Currency and market analytics by Tickmill UK

EURUSD: Weak August PMIs Increase Chances of a Sell-off
Minutes of the ECB July meeting, released on Thursday, showed that the central bank has little understanding of what lies ahead for the European economy. The word uncertainty (i.e. unquantifiable likelihood of future events) were mentioned in the minutes as many as 20 times. Perhaps this is a record.

It is no coincidence that the ECB tried to speak about why it is important to distinguish between recovery and rebound. EU economy is experiencing some kind of pickup and the central bank wants to make sure that market participants and economic agents understand its characteristics. A rebound can gain momentum, but it is natural to expect that the rebound sooner or later runs out of steam. In contrast, economic recovery is self-sustained process which can be interrupted only by a shock of some kind. To put it in another way, the ECB doubts that the economic growth we saw in the summer is the beginning of a new expansionary phase of the cycle.

And indeed, it didn’t take long to see first confirmations of these concerns. On Friday we’ve got first signs of a slack in ongoing rebound on the side of mfg./non-mfg. PMIs:

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Manufacturing and combined manufacturing/non-manufacturing activity in the Eurozone came lower than expected in August. Euro was sold aggressively on the news, which gives us a useful insight – slowing EU recovery may be heavily underpriced in EURUSD because of excessive focus on USD side:

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The minutes also showed that positive economic projections from July were based on the fact that strong support from the monetary policy will remain in place. According to the ECB, normalizing policy too early would be like pulling out a lifeline for drowning, which indicates a reluctance to move the rate in the next year or two.

There were also hawkish moments in the protocol. For example, ECB mentioned that the size of asset buybacks under the pandemic asset buyback program (PEPP) should be viewed as an upper bound, not a target. In addition, according to the ECB, economic reports in recent months have been more surprising in a positive way than in a negative one, and some of the risks that the ECB was concerned about in June have lost their urgency.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
Two Big Rules of the Bearish USD Trend
Fatigue is growing in the upward trend of EURUSD, which became rather apparent on Friday, when the release of PMI data provoked sustained sell-off in the pair. The index of activity in the EU non-manufacturing sector showed that almost “mechanical” post-lockdown recovery is losing steam and at best enters plateau.

In the analysis of PMI data, it may be helpful to focus on how deviation of actual reading from the forecast changed in time to see how it corresponds with the story of consumer spending impulse. For example, in the August report, we see that PMI reading in the services sector lagged far behind the forecast (50.1 points against the forecast of 54.5 points).

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In May and June, it was the other way around – the actual values were significantly ahead of the forecasts. This dynamic suggests there is a rise and fading of some impulse (most likely in consumption), which is reflected in respective acceleration and subsequent slowdown in the services sector activity.

Sustained economic momentum in the EU in the first months after lockdown period mixed with less dovish (compared to the Fed) ECB served as a driver for euro advance for some time, but now this factor is gradually fading away.

On Monday, USD came under strong pressure on news that Trump is interested in accelerated approval of vaccines, including foreign-made ones. Such a move, undoubtedly, has a political motive, but this does not negate the fact that it may approach the date of vaccination in the US. However, exploring new lows in USD, in my opinion, will be possible if two conditions are met:

  1. US data will continue to point on sustained economic momentum
  2. The Fed will retain dovish tone or sound more bearish.
If we look closely at the conditions under which the dollar declined in June-July, we can notice that positive economic surprises (i.e. momentum) were combined with expectations of aggressive easing by the Fed. However, in August, the minutes of the Fed meeting in July showed that the central bank, if it continues easing, will be less aggressive than expected. On the data side, we started to see some signs of weakness in the US economic data. Therefore, in my opinion, it becomes much more difficult for USD to make its way to new lows, as the factor of declining real yield weakens. The Jackson Hole symposium, which will take place as an online conference on Thursday, at which Jeremy Powell will have to outline the updated guidelines of the Fed in shaping monetary policy, will clarify a lot in this sense.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
A Few Remarks on Yesterday’s Powell Speech
Well, yesterday the Fed, represented by its head Jeremy Powell, formally confirmed that it adjusts reaction function to changes in inflation. Whereas previously the Fed used to target specific rate of inflation (2%), new framework implies average inflation targeting.

The decision was widely expected, but I would like to make a few remarks about why that was necessary and how it could affect expectations on tentative dates of policy normalization.

