Ipek Ozkardeskaya

Ipek Ozkardeskaya

Ipek Ozkardeskaya provides market analysis on FX, leading market indices, individual stocks, oil, commodities, bonds and interest rates.
She has begun her financial career in 2010 in the structured products desk of the Swiss Banque Cantonale Vaudoise. She worked in HSBC Private Bank in Geneva in relation to high and ultra-high net worth clients. In 2012, she started as FX Strategist in Swissquote Bank. She worked as Senior Market Analyst in London Capital Group in London and in Shanghai. She returned to Swissquote Bank as Senior Analyst in 2020.
She is passionate about the interaction between the economy and financial markets. She has been observing and analyzing a wide variety of relationships between the economic fundamentals and market behaviour over the past decade. She has been privileged to live and to work in the world's most exciting financial hubs including Geneva, London and Shanghai.
She has a Bachelor's Degree in Economics and a Master's Degree in Financial Engineering and Risk Management from the University of Lausanne (HEC Lausanne), Switzerland.
All Eyes on US Inflation: Impact on Rate Expectations and Market Sentiment

All Eyes on US Inflation: Impact on Rate Expectations and Market Sentiment

Ipek Ozkardeskaya Ipek Ozkardeskaya 15.02.2024 11:04
All eyes on US inflation! By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank The week started on a positive note on this side of the Atlantic Ocean, and on a mixed note on the American side. Equities in Europe were better bid on Monday, fueled by luxury stocks like LVMH for example which added 14 points to the index after Hermes hit a record high last week on string quarterly results. The Dutch Adyen extended last week's post-earnings gains, adding around 34 points to the Stoxx, while Arm holdings jumped another 30% on Monday, after jumping more than 50% in the immediate aftermath of releasing its own quarterly results. All this to tell you that the rally in the European and US stock markets are somehow shouldered by a robust market reaction to encouraging corporate results. But a part of it is supported by the rate outlook. And the rate outlook is coming on slippery ground with every Federal Reserve (Fed) official adding his or her pinch of hawkishness into the mix. Yesterday, Fed's Michelle Bowman said that the rates are in a good place to keep pressure on inflation and that there is no need to ease rates soon. Likewise, Richmond Fed's Thomas Barkin said that they are 'closing in on inflation' but that they 'are not there just yet'. This being said, the New York Fed's latest inflation survey came with a good surprise. The one and five-year expectations remained unchanged from the month before, but the 3-year inflation expectations fell to the lowest level on record, to 2.35%. That's what the Fed is working so hard to achieve. And inflation expectations are very important to keep the actual inflation numbers in control. Therefore, the encouraging inflation expectations give hope that the Fed would start cutting rates despite strong growth and spending. However, the expectation of five rate cuts from the Fed is no longer the base case scenario; investors now see four rate cuts being more likely, with the first rate cut priced in at nearly 50-50 for May, and almost fully for June. These probabilities could change today, in one way or the other, with the latest inflation update. Headline inflation in the US is expected to fall below 3% in January, and core inflation is seen easing to 3.7%. A softer-than-expected set of data will likely boost the May rate cut expectation, keep the dollar index below the 100-DMA and support equities. An unwanted upward surprise, however, should further hammer the May cut expectations and shift focus to June. In this case, we could see the US dollar index finally drill through the thick 100-DMA offers, and some profit taking in the S&P500.
Happy Jobs Friday: BoE Holds Rates, US Dollar Dips, and Anticipation Builds for US Jobs Data

Happy Jobs Friday: BoE Holds Rates, US Dollar Dips, and Anticipation Builds for US Jobs Data

Ipek Ozkardeskaya Ipek Ozkardeskaya 02.02.2024 15:22
Happy Jobs Friday! By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank The Bank of England (BoE) kept its rates unchanged yesterday but opened the door to rate cuts mentioning 'good news on inflation'. Cable rebounded despite a dovish takeaway from the MPC meeting as the US dollar fell sharply despite better-than-expected ISM manufacturing survey. In the euro area, inflation fell slower than expected in January. Combined with a softer US dollar, the EURUSD jumped from 1.0780, a few pips above the 100-DMA. The Swedish Riksbank also held rates steady yesterday and gave the happy news that a rate cut will be coming in H1. The year starts with the sweet smell of the upcoming interest rate cuts, like a freshly baked apple pie ready to come out of oven. We can't wait to have a taste of it before the commercial real estate dives into darkness with more than half of commercial loans in the US due to come to maturity by the end of 2025 – and these loans make up to almost 30% of the small banks' assets. So, let's hope that the Fed won't burn the pie. Happy US jobs day! The US is expected to have added less than 200K jobs this January, for around the same pay growth of 4.1% and unemployment rate is seen ticking slightly higher to 3.8%. A reasonably weak number should revive the Federal Reserve (Fed) doves, while a strong number should melt the March rate cut expectations. The probability of a March hike fell to 35% after the Fed said that March was probably too early to cut rates – while this probability was around 80% at the start of the year. Everyone is focused on the May meeting now, with more than 90% probability priced in for the first Fed cut. The rational with the jobs data is, the softer the data, the sooner the Fed could start cutting rates. And with the number of layoff news on the newswire, it looks safe to bet that today's NFP will be as soft as Wednesday's ADP report. BUT note that Fed Chair Jerome Powell said that they sense that the US economy is accelerating based on anecdotes and chats with private sector. And that's not in line with the layoff news that crowd the headlines. A reasonably soft jobs data is good for the Fed doves and should further weigh on the US dollar, a stronger than expected figure – if not abnormally strong - should not impact the May cut expectations and keep the dollar bulls contained.
Market Echoes: USD Gains Momentum Amid ECB Presser, PCE Numbers Awaited

Market Echoes: USD Gains Momentum Amid ECB Presser, PCE Numbers Awaited

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.01.2024 14:17
Market echoes The US dollar index ticked higher yesterday, as the euro fell across board during ECB Lagarde's presser. But any further weakness in today's PCE numbers could limit the upside move in the dollar index and throw a floor under the EURUSD's weakness around the 200-DMA. It would sure be absurd if the Fed started cutting the rates with such a strong underlying US economy before the ECB, which, in opposition, deals with a serious economic slowdown across the euro area. But the Fed doesn't (need to) decide based on other central banks' actions. As such, a possible earlier Fed cut could slow down the euro depreciation but should not stop it. In equities, the good data gave a positive spin to the S&P500 and Nasdaq 100, but Tesla's 10% slump limited gains. Intel tumbled 10% in the afterhours trading following a disappointing forecast as it has hard time fighting back the all-strong Nvidia and AMD which are catapulted to the moon on the AI craze. The good news is, Nvidia and AMD lovers will barely react to Intel news.    
Navigating Oil Markets: Analyzing Breakouts, Geopolitical Factors, and Bullish Momentum

Navigating Oil Markets: Analyzing Breakouts, Geopolitical Factors, and Bullish Momentum

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.01.2024 14:16
What could go wrong? Energy prices could go wrong. Oil bulls finally got the positive breakout that they were looking for in oil prices. The barrel of American crude cleared the $75pb resistance and extended gains past $77pb on muddy geopolitical picture in the Middle East and on the back of a 9-mio barrel slump in US weekly oil inventories. The American crude tested the 200-DMA, near $77.50pb, to the upside but has so far been unable to take it out. Moving forward: Positive momentum is building, the ample supply story has been broadly priced in and if Mid East tensions take over the market narrative, there is no reason to keep the oil bulls contained. The next natural target is the 200-DMA. If broken, oil bulls will challenge the $78.60, the major 38.2% Fibonacci retracement on September to December selloff and a breakout above this level will point at a medium term bullish reversal, and could pave the way for a further rise to the $80pb.  
Dream Comes True: Analyzing Euro Weakness and US GDP Goldilocks Moment

Dream Comes True: Analyzing Euro Weakness and US GDP Goldilocks Moment

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.01.2024 14:15
A dream comes true. By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank The EURUSD traded south yesterday, as the European Central Bank (ECB) Chief Christine Lagarde reckoned that growth and inflation are slowing, while insisting that the rate cut decision will be data dependent. The pair cleared the 200-DMA support, fell to 1.0820, it's a little higher this morning, but we are now below the 200-DMA and the ECB rate cut bets on falling inflation and slowing European economies remain the major driver of the euro weakness, with many investors now thinking that June could be a good time to start cutting the rates. Three more rates could follow this year. Across the Atlantic, the US released its latest GDP update and the data was as good as it could possibly get. The US economy grew 3.3% in Q4 versus 2% expected by analysts. It grew 2.5% for all of last year –quite FAR from a recession. The consumer spending growth slowed to 2.8%, but remained strong on healthy jobs market and wages growth, business investment and housing were supportive and... the cherry on top: the GDP price index, a gauge of inflation fell to 1.5%. Plus, data from rent.com showed that the median rent rate declined in December, and that's good news when considering that rents have been one of the major drivers of inflation lately, and they look like they are cooling down. In summary, yesterday's US GDP data was the definition of goldilocks in numbers: good growth, slowing inflation. A dream comes true. As reaction, the US 2-year yield fell below 4.30% and the 10-year yield fell below 4.10%. The strong numbers didn't necessarily hammer the Federal Reserve (Fed) cut expectations given that inflation slowed! Investors are not sure that March would bring the first rate cut from the Fed – as the probability of a March cut is around 50%, but a May cut is almost fully priced in. Today, all eyes are on the Fed's favorite gauge of inflation: core PCE – expected to have retreated to 3% in December. A number in line with expectations, or ideally softer than expected could further boost risk appetite.
Shift in Central Bank Sentiment: Czech National Bank Hints at a 50bp Rate Cut, Impact on CZK Expected

When do you start to worry about Chinese stimulus? - Market Analysis by Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.01.2024 16:00
  When do you start to worry about Chinese stimulus?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  The stock rally continued on both sides of the Atlantic on Wednesday; the technology and chip stocks remained in the driver seat. Sentiment in Europe was bolstered by an almost 9% rally in ASML on news that their orders more than tripled last quarter. Now, there is a catch. A third of the $10 billion dollar worth of orders came from China as Chinese companies rushed to buy these machines by the end of last year before the US and Dutch chip ban came into effect. But even if the Chinese demand will fade away, ASML says that it expects its sales to remain steady thanks to AI demand..  As such, the ASML news also boosted the stock prices of our favourite AI plays. Nvidia hit another record yesterday, TSM extended gains, Microsoft was worth $3 trillion for some time. The S&P500 and Nasdaq 100 hit a fresh record, and Netflix – which has nothing to do with AI, but which was just cheering its 13-mio new subscribers for the latest quarter - jumped 10%.   In summary, all goes well for those who are in the technology boat sailing north. For the rest, skepticism best describes how they feel about an unsustainable rise in valuations.   Tesla misses, Intel next.  Tesla missed estimates in its latest quarterly earnings report and warned that its EV sales growth will be 'notably lower' and that the numbers will suffer until the company comes up with a cheaper model. The series of price cuts weren't enough to bolster demand in a way to keep the company smiling and profits rising – sufficiently. As such, Tesla refused to offer a specific growth target and its share price took a 6% hit in the afterhours trading. Intel is due to report its earnings today.   Connecting the dots  The Chinese are serious about bolstering their economy and they look like they are getting to a place where they are ready to do whatever it takes to reverse the slowing trend.  In addition to a series of market stimulus news, the People' Bank of China (PBoC) announced yesterday that it will cut the reserve ratio for the banks by 50bp from February to release more liquidity to bolster stock valuations The latter will free up to an additional trillion yuan, which equals $139bn US dollars.  Will it help? Well, we will see. The good news is, if it doesn't, the Chinese will continue until it does.   The CSI 300 finally sees some positive reaction, stocks in Hong Kong are up 10% since Monday, American crude is drilling above the $75pb per barrel and copper futures – which are a gauge of global growth – also seem gently convinced that the Chinese will put all their weight – all they need to – to make things better.   But note that China's supportive policies may not echo well across the developed markets' central banks, because the Chinese stimulus – if successful – should boost global inflation and interfere with DM central banks' plans to loosen policies.   BoC calls the end of tightening, ECB next to speak.  But until we see concrete results from Chinese measures, softer policies remain the base-case scenario for the Federal Reserve (Fed) and the other major central banks (except Japan). In this context, the Bank of Canada (BoC) kept its rates unchanged at yesterday's meeting and called the end of rate hikes. The European Central Bank (ECB) will meet today and will certainly vehicle the same message - that policy tightening is over. But that's not enough.  When it comes to the ECB, what investors want to know is WHEN the ECB will start cutting the inteerest rates. If we had this conversation two weeks ago, I would say that the ECB would push back on expectations of premature rate cuts. But after having heard Christine Lagarde say that the first rate cut could come in summer, I am more balanced going into the meeting. Inflation has come lower – but we saw an uptick in the latest figures. The rising shipping costs and the positive pressure in oil prices mean that upside risks prevail. Yet the slowdown in European economies calls for lower rates. Released yesterday, the Eurozone PMI figures showed that aggregate activity remained in the contraction zone for the 8th straight month and slow down accelerated in January – except for manufacturing.   A hedge fund called Qube apparently built a $1 bn short position against German stocks, and Goldman Sachs says that a Trump presidency would increase risks for European businesses, and economically sensitive pockets of the market, like the German industries, would be the most exposed.  
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Netflix Surges: A Boost to Market Confidence Amid Global Economic Uncertainty

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.01.2024 15:01
Netflix beats By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Netflix jumped 8% in the afterhours trading as its revenue and new subscriptions topped estimates. More than 13 mio people decided that Netflix was worth paying for, and the number of total paid subscribers rose past 260 mio. The password sharing ban has been a boon for the company. The only thing they regret is not having thought about it before.   Strong Netflix results will likely give a positive spin to the major US indices which were slow to move yesterday after the Richmond manufacturing index came in much lower than expected.  In the sovereign space, a mixed 2-year bond auction in the US hinted at declining optimism from the Federal Reserve's (Fed) dovish camp, but a jump from foreign buyers pulled the US 2-year yield lower. The 10-year yield remains steady above the 4.10% and will hopefully cross back above the 2-year yield after having stayed inverted for more than a year-and-a-half as the US soft-landing scenario is given more weight despite the slow manufacturing numbers as US consumer spending remains strong and helps keeping the US economy afloat. The US will release its latest GDP update tomorrow and is expected to print a decent 2% growth for the last quarter.   Robust US economic growth, strong earnings and prospects of lower Fed rates remain supportive of equity valuations, although the ATH levels and near-overbought market conditions in the S&P500 call for – at least – a minor correction in the short run. Today, Tesla will be reporting its latest Q4 results after the bell, and the results will unlikely be as enchanting as Netflix'. But overall, investors don't want to miss the US stocks' rally to fresh highs. And if the trend is your friend, well, the trend is clearly positive.  In China, though, sentiment is the exact opposite. Chinese stocks saw a little bump yesterday on the announcement of a $278bn rescue package to lift the Chinese stocks up. But skepticism reigned as 1. the rescue package was found to be a bit meagre compared with around $6 trillion of market value wiped off the value of Chinese and Hong Kong stocks in past 3 years. 2. The rescue package doesn't solve the underlying fundamental problems, namely slowing economic growth, a serious property crisis and slowing population. And 3. No one can guarantee a consistent action plan from the Xi government in the medium to long run. The ruthless government crackdown and extreme Covid measures are responsible for a severe confidence loss. And the market reaction to Chinese measures prove that you can't buy confidence.   In the FX, the US dollar index is testing the 200-DMA to the upside. Parallelly, the EURUSD is testing its 200-DMA support to the downside. Today's PMI data and tomorrow's European Central Bank (ECB) decision will likely help provide fresh direction to the pair. Fading inflation, sputtering European economies and ECB Chief Lagarde's latest words in Davos hint that the ECB is preparing for a summer rate cut. More clarity on the ECB's rate cut plans could provide a green light for a sustainable move below the 200-DMA. Elsewhere, the Bank of Canada (BoC) meets today and is expected to maintain rates unchanged. The Loonie remains under the pressure of limited appetite for oil.  Speaking of oil, US crude's inability to clear the $75pb offers is intriguing despite news that would normally be positive for oil prices – like the geopolitical tensions in regions where oil is pumped and transported, and the US API data showing a 6.7-mio barrel slump in weekly oil inventories. The next decisive move in oil prices should be a positive breakout. 
Hawkish Notes and Global Markets: An Overview

Hawkish Notes and Global Markets: An Overview

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.01.2024 12:37
Say something hawkish, I'm giving up on you By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The week started on a positive note on both sides of the Atlantic Ocean. Equities in both Europe and the US gained on Monday. The tech stocks continued to do the heavy lifting with Nvidia hitting another record. The positive chip vibes also marked the European trading session; the Dutch semiconductor manufacturer ASML regained its status as the third-largest listed company in Europe, surpassing Nestle, thanks to an analyst upgrade.  Moving forward, the earnings announcements will take the center stage, with Netflix due to announce its Q4 results today after the bell. The streaming giant expects to have added millions more of new paid subscribers to its platform after it scrapped password sharing last year.   Away from the sunny US stocks, the situation is much less exciting for China. Right now, the CSI 300 stocks trade near 5-year lows and Chinese stocks listed in Hong Kong are trading with the deepest discount to the mainland peers in 15 years, as the Chinese interventions are said to be less felt in Hong Kong than in the mainland. Today, though, the Chinese stocks are better bid because Chinese Premier Li Qiang called for more effective measures to stabilize the slumping Chinese stocks, but the truth is, investors left Chinese stocks because of the ferocious government crackdown on most loved Chinese companies. Nothing less than drastic financial support would be enough to bring investors back.  The Japanese stocks continue to be the bright spot among the Asian equity markets. The Bank of Japan's (BoJ) negative interest rates, the cheap yen and the positive outcomes of the tech war between the US and China have been pushing the Japanese Nikkei index to multi-decade highs, and these factors are not ready to reverse just yet. Today, the BoJ didn't only announce that it would keep the interest rates unchanged at -0.10% and the upper band for the 10-yer yield steady at 1%, but the bank lowered its inflation forecasts citing the decline in oil prices. We haven't heard the BoJ presser at the time of writing but lowering inflation forecast highlights that there is no emergency to make any changes to the BoJ policy, even less so after a powerful earthquake hit the island at the very beginning of the year. On the contrary, if inflation – which is the bad side of low rates – is under control, the bank would do better to keep the rates low and its economy supported. As such, the USDJPY remains bid above the 148 level after the BoJ decision and before the post-decision presser. The long yen trade looks much less appetizing today than it did by the end of last year. Yet going short the yen is a risky option considering the rising risk of a verbal intervention when the USDJPY approaches the 150 level. Therefore, the USDJPY will likely waver between the 145/150 range, until there is more clarity about the timing of the BoJ normalization.   Elsewhere, the day is expected to unfold slowly. Investors will monitor the Richmond manufacturing index and await Netflix's earnings release. Additionally, attention is on Donald Trump, who has gained favoritism after Ron DeSantis withdrew his support and endorsed Mr. Trump for this year's presidential race. The potential impact of a Trump victory on financial markets is challenging to quantify; he may adopt a tougher stance on China, implement tax cuts, and increase spending, leading to mixed effects.   For those who missed out on the meme stock frenzy, it's however intriguing to observe Trump's special-purpose acquisition company, DWAC, which surged nearly 90% yesterday.  
Eurozone PMIs: Tentative Signs of Stabilization Amid Ongoing Economic Challenge

Surprise Surge in UK Inflation Triggers Market Response

Ipek Ozkardeskaya Ipek Ozkardeskaya 17.01.2024 15:55
UK inflation unexpectedly rises By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Yesterday was just another day where another policymaker pushed back on the exaggerated rate cut expectations. Federal Reserve's (Fed) Christopher Waller said that the Fed should go 'methodically and carefully' to hit the 2% inflation target, which according to him is 'within striking distance', but 'with economic activity and labour markets in good shape' he sees 'no reason to move as quicky or cut as rapidly as in the past', and as is suggested by the market pricing. So that was it. Another enlightening moment went down the market's throat in the form of a selloff in both equities and bonds. The US 2-year yield – which captures the rate expectations rebounded 12bp, the 10-year yield jumped past the 4%, the US dollar index recovered to a month high and is testing the 200-DMA resistance to the upside this morning, while the S&P500 retreated 0.37%.   Waller spoke from the US yesterday, but many counterparts are wining, dining and speaking in the World Economic Forum in Davos this week, which doesn't only offer snowy and a beautiful scenery this January, but it also serves as a platform to many policymakers to bring the market back to reason. Expect more comments of this hawkish kind during this week. It turns out that one of the most popular topics of this year's WEF is rising inflationary risks due to the heating tensions in the Red Sea which disrupt the global trade roads and explode the shipping costs.  
The Australian Dollar Faces Challenges Amid Economic Contractions and Fed Rate Cut Speculations

Global Market Overview: Mixed Signals from China and Taiwan, Currency Moves Set Tone for the Week

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.01.2024 12:14
Elsewhere  The People's Bank of China (PBoC) held its policy rate steady this Monday - defying the expectation of a 10bp cut - while pumping more cash into the financial system to reverse the selloff and boost asset prices, and eventually growth. But in vain. The Chinese CSI 300 index barely reacted to the news after China posted a third negative CPI read on a yearly basis. China is still expected to hit its official 5% target this year, but the confidence crisis and the slump in property prices are not going to reverse overnight. Outlook for Chinese equities is not bright.   Taiwan's stock exchange, on the other hand, which diverged positively from the mainland stocks last year, had a cheery start to the week after the ruling DPP's Lai – who is pointed at as a 'separatist' by Beijing - won presidency and his party lost its legislative majority. The latter was seen as a good compromise for relations between China and Taiwan – as the outcome was clearly not over-provocative for Beijing. The Japanese Nikkei 225, on the other hand, hit the 36K mark on the back of a softer yen, and waning expectations that the BoJ will be normalizing at a decent speed this year.   In the FX, the US dollar kicks off the week on a slightly negative note, the AUDUSD struggles to find buyers near the lower bound of its October to now ascending channel, as the PBoC could've been more supportive. The EURUSD couldn't clear the 1.10 resistance last week, and the failure to break above the crucial psychological could weaken the euro bulls' hands this week. Across the Channel, Cable remains cautiously bid after Friday's GDP printed a better-than-expected growth number. The UK will release its latest inflation report on Wednesday. UK inflation is expected to have further eased from 3.9% to 3.8% in December, and core inflation is seen slipping below the 5% mark. A softer-than-expected set of inflation figures could prevent Cable from making a sustainable move above the 1.28 level.   
UK Inflation Dynamics Shape Expectations for Central Bank Actions

