speeches:ECB Nowotny (hawkish) at 0855, BoE Saunders (hawkish) at 1145, FOMC Evans (dovish, non-voter at 2000, Mester (hawkish, voter) at 2130.

If SPX does not fall below 2705 at the Wednesday close (which is unlikely), it will, at 395 trading days, make the longest run without a 3% drop in history, the most recent and previous record being the 394 day run from Dec 21, 1994 to Jul 12, 1996. The market rose 40.6% in that period. SPX needs to hit 2800 (only 11 handles away) to beat the gain record as well.

The main news on Thursday comes in the Asian session with Chinese Retail Sales, and the Australian version of NFP. After a standout print last month of 61.6k, this month’s estimate of 24.9k is moderate, but is still equivalent to 333k in US terms, a figure not seen in the US for years. (The US has 13.4 times the population of Australia). Canada has recently surprised with conservative estimates and then strong beats, and it is interested to see if Australia is going the same way.

President Trump will on the stump supporting Republican Rick Saccone in the Mar 13 Pennsylvania election. Trump won this district by over 20% in the election. Bundesbank President Weidmann opens the IMF/Bundesbank joint event on German economic policy, and ECB Coeure speaks there at 1430. Finally, there is the new Canadian ADP report, although as this follows the official jobs report last week rather than preceding it, the effect is very little. The Central Bank of Turkey make a rate decision at 1100.

The short week finishes quietly on Friday on the economic release front. However it is once again the US government shutdown deadline. This has been deferred twice. The sticking point is the immigration (DACA and the ‘wall’). However, the Democrats will not want to take the blame, given the proximity of mid-term elections. Watch this space!


CALENDAR (all times are GMT). High volatility items are in bold

Mon Jan 15
0200 CNY China FDI
1000 EUR Eurozone Trade Balance
2145 NZD Retail Sales
2200 NZIER Business Confidence

Tue Jan 16
0930 GBP UK CPI/PPI
1400 NZD GDT Milk Auction (time approx)
1700 CHF SNB Chairman Jordan speaks
2350 JPY Japan Machinery Orders

Wed Jan 17
0030 AUD Australia Homes Loans/Investment Lending
1000 EUR Eurozone CPI
1415 USD US Industrial Production/Capacity Utilisation
1500 CAD BoC Rate Decision (est 1.25% prev 1.00%)
1500 USD US NAHB Housing Market Index
1615 CAD BoC Press Conference
1900 USD Fed Beige Book
2130 USD FOMC Mester speaks
2130 WTI API Stock
2330 AUD Australian Westpac Consumer Confidence
2350 JPY Japan FDI

Thu Jan 18
0000 AUD Australian HIA New Home Sales
0001 GBP UK RICS Housing Price Balance
0030 AUD Australia Employment/Unemployment
0200 CNY China Retail Sales/Ind Production
0200 CNY China GDP
0815 EUR Germany BuBa Pres Weidmann speaks
1330 USD US Building Permits/Housing Starts
1330 USD US Jobless Claims
1330 USD US Philly Fed Manuf Survey
1330 CAD ADP Payrolls
2130 NZD Business NZ PMI

Fri Jan 19
0700 EUR Germany PPI
0930 GBP UK Retail Sales

1800 WTI Baker Hughes Rig Count

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