According to the Fed’s report entitled “Review of The Monetary Policy “, the decision is based on the fact that the US is entering a “new normal”, which is characterized by the following observations:

  • Productivity (output per worker) continues to decline, and the population is aging.
  • The hypothetical neutral interest rate (at which GDP and inflation grow at a stable rate) is decreasing which implies that you need less interest rate hikes to get to the desired level.
  • Increasing the workforce (i.e. the level of labor force participation) should become a priority. By the way, the last decade of monetary stimulus was able to inflate many nominal indicators and raise some real indicators, but it was the LFPR that mysteriously remained at low levels, and drifted even lower during the pandemic:
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The crucial importance of LFPR in driving inflation can be demonstrated with the following hypothetical example: Suppose unemployment level is 0% which is associated with extreme economy overheating and thus inflation. If LFPR is low, for example 30%, only 30% of the working population will get paid and feed inflation through spending. In this case, contrary of our expectation of high inflation, we may barely see its move towards a target level.

  • A related issue with point 3 is that jobless rate sufficient to generate desired level of inflation decreases over time. Unemployment of 4% now and 10 years ago are clearly different in terms of potential to create inflation pressures.
Now let’s discuss the Powell speech.

The first thing that sticks out is extremely vague definitions. “Moderate” inflation overshoot over 2%, “period” during which inflation will average 2% … What does “moderate” mean in quantitative terms? When this very “period” will start, when it should end – all this remained unclear. According to Powell himself, there won’t be “mathematical formula”, everything will be very flexible (i.e. at the discretion of the Fed). The new framework is clearly a progress towards greater flexibility. We didn’t get nothing concrete except for the strong feeling that in the next 6+ years the rates will be likely near zero. But why? Firstly, from June FOMC projections we know that for the next three years, Central Bank officials expect the interest rate to stay at current level, and Core PCE below 2%:

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Second, if we recall how long inflation stayed above 2% in the last decade after massive easing and fiscal stimulus…

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… we can conjecture that pursuing average inflation of 2% without additional stimulus may require quite wide period which extends beyond 2030.

Hence, the bond market reaction to the Powell speech was mainly concentrated at the far end of the yield curve – the yield on long bonds rose, as the risks of increased inflation in the longer term increased. In the closer parts of the yield curve, there was less news from the speech, so the reaction wasn’t so strong.

The main conclusion from Powell’s speech is that rates will remain at a low level for a longer time. It is a key ingredient in further, sustained declines in US real yields, a powerful driver of USD depreciation and Gold gains that have already shown its potential this year.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
Fed’s Mester: Rising Corporate Profits in 3Q Doesn’t Mean Recession is Behind
Economic activity and hiring have been constrained during coronavirus outbreak, confirming that the recovery will be slow and economy will need more support from monetary and fiscal authorities, Cleveland Federal Reserve Bank chief Loretta Mester said on Friday.

“I really think the recovery will be slow,” Mester told CNBC.

The economic data is likely to point to third-quarter growth after companies resume operations, but that doesn’t mean the economy is no longer in danger, Mester said.

“I actually think there are more challenges ahead and we will have to support the economy to overcome them,” she added.

Powell speech on Thursday indicated that the Fed becomes increasingly inclined to hold rates near zero bound for a very long time to generate inflation above 2% for some time. This inflation risk spooked investors in long-term bonds as well as fuelled speculations that the Fed will make additional easing of monetary conditions in the coming months. USD is expected to remain under pressure next week because of these expectations.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
Long-term bond yields rise. Will the Fed conduct “Operation Twist 2”?
Following Jerome Powell’s speech at Jackson Hole last week, 30-year bond yields advanced to the highest level for two months on Friday. There are signs that the market expects consumer inflation to accelerate, and these expectations hit the far end of the yield curve hardest due to longer maturity.

As the Fed needs to keep borrowing costs under control, including long-term rates, the outflow of investors from long-term bonds started to gradually shape expectations that this demand will be replaced by the Fed purchases on the open market, i.e. increased QE. However, it is not clear how much the yields should rise, that the Central Bank started to worry.

Since the start of the pandemic, the Fed has bought nearly $2 tn in government bonds from the open market bringing its Treasury holdings to $4.36 tn. Short bonds prevailed in the composition of purchases.

In a similar situation after the GFC, when the yields of long-term bonds began to rise faster than short ones (steepening of the yield curve), the Fed resorted to a technique, which consisted in changing the composition of treasuries on the balance sheet – selling short and using proceeds to buy long-term bonds (so-called operation twist). The Fed began to do this in September 2011, curiously, it coincided with gold making a U-turn after it reached the then all-time high of $1900:

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Perhaps this happened because investors tried to front-run purchases of the Fed, dumping safe gold and increasing demand for long-term bonds anticipating large buyer would soon appear on the market. If the Fed hints in September that it is interested in conducting “Operation Twist 2” there is a risk that the market reaction may be similar. It is necessary to closely monitor how the Central Bank will comment/react to the rally of long-term yields.