The Finish Line: Reflections on 2023 and a Glimpse into 2024

Ipek Ozkardeskaya Ipek Ozkardeskaya 02.01.2024 12:48
The Finish Line By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Here we are, on the last trading day of the year. This year was completely different than what was expected. We were expecting the US to enter recession, but the US printed around 5% growth in the Q3. We were expecting the Chinese post-Covid reopening to boost the Chinese growth and fuel global inflation, but a year after the end of China's zero-Covid measures, China is suffocating due to an unexpected deflation and worsening property crisis. We were expecting last year's negative correlation between stocks and bonds to reverse – as recession would boost bond appetite but batter stocks. None happened.  The biggest takeaway of this year is the birth of ChatGPT which propelled AI right into the middle of our lives. Nasdaq 100 stocks close the year at an ATH, Nvidia – which was the biggest winner of this year's AI rally dwarfed everything that compared to it. Nvidia shares gained more than 350% this year. That's more than twice the performance of Bitcoin – which also had a good year mind you.   Besides Nvidia, ChatGPT's sugar daddy Microsoft, Apple, Amazon, Meta, Google and Tesla – the so-called Magnificent 7 generated almost all of the S&P500 and Nasdaq100's returns this year. And thanks to this few handfuls of stocks, Nasdaq100 is set for its best year since 1999 following a $7 trillion surge.   The million-dollar question is what will happen next year. Of course, we don't know, nobody knows, and our crystal balls completely missed the AI rally that marked 2023, yet the general expectation is a cool down in the technology rally, and a rebalancing between the big tech stocks and the S&P493 on narrowing profit lead for the Magnificent 7 compared to the rest of the index in 2024. T  The other thing is, the S&P500's direction next year is unclear as the Federal Reserve (Fed) is expected to start chopping the interest rates, with the first rate cut expected to happen as early as much with more than 85% probability. So what will the Fed cuts mean for the S&P500? Looking at what happened in the past, the S&P500 typically rises after the first rate cut, but the sustainability of the gains will depend on the underlying economic fundamentals. Lower rates are good for the S&P500 valuations EXCEPT when the economy enters recession within the next 12-months. So that backs the idea that I have been trying to convey here since weeks: lower US yields will be supportive of the S&P500 valuations as long as the economy remains strong, and earnings expectations hold up.    For now, they do. The S&P500 earnings will certainly end a bit better than flat this year, and the EPS is expected to rise by more than 10% next year. The Magnificent 7 are expected to post around 22% EPS growth next year. But note that, these expectations are mostly priced in, so yes, there will still be a hangover and a correction period after a relentless two-month rally triggered a broad-based risk euphoria among investors. The S&P500 is about to print its 9th consecutive week of gains – which would be its longest winning streak in 20 years.  In the FX, the US dollar index rebounded yesterday as treasury yields rose following a weak sale of 7-year notes. But the US dollar is still set for its worse year since 2020. Gold prepares to close the year near ATH, the EURUSD will likely reach the finish line above 1.10 and the USDJPY having tested but haven't been able to clear the 140 support. In the coming weeks, I would expect the EURUSD to ease on rising expectations from the ECB doves, and/or on the back of a retreat from the Fed doves. We could see a minor rebound in the USDJPY if the Japanese manage to calm down the BoJ hawks' ambitions. Overall, I wouldn't be surprised to see the US dollar recover against most majors in the first weeks of next year.  In the energy, crude oil remains downbeat. The barrel of American crude couldn't extend rally after breaking the $75pb earlier this week, and that failure to add on to the gains is now bringing the oil bears back to the market. The barrel of US crude sank below the $72pb as the US oil inventories slumped by more than 7mio barrels last week, much more than a 2-mio-barrel decline expected. The latter brought forward the demand concerns and washed out the supply worries due to the Red Sea tensions. Note that crude oil is set for its biggest yearly decline since 2020; OPEC's efforts to curb production and the rising geopolitical tensions in the Middle East remained surprisingly inefficient to boost appetite in oil this year. 
Geopolitical Tensions Propel Oil Rally: Market Insights by Ipek Ozkardeskaya

Geopolitical Tensions Propel Oil Rally: Market Insights by Ipek Ozkardeskaya

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.12.2023 15:19
Rally extends By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The barrel of American crude finally cleared the $74/75pb resistance range on the mounting geopolitical tensions in the Red Sea and traded at $76pb on Tuesday. Yet the bullish market reaction looks relatively week given the amplitude of the issues in the region. The rally will likely continue at a gentle speed. The next natural target for oil bulls stands at 200-DMA, near $78pb, but the price should meet solid resistance at this level due to weak momentum.  Other than oil, yesterday was a slow day where the dovish Fed expectations continued to remain in the driver seat and drive the US stock and bond markets higher... while many other markets were peacefully sleeping. Buyers rushed into the US Treasury's bond auctions yesterday to close in some good deals before the year ends on expectations that the Federal Reserve (Fed) will start chopping the rates by spring. According to Bloomberg, Treasury's 52-week bill auction saw a record demand from indirect bidders – a group that includes foreign central banks – and the 6-month bill saw 71.6% demand, the 3rd biggest in history. This means that investors expect the yields to come significantly lower in the next 6-12 months. Consequently, the US 2-year yield slipped below the 4.30% mark, the US 10-year yield steadied below the 3.90% level.   The US dollar remains under a decent selling pressure, gold extends gains on the back of softening US yields – that decrease the opportunity cost of holding the non-interest-bearing gold, the EURUSD continues to push higher above the 1.10 level on the back of hawkish European Central Bank (ECB) commentaries, yet the rally in the Japanese yen starts giving signs of exhaustion into the 140 mark in the short run. A stronger yen will help the Bank of Japan (BoJ) rein in on inflation and decrease the need of normalizing. In the longer run, even if the BoJ doesn't act, a dovish shift from the Fed should ensure a fall in the USDJPY towards 130/132.   The interesting thing is, we see the negative correlation between the Japanese Nikkei and the yen – wane. The latest appreciation in the Japanese yen didn't bother stock buyers. The Nikkei continued to find buyers even with a stronger Japanese yen, meaning that either the stock investors don't want to price in a potential easing from the BoJ – and maybe THEY are right, or the Fed dovishness is a nice boost to global stock markets and Japanese stocks benefit from the dovish Fed winds. In all cases, Japanese stocks remain on track for more gains.   In America, the S&P500 buyers will certainly not back down before sending the index to a fresh high this week, or the next. The index was trading just 0.5% below its ATH yesterday, so it would clearly be a shame if we finished this year without an S&P500 record, no?  But yes, the market optimism is overstretched, the Fed's rate cut expectations are unfunded – in that, yes, the Fed will probably cut rates but not at the speed that's been currently priced in – the oversold market conditions do hint that a downside correction would be healthy. Once the Santa high fades, the hangover will hit.  
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Soft Inflation Dynamics: A Key Factor in the Santa Rally

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.12.2023 14:55
Soft inflation at the Top of Santa's Wishlist By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Appetite in European stocks waned yesterday, yet the US counterparts recovered Wednesday losses and closed the session more than 1% higher as the latest growth data was revised slightly lower to 4.9%, real consumer spending was revised down from 3.6% to 3.1%, corporate profits from above 4 to 3.7%. Else, jobless claims came in lower than expected and the Philly Fed index printed a sharper contraction in December. All in all, the data pointed at a certain slowdown – except for the jobless claims – but the numbers looked strong in absolute terms: that's about everything that the soft-lander camp love to hear : a slowing economy that will allow the Federal Reserve (Fed) to loosen its grip on the monetary policy, but an economy that will avoid entering recession if inflation falls and remains low near the Fed's 2% target. As such the S&P500 closed a few points below 4500 and Nasdaq 100 a few points below an ATH.   Today's inflation print is the Fed puzzle's last crucial piece. If today's PCE print comes in as soft as expected, or ideally softer-than-expected, we shall see the rally in bonds – and perhaps in stocks – extend the Santa rally. In numbers, core PCE is expected to show no change on a monthly basis. If that's the case, the core PCE – the Fed's favourite gauge of inflation – will fall to the Fed's 2% target over the past 6 months, on an annualized basis. Given the strong positive trend and the market's optimism, a sufficiently soft inflation figure should be enough to justify a fresh record for the S&P500 after the Dow Jones and Nasdaq renewed record after record over the past week. When the market is high on dovish Fed expectations, the sky is the limit.  Presently, swaps point at six 25bp cut in the US by this time next year. That's a 150bp cut in total. It means that the US rates are expected to fall to 375/400bp range in a year time. And that leaves the 2-year bond – which currently yields near 4.35% with plenty of room to extend rally. This being said – and I can't repeat it enough – if the US economy is set for a 150bp cut, it would also be due to something ugly that would've triggered that Fed reaction. A 5% growth, combined with robust consumer spending, strong profit expectations and a historically low unemployment rate don't call for a 150bp cut.   Elsewhere  Today's inflation data from Japan confirmed an expected fall in inflation to 2.5% from 2.9% printed a month earlier. As such, there is no rush for the Japanese policymakers to move; low rates are sweet for growth if they don't generate inflation. Plus, the yen appreciation should keep inflation contained in Japan and leave the Bank of Japan (BoJ) in a position to ... wait until at least April to exit the negative rates... et encore. Therefore, there is a weakening case for the USDJPY to dip below the 140 level, and there is no issue with buying the Japanese stocks at 33-year high levels when the BoJ remains so supportive.   In Europe, the EURUSD bulls are waiting for the US inflation data in ambush. A sufficiently soft inflation read is expected to boost the Fed doves, back a further USD depreciation and drive the EURUSD above the 1.10 mark to the end of the year. In this configuration, gold will also remain on track for further gains above the $2000 level.   Good Bye!  American crude is testing the top of the downtrending channel that has been building since the end of September. The $74/75 offers continue to push back the bullish attempts, while trend and momentum indicators are strong and tell that a positive breakout is still possible and could lead the price of a barrel to near 200-DMA – near $78pb.   The latest news from OPEC is not necessarily enchanting. Angola decided to leave OPEC as the country rejected the restricted production quotas that the cartel imposed on them. But note that, Angola won't be pumping significantly more outside OPEC: once Africa's biggest producer, the country's production collapsed by 40% in 8 years due to an unfavourable tax environment and the absence of fresh investments, and the country pumped just above 1.1mbpd, anyway. Therefore, in absolute terms, Angola's exit won't change the dynamics for OPEC, but Angola's walkout is just another reminder that the tensions are mounting at the heart of OPEC, and the cartel – which now has the lowest market share of its history – will hardly maintain an impactful position to influence the oil price if they can't show unity.    
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Deciphering the Bank of Japan's Policy Shift: Will Negative Rates Bid Farewell?

Ipek Ozkardeskaya Ipek Ozkardeskaya 18.12.2023 13:47
What's cooking in Japan?  The Bank of Japan (BoJ) will announce this year's final policy verdict on Tuesday. The BoJ Governor Ueda's comments that the BoJ's policy would be hard to maintain from the year end, had triggered expectations that the BoJ will finally say goodbye to negative rates. There is nothing more than a slim probability for the BoJ to exit negative rates this week, but investors are eager to hear further details about how and when the BoJ will leave the negative rate territory. Concrete details regarding the BoJ's policy plans and/or changes in BoJ's inflation outlook could cause swift moves in yen markets, which became very volatile since Ueda hinted that something is cooking in its kitchen. The USDJPY fell from above 150 to nearly 140 in just two weeks. As such, the pair slipped - a bit too fast – into the bearish consolidation zone, below the major 38.2% Fibonacci retracement on this year's rally.   The market's position regarding the yen couldn't be clearer. Presently, long Japanese yen is the most obvious trade in the currency markets. It is almost too easy. A hawkish signal from the BoJ has the potential to push the USDJPY below the 140 level, even with prevailing oversold conditions. Conversely, should the BoJ disappoint the market once more, any price rallies could draw the attention of top sellers.   
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Navigating the Murky Waters: Decoding the Federal Reserve's Chaotic Rate Cut Signals and Market Implications

Ipek Ozkardeskaya Ipek Ozkardeskaya 18.12.2023 13:47
The uncertainty surrounding the Federal Reserve's (Fed) stance on rate cuts has created a complex narrative that demands close attention. As the Fed hinted at a potential halt to its monetary tightening efforts, European policymakers resisted aligning with this sentiment. Notably, Fed members like John Williams and Raphael Bostic have contradicted expectations of a rate cut. Despite this, Fed funds futures activity indicates a high probability of the first rate cut by March next year, with a more than 75% chance, and a near 100% chance of the first cut in May. The market anticipates around a 150 basis points cut throughout the next year, doubling the 75 basis points cut predicted by Fed officials. This ambitious projection clashes with the current resilience of the US economic growth.   Long Japanese yen By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve's (Fed) rate cut talk becomes chaotic and frankly, hard to follow. After the Fed signaled a possible end to its monetary policy tightening campaign and the European policymakers refused to adhere, some Fed members including John Williams and Raphael Bostic pushed back the Fed cut expectations.   Alas, activity on Fed funds futures price in the first Fed cut by March next year with more than 75% chance, and the first cut in May with almost a 100% chance. The market pricing matches the expectation of around 150bp cut throughout next year, versus only 75bp cut foreseen by Fed officials – which is already ambitious given the resilience of the US economic growth. Therefore, either the US economy will do fine, and the Fed won't start cutting rates in March. Or we will see a sharp slowdown in the US growth and a potentially deteriorating growth outlook will force the Fed to start cutting the rates in Q1 and cut thoroughly. But a scenario where the Fed starts cutting rates in March while economy remains resilient and inflation low makes little sense as the fiscal spending will remain robust into next year's presidential election and maintain the risk of a U-turn in inflation alive.   But anyway, investors could give the Fed doves the benefit of the doubt until Friday's PCE data. The PCE, the Fed's favourite gauge of inflation, is expected to show a further decline in both headline and core inflation. More importantly, if the data matches expectations, it would mean that 6-month annualized inflation will be a touch above the Fed's 2% target. The latter could keep the Fed doves in charge. Nonetheless, the successful alleviation of inflation can be attributed to the decline in oil prices. Even though the base case scenario is a limited upside potential in oil prices, any reversal in oil price dynamics could tame the Fed cut expectations. In the short run, the barrel of American oil is around the $72pb on Monday on the back of lower Russian exports and suspended transit in the Red Sea due to attacks by the Houthis on ships in the region. Solid offers are seen into $74/75pb range. 
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Markets Await US Jobs Data: Tech Stocks Soar, Japanese Yen Surges, and Eyes on Federal Reserve Outlook

Ipek Ozkardeskaya Ipek Ozkardeskaya 12.12.2023 14:52
Elsewhere...  The nice jump in the Japanese yen pulled the dollar index lower yesterday. Of course, the EURJPY, GBPJPY and AUDJPY all made a similar move. The US bonds, on the other hand, were little changed yesterday – for once – as traders sat on their hands ahead of this week's much-awaited US jobs data, while technology stocks were on fire yesterday. Alphabet jumped more than 5% after Google released Gemini – the largest and most capable AI model it has ever built, and AMD jumped nearly 10% after the company unveiled a chip that will run AI software faster than rival products. But rival Nvidia was little hit by the news, as its chips gained 2.40% yesterday. The AI demand is big enough for everyone to benefit amply from it.   Today, all eyes are on the US jobs data.  According to a consensus of analyst estimates on Bloomberg, the US economy may have added 180'000 new nonfarm jobs in November, the pay may have risen slightly faster on a monthly basis, and the unemployment rate is seen steady at 3.9%. The fact that the data released earlier this week hinted at a clear loosening in the US jobs market makes many investors think that today's official data will also follow the loosening trend. If the data is soft enough, the rally in the US bonds could continue and the US 10-year yields could have a taste of the 4% psychological mark, while a stronger-than-expected figure could help scale back the dovish Federal Reserve (Fed) expectations but could hardly bring the hawks back to the market before next week's FOMC decision.    
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The Day of Anticipation: BoJ's Hint at Exiting Negative Rates Sparks Market Reaction

Ipek Ozkardeskaya Ipek Ozkardeskaya 12.12.2023 14:50
The day has come By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Yesterday was finally the day that most FX traders have been waiting for since at least a year: the day where the Bank of Japan (BoJ) gave a hint that it will finally exit its negative interest rate policy. Precisely, the BoJ Governor said, after his meeting with the Japanese PM - that handling of monetary policy would get tougher from the end of the year. Indeed, the BoJ is buying a spectacular quantity of JGBs to keep the YCC intact at absurdly low levels compared with where the rest of the developed markets yields are following an almost 2-year long of aggressive monetary policy tightening campaign. At its highest this year – after the BoJ relaxed the rules on its YCC policy – the 10-year JGB flirted with the 1% mark, whereas the 10-year yield German bund yield hit 3%, the 10-year British gilt yield advanced to 4.70% and the US 10-year yield hit 5%. Certainly, inflation in Japan lagged significantly behind inflation in Western peers, yet inflation in the US is now exactly where inflation in Japan is: near 3%.   The BoJ's negative rate is the last souvenir of the zero/negative rate era and any small hint that things will get moving over there could move oceans. And this is what happened yesterday. The speculation that the BoJ will hike rates as soon as this month spiked to 45% soon after Mr. Ueda's words reached investors ears. The 10-year JGB yield spiked to 0.80% from around 0.62% reached earlier this week in parallel with the falling DM yields. The USDJPY fell from 147 to 141 in a single move, and the pair is consolidating gains a touch below 144 this morning, as traders argue whether a December normalization is too soon or not. Fundamentally it is not: in all cases, the BoJ will start normalizing policy two years after the Bank of England (BoE) hiked its rate for the first time after a long period. And the BoJ will be normalizing its rates when all major central banks plateau their tightening policy and when investors are out guessing when the normalization – toward the other direction – will begin. So no, fundamentally, it is not too early for the BoJ to start hiking its policy rate. But it would be a sudden move – that's for sure!   The Day of Anticipation: BoJ's Hint at Exiting Negative Rates Sparks Market Reaction"In any case, it is more likely than not that the fortunes of the Japanese yen turned for good this week. In the short run, consolidation is the immediate answer to yesterday's kneejerk rally – which took the USDJPY immediately into the oversold market conditions as the move was also amplified with many traders covering their short positions. But from here, yen traders will be looking to sell the tops rather than to buy to dips. A sustainable move below 142.60 – the major 38.2% Fibonacci retracement on this year's bullish trend – will confirm a return to the bearish consolidation zone, then the pair will likely take out the next major technical supports: the 200-DMA near 142.30, the next psychological support at 140 and should gently head back to – at least around 127 – where it started the year. But these forecasts will hold only, and if only, the BoJ doesn't make a sudden U-turn on its normalization plans. Remember, the BoJ didn't say it would normalize. It just said that it will be hard to handle the actual policy for longer. If one were to imagine, Governor Ueda maybe spent last night looking at the ceiling and wondering 'what have I said!'. Funny thing is, the BoJ's rate normalization speculation comes a few hours before the country revealed a 2% fall in its GDP; obviously, the global policy tightening has been hard on the world economy, and Japan can't avoid the global slowdown winds. If it turns out, Japan might normalize its monetary policy when its economy begins to slow down.    
Tackling the Tides: Central Banks Navigate Rate Cut Expectations Amid Heavy Economic Calendar

Tackling the Tides: Central Banks Navigate Rate Cut Expectations Amid Heavy Economic Calendar

Ipek Ozkardeskaya Ipek Ozkardeskaya 12.12.2023 14:30
Keeping up with the central banks  The economic calendar for the week is heavy. The US will announce its latest CPI update on Tuesday and the Fed will announce its latest policy verdict on Wednesday, then the Swiss National Bank (SNB), the European Central Bank (ECB) and the Bank of England (BoE) will give their last verdict for this year on Thursday. All four major central banks are expected to keep their interest rates steady at the current levels, but we will closely scrutinize how they address the rate cut expectations that have been ahead of their skis since the end of October. Chances are that the accompanying statements will attempt to cool down the doves.  Activity on Fed funds futures asses nearly 75% chance for May rate cut, and around 42% chance for a March cut. The game will be played on this field. Either a sufficiently dovish Fed will boost earlier rate cut expectations, or – more reasonably – Powell will reiterate that the battle against inflation is on the right track, but the rates will remain high for a prolonged period until the Fed is convinced that the inflation battle is won. If that's the case, we could see the US dollar extend recovery against major peers and the major pairs slip into bearish consolidation zone before the holiday season.    
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Bonds Rally as Equities Keep a Watchful Eye

Ipek Ozkardeskaya Ipek Ozkardeskaya 12.12.2023 12:40
Bonds rally, equities watch By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The central bank doves are forcefully back following a significantly lower-than-expected US JOLTS print, and on the back of a surprisingly dovish comment from an otherwise... hawkish Isabel Schnabel from the European Central Bank (ECB).   Jolts Released yesterday, the JOLTS data showed that the US job openings fell below 8.8 mio jobs in October – when strikes in Detroit's three big carmakers may partly explain why the job openings saw such a meaningful decline. But whatever it is, the US offered a lot less jobs in October than it did the previous month, and that has come to cement the idea that the US jobs market is further loosening. Again, the October numbers should be taken with a pinch of salt as they were certainly impacted by the strikes, and November numbers could also be influenced by the distortions of October – meaning that we could see some robust numbers after a depressed month of October. Yet overall, the US jobs market had started giving signs of cooling before the strikes, and this week's numbers may not be representative of the underlying trend. However, the US jobs figures gain a crucial importance as the Federal Reserve (Fed) approaches a policy pivot.   Due today, the ADP is expected to print 130K private job additions in the US last month, and the Atlanta Fed's GDP forecast is expected to hint at a sharp decline in Q4 growth to 1.2% from above 5% printed last quarter. If that's the case, the Fed doves will remain in charge of the market, but the everything rally will likely turn into a... bond rally as we are now at a juncture where the bond optimism might only persist with increased recession probabilities, which doesn't bode well for equity appetite. 
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Market Musings: Powell's Mixed Signals, Oil's OPEC Struggles, and FX Crossroads