Consumer inflation in the US (Core PCE metric) accelerated in July, which was the expected development amid data on unemployment and retail sales. Consistent with the volatility in economic data in the post-pandemic period, consumer spending also exceeded expectations (1.9% monthly growth, 1.5% forecast), so the effect was small. Much more interesting and unexpected was the report from U. Michigan on consumer sentiment and expectations for August. It is August that is the hypothetical starting point for the second phase of the US economic recovery – the phase of deceleration, so the data for August may pave the way for risk appetite in the market. In August, the sentiment index rose slightly – from 72.5 to 74.1 points, remaining in the same depressive range after it plunged in April.

The more important point of the report was inflation expectations. They rose to 3.1% in August, up from 3.0% in July, the report showed on Friday. Market metric of inflation expectations – the difference between the yield on unprotected and inflation-protected bonds reacted immediately, strengthening to 1.77%, the highest since mid-January 2020:

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Since the Fed decided to play openly, announcing its readiness to keep rates low for a long time and tolerate inflation, the risk of a further decline in the dollar increases due to increasing risk of acceleration of inflation expectations including due to the Fed commitment.
 
Bears in SPX Still Struggle to Make Downside a Base Case
US stock futures declined on Wednesday, followed by European indices, promising a tough day for those who are betting on extension of Wednesday bounce. S&P 500 futures slipped below 3400 points, but moderate selling indicates that the acute phase of the correction had passed and a period of “healthy” consolidation in the 3250-3400 range is coming.

Short-term tests below the range are possible, however, there are no fundamental catalysts in sight nor U-turn in market sentiments for consolidation below the lower bound.

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On September 4, when the S&P500 dropped below 3,400, Goldman Sachs maintained its year-end projection of 3,600. The presidential election now poses the greatest risk as Trump is again betting on anti-Chinese rhetoric and “bring back manufacturing jobs in the US.” This adds uncertainty to the political and economic course of the next US leader. It is unknown how far he can go in his campaign pledges. So far, the incumbent has threatened to strip firms from federal contracts which try to save on labor by moving jobs to China.

Corporate reporting of the US firms included in the S&P 500 for the second quarter beat forecasts in 23.1% of cases (data from Lord Abbett), which is a way higher than 4.7%, the average for the previous 5 years. In the context of yield suppression in alternative asset classes better-than-expected 2Q performance may give some justification to their market valuations.

The US Senate, controlled by Republicans, is going to vote on a fiscal package, the proposed volume of which is significantly thinner compared to previous proposals and amounts to only $300 billion. This is much less than what the Democrats want to pass ($2 tn). Approval of a fiscal package worth at least $1tn would be a powerful shot of optimism for risk assets, but time shows that the GOP wants to approve less and less, increasing uncertainty about the final size date of approval.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
Stalemate in Fiscal Talks, Growing Slack in eco Data put a dent in Equities Rally
US equities were unable to develop positive start of Thursday session and bulls ceded ground to sellers later. There may be growing conviction in the market that US lawmakers (both the Fed and Congress) will not be able to enact monetary or fiscal support before the US presidential elections. This is a negative scenario for equity markets which reinforces the case for consolidation.

Yesterday I wrote that the GOP wanted to adopt skinny fiscal package – in the amount of only $300 billion. The vote on it was scheduled for Thursday. The vote failed and it looks like that the talks headed for a dead end.

A break below 3300 points in SPX early in the session today may set persistent corrective tone for risky assets extending for the rest of the session. However, rising US index futures indicate that breaking support won’t be an easy task.

In the economic calendar, the focus is on the US CPI release for August. Core inflation is expected at 1.6%, and the market will be more sensitive to negative deviations from the forecast than positive ones. Market response to accelerating inflation is limited by the Fed’s new “patient” inflationary stance (FAIT). Slowing inflation in the US is critical for sentiment, since nothing can be opposed to it yet due to the stalemate in fiscal negotiations. Yesterday’s PPI release which beat estimates indicates that inflation pressure could rise in the prices of consumer goods as well.

The report on unemployment claims in the US released on Thursday was a blow to market optimism. The number of unemployed increased for the fourth consecutive week. This is a subtle signal that slack in economic activity is growing in the US.

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Key points from the September ECB meeting

Earlier in this week I wrote that the chance for the resumption of EURUSD rally is high, since the ECB cannot stop the growth of the Euro with any specific measures. This statement can be strengthened by considering key meeting takeaways:

  • The ECB’s response to the Fed’s new inflation targeting concept is in the works, so the euro could not get anything out of it;
  • Inflation forecasts for 2020, 2021 are unexpectedly revised upwards – the ECB’s bias to ease policy becomes lower;
  • The ECB is closely monitoring the exchange rate of the euro and believes that the expensive euro slows inflation. However, targeting of Euro exchange rate is not included in monetary policy objectives. This is the verbal intervention that we talked about, and which did not make an impression on the euro. The base scenario for EURUSD, despite the growing chances of the dollar bullish pullback in the next two weeks, is continue rally towards 1.25 level.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
The RBA left cash rate unchanged on Tuesday but gave clear-cut indications that it wants to float additional easing measures at the next meeting to stimulate hiring.

“The Board continues to consider how additional monetary easing could support jobs as the economy opens up further”, the policy statement said.
Three out of four major Australian banks - Westpac, NAB and ANZ expect the central bank to cut the cash rate in November.
The implicit pledge of the RBA to reduce borrowing costs was made just before the release of the government's budget for 2020/21. The government is expected to ramp up borrowing, but accommodative policy of the RBA should help the government bond market to absorb increased supply.

We can also notice a subtle shift in emphasis in the policy statement towards employment goals (instead of routine discussion of inflation targets) which is reminiscent of the Fed’s shift toward flexible average inflation targeting policy.If it’s true, then the RBA may be willing to tolerate higher inflation as well in exchange for lower future unemployment. Of course, this development bodes ill for the national currency, AUD.

From the technical perspective the RBA’s dovish bias helped AUDUSD to complete formation of the double-top reversal pattern in the pullback that started on September 28, which in turn was part of the bearish trend initiated in September:

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A breakthrough of the local minimum at 0.7130 should allow us to consider targets at 0.7080 and 0.70 levels.
The AUDUSD decline of more than 5% in September and the episode of "resistance" since September 28 were consistent with waves of correction and rally in equity markets, indicating a link between the events. Then a further decline in AUDUSD suggests a nix in the stock markets, which is very likely to happen due to upcoming pre-election volatility. Earlier, retail brokers in the US (such as IB) announced an increase in initial and maintenance margins for some instruments, mentioning the risks of "elevated volatility" ahead of the elections.

The trade balance of Australia in August was almost half of the forecast (2.64 billion against 5.15 billion Australian dollars), which indicates a reduction in exports. Business activity in Australia is especially sensitive to the dynamics of foreign trade, therefore, the weakening of exports is an additional blow to Australian assets and hence the demand for AUD.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

Last Chance for Trump to Narrow the gap​

Biden’s lead in polls declined last week, albeit slightly, which still kept markets under pressure. The event which jumps into the foreground this week is the second presidential debate. It is Trump's last big chance before the election to leap forward and narrow the lead. In my opinion, if Trump manages to weaken Biden’s advantage, it will be a risk-off event since this outcome increases the chance of contested elections (which is a great source of uncertainty). Extension of Biden’s lead should be a boon for the markets helping them to extend the rally.
Important data on the US economy this week will be new home sales, the Fed's Beige Book and, of course, the initial jobless claims, which will receive a little more attention as the jobs market exhibited some weakness last week. The rest of the calendar for America is not particularly remarkable.

On Monday, the USD index began to decline aggressively, continuing the downward trend from September 25. Recall that at the same time the probability of Biden's victory and the probability of a complete victory for the Democrats began to rise:
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The Covid situation in the United States was generally calm in September, but became alarming in early October:
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The numbers are not so critical yet to tighten measures (and crash the market), but let’s keep the finger on the pulse.
In my opinion, there are little grounds to expect some surprise in Trump performance on the debates and expectations that Biden will extend or retain its lead should drive USD decline this week. The target for USD index is 93.00 level and 1.1830 - 1.1850 in EURUSD.
The data on Chinese economy left a mixed impression. GDP in the third quarter increased by 4.9% (forecast 5.2%), but the growth of industrial production in September (which is tied to external demand) beat expectations - 6.9% against the forecast of 5.8%. Retail sales jumped 3.3% YoY last month, against a more modest forecast of 1.8%. Unemployment has dropped.
Today, a meeting of the OPEC + joint monitoring commission is scheduled, at which it will be discussed how responsibly the participants are approaching production cuts. Europe has tightened measures due to rising incidence of Covid-19, which curbs fuel demand and OPEC is increasingly aware of the need to adjust supply. Specific decisions, however, may happen at the full OPEC+ meeting due on November 30 - December 1, but today's meeting should contribute to the discussion about what OPEC + will do at the full meeting.
COT data showed that long positions of Brent speculators increased by 37,531 lots in the last reporting week. The net position increased to 120,108 lots. Most of the changes occurred in short covering - 28K out of 37K (~ 75%). It looks like speculators were unwilling to stay short ahead of news from OPEC + this week which creates opportunity for prices to test some monthly resistance levels:
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SPX and USD Index: What to Expect in the Second Half of the Week?​