Ipek Ozkardeskaya Ipek Ozkardeskaya 04.12.2023 13:49
Mixed feelings By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) President Jerome Powell pushed back against the rate cut bets at his speech given in Atlanta last Friday. He is of course playing the card of 'high for long' rates to tame inflation, yet he hinted that the Fed will probably not hike rates when it meets this month. He said that the US monetary policy is 'well into restrictive territory' and that the fell of effect of higher rates to combat inflation is working its way through economy. 'We are getting what we wanted to get,' said Powell. And indeed, inflation is cooling, people start to spend less, and the job market loosens. But in parallel, the financial conditions are loosening fast, as well. Hence the market optimism and stocks/bond gains become increasingly vulnerable to hawkish Fed comments, and/or strong economic data. The US jobs data will take the center stage this week. Investors expect further fall in US jobs openings, less than 200'000 job additions last month with slightly higher pay on month-on-month basis. The softer the data, the better the chances of keeping the Fed hawks away from the market.   Unsurprisingly, the part of Powell's speech where he pushed back against rate cut expectations went fully unheard by investors on Friday. On the contrary, the Fed rate cut expectations went through the roof when it became clear that the Fed will stay pat again this month. The US 2-year fell to nearly 4.50% on Friday, the 10-year yield tipped a toe below the 4.20% mark. The S&P500 flirted with the summer peak, flirted with the 4600 level and closed the week a touch below this level, while the rate sensitive Nasdaq closed a few points below the 16000 and iShares core US REIT ETF jumped nearly 2.70% last Friday.   The SPDR's energy ETF, on the other hand, barely closed above its 200-DMA, as last week's OPEC decision to cut the production supply by another 1mbpd and to extend the Saudi cuts into next year barely impressed oil bulls – even less so given the apparent frictions at the heart of the group regarding this supply cut strategy when prices keep falling. The decline in oil prices continues this Monday. The barrel of US crude remained aggressively sold near the 200-DMA last week, and we are about to step into the $70/73pb region which should give some support to the market. With the clear deterioration of the positive trend, and the lack of any apparent boost to the oil market following last week's OPEC meeting, there is a chance that we will see oil finish the year below the $70pb mark. An increasingly shaky OPEC unity, record US production, a slowing global economy, deteriorating global demand outlook and efforts to shift toward cleaner energy sources weigh heavier than the supply worries. As such, the $100pb level becomes an increasingly difficult target to reach. And even though the COP28 president Mr. Al Jaber said last weekend that there is 'no science' behind demands for phase-out of fossil fuels – yes 70'000 people flew to Dubai to hear that there is no evidence that fossil fuel is destroying climate – efforts to phase-out fossil fuel continues at full speed with solar panel installation surpassing the most optimistic estimates according to Climate Analytics.  In the FX, the US dollar's positive attempt above the 200-DMA was halted by Powell's speech on Friday – or more precisely by investors' careful extraction of all the dovish elements in that Powell speech. Both the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) will likely keep their rates unchanged this week, but the RBA will certainly sound hawkish faced with worries of 'home-grown' inflation. The AUDUSD stepped into the bullish consolidation zone following a 6+% jump since the October dip and could gather further strength this week. The EURUSD, on the other hand, remains under growing selling pressure despite FX traders' hesitancy regarding what to do with the US dollar. The pair sank to 1.0830 on Friday and is preparing to test the 200-DMA, which stands near 1.0820, to the downside. The easing Eurozone inflation, along with slowing European economies, boost the dovish ECB expectations. The final PMI data will confirm further contraction in the Eurozone last month, as the Eurozone GDP read will likely confirm a 0.1% contraction last quarter. Coming back to the EURUSD, the pair will likely see a solid support near 1.0800/1.0820, which includes the 200-DMA and the major 38.2% Fibonacci retracement on October – November rebound. And clearing this support should pave the way for an extended selloff toward 1.0730.    
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Forex Markets React to Soft Dollar, OPEC Decision Anticipation, and Quirks of COP28

Ipek Ozkardeskaya Ipek Ozkardeskaya 30.11.2023 13:08
URUSD retreats despite soft dollar The rally in US bond markets, and the tumbling US yields weigh on the US dollar. The USDJPY extended its drop, and finds sellers above the 100-DMA, whereas the EURUSD couldn't extend gains above the 1.10 mark as inflation data from some Eurozone countries came sufficiently soft yesterday. Spanish inflation fell more than expected to 3.2%, as German inflation fell more than expected to 2.3% in November. The Eurozone's aggregate inflation will be released after the French and Italian figures this morning, and slowing inflation will certainly give cold feet to the euro bulls above the 1.10 level – even though it's not impossible to see the pair surpass this level due to USD weakness.  Crude oil rebounds before OPEC decision  OPEC is expected to announce an eagerly expected decision regarding its supply strategy today. The barrel of US crude is back to $78pb, and ready to jump above the 200-DMA if Saudi Arabia obtains a joint effort from other members in reducing supply.  Of course, OPEC will do its best to get the oil bulls on its side when it announced its decision today. But when expectations are high, they are harder to satisfy. Therefore, if a post-decision rally fails to send the price of a barrel above the $81pb level, the critical 38.2% Fibonacci support on September to November selloff that should distinguish between the actual bearish trend and bullish consolidation, it could be a better idea to sell the tops.  COP28 70'000 people flew to Dubai this week to talk about how to cut carbon emissions. 70'000 people. Staying where they were would certainly be a first step in gaining credibility on how to cut emissions. And that's not all the absurd in this COP summit. The CEO of the Abu Dhabi National Oil Company will be leading this week's summit. Yes, the CEO of a company that can survive only by keeping carbon emissions where they are. Additionally, the fossil fuel industry has been invited to participate more than any other COP since the gatherings began in 1995. You know, nothing says 'let's save the planet' like a summit led by a big oil CEO. 
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Surging US Bond Rally Raises Rate Cut Expectations Amid Strong Q3 GDP Performance

Ipek Ozkardeskaya Ipek Ozkardeskaya 30.11.2023 13:07
Nothing says 'let's save the planet' like a summit led by a big oil CEO By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The rally in US bonds continued at full speed yesterday and bonds are set to record their best month since the GFC this November. The US 2-year yield tumbled to almost 4.60% yesterday from nearly 5% at the start of the week. While the 10-year yield rebounded after hitting 4.25%. That makes an almost 40bp fall for the US 2-year yield and a 25bp fall for the US 10-year yield in three days only.   A faster fall in short-term yields means that that the market is busy pricing rate cuts (which we know it does), yet the amplitude of the move is relatively big.   Released yesterday, the US Q3 GDP was revised to an eye-popping 5.2% from an already high 4.9% printed earlier. The consumer spending component was revised slightly lower, and the price pressures seemed softer than previously announced. But we could easily say that the US economy's Q3 performance made China jealous!   If you dig deeper: even though yesterday's above-5% GDP print would've been an excellent trigger for a rebound in the US bond yields and the dollar – on belief that the US economy is strong enough to allow the Federal Reserve (Fed) to keep rates 'high for long' - it also surfaced the worries (or hope) that this incredible performance can't last!   And guess what? The Atlanta Fed's GDP Now forecast – which beautifully predicted last month's above-average performance – is now pointing at a sharp decline in the US GDP growth in the current quarter to around 2%. Note that a 2% growth in the US is still above average and shouldn't be enough to convince the Fed to start cutting the rates too early if the slowdown in inflation remains insufficient. But if inflation slows, nothing will stop the bond traders from continuing to rush in.   Today, all eyes on the US PCE index – the Fed's favourite gauge of inflation. The headline PCE may have eased from 3.4% to 3.0% in October, and core PCE is seen down from 3.7% to 3.5%. A softer-than-expected figure could further fuel expectations of an early Fed cut, while a stronger-than-expected set of figures should, in theory, calm down the dovish enthusiasm and call for a rebound in the yields. Presently, activity on Fed funds futures gives almost 80% chance for a Fed rate cut in May, and the probability of a March cut is 50-50.     
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The Dollar Index Extends Losses Below 200-DMA Despite Yields Rebound: Weekly Market Analysis

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.11.2023 15:12
The dollar index extends losses below 200-DMA   Friday's rebound in the US yields couldn't give a bullish shift to the US dollar. The dollar index slipped below its 200-DMA, closed the week below this level and is under renewed selling pressure this morning despite positive pressure on the yields. The broad-based dollar weakness helps the EURUSD extend gains to 1.0950, with solid resistance seen into the 1.10 level given weaker growth perspectives for the European economies compared to the US in the coming months. Cable trades past the 1.26 level, while the USDJPY remains offered near the 50-DMA, near the 149 level. The yen is benefiting from rumours that a growing number of institutional players are turning long yen on expectation that the Bank of Japan (BoJ) will one day normalize its rate policy. Every day that goes by brings the BoJ closer to normalization and there is a great upside potential for the yen at the current levels – hence a great downside potential for the USDJPY. Yet the right time for getting long yen is anybody's guess. What we know however is that the upside potential in the USDJPY is certainly limited above the 150 level.   In commodities, gold pulled out offers at the $2000 per ounce and is trading above this level this morning. The softer dollar gives support to the yellow metal, yet the rebound in the US long-term yields, news of a potential extension of cease fire in Gaza beyond today and the fact that the precious metal is worth just shy of its ATH levels hint at a limited upside potential at the current levels.   In energy, appetite in oil is nowhere to be found this morning. The barrel of US crude trades below the $75pb level despite news that OPEC+ is nearing a resolution of the disagreement on output quotas, which led to the group delaying a crucial meeting last weekend. Officials said that discussions with the African nations over the production quotas continue and agreement is within reach – in which case Saudi will likely announce at least 1mbpd extra supply cut to prevent oil bulls from leaving the battlefield. But oil traders need more effort to reverse the selloff in oil prices. The barrel of US crude sees strong resistance around the 200-DMA, near the $78pb level, and the price should rally past the $81pb level for the current bearish trend to reverse. 
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USD Slips Below 200-DMA Despite Rebound in Yields: A Weekly Market Analysis

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.11.2023 15:10
USD slips below 200-DMA despite rebound in yields  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Last week ended on a positive note where the US equities advanced to fresh highs since summer on a holiday shortened trading week. The S&P500 gained for the 4th consecutive week and closed the week near 4560, the rate-sensitive and technology heavy Nasdaq 100 extended gains beyond the summer peak, and hit an almost 2-year high, while the VIX index, which is known as Wall Street's fear gauge, or the volatility index, slumped to the lowest levels since January 2020. The belief that the Federal Reserve (Fed) is done hiking the interest rates, and the rapidly falling US long-term yields are at the source of this optimism – especially after the latest CPI update in the US printed a softer-than-expected number, suggesting that inflation in the US fell to 3.2% last month. This week, investors will find out if the Fed's favourite inflation gauge, the PCE index, tells the same story. The PCE index is expected to have fallen from 3.4% to 3.1% in October, and core PCE may have eased from 3.7% to 3.5% during the same month. Anything less than soothing could lead to some more correction in the US long-term yields. The 10-year yield jumped to 4.50% early Monday, though the positive pressure slowed above 4.50%.   News that the Black Friday spending jumped 7.5% this year to hit a record high of $9.8 billion certainly reminds investors that consumer spending in the US remains strong. The latter gives a strong support to the US economy, which in return gives a solid confidence to the Fed that keeping the rates high for long is not necessarily a bad idea. Today, the sales continue with Cyber Monday deals.   Yet the holiday shoppers' enthusiasm is less visible on the financial markets this Monday. The US futures are down, along with their Asian peers on the back of a rebound in US yields, the nearly 8% slump in Chinese industrial profits in October and news that children in China are suffering from respiratory infections – which spurs speculation that it could be a new strain of Covid. Chinese authorities say that it's simply a mix of known respiratory diseases. But you know, once bitten, twice shy.   
Challenges and Contrasts: Navigating the Slippery Slope of Global Economies

Challenges and Contrasts: Navigating the Slippery Slope of Global Economies

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.11.2023 14:14
On a slippery floor By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   While the US economy has been surprisingly resilient this year to the Federal Reserve's (Fed) aggressive monetary tightening, we cannot say that we have a similar soothing picture in Europe. The energy crisis, that followed the pandemic, has been hard on Germany. The country needs money when money becomes rare and expensive. Germany decided to suspend the debt limit for the 4th consecutive year – signaling that borrowing in Europe will continue to increase, and the new debt that the Europeans will take on their shoulders will cost significantly higher than a few years ago.   German bonds fell yesterday on news of yet another suspension of the debt limit. The 10-year German yield advanced to 2.60%, Italy's 10-year yield jumped to 4.40%, the Italian – German yield spread rebounded this week from the lowest levels since September, and the widening yield spread between core and periphery could become a limiting factor for euro appetite at a time traders should decide whether the EURUSD should appreciate above the 1.10 psychological mark.   As per the European Central Bank (ECB) expectations, the European officials do their best to tame the rate cut expectations in the Eurozone. Belgian central bank governor Pierre Wunsch said yesterday that the ECB won't cut the rates as long as wages growth remains elevated, while the German central bank head Joachim Nagel said that cutting rates too early would be a mistake. A mistake? Maybe. Yet, economic data comes as further evidence that the European economies are not going toward sunny days. Released yesterday, the European PMI figures came in slightly better than expected, but the reading was below 50 for the 6th consecutive month, meaning that activity in the Eurozone contracted for the 6th consecutive month. The Eurozone GDP fell below 0 at the latest reading, while in comparison, the US GDP grew nearly 5%. This is to say that, based on the current data, the Fed has a greater margin for keeping rates steady than their European counterparts. It at least has better credibility. And the Fed's bigger hawkish margin compared to the ECB should keep the euro appetite limited against the US dollar following the rally since the beginning of October.   In the US, despite warnings that the falling US long-term yields will, at some point, trigger a hawkish reaction from the Fed and eventually reverse, the Fed doves remain in charge of the market. The US dollar index struggles to gain traction above the 200-DMA.   The USDJPY remains offered near the 50-DMA after the Japanese inflation advanced to a 3-month high in October (rose to 3.3% level from 3% printed a month earlier). Normally, it would've boosted bets of Bank of Japan (BoJ) normalization, but the BoJ should first awaken from its coma.  In energy, US crude trades near $75/76 region. Downside risks prevail due to speculation that the delayed OPEC meeting could result in Saudi Arabia not doubling its solo production cuts. There is even a slim possibility that they eventually reverse them.   I am wondering if this week's drama is not staged amid poor buying following the news that Saudi would doble its cuts, to cast shadow in Saudi's intention to defend oil prices, to bring attention to OPEC and to Saudi which finally would go ahead and double its production cuts hoping that the market reaction would be stronger than if they had announced the same outcome this weekend. In all cases, deteriorating growth prospects will likely limit the upside potential in oil prices in the medium run. The short run will certainly see more volatility.    
Manufacturing PMIs for November Reflect Lingering Weakness in Eurozone's Economic Activity

Thanksgiving Disinflation: US Dollar Rebounds Amid Economic Data and Falling Prices

Ipek Ozkardeskaya Ipek Ozkardeskaya 23.11.2023 13:08
Disinflation is on this year's Thanksgiving menu The US dollar index rebounded yesterday, and the rebound was on the back of some data points that cooled down the Fed doves' enthusiasm. First, the short-term inflation expectations advanced to a seven-month high in November, with Americans expecting a 4.5% jump in prices over the next year. Then, the University of Michigan's sentiment index improved more than expected, and the weekly jobless claims fell the most since June – all negative for the Federal Reserve (Fed) doves.   Adobe Analytics said that Thanksgiving shopping will be up by 5.4% this year, and no it is not because of inflated prices. On the contrary, according to Adobe e-commerce prices fell for the 14th straight month, by 6% from last October to this October and if we factor in the online deflation, the Thanksgiving spending growth would be an eye-popping 12%. But it's always the same old story. Americans spend, but they spend their savings, and worse, they spend on debt. In this context, the use of buy now spend later options has jumped by 14.5% since last year – and it will certainly hit back, one day. For now, the US 2-year yield remains real steady around the 4.90% level, the US 10-year is headed back to fresh lows since this fall, after a short attempt for a rebound yesterday and the dollar index is back to testing the 200-DMA to the downside.  Happily, for the American people, the Fed doves and all of us, disinflation is on the menu of this Thanksgiving. Turkey prices cost around 5.6% less than last year, stuffing mix costs nearly 3% less, pie crusts are nearly 5% cheaper and cranberry prices are down by more than 18%. It is said that an average 10 people Thanksgiving feast would cost less than $62 - that's less than $6.2 per person, down from around 4.5% compared to last year.   Last word  Thanksgiving is one of the calmest trading days of the year. Expect thin trading volumes and higher volatility.  
GBP: Services Inflation Expected to Persist Above 6%, BoE's Dovish Stance Unlikely to Shift

Downgraded Growth Projections: Germany and UK Face Economic Challenges Amid Budget Chaos

Ipek Ozkardeskaya Ipek Ozkardeskaya 23.11.2023 13:07
Speaking of morose growth projections Forecasts for German growth in 2024 have been significantly lowered following the recent budget chaos after the German Constitutional Court declared government's spending plans unconstitutional. Germany – Europe's growth engine – is now seen growing just 0.4% next year. The UK, on the other hand, cut its own growth forecast significantly in yesterday's Autumn Statement. Jeremy Hunt said that the economy would grow only by around 0.7% - still better than Germany, but that projection is down from the 1.7% announced earlier. The good news for British people and businesses is that Hunt announced tax cuts for both individual and companies and lowered the national insurance payroll levy. The Brits will now make a permanent 100% - yes 100% tax relief – on companies' capital spending. But don't be fooled by these beautiful numbers. In reality, the British tax burden will still mount to 38% of its GDP by the end of this decade and will reach its highest since post-WW2 and that 100% tax relief – the so-called 'full expensing' - is good for businesses that invest in big machinery but in a service-focused economy like the UK's, the benefits will likely remain limited. This is certainly why the market reaction was muted yesterday. The 10-year gilt yield was slightly up, the FTSE 100 closed the session slightly in the negative, while Cable fell below the 1.25 mark, on the back of a broad-based rebound in the US dollar that hit most major peers.  
Bank of England's February Meeting: Navigating Rate Cut Speculations and Economic Variables

OPEC Meeting Delayed: Analyzing the Potential Impact on Oil Prices and Saudi Arabia's Strategic Dilemma

Ipek Ozkardeskaya Ipek Ozkardeskaya 23.11.2023 13:06
Delay is no good sign By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   OPEC decided to delay this weekend's meeting to next week because talks between Saudi and African members apparently ran into trouble. Saudi likely sensed in this week's poor price action - 'buy the fact that Saudi will double its production cuts' action - that 1mbpd extra cut wouldn't send the oil prices higher, sustainably. Hence, Saudis need other member to put their hand in the mud, and seemingly the negotiations aren't easy.   A bit of history...  Saudi has a history of walking away from its role of 'swing producer' - a crucial role in balancing global oil markets by adjusting its production levels to stabilize prices. Back in the 1980s, Saudi Arabia has shifted its strategy and opted for a market share approach. Instead of cutting production to support oil prices, Saudi Arabia had decided to increase its output significantly, contributing to a glut in the global oil market.   Therefore, if Saudi doesn't get the support that it needs from the other producer countries after all the unilateral efforts that they put in, they will naturally be tempted to abandon the idea of doubling its supply cut, and eventually reverse it. Such a decision would lead to a sharp decline in oil prices and have a significant impact on the economies of other oil-producing nations.   The barrel of American crude sank to $73.50pb before rebounding to the $76 this morning. Brent fell below $80pb before rebounding above this level. Both in Brent and crude, the 200-DMA remains a solid resistance, as the worries of global slowdown outweigh the worries of supply restrictions, even more so as Saudis start giving signs of stress regarding their solo role in cutting production.  
Crude Oil Eyes 200-DMA Amidst Positive Growth Signals and Inflation Concerns

Hunt's Autumn Statement: Tax Cuts, Political Maneuvers, and Economic Stability in the Spotlight

Ipek Ozkardeskaya Ipek Ozkardeskaya 22.11.2023 14:57
Hunt in the spotlight  British Chancellor of Exchequer Jeremy Hunt will make his Autumn Statement today and he will do his best to try to please British voters by announcing tax cuts amid slowing inflation, try to make the Tories – who lost a lot of support over the past year-and-so and fell around 20 points behind Labour in the latest polls - look good again, while pursuing a hard-won economic and financial stability after the Liz Truss mini-budget crisis, and keep the country's finances together to avoid another Truss-style bond meltdown.   Happily, for him, the Gilt yields have been falling along with other major economies' bond yields since the October peak. The British 10-year yield tested the 4% level to the downside last Friday. Households are happy to see inflation slow, Rishi Sunak is living up – with a bit of luck – to his promise to halve inflation by year-end, and investors think that the Bank of England (BoE) is done hiking the interest rates. The BoE is also expected to start cutting its rates by May next year - to which the BoE Governor Bailey replies saying that if the market conditions loosen too fast, they may have to raise interest rates again. But that's a detail. Cable advanced to 1.2560 yesterday on the back of a broadly softer US dollar. A too generous Autumn Statement – in terms of pleasing voters – could revive the inflation expectations for the UK hence tame the BoE doves. The latter could trigger a selloff in gilts, push yields higher and help sterling extend its gains against the greenback and pave the way for a further advance to the 1.27 level.   Yet, Cable's upside potential also depends on the dollar's downside potential. The US dollar – which came under a decent bearish pressure since the beginning of the month – is near the oversold territory. And the selloff in the dollar could soon bottom out given the Fed's cautious tone faced with the significant decline in the US long-term bond yields.   Elsewhere the EURUSD sees resistance above a major Fibonacci resistance, near the 1.0955 mark, gold is testing the $2000 per ounce this morning as investors chose safety into the long Thanksgiving holiday in the US while US crude sees resistance at the 200-DMA and Bitcoin is down from recent highs on news that Binance CEO was pleaded guilty as his company prioritized growth over compliance and violated anti-money laundering and unlicensed money transmitting to finance terrorists, cyber criminals and child abusers. The Binance verdict will hardly impact the recent appetite in Bitcoin, which is expected to get a boost thanks to potential spot ETF approvals.   
The Commodities Feed: Oil trades softer