Looking at recent volatility, especially vigorous move to the upside, stock markets could rally on hopes that fiscal deal will be approved before the elections. But on Tuesday, much hoped talks fell through once again. House Speaker Pelosi and Mnuchin still “hold hope” and continue tense negotiations almost 24/7, but rumors suggest that there is no progress on key differences. Reuters reported that the GOP’s head in the Senate Mitch McConnell would not want to approved aid before the elections.
The SPX was unable to sustain gains, bouncing down from the level of 3500 last week, without much upside impulses this week. The slide was accompanied by a sharp decline of the odds of Democratic sweep outcome:
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On the hourly chart we see that 200-day SMA test failed, but on October 19 the market gave up important support:
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Now the battle unfolds for the horizontal level of 3420. It has sustained multiple tests so far due to weak sellers’ indecision, but chances are good that we will go lower with 50-day MA on the daily chart (the next important support at 3400) as the next target. Depending on the struggle at the level it will be seen whether the prospects remain to switch quickly to the growth. Accordingly, there is an opportunity for a near-term short trade, and a pause is assumed for buyers, since they can wait for more discount.
The dollar sold heavily in line with the ideas set forth in my Monday post. The tests of 93.00 and 92.76 levels have been successfully complete and, in my view, it is time to correct upwards with potential entries in the 92.70 - 92.45 area. For EURUSD, this should be the zone 1.1890 - 1.19160:
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The reason is potential downside in the US stock market.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

SPX Tests 50-day SMA at 3400 Points. Will the Level Hold?​


The "jingle" from the Congress, Treasury and the US administration about coronavirus aid was hollow again. Controversial messages culminated in Trump's trash talk in Twitter that Democrats want to hand out cash to Democratic states - poorly run and with high crime rates. Who would doubt that the fiscal deal is nothing more than a convenient opportunity to please traditional and potential voters and earn extra political points. The horse trading that we observe looks like attempts to hog the covers.
As long as the harm from delaying the aid (i.e. wrath of constituents) does not outweigh the expected political gain from striking a deal with an opposing party, it makes sense to delay it. There is no urgent need, judging by the US labor market data and retail sales, yet. Democrats can deliberately pursue disadvantageous for the GOP channels of cash distribution, based on Biden's lead in polls.
It is not entirely clear why futures reacted up yesterday after so many promises and hopes, but awareness came quickly. The test of 3400 level in SPX futures, which we discussed yesterday, is almost complete, the USD is correcting upward, also in line with yesterday post:
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SPX sellers weren’t especially confident or assertive yesterday, but this is just the first test of important level. 200-hour SMA has flipped down but given that the lead of Biden and Democrats in polls has retraced slightly (which drives up the odds of contested elections i), there is little reason to switch to brisk rally and a slightly larger correction and a second test of the 50-SMA are likely.
The situation with the virus in the US continues to be tense, the news front is filled with reports of some kind of new measures there. Europe also actively dampens optimism. I would not be in a hurry to go into longs on the benchmark, even at 3400 level.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

EURUSD: Case for Deeper Pullback as Markets Enter Turbulent Pre-election Week​


US index futures slipped into negative territory on Monday as the greenback went on a massive offensive (gained both against major and EM currencies). Oil bounced down. US 10yr bond yield dropped indicating some fresh demand for risk-free assets. There are good chances that the last week before the US elections will be marked by risk-off, as by the end of last week there was little confidence that Trump would not resist the outcome of the elections.
Another important theme for the markets is the number of Covid-19 new cases in the US, which has set a new record:

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In my view, US government and local authorities currently don’t have means to resist other than returning part of restrictions, decreasing mobility and thus increasing social distancing. But they will probably be less severe than in the first wave. Nevertheless, as we have already seen with the example of European assets, these measures weigh heavily on market sentiments. While the US stock market compensated for the fall in September with subsequent rebound, European equities failed to soar in the same fashion, remaining largely in consolidation mode.
In addition, on Friday we saw the indexes of activity in the EU service sector for September, which behaved significantly worse than the manufacturing ones, i.e. services business is suffering again.
The ECB will hold a policy meeting this week, where the focus will be on regulator's response to the recent weakening of activity in the service sectors and downgrade of the EU growth forecasts by market experts. Together with increased demand for USD on risk-aversion, I would consider another downside correction in EURUSD this week with targets at 1.178 and 1.17:
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In addition, the plight of the EU services sector suggests that soon the fiscal or monetary authorities will have to offer some substantial monetary cushion, putting medium-term pressure on the Euro.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