When Fantastic Falls Short: Fed Minutes and Nvidia Earnings Analysis

Ipek Ozkardeskaya Ipek Ozkardeskaya 22.11.2023 14:50
When fantastic falls short...  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The minutes from the Federal Reserve's (Fed) latest monetary policy meeting showed that the Fed members agreed to 'proceed carefully' with their future rate decisions. Carefully doesn't mean that the Fed is done tightening, it means that it will 'proceed carefully' in the light of the economic data and the market conditions to decide whether it should hike, pause, or cut the interest rates. Note that 'most' members 'continued to see upside risks to inflation'.   Alas, the cautious tone in Fed minutes went completely unheard as the latest CPI data acted as a shield against the Fed hawks. As such, the market reaction to the Fed minutes was muted. The US 2-year yield remained little changed near the 4.90% level, the 10-year yield rebounded past 4.40%, and is still around 60bp lower than the October levels. The S&P500, which is now trading in the overbought market, retreated 0.20% and Nasdaq 100 fell 0.60% from an almost 2-year high, as investors didn't want to do much before seeing the Nvidia's results.   When fantastic falls short...  Nvidia's Q3 results were strong. The company exceeded the $16bn revenue forecast by $2bn. They earned more than $18bn, made more than $4 profit per share and said that they will be earning around $20bn this quarter. But the latter forecast couldn't meet the top forecast ($21bn) and the share price fell in the afterhours trading, though by less than 2%; investors couldn't decide whether they should buy the fact that the company exceeded the sky-high expectations, or they should sell the reality that the chip sales to China will slow this quarter and that would weigh on revenue – although Nvidia stated that the 'decline will be more than offset by strong growth in other regions' and that they are working to comply with regulations to sell to China, anyway.   Taking a step back: Nvidia is growing, it is growing fast, it has potential to grow further, but the valuation of the company is also sky-high, its price got multiplied by almost five since October 2022. Its PE ratio stands around 120 versus a PE ratio of around 25 in average for S&P500 companies. And its market capitalization is more than $1 trillion more than Intel's, which used to be the world's biggest chipmaker. In summary, the company is growing but that strong growth is already priced in and out. Therefore, we will probably not see a big profit taking post-earnings, we will likely see correction and consolidation instead below the $500 psychological hurdle.   And with that – the Nvidia earnings – out of the way, the S&P500 and Nasdaq futures are slightly in the negative at the time of writing. The market will likely digest the Fed minutes and the Nvidia results in a calm mood before the Thanksgiving holiday.   
Navigating Uncertainty: Insights into U.S. Yields, Equities, and the Nvidia Conundrum

Navigating Uncertainty: Insights into U.S. Yields, Equities, and the Nvidia Conundrum

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.11.2023 12:01
Therefore, the US 2-year yield may have bottom at 4.80% level and should be headed back toward 5%. The US 10-year yield should hold ground above 4.50%. As per equities, the direction is unclear to everyone, but the recent dovish shift in Fed expectations and the dropping yields gave a great energy boost to the US stocks. The S&P500 jumped more than 10% since end of October, the rate-sensitive Nasdaq 100 is now flirting with the highest levels since summer while the Russell 2000 index is having a blast since its October dip. The index rallied almost 12% in 3 weeks, pulled out the 50-DMA, the major 38.2% Fibonacci retracement and consolidated gains in the medium-term bullish consolidation zone yesterday.   As equities move higher and inflation slows, the anxiety regarding short positions mount – hence short covering is adding to the positive pressure.   The Big Short's Micheal Burry reportedly exited his short position against SPDR's P&P500 and Invesco's QQQ and began betting against semiconductor stocks, including Nvidia.   Nvidia, on the other hand, is flirting with its ATM levels near the $500 per share level. A quick glance at Nvidia's long-term price chart clearly suggests that the chances are that we are in the middle of an AI-led bubble and that the exponential move cannot extend infinitely. Yes, AI is boosting Nvidia's revenue and profits, but the revenues that will flow into the pockets of Nvidia thanks to AI are already embedded in the share price, and we will likely see the price bubble burst. But there are two things to keep in mind when you bet against a bubble. 1. A bubble is a bubble only when it bursts – it's like 'you are innocent until proven guilty'. And 2. You can wait a while before the market comes back to its senses. For now, we are in the middle of making eye-popping predictions and beating them. The company is due to release earnings on November 21st.  One big risk for Nvidia is the tense relations between the US and China, and the extension of chip export curbs to a bigger range of Nvidia chips. This week's meeting between Biden and Xi carried hope that the high-level communication could help melting ice. There has apparently been some 'real progress' in restoring military communication and foreign policy... Then, Joe Biden said that Xi is a dictator.
Rates Spark: Time to Fade the Up-Move in Yields

US Market Outlook: Retail Sales, Big Retail Earnings, and Political Jitters Set the Stage

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.11.2023 11:16
Back to US: retail sales, Big Retail earnings & US political jitters   Yesterday's rush to open fresh long US Treasury positions was likely intensified by a hurry to cover short positions. We shall see a correction in the US yields, as the Fed members still maintain their position for 'higher for longer' interest rates. But the market position is clear. The pricing now suggests a 50bp cut from the Fed by July next year; the sweet and sour cocktail of softening jobs market and easing inflation suggests that the Fed's next move will probably be a rate cut, rather than a rate hike.   So yes, ladies and gentlemen, the way is being paved for a potential Santa rally this year. But the Fed will continue to calm down the game, and any strength in the US economic data should reinforce the 'high for long' rhetoric and tame appetite.  Investors will watch the US retail sales data today. A strong figure could pour cold water on heated Fed cut bets. A soft figure, on the other hand, could bring in more buyers to US bond markets.   On the individual front, Home Depot shares rallied more than 5% yesterday. Earnings and revenue narrowed and the company released a cautious year-end guidance, but the results were better than expected. Target is due to report today, and Walmart on Thursday.  To add another layer of complexity – on top of the economic data and corporate earnings – the US political scene will impact bond pricing in the next few days. The US politicians try to avoid a government shutdown by Friday. The latest news suggests that the odds of shutdown diminished yesterday as House Speaker Mike Johnson gained more Democratic support for his interim funding plan. The interim plan however excludes aid for Ukraine, aid for Israel and could lead to a two-step shutdown at the start of next year. And it does not include the steep spending cuts that the hardcore Republicans are looking for. In summary, the political mess continues.   In the best-case scenario, the US politicians will agree on another short-term relief package and avoid a government shutdown, push away the threat of another rating cut – from Moody's this time. The latter would maintain appetite in US bonds and support a further rally in the US stocks. In the worst-case scenario, the US government will stop its operations by the end of this week and the political chaos will lead to a bounce in US yields and stall the equity rally.   
Rates Spark: Time to Fade the Up-Move in Yields

US Market Outlook: Retail Sales, Big Retail Earnings, and Political Jitters Set the Stage - 16.11.2023

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.11.2023 11:16
Back to US: retail sales, Big Retail earnings & US political jitters   Yesterday's rush to open fresh long US Treasury positions was likely intensified by a hurry to cover short positions. We shall see a correction in the US yields, as the Fed members still maintain their position for 'higher for longer' interest rates. But the market position is clear. The pricing now suggests a 50bp cut from the Fed by July next year; the sweet and sour cocktail of softening jobs market and easing inflation suggests that the Fed's next move will probably be a rate cut, rather than a rate hike.   So yes, ladies and gentlemen, the way is being paved for a potential Santa rally this year. But the Fed will continue to calm down the game, and any strength in the US economic data should reinforce the 'high for long' rhetoric and tame appetite.  Investors will watch the US retail sales data today. A strong figure could pour cold water on heated Fed cut bets. A soft figure, on the other hand, could bring in more buyers to US bond markets.   On the individual front, Home Depot shares rallied more than 5% yesterday. Earnings and revenue narrowed and the company released a cautious year-end guidance, but the results were better than expected. Target is due to report today, and Walmart on Thursday.  To add another layer of complexity – on top of the economic data and corporate earnings – the US political scene will impact bond pricing in the next few days. The US politicians try to avoid a government shutdown by Friday. The latest news suggests that the odds of shutdown diminished yesterday as House Speaker Mike Johnson gained more Democratic support for his interim funding plan. The interim plan however excludes aid for Ukraine, aid for Israel and could lead to a two-step shutdown at the start of next year. And it does not include the steep spending cuts that the hardcore Republicans are looking for. In summary, the political mess continues.   In the best-case scenario, the US politicians will agree on another short-term relief package and avoid a government shutdown, push away the threat of another rating cut – from Moody's this time. The latter would maintain appetite in US bonds and support a further rally in the US stocks. In the worst-case scenario, the US government will stop its operations by the end of this week and the political chaos will lead to a bounce in US yields and stall the equity rally.   
All Eyes on US Inflation: Impact on Rate Expectations and Market Sentiment

Inflation Fever Breaks: Fed Doves Energized as US CPI Falls, Markets React

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.11.2023 11:14
Inflation fever breaks By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) doves got a big energy boost yesterday by a slightly lower-than-expected inflation report. The headline inflation fell to 3.2% in October from 3.7% printed a month earlier, and core inflation eased to 4% from 4.1% printed a month earlier. Services excluding housing and energy costs – the so-called super core figure closely watched by the Fed - rose only 0.2% and shelter costs rose only 0.3%, down from a 0.6% advance printed a month earlier. The soft set of inflation print cemented the expectation that the Fed is done hiking the interest rates. The US 2-year yield – which best captures the rate bets – tanked 24bp to 4.81%. The 10-year slipped below 4.50% and activity on Fed funds futures gives around 95% chance for a no rate hike in December. That probability stood at around 85% before yesterday's US CPI data.   In equities, the S&P500 jumped past its 100-DMA, spiked above the 4500 mark, and closed the session a few points below this level. Nasdaq 100 extended its gain to 15850. In the FX, the US dollar took a severe hit. The index fell 1.50% on Tuesday, pulled out a major Fibonacci support and sank into the medium-term bearish consolidation zone. The EURUSD jumped to almost the 1.09 level. Yes, there is no mistake – to nearly 1.09 level, and Cable flirted with the 1.25 resistance. What a day!   A small parenthesis on UK inflation   Good news came from Britain this morning, as well. Inflation in the UK fell 6.7% to 4.6% in October, lower than the 4.7% penciled in by analysts. Core inflation also eased more than expected to 5.7%. There is growing evidence that the major central banks' efforts are bearing fruit. Cable is sold after the CPI data, but the pullback will likely remain short-lived if the USD appetite continues to wane globally.   
Taming Inflation: March Rate Cut Unlikely Despite Rough 5-Year Auction

"Inflation, Yields, and Political Uncertainty: A Look at the Upcoming US Financial Landscape

Ipek Ozkardeskaya Ipek Ozkardeskaya 13.11.2023 14:44
All eyes on US inflation and the government's funding deadline  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   What everyone – most investors, every household and every politician want to see and to sense right now is the end of the global monetary policy tightening cycle, and the beginning of the end starts mostly with the Federal Reserve (Fed).   Until the beginning of this month, we have seen a pricing that reflected the market's belief that the Fed is going to keep the rates high for long because the world is now braced for an extended period of high inflation. And the rapid rise in the US long term yields because of this very belief that the Fed will keep rates high for long helped the Fed keep its rates steady, at least at the latest meetings. The US 10-year yields spiked above the 5% mark in the second half of October, stagnated close to this peak for a week.   Then, a sufficiently soft set of jobs data from the US at the start of the month, combined with a record but lower-than-expected Treasury borrowing plans slowed down the sharp selloff in US Treasuries and reversed market sentiment. Investors, since the beginning of this month, began flocking back into the US long-term papers. The US 10-year yield tipped a toe below the 4.50% level, this time. We are talking about a plunge of more than 50bp for the 10-year paper in about two weeks.   And finally, last week, two bad 10- and 30-year bond auctions in the US, and Fed Chair Powell's warning that the Fed could opt for more rate hikes if needed, brought bond investors back to earth. And the 10-year yield rebounded from a dip. This is where we are right now – a period of heavy treasury selloff, followed by significant inflows, and uncertainty.   The uncertainty regarding when the Fed will be done hiking the rates is killing everyone, but even the Fed itself doesn't know when tightening will/should end. It will depend on crucial economic data, like inflation, jobs, and growth figures. The US jobs data is giving signs that the US labour market has started loosening. The US growth numbers are off the chart, but spending isn't necessarily sitting on solid ground, as the US credit card loans go from peak to peak and the credit card delinquencies have taken a lift. The delinquency rate is above the pre-pandemic levels, and just around the post-GFC levels – this means that the Americans spend on debt that they can't pay back anymore. And the US government debt is – as you know - growing exponentially, and Americans pay significantly higher interest on their debt because the rates went from near zero to above 5% in less than two years.  But uncertainty regarding the US debt does not mean that the US Treasuries will fall off grace, because there is nothing comparable to the US Treasuries that could replace US treasuries in a portfolio for low-risk allocations.   Volatility in this space is however unavoidable. This week, we will plunge back into the US political saga, as the government short-term funding deadline is due 17th of November and not much progress has been made to seal a fresh deal. And remember this, the last time the US politicians agreed on a short-term relief package, Joe Biden was forced to leave the funding for Ukraine outside of it. Since then, a new war in Gaza popped up, and the US is now expected to bring financial contribution there, as well.   We could see the US long-term yields recover from the past weeks' decline. Depending on the new funding resolution – or the lack thereof – we could see the US 10-year yield return above 4.80%.   Happily, slower inflows into US treasuries will be a relief for the Fed, which needs the yields to remain high enough to restrict the financial conditions without the need for more action. But the US political shenanigans are only one part of the equation. The other part is...economic data.   The all-important inflation data due Tuesday is going to impact the inflow/outflow dynamics in US Treasuries before the worries grow into the Friday funding deadline. A sufficiently soft inflation read should keep bond traders in appetite for further purchases and mask a part of the political worries, while disappointment could keep buyers on the sidelines and amplify a potential political-led selloff. The good news is that the US headline inflation is expected to have eased to 3.3% in October, from 3.7% printed a month earlier. Core inflation is seen steady around the 4.1% level. The bad news is, the expectation is soft and could be hard to beat.   The US dollar sees resistance at around the 50-DMA, the US stocks continue to cheer the latest pullback in the US yields. The S&P500 closed last week with a beautiful rally, that led the index to above its 100-DMA for the weekly close. The big tech remains the driver of the S&P500 gains as Microsoft hit a fresh high on Friday and Nvidia remained bid a few points below its ATH on news that Chinese AI startup bought enough Nvidia chips before the US exports curbs kicked in. This week, US big retailers will announce their Q3 results and will give a hint on the US consumer trends, health and expectations. Earnings could be mixed but the overall outlook will likely be morose.   
Commodities Update: US Crude Oil Inventories Rise, Putting Pressure on Oil Prices

FX and Energy Market Overview: Dollar's Reaction to Treasury Yields, Bearish Euro, Oil's Timid Rebound

Ipek Ozkardeskaya Ipek Ozkardeskaya 10.11.2023 09:59
In the FX  The US dollar jumped to its 50-DMA as a response to a rapid surge in the US Treasury yields. The EURUSD sank below the 1.07 level. From a technical perspective, the early week rally remained capped below a major Fibonacci level, the 38.2% retracement on summer to October selloff near the 1.0760. The EURUSD remains in a bearish trend after the failure to clear an important technical resistance. Unideal political news from Spain and Portugal, and a morose economic outlook for the Eurozone will likely keep the euro in retreat against the US dollar. Even though the European Central Bank (ECB) officials cry out loud that the rates will stay high for long in the Eurozone as well, it sounds much less credible when economic data doesn't give sufficient support.   In the UK, the Bank of England (BoE) wants to look tough and convince investors that it's too early to talk about rate cuts. But Cable's latest surge remained capped below the 200-DMA, and the pair is back to 1.22. The medium-term outlook for Cable remains neutral to bearish. Another surge in the dollar appetite will easily send the pair to 1.20 psychological level.   The dollar-yen is back to misery, above 151. Traders want to buy the USDJPY, but they also know that the Japanese authorities are tempted to intervene to prevent the Japanese yen from getting shattered just because the Bank of Japan (BoJ) can't keep up with the rest of the major global central bank policies. Japanese are happy to see inflation emerge after decades of deflation. Perhaps, the view of China – and Chinese deflation – doesn't make them want to move any faster.  In energy, the oil bulls come in timidly near the $75pb psychological support. The oil selloff probably went too far and it's time for – at least – a minor positive correction. A move toward the $78/80 range would be reasonable. This area includes the 200-DMA and the minor 23.6% Fibonacci retracement on September to November selloff.   Today is Friday. Fears of escalating geopolitical tensions could help strengthen the $75 support in US crude. But regarding that topic, the biggest fear of oil traders in Gaza was the implication of Iran in the war, which would then lead to another embargo on the Iranian oil, decrease the global supply and send prices higher. Now, the new market narrative is that, even if the Iranian oil gets banned, it doesn't matter because first, the Iranian shipments have been falling due to weaker Asian demand and two, 90% of the Iranian shipments go to China anyway, and China doesn't care about the Iranian oil ban, they will continue buying it. And oh, there is also the fact that the US shale production hit a record high of 13.2mbpd. Together with the rising worries of slower global demand, the above-stated factors should ensure that a potential rebound in oil prices doesn't extend easily above the $78/80 range.   
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US Yields Surge, Equities Drop, and Oil Rebounds: A Market Recap

Ipek Ozkardeskaya Ipek Ozkardeskaya 10.11.2023 09:58
US yields spike, equities fall, oil rebounds By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Bad. Yesterday's 30-year treasury auction in the US was bad. And this time, the bad auction got the anticipated reaction. The US Treasuries saw a sharp selloff - especially in the 20 and 30-year papers. The US 30-year yield jumped 22bp, the 20-year yield jumped more than 20bp, while the 10-year yield jumped 18bp to above 4.60%.   Then, the Federal Reserve (Fed) Chair Jerome Powell's speech at an IMF event was hawkish. Powell repeated that the FOMC will move 'carefully' and that the Fed won't hesitate to raise the interest rates again, if needed. The US 2-year yield is back above the 5% level.   Of course, the sudden jump in US yields hit appetite in US stocks yesterday. The S&P500 fell 0.80%, and Nasdaq fell 0.82%. The US bond auction brought along a lot of volatility, questions, and uncertainty.  At 5%, the US 2-year yield is still 50bp below the upper limit of the Fed funds target range. Therefore, if the Fed could convince investors that the rates will stay high for long, this part of the curve has potential to shift higher. On the longer end, we could reasonably expect the US 10-year yield to remain below the 5% mark – and even ease gently if economic growth slows and the job market loosens. A wider inversion between the US 2-10-year yield should boost the odds a higher of US recession. But hey, we are used to the inverted yield curve, and we believe that it won't necessarily bring along recession. Goldman sees only a 15% chance of US recession next year. 
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Market Insights: US Yields Dip Amid Cautious Fed Talk; Oil Nears Oversold Territory