What can we expect from the EURUSD after the ECB meeting?​


As expected, EURUSD crashed after the ECB meeting on Thursday, as policymakers almost openly stated that the central bank will continue to ease credit conditions in December. The only question is what policy instruments will be involved (depo rate cut, increase in QE, expansion of TLTRO or increased asset-purchases within the PEPP). The coronavirus impacts began without warning, causing the ECB to act almost preemptively:
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All members of the ECB governing council unanimously supported the need for intervention in December. Recent tightening of social restrictions in Europe threaten to plunge the economy into another recession (this becomes the baseline scenario now!).
ECB President Lagarde announced that all instruments will undergo recalibration. In fact, this means that in December a mix of a rate cut, an increase in QE, etc. can be announced. Amid a pause in the actions of other central banks, yesterday's announcement by Lagarde is a very hard blow for the euro. Common currency was sold much faster than expected.
As a result, a noticeable imbalance of statements in favor of the ECB is formed in the central bank policy environment. The virus activity in the US has not yet forced the Fed to announce similar easing of credit conditions, which could balance the pressure on the euro in EURUSD. Also, judging from the dynamics of the disease in the United States, no urgent statements by the Fed are expected:
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The United States has already “visited” the ~ 70K daily case zone in July, so I think that the US is quite away from the critical point of depletion of healthcare reserves. Therefore, there is no need to impose tougher curbs or introduce lockdowns. This means that there is no need for the Fed to rush to ease monetary policy. Hence, the Central Bank policy imbalance will linger for some time which should be properly priced in the Euro.
I expect that the pressure on the euro will continue in November and most likely we will see a breakthrough of the September low in EURUSD (1.161) after the elections.
 

German Government may be Preparing a Surprise for the Markets​


Increasing social restrictions in the US in response to unabated advance of coronavirus cases appears to be a convenient reason to extend stocks correction on Thursday. SPY and QQQ closed down 1.2% and 0.74% on Wednesday while decline of index futures on Thursday suggests that US markets are likely to open lower today. USD index, bouncing to the upside is an extra signal of strong risk-off mood as key bullish catalysts (Biden’s win, vaccine news) have been already reflected in prices.
The release of manufacturing activity figures from the Philly Fed, initial claims for unemployment benefits, US home sales today are expected to pass unnoticed as the focus is on the short-term impact of the new social curbs. New York's decision to move schools to distance learning was a punch to economic recovery as this may also lock at home a good part of economically active population (i.e. parents). In addition, it leaves the question open about extension of restrictions as the path to new records appears to be unchecked. Meanwhile, the daily growth in the US has renewed record this week exceeding 190K cases, while the 7-day trend remains upward:
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Note that the Europe brought its epi curves under control after more or less strict restrictions were introduced. The United States will probably have to follow the same path.
It is important to keep tab on the deadlines for extension/easing of lockdowns in Europe as potential catalysts for stocks decline/rebound:
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Germany decides on the current lockdown on November 30, but today the head of the Koch Institute (advising the government on the epidemic) apparently has tried to leave a room for a possible extension, stating the following:
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So, on November 30, there is a chance to see a shocking announcement from German authorities and current price action in equities may reflect these concerns already.
On November 22, the decision on lockdowns is expected in Italy, the shape of the epi curve there, as well as in Germany, draws the second peak (see chart below). On this basis, we can assume that Italy decision can help to predict German’s one:
1-1605789865.png

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

Negative Headlines Grab Markets’ Attention as Equity Rally Stalls​


There are convincing signs that the rally on equity markets has stalled in the second half of this week. European indices gained less than 1% on Friday attempting to price in some early positive developments in coronavirus trends. There is not much to rally on in the short term, while increasing number of negative headlines feeds cautious state of the markets. The NYC authorities are mulling over extension of restrictions after closing schools as the mayor of the city de Blasio said that restaurants could be closed within the next week or two. Another heavy blow of economic activity in the US which the markets have not yet fully absorbed.
US Treasury Chief Mnuchin said that the $ 4.5 trillion emergency lending programs, which expire at the end of this year, won’t be extended. The Fed loses significant potential to absorb toxic debt in the event of a new shock, while medium-sized businesses lose access to direct loans from the Central Bank (through the Main Street lending program). However, it is possible that the proceeds will be used by Congress to fund other programs.

Initial jobless claims in the US fell short of forecasts for the first time in four weeks. Really bad signal. The increase in the unemployed amounted to 742K against the forecast of 707K, which likely reflects the impact of coronavirus restrictions, which are increasing in the US:
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The negative print in the data point can be an early flare of slack in labor market recovery which warrants more attention to the data update in the next week. To continue the upward trend, equity markets would need a breakthrough in the fiscal deal negotiations which seemed like the only thing that can offer broad-based help to bullish sentiment.
However, it makes sense to expect a breakthrough not earlier than in January 2021 as runoff elections to the Senate in Georgia will take place then and determine who will get majority in the Senate. Based on the following chart, the Republicans should have a negotiating advantage with Democrats:
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Source:Smarkets.com
The growth of existing home sales in the United States left many forecasters bewildered. In October, sales increased by 4.3% versus September (-1.2% forecast), while the monthly growth in September was revised to 9.9%. Thus, in annual terms, sales increased by as much as 26.61%. Interestingly, the median price of home sold also increased - by 15.5%. Demand grew despite pandemic restrictions, falling incomes, high unemployment, to the extent that 2020 turned out to be the best year for the secondary market since 2009:
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Source: NAHB
Obviously, the sales dynamics should offer some prolonged demand for goods and services of companies in home-improvement market.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

Expectations of a new Business Cycle Warrant Pressure on USD​


US index futures started the week in high spirits, trading in modest positive territory thanks generally supportive fundamental background. Oil prices continue to move higher ahead of the OPEC meeting on November 30 and are likely to hold onto gains after the second test of $43 resistance level. As expectations brew in the markets that global economy enters recovery phase of a new business cycle, the commodity market, in particular energy prices, should be the leading indicator of these expectations. Commodity markets, especially oil tend to outperform in this phase of the cycle.
Recovery of drilling activity in the US, major OPEC’s rival unexpectedly slowed despite rise in the rise prices, which further supported the market on Monday. Baker Hughes reported on Friday that rig count declined from 236 to 231 units.
Consumer confidence in the Eurozone declined took predictable downward path, the corresponding index fell to -17.6 points in November against the forecast of -17.7 points. This is a first indication that the shock to the EU economy from the reimposed lockdowns may be in line with general level of concerns.
Since the start of November, the best performance among major currencies has been shown by currencies tied to business cycle while the currencies where defensive assets prevail underperformed. The greenback turned out to be the main outsider:
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The index of US currency (DXY) is expected to play with 92.00 support this week without conclusive movement below the level, thanks to steadily rising optimism in the leading commodity markets, keeping expectations of a new investment cycle high.
Price action in the equity markets is expected to remain muted in the first half of this week, as the US celebrates Thanksgiving on Thursday and the start of shopping season on Friday. Economic calendar this week is relatively uneventful with durable goods orders, US Q3 GDP, Core PCE inflation set to hit the wires Wednesday. Perhaps the most important report this week will be the Fed's November meeting minutes, which will be scrutinized for clues about possible increase in QE purchases in the next month.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
OPEC decision is likely to have short-term impact as focus turns to demand side

Positive update on oil inventories in the US pulled WTI above the key level of $ 45, however, prices have been moving in a narrow box as OPEC is dragging its feet on key output decision:

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EIA data unexpectedly indicated US crude oil inventories declined by 679 thousand barrels. Stocks at Cushing decreased by 317 thousand. Drawdown in inventories was an unexpected outcome which produced some upside in the market as it came against the backdrop of an increase in oil imports and a decrease in refinery utilization rate, indicating that increased oil exports in the reporting week made up for this decline. The data showed that oil exports from the US surged by 625 thousand bpd to 3.5 million bpd, which indirectly indicates a rapid recovery in demand from foreign refineries.

OPEC is making an important decision today about output cuts. Initially, the decision was supposed to be made on December 1, but disagreements arose among the participants and it was decided to postpone the meeting. The market is leaning in favor of a positive outcome of the meeting, but in my opinion, OPEC will opt for balanced solution because recent economic data around the world indicates brisk recovery and oil producing nations may be reluctant to miss this demand opportunity.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
Oil market appears to be slow to digest OPEC+ new trade-off

The new OPEC+ deal appears to be a massive success both for oil producing nations and the market. Agreeing to boost production in January the group could convince market participants that surplus inventories will nevertheless decline. The deal was somewhere in the middle between the worst and the best possible outcome of the meeting. Oil-producing nations will start to increase output from January 2021, but great flexibility of the new plan was a key to soothe market concerns.

This week was difficult for OPEC as due to disagreements the meeting scheduled for Tuesday had to be postponed to Thursday. The deal participants came to a new agreement, but initial market reaction to it was tepid. OPEC+ plans to increase production from the current level by 500K bpd starting from January 2021, which is less than in the worst-case scenario (1.9 million bpd). In doing so, the organization will monthly assess market conditions in order to better adjust the supply. The deal also included the condition that the members cannot increase output by more than 500K bpd per month.

The best outcome for prices would be to extend current output cuts for another three additional months, however, judging by the market reaction, the market liked the OPEC+ flexible output plan.

At first, the market reacted with a small upward leap, but on Friday spot prices increased by another 1%. A barrel of WTI was trading above $ 46 a barrel, the highest level since early March while Brent was trading above $49 a barrel. An important point was the very fact of the deal - recall that in March prices collapsed due to the fact that among the main producers a short-term situation arose where "everyone produces as much as they want."