Ipek Ozkardeskaya Ipek Ozkardeskaya 08.11.2023 14:24
US yields fall despite cautious Fed talk. Oil near oversold territory By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  Portuguese markets were hit yesterday by the resignation of the country's PM following an investigation into possible crimes of corruption involving lithium and hydrogen projects. The Portuguese PSI 20 fell more than 2.50% on political jitters and uncertainty. But the scandal didn't resonate much in the rest of the European indices – which were little changed yesterday. The Stoxx 600 remained offered at the 445 level, which is an old support that turned resistance. The outlook remains negative due to the slowing European activity, and the EURUSD slipped below the 1.07 mark as the US dollar extended its gains for a second day.  Whatever  Yesterday was quite interesting in terms of the Federal Reserve (Fed) talk and the market reaction to the Fed talk. A few Fed speakers including Neel Kashkari and Michelle Bowman sent a cautious message to the market that the Fed's battle against inflation is not won yet and tightening could continue. But in vain, the market reaction to the latest comments from the Fed speakers was a thick and determined 'whatever'. The US 10-year yield fell below its 50-DMA, the 2-year yield steadied below the 5% mark, and the gap between the two is widening again as the dovish Fed expectations swamp the marketplace following the soft US jobs data released last week in the US and the Fed's decision to pause for another month. The Fed President Powell is due to speak this week and will certainly say the same thing than his dear colleagues : that the Fed's fight against inflation is not done yet and that they will watch the economic data to decide what's the next step – which could be another pause, or a hike – but investors have made their mind and trade confidently on the expectation that the Fed is done hiking.   Now, I also think that if we don't see inflation numbers take off, the Fed is gently done hiking. But the excess optimism in the market, and the falling yields will get the Fed to firm up its stance to make sure that the financial conditions don't ease too fast too soon. A 50bp fall in the US 10-year yield and a strong rebound in the equity markets is not good for taming inflation. Therefore, I expect the bond rally to start slowing approaching the 4.50% level in the 10-year yield and expect the 2-year yield to return above the 5% mark.   In equities, the S&P500 is above its 50-DMA for the 3rd day and the rate-sensitive Nasdaq 100 broke above its summer down-trending channel top. At the current levels, the S&P500's earnings yield is around 4%, and Nasdaq's is around 3.70%. That means that the Fed should proceed with a couple of rate cuts and the sovereign yields should fall significantly more for these returns to look appealing in comparison. That's why the equity rally doesn't look like it's on solid ground. Non-cyclical, value names are preferable. US equities could continue to outperform the European and Chinese peers. 
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AUD Weakens Post RBA Hike, Oil Takes a Hit: Market Analysis by Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Ipek Ozkardeskaya Ipek Ozkardeskaya 07.11.2023 15:47
AUD weakens after RBA hike, oil downbeat By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The US bond yields rebounded, and the equity rally slowed on Monday. The US 10-year rebound from last Friday low, and the S&P500 consolidate gains near three-week highs. There are divergent opinions regarding whether last week's risk rally is on sufficiently solid ground to extend into a Santa rally, or it would simply fade away. And it all depends on what matters the most for investors. The softening Federal Reserve (Fed) and other central bank expectations and falling sovereign yields are positive for stock valuations, but the chatter of potentially higher-for-longer rates, growing signs of slowing global economy and the rising recession odds don't offer a bright outlook for equities into the year end. Seasonally speaking, November and December are known to be good months for the S&P500 stocks. In the past, the S&P500 stocks gained, on average, 1.8% in November and 0.9% in December. But this year, the picture is overshadowed by a lot of weak guidance and revenue warnings.   The chatter of weak demand and profit warnings are not great for equities but the worst news would be sticky inflation despite slowing growth and a persistently long period of high interest rates. For now, the Fed is perceived as being 'done' with interest rate hikes. But Powell is due to speak this week and he will probably leave the door open for a rate hike... otherwise he knows that all the past 1.5-year's efforts will be instantaneously thrown out of the window with everyone rushing to US treasuries – which would pull the yields lower and loosen the financial conditions and eventually boost growth and inflation. This is something the Fed doesn't want.   And despite a series of no rate hike news that we received over the past few weeks from major central banks including the Fed, the ECB and the BoE, the Reserve Bank of Australia (RBA) raised its rates by 25bp, as broadly expected, today. The RBA hike came as a sour reminder that there is no rule that says that a bank can't hike rates after pausing for four meetings. Interestingly, the AUDUSD fell after the decision, along with the Australian stock markets. Today's rate hike revived fears of economic slowdown more than appetite for higher Aussie yields – while a broad-based recovery in the US dollar and weak Chinese trade data certainly didn't help.  Speaking of weakness  The Chinese exports which are a good gauge of global economic health, are down for the 6th consecutive month and Iranian oil exports fell for the 2nd straight month to 1.43mbpd as demand in Asia weakened. That's certainly why we haven't seen oil prices react to the news of escalation tensions in the Middle East and the news that Saudi and Russia will keep their oil production curbs in place during the weekend. The barrel of crude is trading a touch above the $80pb psychological mark this morning. We revise our medium-term outlook for crude oil from neutral to negative. Last week's persistent selloff despite a broad-based risk rally, oil bulls' unresponsiveness to normally price-positive geopolitical developments and the fact that the market focus is shifting from supply to demand side hint that a fall below the $80pb is increasingly possible, and a verbal intervention from Saudi or OPEC won't prevent a deeper decline in the short run. Iran's implication in the Gaza war could be a game changer but the American crude is now in the medium-term bearish consolidation zone, and will remain downbeat below $81.50, the major 38.2% Fibonacci retracement on this summer's rally
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Turbulent Markets: Apple's Disappointment and the Jobs Day Impact

Ipek Ozkardeskaya Ipek Ozkardeskaya 03.11.2023 14:11
Jobs day!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The S&P500 jumped almost 2% to above its 200-DMA, and Nasdaq 100 gained 1.74% and tested its 50-DMA to the upside as the rally in the US sovereign bonds extended to another day.   Apple disappoints Apple will likely slow the rally in major US indices. Apple shares dived up to 4% in the afterhours trading after announcing that the sluggish Chinese demand for iPhones dented revenue. The Mac computers sales also fell short of a billion USD. Apple sales fell for the fourth straight quarter, the longest such decline in 22 years. As a result, Apple stock could sink to $170 a share, the critical 38.2% Fibonacci retracement level, if taken out, would let Apple sink into the medium-term bearish consolidation zone. The only thing that could save Apple from falling into dark waters is... a further rally in US bonds, and a further fall in yields.  Falling yields are no good for Fed The US bond rally popped this week because the US Treasury said that it would borrow slightly less than previously thought and slightly less 3-, 10- and 30-year papers. The Federal Reserve (Fed) hinted that the rate hikes could be coming to an end because the recent surge in US long term yields helped them tighten the financial conditions without the need for another rate hike.   But if the yields fall at this speed, the Fed expectations will become hawkish very quickly, and depending on how far the market will go, the Fed could be obliged to hike rates again in December, or in January to keep financial conditions tight enough.   Jobs day!  US growth is strong, and the jobs market remains healthy. The Fed thinks that solid labour-force participation and immigration explain the resilience of the jobs market. According to the consensus of analyst estimates on Bloomberg, the US economy is expected to have added 180K new nonfarm jobs, the unemployment rate is seen steady at around 3.8% and the wages growth may have slowed from 4.2% to 4% on an annual basis. Any strength in job additions or wages growth data could bring bond trades back to earth and remind them that if the US jobs market - and the economy - remains this strong, the Fed could turn hawkish again. But strong jobs data in a context of higher supply is not necessarily inflationary.  Gloomy UK outlook  The Bank of England (BoE) kept its interest rate unchanged for the second straight month yesterday. Some MPC members still voted for a 25bp hike to make sure that the pause is not premature, but they all said the same thing: it's too early to talk about rate cuts.   Good news is that inflation may fall below 5% in October and somewhere near 4.5% by the year end. But at 4.5-5%, inflation is still more than twice the BoE's policy target. Therefore, the BOE can't promise that it's done hiking. It could only hope that the cumulative impact of higher rates on the economy would do the rest of the heavy lifting.   In the best-case scenario, the UK's gloomy economic outlook - which seems to become gloomier as months go by - weighs on demand and brings inflation lower. In the worst-case scenario, inflation remains sticky while the economy sinks into a recession. In both cases, the BoE wouldn't hike. The expectation of another hike is down to 1 in 3 and markets now fully price in 3 quarter-point cuts by the end of 2024. The softer economic outlook and softening BoE expectations are threatening for sterling bulls both against the US dollar and the euro.  
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Yen Dips as Bank of Japan Adopts Cautious Approach; US Bond Investors Await Treasury's Debt Strategy Amid Fed Meeting

Ipek Ozkardeskaya Ipek Ozkardeskaya 02.11.2023 11:59
Yen falls after BoJ decision, US bond investors hopeful on Treasury's plan to spend 'less'  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Bank of Japan (BoJ) kept interest rates unchanged, redefined the 1% limit on the 10-year JGBP yield as a loose 'upper bound' and scrapped its promise to keep that level intact. Alas, the move was less aggressive than expected by the market and sent the yen tumbling. Japanese policymakers' insistence that they won't hesitate to take additional easing measures 'if needed' also spoiled sentiment. The USDJPY trades just above the 150 mark this morning after the BoJ decision, although the spike in the 10-year JGB yield to almost 1% should've pulled the pair lower – especially after the news that the US Treasury will be borrowing less money in the last three months of this year.  The US Treasury will borrow less; the Fed is expected to announce no change. Yet...  The US Treasury Department said yesterday that they are planning to borrow around $776 billion in the final quarter of the year. That's still a historically high borrowing, but it has the merit to be below the expectation of around $800bn and it's well below the $1 trillion that they borrowed in the July-to-September period, and which wreaked havoc in the US bond market, sending – especially the long-end of the US yield curve rallying.  Today, the Federal Reserve (Fed) starts its two-day policy meeting. Yes, the FOMC announcement on interest rates is often a big event for investors, but this time around, it won't be the only shining star of the week. First, because we know that there won't be any rate hikes this week. The probability of no change is priced as being almost 100% sure. The Fed members will still be raising their eyebrows given the strength of the recent economic data, the uptick in inflation and global uncertainty. But they won't necessarily be raising the rates. Therefore, what they will say they will do will matter more for the market pricing than what they will do. And the rate expectations will be played for the December and January meetings – which both hint at no rate hike either, by the way. That could change, but for now, no more rate hike is what investors are betting on.   So, in the absence of a surprise rate decision, or a surprise forward guidance about a rate decision, what will really, really matter this week for the US sovereign space and the faith of the US yields, is the US debt situation, and the Treasury Department's quarterly announcement on details regarding the size and the maturity of the bonds that they will issue to borrow that extra $776 bn this quarter.  The composition of the US Treasury's bond issuances will be crucial. Shifting toward shorter maturity debt could relieve the pressure on the US long-term papers but the problem with the short-term bills is that the US Treasury already sold plenty of them - they came close to their self-imposed limit of 20% last quarter- and that's why they decided to sell more longer maturity bonds since September. The latter shift towards longer-term maturity debt explained why the long-term yields took a lift since September. Therefore, it's not a given that the Treasury's issuance calendar will fully calm down the bond investors' nerves on Wednesday. 
The Fear of Strong Jobs: How US Labor Market Resilience Sparks Global Financial Panic

The Fear of Strong Jobs: How US Labor Market Resilience Sparks Global Financial Panic

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.10.2023 08:55
The fear of strong jobs By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Even a hint of an improving US jobs market sends shivers down investors' spines.  This is why the stronger than expected job openings data from the US spurred panic across the global financial markets yesterday. Although hirings and firings remained stable, the financial world was unhappy to see so many job opportunities offered to Americans as the data hinted that the US jobs market could be going back toward tightening, and not toward loosening. And that means that Americans will keep their jobs, find new ones, asked better pays, and keep spending. That spending will keep US growth above average and continue pushing inflation higher, and the Federal Reserve (Fed) will not only keep interest rates higher for longer but eventually be obliged to hike them more. Alas, a catastrophic scenario for the global financial markets where the rising US yields threaten to destroy value everywhere. PS. JOLTS data is volatile, and one data point is insufficient to point at changing trend. We still believe that the US jobs market will continue to loosen.  But the market reaction to yesterday's JOLTS data was sharp and clear. The US 2-year yield spiked above 5.15% after the stronger than expected JOLTS data, the 10-year yield went through the roof and hit the 4.85% mark. News that the US House Speaker McCarthy lost his position after last week's deal to keep the US government open certainly didn't help attract investors into the US sovereign space. The US blue-chip bond yields on the other hand have advanced to the highest levels since 2009, and the spike in real yields hardly justify buying stocks if earnings expectations remain weak. The S&P500 is now headed towards its 200-DMA, which stands near the 4200 level. The more rate sensitive Nasdaq still has ways to go before reaching its own 200-DMA and critical Fibonacci levels, but the selloff could become harder in technology stocks if things got uglier.  In the FX, the US dollar extended gains across the board. The Reserve Bank of New Zealand (RBNZ) kept the interest rate steady at 5.5% as expected. Due today, the ADP report is expected to show a significant slowdown in US private job additions last month; the expectation is a meagre 153'000 new private job additions in September. Any weakness would be extremely welcome for the rest of the world, while a strong looking data, an - God forbid – a figure above 200K could boost the Federal Reserve (Fed) hawks and bring the discussion of a potential rate hike in November seriously on the table.   The EURUSD consolidates below the 1.05 level, the USDJPY spiked shortly above the 150 mark, and suddenly fell 2% in a matter of minutes, in a move that was thought to be an unconfirmed FX intervention. Gold extended losses to $1815 per ounce as the rising US yields increase the opportunity cost of holding the non-interest-bearing gold.  The barrel of American crude remains under pressure below the $90pb level. US shale producers say that they will keep drilling under wraps even if oil prices surge to $100pb, pointing at Joe Biden's war against fossil fuel. A tighter oil supply is the main market driver for now, but recession fears will likely keep the upside limited, and September high could be a peak.   
Uncertain Waters: Saudi's Oil Production Commitment and Global Economic Jitters

Uncertain Waters: Saudi's Oil Production Commitment and Global Economic Jitters

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.10.2023 08:17
Saudi's commitment is not written into a law By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Markets are on an emotional rollercoaster ride this week. The slightest data is capable of moving oceans. Yesterday, the significantly softer-than-expected ADP report, and the announcement that 75'000 healthcare workers at Kaiser went on strike sparked a positive reaction from the market in a typical 'bad news is good news' day. The US economy added only 89K new private jobs in September, much less than 153K penciled in by analysts. It was also the slowest job additions since January 2021. The rest of the data was mixed. US factory orders were better than expected in August, but the services PMI came close to slipping into the contraction zone, and the ISM's non-manufacturing component also hinted at slowing activity. Mortgage activity in the US fell to the lowest levels since 1995, as the 30-year mortgage rates spiked higher toward 8%. Housing and services are among the biggest contributors to high inflation besides energy prices, therefore, seeing these sectors cool down has a meaningful impact on inflation expectations, hence on Federal Reserve (Fed) expectations. As such, yesterday's soft-looking data tempered the Fed hawks, after the stronger-than-expected JOLTs data triggered panic the day before. The US 2-year yield took a dive toward the 5% mark, the 10-year yield bounced lower after flirting with the 4.90% level, while the 30-year hit 5% for the very first time since 2007 before bouncing lower on relieving news of soft job additions. Hallelujah.  The US dollar index retreated across the board, and equities rebounded. The S&P500 jumped from the lowest levels since the beginning of June. The score is now one to one. One good news for the US jobs market, and one bad news. Everyone is now holding his or her breath into Friday's jobs data, which will determine whether we will end this week with a sweet or a sour taste in our mouth. Sweet would be loosening jobs data, sour would be a still-strong jobs data which would fuel the hawkish Fed expectations and further boost US yields while the US yields are at a critical moment.   For the first time since 2002, the US 10-year yield comes at a spitting distance from the S&P500 earnings. The index is just about 60 points above its critical 200-DMA. Looking at the seasonality chart, the S&P500 could dip at about now. In this context, there is a chance that soft jobs data from the US marks a dip in the S&P500 selloff. But one thing is sure: the yields and the US dollar must come down to keep the S&P500 on a rising path. Profits at the S&P500 companies are inversely correlated with the US dollar as their international profits account for about a third of the total. If the yields and the US dollar continue to rise, the S&P500 will face severe headwinds into the year end.    Oil fell nearly 6%!  Rising suspicions that the global economy is headed straight into a wall didn't spare oil bulls yesterday. The barrel of American crude dived almost 6%, slipped below the 50-DMA ($85pb), and below the positive trend base building since the end of June. The 6.5-mio-barrel build in gasoline stockpiles last week helped bring the bears back to the market even though the data also showed a more than 2-mio-barrel draw in crude inventories over the same week.   Yesterday's move shows that what matters the most for intraday moves is the rhetoric. This summer, the market focus was on the tightening global oil supply and how the US will 'soft land' despite the aggressive Fed tightening. Now we start talking about slowing economies and recession worries.   OPEC decided to maintain its oil production strategy unchanged at yesterday's decision. Saudi and Russia repeated that they will keep their production restricted to maintain the positive pressure on oil. But if global demand cools down and volumes fall, both Saudi and Russia will be tempted to increase profits by selling more oil at a cheaper price. Saudi Arabia shouldering all the production cuts for OPEC is not written into a law, it could become uncertain if market conditions turn sour.
Stocks Down, USD Up Amid Looming Government Shutdown Concerns

Stocks Down, USD Up Amid Looming Government Shutdown Concerns

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.09.2023 13:04
Stocks down, USD up By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank     Investors continue to dump stocks and buy US dollars on looming uncertainty regarding whether the US government will be shut in three days. There is progress regarding a 6-week short-term funding deal, but getting an approval from the Senate will be a challenge. In the meantime, falling savings, rising theft and delinquencies hint at the growing cost-of-living crisis whereas the central banks' inflation fight is certainly not over just yet.  The looming government shutdown talks continue feeding into a stronger US dollar. US politicians have agreed to a 6-week short-term funding to keep the government running for another month and a half, but getting approval from the full Senate will be a challenge with far-right Republicans' determination to 'shoot it down if it reaches the floor'.   The S&P500 fell to the lowest levels since the beginning of June and the Stoxx 600 could slip below 445 due to slowing European activity, waning Chinese demand, the European Central Bank's (ECB) pledge to keep the monetary policy tight until inflation comes down significantly. The euro's depreciation makes inflation harder to ease along with rising energy prices.     After a few sessions of consolidation, and despite a more than 1.5-mio-barrel build in US crude inventories last week, US crude is upbeat this morning, again. The barrel of American crude is trading above the $92 level, as the European nat gas futures flirt with the 200-DMA. The EURUSD lost around 6.5% since the July peak. Oversold market conditions call for consolidation, or recovery, yet appetite in the US dollar remains too strong to let the other currencies breathe. And if this is not enough bad news, the EU is now investigating the degree to which China has subsidized EV manufacturers. Tesla is clearly in a hot seat, but not only. Some European carmakers including Renault and BMW also have joint ventures in China and will be probed. The cherry on top, VW announced to cut EV output at German sites due to lacking demand. All this to say, there is little place to go in the market other than the FTSE 100, which could at least take advantage of the energy rally.     The combination of higher energy and stronger dollar has well pushed inflation in Australia to 5.2% in August, up from 4.9% printed a month earlier -which was a 17-month low. We could see a similar upturn in global inflation metrics due to rising oil prices. The Eurozone data will soon be coming in. Unfortunately for the Aussie, the uptick in inflation won't prevent it from getting smashed against the US dollar. The pair will likely test and take out the September support of 0.6360
Rising US Yields and Dollar Strength Amidst Government Shutdown Drama

Rising US Yields and Dollar Strength Amidst Government Shutdown Drama

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.09.2023 14:43
US yields rise, dollar gains on another US government gong show By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The US yields rose, and the dollar extended gains yesterday as the looming US government shutdown drama got the only remaining big rating agency company Moody's to sound cautious about the US' AAA rating. 'Debt service payments would not be impacted, and a short-lived shutdown would be unlikely to disrupt the economy', they said, but 'it would underscore the weakness of US constitutional and governance strength relative to other triple-A rated sovereigns.' Both S&P and Fitch have downgraded the US credit rating this summer, over a potential US default in the context of debt ceiling drama.   The US 10-year yield advanced past the 4.55% level and could advance even higher due to political tensions and an increased treasury issuance for long-dated papers. Rising US yields helped the US dollar gain more strength across the board. The US dollar index, which was already propelled into the bullish consolidation zone following the Federal Reserve's (Fed) pledge last week to maintain rates higher for longer, hit a fresh high since last November. Even if it sounds funny, the dollar could profit from safe-haven inflows if the government shutdown drama doesn't last long. During the last US government shutdown, in 2018 – which was, by the way the longest shutdown since 1970s - the US dollar gained against most major currencies. Of course, the longer a shutdown lasts, the bigger the impact would be on the economy, and potentially on the US' credit rating. And the bigger the impact on the US growth and its credit worthiness, the more likely we see the US dollar get – at least a small – hit from another political gong show. For now, though, don't pull all your eggs out of the US basket, because, the dollar could well strengthen despite the political shenanigans in the US, and the US stocks could see increased inflows, as well. The last time the US government was shut in 2018, the S&P500 rallied 13%.   Yesterday's renewed dollar rally pushed the EURUSD below a critical Fibonacci level yesterday. The EURUSD slipped below the major 38.2% Fibonacci retracement on last September to July rally, and was thrown into a medium term bearish consolidation zone. The expectation that inflation in the euro area may have eased significantly may have enhanced the euro selloff before investors had a glimpse of the latest update – due later this week. Cable tested the 1.22 support to the downside, in a move that could extend toward the 1.2080 level, which is the major 38.2% retracement on pound-dollar's last year rally. The dollar-franc rises exponentially above the 200-DMA, after last week's surprise Swiss National Bank (SNB) pause convinced traders that the end of a strong franc era could be coming to an end, as long as inflation in Switzerland remains under control. Gold fell, trend and momentum indicators turned negative, and the yellow metal is about to post a death cross formation where the 50-DMA is about to cross below the 200-DMA, which could further fuel some short-term selloff. And the USDJPY is flirting with the 149 level, with traders determined to defy the Japanese officials' threats of direct FX intervention into the 150. Released this morning, the Bank of Japan's (BoJ) core CPI came in steady at 3.3%, higher than 3.2% expected by analysts. Normally, a stronger-than-expected inflation data would revive the BoJ hawks, and rate hike expectations and lead to a stronger yen. But, the BoJ isn't much concerned about inflation when they decide on their rate policy, they are more concerned about how to keep an absurdly loose monetary policy without causing more bleeding in the yen.  In energy, the barrel of US crude stabilizes around the $90pb, the daily MACD index fell to the negative territory for the first time since the beginning of September, and the impact of US shutdown drama on growth outlook, and the deepening real estate crisis in China, with Evergrande's latest default on a 4 billion yuan onshore bond, could add another layer of uncertainty in global financial markets, and trigger a much-awaited correction in oil prices. The $86/87 range is a reasonable target for those looking for a minor downside correction in oil prices without having to bet on a dramatic trend change.    
Asia Weakness Sets Tone for Lower European Open on 26th September 2023

Asia Weakness Sets Tone for Lower European Open on 26th September 2023

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.09.2023 14:41
05:40BST Tuesday 26th September 2023 Asia weakness set to see lower European open By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a poor start to the week yesterday as concerns around sticky inflation, and low growth (stagflation), or recession served to push yields higher, pushing the DAX to its lowest levels since late March, pushing both it and the CAC 40 below the important technical level of the 200-day SMA. Recent economic data is already flashing warning signs over possible stagnation, especially in Europe while US data is proving to be more resilient.   Worries over the property sector in China didn't help sentiment yesterday after it emerged Chinese property group Evergrande said it was struggling to organise a process to restructure its debt, prompting weakness in basic resources. The increase in yields manifested itself in German and French 10-year yields, both of which rose to their highest levels in 12 years, with the DAX feeling the pressure along with the CAC 40, while the FTSE100 slipped to a one week low.   US markets initially opened lower in the face of a similar rise in yields with the S&P500 opening at a 3-month low, as US 10-year yields continued to push to fresh 16-year highs above 4.5%. These initial losses didn't last as US stocks closed higher for the first time in 5 days. The US dollar also made new highs for the year, rising to its best level since 30th November last year as traders bet that the Federal Reserve will keep rates higher for much longer than its counterparts due to the greater resilience of the US economy. The focus this week is on the latest inflation figures from Australia, as well as the core PCE Deflator from the US, as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday. This could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further to a record high.   On the data front today the focus will be on US consumer confidence for September, after the sharp fall from July's 117.00 to August's 106.10. Expectations are for a more modest slowdown to 105.50 on the back of the continued rise in gasoline prices which has taken place since the June lows. The late rebound in US markets doesn't look set to translate into today's European open with Asia markets also sliding back on the same combination of stagflation concerns and reports that Chinese property company Evergrande missed a debt payment.   Another warning from ratings agency Moody's about the impact of another government shutdown on the US economy, and its credit rating, didn't help the overall mood, while Minneapolis Fed President Neel Kashkari said he expects another Fed rate rise before the end of the year helping to further boost the US dollar as well as yields.     EUR/USD – slid below the 1.0600 level yesterday potentially opening the prospect of further losses towards the March lows at 1.0515. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.      GBP/USD – slipped to the 1.2190 area, and has since rebounded, however the bias remains for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – currently have resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.     USD/JPY – has continued to climb higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.     FTSE100 is expected to open at 7,624     DAX is expected to open at 15,405     CAC40 is expected to open at 7,124  
Euro-dollar Support Tested Amidst Rate Concerns and Labor Strikes

Euro-dollar Support Tested Amidst Rate Concerns and Labor Strikes

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.09.2023 11:28
Euro-dollar at important support By Ipek Ozkardeskaya, Senior Analyst |Swissquote Bank   The week started on a cautious note as stocks in Asia mostly sold off following a rough week in the US, where the Federal Reserve's (Fed) hawkish pause triggered a fresh wave of worries that the rates would stay higher for longer. The US 2-year yield bounced lower after hitting 5.20%, yet the US 10-year continues its journey higher and hit 4.50% on Friday. The S&P500 slipped below its ascending base since last October, fell below its 100-DMA, and closed the week at the lowest levels since June, having recorded the worst performance over the week since the banking crisis in March. BoFA said that equity investors are dumping stocks at the fastest level since last December, and Morgan Stanley warned that stocks are now 'fragile'. Indeed! More fragile than the S&P500 are the rate sensitive technology stocks, and the small cap stocks. The growing divergence between the S&P500 and Russell 2000 index is also flashing 'recession', on top of the heavily inverted US yield curve.  Elsewhere, the UAW strikes will broaden to all GM and Stellantis parts plants in the US, which means that 5600 more workers will join the movement (Ford will likely be spared, for now, as some good progress is made on negotiations with the UAW) and the US will shut down by the end of the week if politicians fail to pass a dozen of bills. The latest US GDP update will fall in this chaotic environment, but the expectation is a positive revision from 2.1% to 2.3%.  In the currency markets, the US dollar extends gains. The dollar index entered the bullish consolidation zone after the Fed kept the possibility of another rate hike before the year ends on the table when it met last week, and said that the rates will likely stay higher for longer next year.   The EURUSD tested an important Fibonacci support last week, the major 38.2% retracement level which should distinguish between the positive trend building since last year, and a slide into the bearish consolidation zone. There is a stronger case for further euro weakness than the contrary. Released last Friday, the preliminary September PMI figures were mixed; the Eurozone manufacturing further slowed but German numbers hinted at some improvement. This week, we will see how the recent slowdown impacted the inflation dynamics in September. Headline inflation in the euro area is expected to have slowed from 5.2% to 4.5% this month, a slowdown that would defy the rising energy prices and the euro depreciation. Core inflation is seen softening from 5.3% to 4.8%. Any softness in inflation figures should give further support to the euro bears, while higher than expected numbers, which I believe could be the surprise of this week could revive the European Central Bank (ECB) hawks, but will hardly prevent the euro from seeking into a deeper depression, as further ECB action would also mean a bigger hit on economies. That's a fear that will likely keep euro bulls away from the market for now.  On the corporate calendar, Micron Technology and Nike will be releasing their latest quarterly results, and TotalEnergies Investor Day Event will gather happy industry players as US crude consolidates gains above $91pb with no big sign of a significant downside correction.  
A Bright Spot Amidst Economic Challenges

A Bright Spot Amidst Economic Challenges

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.09.2023 11:05
A bright spot If there is one bright spot in Britain with all this, it is the FTSE100. First, the rising energy prices are good for the energy-rich FTSE100. Second, softer sterling makes these companies more affordable for international investors, who should of course think of hedging their sterling exposure, and third, more than 80% of the FTSE100 companies' revenues come from oversees, which means that when they convert their shiny dollar revenues back to a morose sterling, well, they can't really complain with a stronger dollar. Consequently, if a more dovish BoE is bad for sterling, the combination of a hawkish Fed and a dovish BoE and a pitiless OPEC is certainly good for the FTSE100. The index has been left behind the S&P500 this year, as the tech rally is what propelled the American index to the skies, but that technology wind is now turning direction. The FTSE 100 broke its February to September downtrending trend to the upside and is fundamentally and technically poised to gain further positive traction, whereas, the S&P500 is heaving a rough month, with technology stocks set for their worse performance this year, under the pressure of rising US yields, which make their valuations look even more expensive.   Interestingly, the US 2-year yield peaked at 5.20% after the Fed's hawkish pause this week and is back headed toward the 5% mark, but the gap between the US 2-year yield and the top range of the Fed funds rate is around 40bp, which is a big gap, and even if the Fed decided not to hike rates, this gap should narrow, in theory. If it does not, it means that bond traders are betting against the Fed's hawkishness and think that the melting savings, the loosening jobs market, tightening bank lending conditions and strikes, and restart of student loan repayments and a potential government shutdown could prevent that last rate hike to happen before this year ends. And indeed, activity on Fed funds futures gives more than 70% chance for a third pause at the FOMC's November meeting, and Goldman Sachs now sees the US expansion slow to 1.3% from 3.1% printed in the Q3. KPMG also warned that a prolonged auto stoppage may precipitate contraction. And if no deal is inked by noon today, the strikes will get worse.   One's bad fortune is another's good fortune  The Japanese auto exports surged big this year, they were 50% higher in yen terms. The yen is certrainly not doing well, but yes, you can't have it all. That cheap yen is one of the reasons why the Japanese export so well outside their country. And in case you missed, the BoJ did nothing today to exit their hyper-ultra-loose monetary policy. They didn't even give a hint of normalization, meaning that the yen will hardly strengthen from the actual levels. In the meantime, Toyota, Mitsubishi and Honda shares are having a stellar year, and the US strikes will only help them do better. 
Central Bank Policies: Hawkish Fed vs. Dovish Others"

Central Bank Policies: Hawkish Fed vs. Dovish Others"

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.09.2023 11:05
Hawkish Fed vs. Dovish others  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Swiss National Bank (SNB) and the Bank of England (BoE) surprised by maintaining their rates unchanged at yesterday's trading session. The Bank of Japan (BoJ) surprised by maintaining its ultra-lose monetary policy stance unchanged. Combined with a hawkish pause earlier this week, the major currencies further sank against the greenback. The USDCHF advanced past the 200-DMA, and Cable slipped to 1.2232, a fresh low since March, and whispers of a potential return to parity against the US dollar sparked, yet again. Reasonably, the pound-dollar could return to 1.20, and below, if the major 38.2% Fibonacci support – which stands at 1.2080 is pulled out and lets the pair slip into a medium-term bearish consolidation zone. But we will likely see the Federal Reserve (Fed) soften its tone before we start talking about parity in Cable.   Now, looking at what the BoE did, you know that I was surprised, and intrigued with the decision. In Switzerland for example, inflation – official inflation – steadied below the SNB's 2%, target. The latest data shows that the Swiss CPI is at no higher than 1.6% - even though we are expecting a monstrous rise in health insurance costs, and another 20% rise in average in electricity costs that will certainly drill holes in our pockets at the start of next year, but for now inflation is at 1.6%, say the numbers, and alone, it justifies a SNB pause. But in Britain, the no action is quite premature. Inflation in Britain is almost at 7%, the energy prices are rising, the war in Ukraine is nowhere close to being over, sterling pound is now losing value, which means that whatever the Brits will import from now will cost them more than during the last months, when the pound was appreciating. It's hard to see how, with all these developments, the BoE won't be obliged to hike, again. The only way is a really bad economic performance.  
California Leads the Way: New Climate Disclosure Laws Set the Standard for Sustainability Reporting

How Will Central Banks Respond to Current Challenges?

Ipek Ozkardeskaya Ipek Ozkardeskaya 19.09.2023 13:28
Hawkish pause?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Strikes at GM, Ford and Stellantis factories dampened overall market sentiment on Monday. The walkout led by United Auta Workers (UAW) began last Friday and saw little progress as the union refused a 21% pay rise offered to workers. Shawn Fain, who is at the helm of the movement, demands a 40% pay rise and 32-hour workweek – unprecedented for the US. Good luck to both parties in these negotiations.   GM, Ford and Stellantis fell yesterday. The barrel of US crude traded past the $92 level, as Brent crude advanced past $95pb. I believe that we are approaching a peak in the actual oil rally and we should see a downside correction of at least 5-6% from the actual levels, yet the damage from rising oil prices is already showing in inflation numbers. That's partly why the European Central Bank (ECB) announced a 'dovish hike' last week.  A hawkish pause?  This week, the US policymakers will certainly opt for a 'hawkish pause'. The Fed will likely revise its growth expectations significantly higher on the back of resilient consumer spending and solid growth. The looming talk of another government shutdown, the student loan repayments and the UAW strikes will sure have a negative impact on US growth numbers, but US Treasury Secretary Janet Yellen defends the scenario of 'soft landing' as labour market is still healthy, industrial output is rising and inflation is coming down, she says.   Despite the latest softness in the jobs data, the US inflation figures last week surprised to the upside. A major part of disinflation since last summer was due to waning post-Covid supply issues that led to higher supply, hence slower price growth. But the improvement in supply could be coming to an end, and oil prices are rising. Therefore, the Fed will certainly sound cautious and reasonably hawkish this week. The so called dot plot will certainly point at another rate hike before the year end, and a higher median rate throughout next year.   The US dollar index tested the important 38.2% Fibonacci resistance last week, especially after the euro sold off following the ECB rate hike. The Fed announcement could push the US dollar index into the medium-term bullish consolidation zone.   A dovish hike?  If the Fed is not expected – not even a little bit – to hike rates this week, the Bank of England (BoE) could hike the bank rate by a final 25bp on Thursday. It's possible that a hawkish pause from the Fed propels the dollar higher, while a dovish hike from the BoE has the opposite impact on sterling. Cable slid below its 200-DMA last week and is now back in a long-term bearish trend.   And nothing...?  In Japan, not much is expected to change this week. Warnings from Japanese officials that a further yen selloff would spark a direct FX intervention slowed down but not reversed the JPY selloff. The USDJPY is trading just below the 148 level, with, sure, limited upside potential, and of course a good downside potential, but that downside potential must be unlocked by a reasonably hawkish BoJ, and I don't see that coming this week.    
Euro Plummets After 25bp Rate Hike, Lagarde's Reassurance Falls on Deaf Ears: Market Analysis

Euro Plummets After 25bp Rate Hike, Lagarde's Reassurance Falls on Deaf Ears: Market Analysis

Ipek Ozkardeskaya Ipek Ozkardeskaya 15.09.2023 08:25
Euro tanks after 25bp hike, Lagarde goes unheard By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Investors didn't buy the rumour of a European Central Bank (ECB) rate hike but heavily sold the ECB's intention to stop hiking the rates in the close future. The ECB raised the rates by 25bp yesterday and said that it 'now considers that the key ECB rates reached levels that, maintained for sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target'. And that was it for the euro bears. ECB Chief Christine Lagarde tried to convince investors that the ECB rates are not necessarily at their peak and that the future decisions will depend on the incoming data. But in vain. The EURUSD sank below 1.07 after the decision and the EZ yields melted as many were rubbing their eyes to understand why a 25bp hike didn't even spark a minor rebound given that the decision was not warranted, on the contrary, the expectations were mixed into the meeting!   In fact, many euro bears also jumped on a trade yesterday as Lagarde announced that the ECB significantly pulled its economic projections to the downside. BUT, in the meantime, the ECB revised its inflation expectations higher as well. Therefore, it's naïve to think that the ECB can't continue hiking rates with such a sour economic outlook. They can. They can, because they have a single mandate – price stability. As such, the market certainly remains too enthusiastically, and unrealistically dovish about the ECB. When I hear 'data dependency', I immediately look at energy prices and you know what I see there: further inflation pressures and a real possibility for further rate hikes.   Oil extends gains The barrel of US crude traded past $91 yesterday, and Brent is getting ready to test the $95pb level. The better-than-expected industrial production, retail sales data from China this morning and news that the People's Bank of China (PBoC) cut the required reserves for banks for the second time this year to boost market liquidity are giving a further support to the oil bulls looking for reasons to ignore the overbought market conditions.   But the rising oil prices are not benign, and the hawkish ECB is not necessarily positive for the euro, and here is why: the data released in the US yesterday showed that both retail sales and PPI got a decent boost because of higher gasoline prices in August. But it also showed that spending more on gasoline didn't get Americans to spend less elsewhere. And that's inflationary. Consequently, the latest developments will, at some point, awaken the Federal Reserve (Fed) hawks, and increase the risk of a further selloff for the EURUSD. There is no chance that Jerome Powell will announce the end of the rate hikes next week. He will only say that the trajectory of core inflation is soothing, but rising energy prices is a risk that they must manage. The dollar index could soon take out a major Fibonacci resistance, the 38.2% retracement on last year's meltdown (near 105.40), and step into the medium-term bullish consolidation zone. Hence the EURUSD could well be forced below a critical Fibonacci retracement, its own 38.2% level, near 1.0615.   PS: US government drama and shutdown risk could eventually soften US outlook and temporarily prevent the Fed hawks from forcefully coming back.   ARM gains 25%   In the equity markets, ARM went public yesterday, and nailed its first day on Nasdaq. The share price rose 25% and closed above $63. It wasn't as impressive as Rivian, for example which had jumped more than 50% during its first hours of trading, But hopefully, ARM will have a more stable cruise. Arm currently estimates that '70% of the world's population uses Arm-based products', in their PCs, cars, smartphones and so. And growth is the only possible direction for the chip designer with AI's sudden arrival to our lives. 
ECB Signals Rate Hike as ARM Goes Public: Market Insights

ECB Signals Rate Hike as ARM Goes Public: Market Insights

Ipek Ozkardeskaya Ipek Ozkardeskaya 14.09.2023 08:07
ECB decides, ARM goes public!  Yesterday's US CPI report was mixed, worse-than-expected and far from soothing. The headline inflation ticked from 3.2% to 3.7%, higher than the 3.6% expected by analysts, and core inflation came in at 4.3%, in line with expectations. But on a monthly basis, both headline and core inflation numbers were slightly higher than expected. The spike in energy prices was to blame for the rise in the headline figure. In fact, gasoline prices rose by more than 11% in August, and that accounted for more than half of the overall monthly rise in inflation. The only good news was that core inflation in the past three months ran at a 2.4% annual rate, the lowest since March 2021, and just at a spitting distance from the Federal Reserve's (Fed) 2% inflation target. That's maybe why the market reaction to a higher-than-expected set of monthly and yearly CPI metrics didn't see a bad market reaction? The US 2-year yield was shortly above the 5% level yesterday but fell after the data, activity on Fed funds futures now gives 97% chance for a pause at next week's FOMC meeting, but the probability of a pause in November is slightly less than before the data, at 56%. In summary, yesterday's CPI data tilted the expectation for a November hike slightly higher, without however changing the consensus of a no rate hike for the moment.     ECB expectations tilt toward rate hike  Not earlier than the beginning of this week, the expectation for today's European Central Bank (ECB) meeting was a no rate hike. Today, just a few hours before the meeting, the pricing is pointing at a 25bp hike as the most likely scenario; money markets are pricing in a 68% chance for a 25bp hike.   But the data remains morose. Released yesterday, the euro area industrial production figures were looking rather bad, with a more than 1% slump on a monthly basis, and a 2% slump on a yearly basis. That's also why the higher ECB rate hike expectations couldn't really boost appetite in the EURUSD, the pair sees resistance at the 1.0765/1.070 range. If the ECB raises the rates today, the EURUSD could make a move toward the 200-DMA, 1.0825, and the Stoxx 600 could slip below the 445, a double bottom.   While there is a decent downside potential in European stocks, the upside potential in the EURUSD is limited by the weakness of the economic data. In fact, the gap between the US and German 10-year yield has been narrowing since about 3 weeks, but the EURUSD barely benefited from it, on the contrary, the EURUSD weakened more than 1% during the same period. Apparently, the morose economic outlook brings investors to think that, even if the ECB hikes today, it will certainly be the last one, and that in less than a year from now, we will be talking about the first rate cut in Europe due to economic weakness.   Across the Channel, the picture is not sunnier, obviously. The latest data revealed that the British economy shrank at the fastest speed in seven months in July. Strikes and the lack of sun were responsible for the gloomy data. You would think that slower economy could at least mean a softer UK inflation – a silver lining?. But no. Because data released earlier this week showed that the UJ unemployment rose, yet wages grew at a record high, the record starting from 2001. The Brits earned 8.5% more on the year, which is good news for their struggle to keep up with the cost of living crisis, but clearly bad news for the Bank of England (BoE), which is trying so hard to abate inflation, but in vain. They abate economic growth instead. Cable is testing the 200-DMA to the downside this week, for similar reasons to the euro. BoE rate hike expectations are strongly here, but growth outlook looks so gloomy that not many traders are willing to try a long sterling position.   Now, for all central bankers, those who want to raise rates and those who don't want, the headache is the same. Oil prices are rising, and that's muddying the future inflation expectations. The US is in a better position than the rest of world because, at least, they don't have to worry about currency depreciation to make things worse. But the barrel of US crude came close to the $90pb level yesterday. Happily, the latest EIA data showed a 4-mio build in the US inventories last week, which certainly helped not boost the bull's run further. US crude is now at the overbought market territory. The $90pb level is a psychological resistance and global economic data hints at slow activity ahead of us. The mix calls for at least a minor correction at the current levels.  In equities, all eyes are on ARM that will go public today. The company set its IPO price to $51 a share. It's at the top end of the proposed price range, but still lower than the valuation of $64bn when Softbank bought out a stake from Vision Fund.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
Tesla's Market Surge, Apple's Recovery, and Market Dynamics: A Snapshot

Tesla's Market Surge, Apple's Recovery, and Market Dynamics: A Snapshot

Ipek Ozkardeskaya Ipek Ozkardeskaya 12.09.2023 08:49
Tesla fuels market rally By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    Tesla jumped 10% yesterday and reversed morose mood due to the Apple-led selloff. Tesla shares flirted with the $275 per share on Monday, thanks to Morgan Stanley analysts who said that its Dojo supercomputer may add as much as $500bn to its market value, as it would mean a faster adoption of robotaxis and network services. As a result, MS raised its price target from $250 to $400 a share.   Tesla rally helped the S&P500 make a return above its 50-DMA, as Nasdaq 100 jumped more than 1%. Apple recorded a second day of steady trading after shedding almost $200bn in market value last week because of Chinese bans on its devices in government offices, and Qualcomm, which was impacted by the waves of the same quake, recovered nearly 4%, after Apple announced an extension to its chip deal with the company for 3 more years. Making chips in house to power Apple devices would take longer than thought.   Speaking of chips and their makers, ARM which prepares to announce its IPO price tomorrow, has been oversubscribed by 10 times already and bankers will stop taking orders by today. The promising demand could also encourage an upward revision to the IPO price, and we could eventually see the kind of market debut that we like!    Today, at 10am local time, Apple will show off its new products to reverse the Chinese-muddied headlines to its favour before the crucial holiday selling season. The Chinese ban of Apple devices in government offices sounds more terrible than it really is, as the real impact on sales will likely remain limited at around 1%.   In the bonds market, the US 2-year yield is steady around the 5% mark before tomorrow's much-expected US inflation data. The major fear is a stronger-than-expected uptick in headline inflation, or lower-than-expected easing in core inflation. The Federal Reserve (Fed) is torn between further tightening or wait-and-see as focus shifts to melting US savings, which fell significantly faster than the rest of the DM, and which could explain the resilience in US spending and growth, but which also warns that the US consumers are now running out of money, and they will have to stop spending. So, are we finally going to have that Wile E Coyote moment? Janet Yellen doesn't think so, she is on the contrary confident that the US will manage a soft landing, that the Fed will break inflation's back without pushing economy into recession. Wishful thinking?   But everyone comes to agree on the fact that the Eurozone is not looking good. The EU Commission itself cut the outlook for the euro-area economy. It now expects GDP to rise only 0.8% this year, and not 1.1% as it forecasted earlier, as Germany will probably contract 0.4% this year. The slowing euro-area economy has already softened the European Central Bank (ECB) doves' hands over the past weeks. Consequently, the EURUSD gained marginally yesterday despite the fresh EU commission outlook cut and should continue gently drifting higher into Thursday's ECB meeting. There is no clarity regarding what the ECB will decide this week. The economy is slowing but inflation will unlikely to continue its journey south, giving the ECB a reason to opt for a 'hawkish' pause, or a 'normal' 25bp hike. 
Behind Closed Doors: The Multibillion-Dollar Deals Shaping Global Markets