The parameters of the deal were determined in such a way that implementing it OPEC+ should keep the market in a deficit, thus drawing down inventories and pushing prices up. As a new coronavirus shock becomes less likely to happen, there are no major obstacles for a recovery in demand, so prices have a room to rise. In December, Brent will probably be able to touch $51 per barrel, but it is preferable to wait for a pullback, if we want to bet on this outcome:

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However, next year, after Biden moves to the White House, Iran's return to the market could become a serious threat to the market. In other words, the risk of successful negotiations between the United States and Iran on the nuclear program. If sanctions on Iran are lifted, the market will face a challenge in the form of a potential 1-2 million barrels of additional supply from Iran. However, this risk is not traced on the horizon of 3-4 months.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
A case for a bearish pullback in S&P 500. What could go wrong?



US job growth fell short of expectations in November, pointing to waning recovery momentum in the US economy. However, it didn’t stop the US equities from renewing all-time highs. SPX inched closer to 3700 points, DOW rose above 30,000 mark.


On Monday, equity markets went into a mild retreat while US currency recovered some of the lost ground. The biggest question is the strength of this downside move. In my view, fundamental background and news flow expected this week suggest that the 3700 mark should remain a local resistance for SPX for a week or so and a retracement to 3650 (100-hour SMA support) is likely. The next target that we could then consider is a test of an intermediate trend line at 3620 points:


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Let’s look at the arguments.


The NFP report was actually worse than the headline numbers suggested. Job growth calculated on the basis of firms' payrolls (so-called establishment survey) slowed to 245K (460K exp.). The same indicator, calculated through the household survey (more precise measure), was -78K. There is a backstory that indicated that we had to expect this kind of a surprise - November dynamics of initial claims for unemployment benefits (which I wrote about here). Unemployment rate decreased by 0.1% but it remains a highly biased indicator - if we look at employment rate (share of employed from working-age population), it is still significantly lower than it was in February:


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Over the weekend, the data showed that the US hit a fresh record for daily cases of Covid-19, hospitalizations, and ICU occupancy rate:


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In other words, the pressure for local government to tighten restrictions at least for some time, increased, which present a near-term risk for the markets.


Certainty about the vaccine, unfortunately, does nothing to ease the short-term pressure from rising Covid-19 positivity rate. The latter has intensified thanks to lax rules during Thanksgiving and the start of shopping season which led to more crowded shopping places. Therefore, there is a risk that social restrictions in the US could be briefly tightened again, and with the economy losing momentum in November, December could be very weak in terms of employment and economic recovery. It is no coincidence that Congress stirred in December and is going to adopt a $ 900 billion stimulus package within a week or two.


Basically, swift approval of the stimulus bill is a key obstacle for prolonged decline as positive headlines can quickly spur another leg of buying momentum making bearish pullback quickly losing integrity.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
This broken link between banks and bond markets indicates Central Bank support is the only thing that matters for stocks


Price action in European equities and US futures lack clear direction on Tuesday as markets wait for a "Christmas gift" in the form of a fiscal deal. In the absence of news headlines signaling about progress in stimulus talks, there is a chance for equity markets to stage a minor pullback (scenario that we discussed yesterday) and the signs of bearish pressure do persist. The greenback remained weak against other majors, trading below the key foothold at 91 points.


While stocks markets trade near all-time highs, sustained by expectations and liquidity backstop from the Central Banks, signaling that the worst is over, the Bank of International Settlements issued a warning, saying that the crisis is moving from liquidity to default phase.


In its quarterly report released on Monday, the "bank of all central banks" said that while the recent rally in global equity markets was justified by compression of interest rates in bond markets and rotation of investors into risky assets, quick development of vaccine and thus foreseeable end of the pandemic, current market valuations may not fully reflect the risks of defaults. This is better reflected in dynamics of credit spreads in the US and Europe which rapid decline remains out of step with stalling recovery of firm revenues, key measure of quality of a firm as a borrower. It means that bond market valuations may underestimate risks of corporate defaults as well.


In this regard, it is significant how the two major groups of lenders - banks and market investors (indirect and direct channel of financing) changed their lending attitude. If the former has been tightening their credit standards, the latter, on the contrary, has been lowering the credit risk bar:


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Bank and bond market assessment of credit risk usually move in sync, but now we a strong divergence which suggests there is a strong factor breaking the interplay. This factor is obviously “unlimited” credit facilities offered by Central Banks and it means that complacency in bond markets may hinge heavily on the Central Bank backstop.


Anyway, current focus remains on the stimulus talks in the US. In addition to disagreements between parties, there is another obstacle on the way to a fiscal deal - a Christmas shutdown. The work of Congress is funded until December 11, so in order not to interrupt negotiations, legislators will first have to approve a bill that will finance another week of work and bring fiscal negotiations to their logical conclusion. Therefore, the focus of the markets is primarily on whether Congress will succeed in approving funding bill. The voting on the bill is due on Wednesday.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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