A Week Ahead: Market Insights and Key Events with Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Ipek Ozkardeskaya Ipek Ozkardeskaya 11.09.2023 10:54
A busy week ahead By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The S&P500 ended last week on a meagre positive note, as the selloff in Apple shares slowed. Apple will be unveiling the new iPhone15 after the Chinese storm. Last week's selloff was certainly exaggerated. Once the Chinese dust settles, Apple's performance will continue to depend on the overall sentiment regarding the tech stocks, which will in return, depend on the Federal Reserve (Fed) expectations, the rates, energy prices, Chinese property crisis, deflation risks, and how that mix affects the global price dynamics.   China announced this morning that consumer prices rose by 0.1% y-o-y in August, slower than 0.2% penciled in by analysts and after recording its first drop in over two years of 0.3% a month earlier. Core inflation, excluding food and energy prices, rose 0.8% y-o-y, at the same speed as in July, and remained at the fastest pace since January. The numbers remain alarmingly low, and the recent stimulus measures announced by the government did little to boost investors' appetite. The CSI 300 was thoroughly sold on the rallies following stimulus news. And the yuan continued trending lower against the US dollar.  The US dollar is under a decent selling pressure this morning, particularly against the yen, after comments from the Bank of Japan (BoJ) Governor Ueda were interpreted as being 'hawkish'. Ueda said that 'there may be sufficient information by the year-end to judge if wages will continue to rise', and that will help them decide whether they would end the super-loose monetary policy and step out of the negative rate territory. The remarks were disputably hawkish, to be honest, but given how negatively diverged the Japanese monetary policy is, any hint that the negative rates could end one day boosts hope. The 10-year JGB yield jumped 5bp to 70bp on the news, and the USDJPY fell to 146.30. The USDJPY has a limited upside potential as the Japanese officials have been crystal clear last week that a further selloff would be countered by direct intervention. But the pair has plenty of room to drop significantly, when the BoJ finally decides to jump and leave the negative rates behind.   This week, the US inflation numbers will give the dollar a fresh direction, and hopefully a softish one. The headline inflation is expected to tick higher from 3.2% to 3.6% in August, on the back of rising energy prices, while core inflation may have eased from 4.7% to 4.3%. 'We've gotten monetary policy in a very good place' said the NY Fed President Williams last week. Indeed, the Fed hiked the rates by more than 500bp and shed its balance sheet by $1 trillion, while keeping the GDP around 2%, as inflation eased significantly from the 9% peak last summer to around 3% this summer. But crude oil cheapened by more than 40% between last summer and this spring, and the prices are now up by nearly 30% since then. The Fed will likely hold fire when it meets this month, but nothing is less sure for the November meeting. This week's inflation data will be played in terms of November expectations.   For the European Central Bank (ECB), the base case scenario is a no rate hike at this week's monetary policy meeting, but the European policymakers could announce a 25bp hike despite the latest weakness in economic data. The EURUSD is slightly better bid this morning, expect consolidation and minor correction toward the 200-DMA, 1.0823, into the meeting. The ECB, unlike the Fed, is not worried about surprising the market, on one side or the other. A no rate hike – even if it's a hawkish pause - could push the EURUSD to below 1.0615, the major 38.2% Fibonacci retracement, into a medium term bearish trend whereas a 25bp hike should trigger a rally toward the 1.09 level.   On the corporate calendar, ARM will go public this week, in what is going to be this year's biggest IPO. The company is expected to price on the 13th of September with a price range of $47-51 per share, and will start trading on Nasdaq the following day. ARM is expected to be valued at around $52bn, roughly 20 times its last disclosed annual revenue on expectation that the chips needed to power the generative AI will make ARM a sunny to-go place. Hope it won't be stormy.  
UK Labor Market Shows Signs of Loosening as Unemployment Rises: ONS Report

Market Impact Beyond Apple: US Small Caps, Yen, and ECB Meeting

Ipek Ozkardeskaya Ipek Ozkardeskaya 08.09.2023 12:49
Beyond Apple...  When a tech giant like Apple, with a market cap of nearly $2.8 trillion sneezes, the whole market catches a cold. The S&P500 fell for the third day to 4451 yesterday, while Nasdaq 100 slipped below its 50-DMA. Apple selloff also affected suppliers and other mega cap stocks. Qualcomm for example fell more than 7%, while Foxconn remained little impacted by the news.   Zooming out, the US small caps were also under pressure yesterday, the Russell 2000 fell below its 100-DMA and came close to the 200-DMA, as the latest data showed that the US jobless claims fell to the lowest levels since February, defying the latest softness in jobs data. Other data also showed that the labor unit cost didn't fall as much as expected in Q2. But happily, the US treasuries were not much affected by the latest jobless claims data. The US 2-year yield fell below 5%, although the US dollar index extended its advance toward fresh highs since last March.   The selloff in the Japanese yen slowed against the US dollar. The USDJPY pushed below the 147 mark this morning despite a slower than expected GDP print in Japan in the Q2. Capital expenditure fell 1%, private consumption declined 0.6%, making the case for a softer Bank of Japan (BoJ) more plausible. But the Japanese officials dared traders to continue buying the USDJPY to 150, saying that they would intervene.   The EURUSD sees more hesitation into the 1.07 mark, and into next week's European Central Bank (ECB) meeting. The base case is a no rate hike, and yesterday's morose growth figures came to cement the no change expectation. But the economic weakness may have little impact on inflation. Any bad surprise in German inflation due this morning could convince some ECB doves that the European policymakers may announce another 25bp hike when they meet next week.  
Apple's Market Slide Over China iPhone Ban Exaggerated: Potential Buying Opportunity Emerges

Apple's Market Slide Over China iPhone Ban Exaggerated: Potential Buying Opportunity Emerges

Ipek Ozkardeskaya Ipek Ozkardeskaya 08.09.2023 12:45
Exaggerated. By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Apple lost almost $200bn in market valuation in just two days on the news that China would ban iPhone usage in government offices and state-backed companies. Of course, China is one of Apple's biggest markets; the company makes roughly a fifth of its revenue from China and it would be a shame to lose market share in such a huge marketplace, but the market has certainly overreacted to the latest news, because Chinese government staff could already not show up at work with their iPhones.   So, the chances are that, if you are a government worker in China, you already didn't have an iPhone! In this respect, an analyst at Wedbush highlighted that the ban would affect around half a million iPhones over the roughly 45 mio that he expects the company to sell in China over the next 12 months. That's around a 1% hit. Another analyst at Evercore ISI said that the government wouldn't got too hard on Apple either, as even if Apple moves production toward India, today, most iPhones are still assembled in China, and making Apple angry would cause many job losses, and that Xi is not in a position to afford today. Unfortunately for Apple, its iPhones lost market share from 20% to 16% between the first and the second quarter of this year, but iPhones market share stands at 65% of the smartphones worth more than $600 in China, according to IDC – cited by the WSJ. Huawei, on the other hand, stands for around 18% of the sales of iPhones of a higher price range. Therefore, the latest Apple selloff could be an opportunity for buying a dip. Apple lost almost 3% yesterday, after falling more than 3.5% the day before. The share price is now below $180 per share. 38 analysts on CNN's business survey point at a median price expectation of around $200 for Apple shares for the next 12-months. The high estimate goes up to $240 per share. 
iPhones Banned in Chinese Offices: Tech Tensions Escalate

iPhones Banned in Chinese Offices: Tech Tensions Escalate

Ipek Ozkardeskaya Ipek Ozkardeskaya 08.09.2023 10:26
iPhones banned in Chinese offices The S&P500 didn't like the rising US yields and slipped below the 4500 level and the 50-DMA yesterday. Nasdaq 100 also fell 0.88%, as Apple dived more than 3.50% on a report that the Chinese government agencies banned staff from bringing iPhone and other foreign-branded devices into the office. This is now something new, the government employees were always expected not to bring iPhones to the office since the Trump-era trade war. But the news was perceived as further escalation of technology war between the US and China, amid other news including Huawei unveiling a new phone that is powered by a chip 'that appears to be the most advanced version of China's homegrown technology to date' – as a demonstration of power that the US' chip export ban is not holding the Chinese companies back from progressing. And the announcement came in the middle of US commerce secretary's goodwill tour in China. Released this morning, Chinese trade data confirmed a 4th consecutive month of drop in Chinese exports. Although the drop itself was lower than expected, China's share of US imports fell to the lowest levels since 2006.   
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Oil Consolidates Gains Amidst Strong US Dollar and Global Central Bank Divergence

Ipek Ozkardeskaya Ipek Ozkardeskaya 08.09.2023 10:25
Oil consolidates gains Brent consolidates gains above $90pb, and US crude is at $87pb with little conviction from the bears to counter the positive trend after the latest API data showed around 5.5-mio-barrel fall in US inventories last week.   The US dollar's appreciation adds an additional layer of complexity for the rest of the world, as not only crude prices rise, but the US dollar used to trade oil gains in value as well. Big Asian economies are reacting to the US dollar's renewed strength. China defends its yuan by offering forceful guidance with its daily reference rate, while the Japanese issued a strong warning this week, threatening investors that if the USDJPY continued to rise, they would intervene. But in vain, the USDJPY 147.80 and consolidates above 147.50 this morning. However, the upside potential is clearly limited as the Japanese have been vocal about the fact that they won't let the dollar-yen hit 150.   Elsewhere, the USDCAD advanced to the highest levels since March as the Bank of Canada (BoC) kept its policy rate unchanged at 5% as expected, Cable slipped below 1.25, while the selloff in the EURUSD slowed into the 1.07 support. What's next? The European Central Bank (ECB) doves may have gotten ahead of themselves on the back of the recent weakness in economic data, but the fact that the softness in inflation is at jeopardy means that an ECB pause this month is not warranted. ECB's Knot said that the markets are underestimating the chance of a rate hike next week. He reminded that a rate hike is 'still a possibility', just not a 'certainty'. Peter Kazimir also said that one more rate hike should happen in Europe. Yes, the 11% slump in German exports make the ECB hawks sound less powerful, but you must keep somewhere in the back of your mind that economic weakness is needed to slow inflation – at least this is what the theory tells – therefore, the ECB hawks will fight for their last 25bp hike this month. 
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A 'Hell of a Good Week of Data' According to Fed Members

Ipek Ozkardeskaya Ipek Ozkardeskaya 06.09.2023 12:13
Hell of a good week of data'   Interestingly, higher oil prices don't seem to bother some Federal Reserve (Fed) members. Christopher Waller said at a CNBC interview yesterday that last week was a 'hell of a good week of data' which will allow the Fed 'to proceed carefully' with its next decisions. 'We can just sit there, wait for the data, and see if things continue' he said. They could also pray while waiting for the data to deteriorate, as higher energy prices won't be any less problematic for the Fed.   Anway, both the US 2-year and 10-year yields jumped yesterday, because many companies flooded the market with debt sales. The US saw $36bn bond sales yesterday, the highest ytd. The S&P500 fell 0.42%, while Nasdaq eked out a small gain as Tesla jumped more than 4.5% on news that its China-made EV deliveries rose 9.3%, comforting investors that the price cuts in China may be playing in favour of the company.  
Crude Conundrum: Will Oil Prices Reach $100pb Amid Supply Cuts and Inflation Concerns?

Crude Conundrum: Will Oil Prices Reach $100pb Amid Supply Cuts and Inflation Concerns?

Ipek Ozkardeskaya Ipek Ozkardeskaya 06.09.2023 12:13
More cuts  Brent crude rallied past the $90pb yesterday, as US crude advanced above the $88pb mark as Saudi Arabia and Russia announce that they prolong their supply cuts. Saudi Arabia will continue reducing its own unilateral supply by 1mbpd to the end of the year, while Russia will be cutting 300'000 bpd. The kneejerk reaction to the news was a sharp jump in oil prices but the news was not a shocker per se, investors knew that something was cooking. What surprised the market, however, is the timeline: cuts are announced for another 3 months.   The million barrel question now is: is $100pb back on the table? It's unsure, and the road that could lead crude oil prices toward the $100pb psychological mark will likely be bumpy, because higher energy prices have already started being reflected in inflation and inflation expectations. As a result, the central banks, including the Fed, will have little choice but to keep their monetary policies sufficiently tight to prevent an uptick in inflation. That could mean further rate hikes, or keeping the rates at restrictive levels for longer, in which case, oil prices make a U-turn and cheapen due to recession and global demand concerns.   And when global demand worries kick in, and prices cheapen, Saudi will be losing money considering that the kingdom is shouldering the supply cut strategy for OPEC alone. For now, the demand outlook remains strong despite the slowing China and suffering Europe, but if it weakened, Saudi could easily change its mind, and the kingdom has a history of making sharp U-turns on its decision when winds turn against them. 
Turbulent Times Ahead: ECB's Tough Decision Amid Soaring Oil Prices

Turbulent Times Ahead: ECB's Tough Decision Amid Soaring Oil Prices

Ipek Ozkardeskaya Ipek Ozkardeskaya 06.09.2023 12:11
Rising oil prices give off a foul smell.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Released yesterday, the European services PMI data came in softer than expected in all major euro area locations. The data showed that services sector in Italy and Spain slipped into the contraction zone in August - a month of big summer holidays where people flock to Italian and Spanish cities and beaches. The soft PMI data fueled the European Central Bank (ECB) doves and pushed the EURUSD under a bus yesterday; the pair fell to the lowest levels since the beginning of June and flirted with the 1.07 support on idea that the ECB can't raise interest rates next week when the economic picture is souring at speed. But I believe that it can. The ECB can announce another 25bp hike when it meets next week, or a faster reduction of its balance sheet, or the end of remuneration of banks' minimum reserves to tighten financial conditions, because the latest inflation figures from the Eurozone showed stagnation, instead of further easing, and the ECB will allow economic weakness to some extent to fight inflation. The most recent inflation expectations in the Eurozone showed that the next 12-month expectations remained steady at 3.4%, but the three-year inflation expectations spiked to 3.4%, and there is no reason for inflation expectations to continue easing when energy prices are going up toward the sky.
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FX Outlook: EURUSD Below 200-DMA, RBA Holds Steady, and Japanese Bond Market Tests Demand

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.09.2023 11:37
In the FX  The EURUSD remains offered below its 200-DMA today, although the softening Federal Reserve (Fed) expectations make more sense than softening ECB expectations, provided that the ECB is NOT in a comfortable place to call a pause at this month's meeting amid the uptick in latest inflation figures. Therefore, if the ECB expectations, which may have softened unnecessarily are restored into the next ECB meeting, we should see the EURUSD find a solid ground before the critical 1.0615 Fibonacci support.   On the flip side of the world, the Reserve Bank of Australia (RBA) kept its cash rate unchanged at 4.1% at today's monetary policy meeting. The EURAUD rebounded from a month-dip as investors saw opportunity to trade the soft RBA stance versus a possibly unfunded softness in ECB expectations, which justifies a further upside correction in the EURAUD toward the 1.70 mark – especially when the news from China remains disquieting.  Elsewhere in the Pacific, Japan is testing the market demand for its 10 and 30-year bonds this week, as the finance ministry sells 2.7 trillion-yen worth of 10-year bonds today and 900-billion-yen worth of 30-year bonds on Thursday. Of course, the Bank of Japan (BoJ) is out and buying a massive amount of bonds to make sure that the YCC not too relaxed, and traders are looking for signs of still sluggish demand from local investors that could force the BoJ to act earlier than ... never. The Japanese 10-year yield is currently at a 9-year high, but is still below 65bp, meaning that it has ways to strengthen. However, when the Japanese yields will become interesting enough for domestic Japanese investors - which are also among the biggest buyers of US papers, the returning home will apply a decent pressure on the US long term yields.  
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RBA Pauses, But ECB Could Hardly Skip Hiking Next Week!

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.09.2023 11:36
RBA pauses, but ECB could hardly skip hiking next week!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Other than a nice 7% jump in Chinese property stocks following an apparently explosive weekend of home sales in Chinese big cities like Beijing and Shanghai amid the relaxed mortgage rules deployed by the government last week, we didn't have much on our plate yesterday. European trading volumes were down by almost a third below their 30-day average and the major European indices were slightly down, as neither Friday's jobs optimism in the US, nor the Chinese rebound on property news could help Europeans forget about their own slowing economies and sticky inflation, which probably require at least one more rate hike from the European Central Bank (ECB). The DAX remained offered near its 50 and 100-DMA, as the Stoxx 600 closed yesterday's session below its own 50-DMA. Americans coming back from their long weekend, after the latest data showed a sweet loosening in US jobs market last month, could add some optimism to the mix, but the topside in European stock markets remains limited.  There is one place on the old continent, however, where the stock market looks more promising, is the UK. The British FTSE 100 – which clearly lagged its continental European and American peers so far this year, is looking in a better place to outperform in the H2, because of its high exposure to energy and mining stocks. The FTSE 100 has potential for a further rise toward 7650 then to 7800 level.   Activity in FTSE futures hints at a bearish start today.    
Fed Expectations Amid Mixed Data: Wishful Thinking or Practical Pause?

Fed Expectations Amid Mixed Data: Wishful Thinking or Practical Pause?

Ipek Ozkardeskaya Ipek Ozkardeskaya 31.08.2023 10:26
Wishful thinking?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    America had another 'bad news is good news' moment yesterday; softer-than-expected ADP and growth data further fueled expectations that the Federal Reserve (Fed) is – maybe – good for a pause. The ADP report, released yesterday, showed that the US economy added 177K new private jobs in August, lower than expected and more than half the number printed a month earlier, while the US GDP was revised from 2% to 2.1% instead of 2.4%, due to lower business investment than initially reported and to downside revisions in inventory and nonresidential fixed investment. Household spending, however, continued leading the US economy higher; it was revised up to 1.7%. All in all, the data was certainly weaker than expected but the numbers remain strong, in absolute terms.     The S&P500 gained for the 4th consecutive session yesterday, the index is now above the 4500 level and has around 85 points to go before recovering to July highs. The US 2-year yield settles below the 5% level on expectation that the Fed has no reason to push hard to hike rates; it could just wait and see the impact of its latest (and aggressive) tightening campaign.  In the FX, the softening Fed expectations are weighing on the US dollar. The dollar index fell to its 200-DMA and could sink back to its March to August descending channel. But the seasonality is on the dollar's side in September. Empirical data shows that the US dollar performed better than its peers for six Septembers in a row since 2017, and it gained 1.2% on average, thanks to increased quarter-end dollar buying, and an increased safe haven flows before October – which is seasonally a bad month for stocks, according to Bloomberg.       But the dollar's relative performance is also much influenced by the growth and price dynamics elsewhere. Looking at the latest Euro-area CPI numbers, the picture in Europe is much less dovish despite morose business and consumer sentiment in Europe and weak PMI numbers printed recently. Despite the dark clouds on the European skies, the latest inflation numbers showed that inflation in both Spain and Germany ticked higher in August for the second month – a U-turn that could be explained by the re-surge in oil prices since the end of June. This morning, the aggregate CPI number may not confirm a fall to 5.1% in headline inflation. And a stronger-than-expected CPI print will likely boost the ECB hawks and get the euro bulls to test the 50-DMA, near 1.0970, to the upside.     Later today, investors will focus on the US core PCE data, which has a heavier weight on the international platform.  Therefore, the strength of the US core PCE will say the last word before tomorrow's jobs data. Analysts expect a steady 0.2% advance on a monthly basis, and a slight advance from 4.1% to 4.2% on a yearly basis. A bad surprise on the topside could eventually wash out the past days' optimism regarding the future of the Fed policy. So, fingers crossed, we really need the US inflation to fall, and to stay low.    But looking at energy prices, a sustainable fall in headline inflation could be wishful thinking for the upcoming months. US crude remains upbeat near the $82pb, as the latest EIA data showed that crude inventories fall more than 10mio barrel last week, as separate data showed that crude stored on ships at sea fell to the lowest levels in a year - a clear indication that OPEC's supply cuts are taking effect. Plus, Russia is discussing with OPEC to extend oil-export cuts and Saudi is expected to prolong its supply cuts.    
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Dream JOLTS Data Sparks Optimism and Market Gains

Ipek Ozkardeskaya Ipek Ozkardeskaya 30.08.2023 09:43
Dream JOLTS data By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank     Yesterday was a typical 'bad news is good news' day. Risk sentiment in the US and across the globe was boosted by an unexpected dip in US job openings to below 9 mio jobs in July, the lowest levels since more than two years, and an unexpected fall in consumer confidence in August. The weak data pushed the Federal Reserve (Fed) hawks to the sidelines, and bolstered the expectation of a pause in September, and tilted the probabilities in favour of a no hike in November, as well. $    Note that the latest JOLTS data printed the ideal picture for the Fed: Job vacancies eased, but hiring was moderate and the layoffs remained near historically low levels. The data also suggested that the era of Great Resignation, where quit rates hit a record, could be over, as people quitting their jobs retreated to levels last seen before the pandemic. The US 2-year yield dived 15bp, the 10-year yield fell 8bp, while the S&P500 jumped nearly 1.50% to above its 50-DMA and closed the session at a spitting distance from the 4500 level. 90% of the S&P stocks gained yesterday; even the Big Pharma which had a first glance at which medicines will be subject to price negotiations with Medicare held their ground. But of course, tech stocks led the rally, with Nasdaq 100 closing the session with more than a 2% jump. Tesla was one of the biggest gainers of the session with a more than a 7.5% jump yesterday.    US and European futures suggest a bullish open amid the US optimism and news of upcoming deposit and mortgage rate cuts from Chinese banks.    On the data front, all eyes are on the US ADP report and the latest GDP update. The ADP report is expected to reveal below 200K new private job additions in August, while the US growth is expected to be revised from 2% to 2.4% for the Q2 with core PCE prices seen down from 4.90% to 3.80%. If the data is in line with expectations, we shall see yesterday's optimism continue throughout today. Again, what we want is to see – in the order of importance: 1. Slowing price pressure, 2. Looser, but still healthy jobs market, 3. Slowing but not contracting economy to ensure a soft landing. We will see if that's feasible.     In Europe, however, that slow landing seems harder to achieve. Today, investors will keep an eye on the latest inflation updates from euro-area countries, and business and sentiment surveys. We expect to see some further red flags regarding the health of the European economy due to tighter financial conditions in Europe and the energy crisis. German Chamber of Commerce and Industry warned yesterday that German businesses are cutting investments and move production abroad due to high energy prices at home. The EURUSD flirted with 1.09 yesterday, as investors trimmed their long dollar positions after the weak JOLTS data. The AUDUSD rebounded, even though the latest CPI print showed that inflation in Australia slowed below 5% in July, a 17-month low. In the UK, shop prices fell to a 10-month low. But it won't be enough for central bankers to cry victory just yet, because the positive pressure in energy prices remains a major concern for the months ahead. The barrel of American crude is pushing toward the $82pn level, with improved trend and momentum dynamics hinting that the bullish development could further extend.  
Assessing Global Markets: From Chinese Stimulus to US Jobs Data

Assessing Global Markets: From Chinese Stimulus to US Jobs Data

Ipek Ozkardeskaya Ipek Ozkardeskaya 29.08.2023 10:08
Calm before the storm?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The week started in a relatively good mood. The S&P500 posted its first back-to-back gains this month, even though the US 2-year yield advanced to a fresh high since July with the 2 and 5-year treasury auctions hitting the highest yields since before the 2008 crisis. One would think that the Chinese stimulus measures have lifted up the sentiment across global equities, but the CSI 300 closed yesterday just around 1% higher. In this sense, yesterday was just another day the Chinese stimulus measures didn't get the attention Chinese officials were hoping for. And that's the new normal. Before 2020, any stimulus news from China would move oceans, but now, China can cut rates, inject liquidity, half stamp duty, prevent big names from becoming net sellers... nothing is enough to bring investors back apart from a massive fiscal stimulus. And the chances are that, China won't do that, because Xi doesn't want to explode the national debt levels – which are already alarmingly high – to kick start another unsustainable growth in China. That's not bad in the long run, but it sure costs China a lot of investment. MSCI's EM ex-China ETF has outperformed the MSCI China since the beginning of the year and the trend in Chinese equities, and the latest surveys hint at around 5% growth in 2023, in line with the government's growth target, but not enough to bring money on board.     Focus on US growth & jobs data  The softer US dollar gave some breathing room to other currencies yesterday. The EURUSD bulls won a battle near the 200-DMA, and the pair is slightly above that level this morning, while the USDJPY is steady around 146.50. Crude oil steadied above the $80pb with the news that the tropical storm Idalia could interrupt crude production in the Gulf Coast and put an additional short-term pressure on oil prices. Gold is better bid above the $1900 thanks to a retreat in the US 10-year yield.  Today, the US JOLTS data is expected to post a third month below 10mio job openings. A number lower than expectations would point to loosening jobs market and could soften the hawkish Federal Reserve (Fed) expectations, while a strong figure will keep the economists and the Fed officials in a state of confusion. It is now increasingly certain that the Covid disruption in jobs market has largely passed, which means that the fact that the jobs figures remain resilient to rate hikes is due to another reason! And that reason could be the ageing population. Looking at the CBO projections, the participation rate in the US is not at shocking levels compared to the long-term projections. On the contrary, the actual participation rate (62.6%) is even higher than the long-term projection (62.4%).   Strong jobs figures have potential to boost Fed hawks as tightness of the jobs market means people ask for more money for doing the same job than they would otherwise. 
Boosting Stimulus: A Look at Recent Developments and Market Impact

Boosting Stimulus: A Look at Recent Developments and Market Impact

Ipek Ozkardeskaya Ipek Ozkardeskaya 28.08.2023 09:15
Here, get more stimulus!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) Chair Jerome Powell's Jackson Hole speech was boring, wasn't it? Powell repeated that inflation risks remain to the upside despite recent easing and pointed at resilient US growth and tight US jobs market, and reiterated the Fed's will to keep the interest rates at restrictive levels for longer. The US 2-year pushed above 5%, as Powell's comments kept the idea of another 25bp hike on the table before the year end, but the rate hike will probably be skipped in September meeting and could be announced in the November meeting instead, according to activity on Fed funds futures. The US 10-year yield is steady between the 4.20/4.30%. The S&P500 gained a meagre 0.8% last week, yet managed to close the week above the 4400 mark and above its ascending trend base building since last October, while Nasdaq 100 gained 2.3% over the week, although Nvidia's stunning results failed to keep the share price above the $500 mark, even though that level was hit after the results were announced last week. And the disappointing jump in Nvidia despite beating its $11bn sales forecast and despite boosting its sales forecast for this quarter to $16bn, was a sign that the AI rally is now close to exhaustion.   What's up this week?  This week will be busy with some important economic data from the US. We will watch JOLTS job openings tomorrow, Australian and German CPIs and US ADP and GDP reports on Wednesday, to see if the US economy continues to be strong, and the jobs market continues to be tight. On Thursday, Chinese PMI numbers, the Eurozone's CPI estimate and the US core PCE will hit the wire, and on Friday, we will watch the US jobs report and ISM numbers. Note that the US dollar index pushed to the highest levels since May after Powell's Jackson Hole speech. The EURUSD is now trading a touch below its 200-DMA, even though the European Central Bank (ECB) chief Lagarde repeated that the ECB will push the rates as high as needed. Yet, the worsening business climate, and expectations in Germany somehow prevent the euro bulls from getting back to the market lightheartedly, while the yen shorts are comforted by the Bank of Japan (BoJ) governor's relaxed view on price growth – which remains slower than the BoJ's goal, but the possibility of a direct FX intervention to limit the USDJPY's upside potential keeps the yen shorts reasonably on the sidelines, despite the temptation to sell the heck out of the yen with the BoJ's incredible policy divergence versus the rest of the developed nations.   Here, get more stimulus!  The week started upbeat in China and in Hong Kong, after the government announced measures to boost appetite for Chinese equities. Beijing halved the stamp duty on stock trades, while Hong Kong said it plans a task force to boost liquidity. The CSI 300 rallied more than 2% and HSI jumped more than 1.5%. But gains remain vulnerable as data released yesterday showed that Chinese company profits fell 6.7% last month from a year earlier. That's lower than 8.3% printed in June, but note that for the first seven months of 2023, profits declined 15.5%, and that is highly disquieting given the slowing economic growth and rising deflation risks, along with the default risks for some of the country's biggest companies. Evergrande, for example, posted a $4.5 billion loss in the H1.  Therefore, energy traders remain little impressed with China stimulus measures. The barrel of US crude trades around the $80pb level, yet the failure to break below a major Fibonacci support last week – major 38.2% Fibonacci retracement on the latest rally, keeps oil bulls timidly in charge of the market despite the weak China sentiment. Oil trading volumes show an unusual fall since July when compared to volumes traded in the past two years. That's partly due to weakening demand fears and falling gasoline inventories, but also due to tightening oil markets as a result of lower OPEC supply. We know that the demand will advance toward fresh records despite weak Chinese demand. We also know that OPEC will keep supply limited to push prices higher. Consequently, we are in a structurally positive price setting, although any excessive rally in oil prices would further fuel inflation expectations, rate hike expectations and keep the topside limited in the medium run.    
Taming the Dollar: Assessing Powell's Hawkish Tone Amidst BRICS Expansion

Taming the Dollar: Assessing Powell's Hawkish Tone Amidst BRICS Expansion

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.08.2023 09:22
Yes, Mr. Powell?  Those who expected the US dollar to tumble because BRICS are enlarging their alliance with top oil producers were disappointed yesterday. The US dollar extended gains to the strongest levels since the beginning of summer, as traders positioned for a hawkish speech from the Federal Reserve despite two Fed members hinting that the end of the Fed tightening is certainly near.   Boston Fed's Susan Collins said yesterday that we may be 'near a place where we can hold rates for a substantial amount of time', and Philadelphia Fed President Patrick Harker said that the Fed has 'probably done enough' and should keep the rates at restrictive levels and watch the impact on the economy.   Looking at the projections, the Fed's median rate showed in June that the Fed could increase rate one more time and stop, but pricing in the market suggests that the Fed may already be done with its rate hikes.   Bond investors are particularly focused on whether the Fed is willing to revise the neutral rate, r* - a rate at which the economy neither slows nor speeds up, higher. Any hint of a potential upside revision to the neutral rate could trigger a further bond sell-off.   Note that Jerome Powell has made it clear that the Fed itself doesn't know where this hypothetical r* stands.  But one thing looks increasingly plausible to everyone and that's what Bullard said: 'the probabilities are that we are in a new regime that will be a higher interest-rate regime', therefore a higher neutral-rate regime.   And that's best for President Biden, as inflation is one of the most effective ways to... deflate debt.  
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BRICS Expands: A New League of Major Oil Producers Emerges

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.08.2023 09:21
A few more BRICS By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   BRICS – which includes the world's major energy-hungry nations like China and India, invited five countries - which happen to be the world's top oil producers Saudi Araba, Iran, UAE, Egypt and Argentina - to join the bloc. This means that the world's biggest oil producers and consumers will be forming a league within which – they are not necessarily willing to invent a gold-backed common currency – but where they will certainly be willing to settle their trades in terms of member-state currencies. The Chinese yuan could be a good candidate, the Indian rupee could be another alternative, or why not, the Russian ruble could also do the trick.   This is an important step towards weakening the petro-dollar, which is the outcome of an agreement back in the 1970s between Nixon administration and Saudi Arabia to trade oil exclusively in dollars in exchange for security guarantees from the US. Since then, OPEC has been selling its oil in USD terms. If we shift towards a new world order where oil and energy are no more traded in US dollars, that would be a major blow to the dollar as base and reserve currency, and that could also have major implications for the US economy's exploding debt that the rest of the world would not want to finance anymore, and the risk-free-ness of the US treasury.   But we won't reach that point tomorrow. First, China and India should end the conflict at their border. Second, a political alignment of EM countries with China and Russia is less evident than it sounds. India, for example, is not willing to make the US an enemy. PM Modi is the first foreign minister to address the US congress twice in the history of the United States, and many investments that leave China go to India.   But something is cooking in the EM kitchen and it's worth watching.   
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Economic Data Dampens Market Sentiment: PMI Contractions and Yield Concerns

Ipek Ozkardeskaya Ipek Ozkardeskaya 24.08.2023 10:57
PMI disappointment  The US 2-year yield slipped below 5% as both manufacturing and services PMI fell unexpectedly in August, adding a layer of complexity to US data, which strong enough to push Atlanta Fed's GDP forecast for Q3 to 5.8% last week.   August PMI numbers in Europe printed even worse numbers than in the US. The manufacturing PMI was slightly better than expected but remained well below the 50 threshold – in the contraction zone. More disquietingly, the euro-area's services PMI slipped below 50 – to the contraction zone for the first time since January. What's even more worrying is that, the services PMI fell into the contraction for the busiest summer month for mass holidays.   As a result, traders now price around 40% chance for a 25bp hike in European Central Bank's (ECB) next policy meeting, down from 55% before the release. The EURUSD tested the 200-DMA to the downside and remains under the pressure of rising dovish voices for the ECB. And the European bond markets rally: the German 10-year yield fell more than 5.5% yesterday. We see the same gloom across the Channel. All British PMI figures were below 50, and came in worse than expected, pushing Cable shortly below its 100-DMA, which stands near 1.2635. The EURGBP on the other hand fell to a fresh year low, as the continent is now expected to join the UK in its economic demise.   This being said, slow PMI numbers could eventually convince the ECB to slow down on its rate normalizing policy, but it won't be enough to reverse the policy stance if inflation remains high. The ECB, as the Fed, won't hesitate to push economies into further economic trouble if inflation doesn't come down toward their 2% policy target.    The set of morose economic data kept the US crude below the $80pb level, even though the US inventories dived more than 6 mio barrels for the second consecutive week. Trend and momentum indicators remain comfortably negative, and the market conditions are far from the oversold territory, meaning that there is room for a deeper downside correction in oil prices. The key level to watch is the $78.40 level, the major 38.2% Fibonacci retracement on the latest rally and which should, if broken to the downside, call the end of the rally and encourage a bearish reversal, which would then pave the way for a further fall to the 200-DMA, which stands near $75.80pb.   
Summer's End: An Anxious Outlook for the Global Economy

Nvidia's Remarkable Q2 Earnings Spark Excitement

Ipek Ozkardeskaya Ipek Ozkardeskaya 24.08.2023 10:56
Amazing Nvidia.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Nvidia announced STUNNING results when it released its Q2 earnings yesterday after the bell. The company reported $13.5bn sales last quarter, well above its $11bn projection, and said that it expects $16bn sales for next quarter, up from $12.6bn forecast last quarter. And oh, earnings jumped to $2.70 per share, versus $2.09 expected by analysts, and the most-loved chipmaker of the year approved $25bn in share buybacks. There is nothing an investor could ask more. The market expectations were sky-high, the results went to the moon, the forecasts for this quarter are as stunning, and the company is expected to earn around $30bn in FY2024 because Nvidia is not and will not be concerned about the industry-wide slump in chips demand, thanks to a decent surge in demand for AI processors in data centers. Magic is happening for Nvidia. So, the stock price jumped 10% in the afterhours trading to flirt with $518 per share, and Nvidia news has a boosting effect on technology stocks, if nothing by confirming that all the talk around the AI-craze was not empty, after all. Nasdaq futures are up by around 1.23% this morning, the S&P500 futures are also in the positive, and further good news is that the yields are down from Europe to US, on meagre PMI numbers released yesterday. And that is the perfect combo for the tech stocks – which have, so far this year, been – unquestionably - the best place to be in the S&P500 this year.    
Euro-dollar Support Tested Amidst Rate Concerns and Labor Strikes

FX Analysis: Dollar Index Holds Above 200-DMA, EURUSD on Bearish Path, Energy Market Remains Uncertain, Nvidia Earnings Awaited

Ipek Ozkardeskaya Ipek Ozkardeskaya 23.08.2023 10:08
In the FX  The dollar index remains bid above its 200-DMA – though we see a slowing positive trend, and weakening trend and momentum indicators. While I believe that there is room for further USD recovery, we could well see a temporary downside correction in the next few days, depending on what Powell will say, and how the markets will react. The EURUSD is still on a decidedly bearish path. Trend and momentum indicators remain comfortably bearish, and the pair is not yet at the oversold market conditions; the actual selloff could extend toward the 200-DMA, near the 1.08 mark. The USDJPY is steady a touch above the 145 mark, as the possibility of a direct FX intervention holds many traders back from topping up their short yen positions. Cable on the other hand sees resistance at its 50-DMA, a touch below the 1.28 mark.  In energy, the US crude remains close to the $80pb psychological mark, lacking a clear short-term direction. Therefore, this week's US inventories report could help traders decide whether they want to play the slow China demand rhetoric or continue backing the supply tightness narrative. In both cases, we shall see range-bound trading within the $75/85 range, including the 200-DMA and the August peak.     Nvidia goes to the earnings confessional!  Today, all eyes are on Nvidia earnings due after the closing bell. Investors will focus on whether Nvidia's Q2 sales meet the $11bn estimate. Anything less than absolutely fantastic could trigger a sharp downside correction in Nvidia's stock price which rallied 345% since the October dip.      
Metals Exchange Inventories in China Decline: Copper, Aluminium, and Nickel Stocks Fall

US Banks React to Fresh Rating Downgrades as Nvidia Earnings Take Center Stage

Ipek Ozkardeskaya Ipek Ozkardeskaya 23.08.2023 10:05
US banks fall on fresh rating downgrades, Nvidia earnings in focus  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank     The market mood turned sour again, and the S&P500 fell after a short relief. S&P's bank rating downgrades – which came a few days after Moody's downgraded some US small and mid-sized banks and Fitch downgraded the US' rating, came as a reminder that the rising rates won't be benign for banks as depositors move their funds into higher interest-bearing accounts, increasing banks' funding costs. The decline in bank deposits squeezes liquidity, while the value of securities that they hold in their portfolios decline. Plus, regional banks continue to face the risk of a sharp decline in commercial real estate loans. As a result, the S&P500 fell 0.28% on Tuesday, Invesco's KBW bank ETF dived more than 2.50%.       Elsewhere, the rising rates and declining purchasing power finally start showing in some retailers' quarterly announcements. Macy's for example sank 14% yesterday on rising credit card delinquencies and Dick's Sporting Goods slumped more than 24% on 'elevated inventory shrink – in particular theft. Both companies gave a morose outlook for consumer demand moving forward. Could that be a sign of potentially slower consumer spending in the next few months? We will see that. For now, the latest US data remains strong, the Fed expectations are hawkish, no one sees Jerome Powell back off with the Fed's tightening policy, and the US yields are rising. The US 2-year yield pushes higher above the 5% mark, while the 10-year yield struggles near 4.30%, where it sees decent resistance. In one hand, there is a strong demand for US 10-year papers at these levels as many asset managers consider that the levels are good entre points. On the other hand, the hawkish Fed expectations, prospects of – maybe – higher rates, which will be held for a prolonged period of time continue pressuring the yields higher along with the US Treasury's plan to issue more bonds in H2 – as they issued too many T-bills so far to fund their deficit.       And there is one more thing weighing on US treasuries and that's China. Yes, the sluggish Chinese growth is tempering energy and commodity prices and doesn't add to inflationary pressures. But Beijing adds on the US Treasury selloff as it fights against a softer yuan. The People's Bank of China (PBoC) set its daily yuan fixing surprisingly higher than expected this week in a move that Bloomberg described as the most forceful on record.       When the USD/CNY rallies due to higher US and lower Chinese yields, the Chinese sell their US denominated assets to defend yuan. And doing so, they contribute to the further strengthening of the US yields, and the US dollar is pressured higher on the back of stronger yields. Then, the cycle starts all over again. A stronger dollar, and weaker yuan forces the PBoC to sell USD assets. The UST selloff pushes US yields higher and strengthens the dollar and the yields.   
Dollar Strength Continues as 10-year Treasury Surges to 4.34%, Reaching Highest Levels Since Financial Crisis

Anticipating an Extended Rally: US Dollar Strength in Focus

Ipek Ozkardeskaya Ipek Ozkardeskaya 22.08.2023 08:43
Expect the US dollar rally to extend    The US dollar broadly weakened across the board, helping majors to take some breather. The dollar index fell back towards its 200-DMA, the EURUSD settles above the 1.09 mark this morning, while Cable bulls eye a further rise toward the 50-DMA, which stands a touch below the 1.28 level. But looking at the US dollar and the real yields, the end of last year's dollar really coincides with a peak in 10-year real yield. Both started retreating in Q3 of last year. The dollar retreated relatively faster. And now that the real yields are on the rise again, there is little reason to keep the USD on a bearish trend for the months ahead.   The dollar rally which started by mid-July should further develop, and there is significant room for further correction before we could technically call the end of the dollar's bearish trend. In numbers, the dollar index will still be in a bearish trend below the 105.40 mark. Until that level is reached, investors don't have much to lose for jumping on the back of a bull.  
Stocks Rebound Amid Rising Volatility: Analysis and Outlook

Stocks Rebound Amid Rising Volatility: Analysis and Outlook

Ipek Ozkardeskaya Ipek Ozkardeskaya 22.08.2023 08:42
Stocks rebound, but volatility rises.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank       Stocks rebounded on Monday, in a move that looked more like a correction than a reaction to fresh news, as there was no fresh news that went against the slowing China rhetoric, nor against the fear that we will hear something sufficiently hawkish this Friday from Jerome Powell's Jackson Hole speech. At this point, the hawkish Federal Reserve (Fed) expectations are mostly priced in, leaving room for some up and down moves. So yesterday's session was not only marked by a rebound in the S&P500 from the October to July ascending baseline, but also by a visible rise in volatility. Nasdaq 100 jumped 1.65% as well, but the US 2-year yield returned well above 5%, and the 10-year yield pushed to a fresh high since 2007.     One interesting thing is, in 2007, when the US 10-year yield was at these levels, the positioning in the market was deeply negative – meaning that investors expected the yields to rebound, while today the positioning is deeply positive, meaning that investors expect the yields to bounce lower. And that's understandable: the US 10-year yield was on a steady falling path in 2007, so there was a reason for investors to expect a rebound – which did not happen. In a similar way, today, we are just coming out of a long period of near zero rates, so for our eyes, the actual levels seem very high. That explains why many asset managers expect the yields to fall. There is also a growing interest in US 10-year TIPS – which are protected against inflation, and which hit the 2% mark for the first time since the GFC as well. But there is not much reason other than our low comparison levels that gives reason to an imminent reversal in market direction. The US data is strong, the labour market is tight, and inflation is slowing but 'significant upside risks' prevail. A recent study warned that unless the monthly CPI stays below the 0.2%, inflation is headed higher in 2024. So there is a chance that we won't see a downside correction in the US 10-year yield, and if that's not the case, the selloff could extend until the 10-year yield settles somewhere between 5-5.50%.     Anyway, the market mood got significantly better yesterday. Tech stocks fueled the rally in the US, as Nvidia jumped 8.5% yesterday, a day before the release of its Q2 results. Nvidia'd better meet its $11bn sales forecast for last quarter, otherwise, there is a chance that we will see a sizeable downside correction.     In Europe, oil stocks shouldered yesterday's rally, as the barrel of US crude made an attempt above the $82pb, on lower OPEC+ exports and on the back of a golden cross formation on a daily chart where the 50-DMA crossed above the 200-DMA. But yesterday, that wasn't the case. Oil's positive attempt remained short-lived, on the contrary, and the barrel of crude is preparing to test the $80pb support to the downside again this morning. The market is driven by two major forces: the supply tightness and the Chinese demand expectations. These days, the Chinese demand expectations are very much in focus, which could help the oil bears take advantage for selling the recent rally in oil prices. But tighter OPEC rhetoric will remain a major support into the 200-DMA, near $76pb.  
Summer's End: An Anxious Outlook for the Global Economy

Jackson Hole & BRICS: Fed's Hawkish Stance and Global Currency Shifts

Ipek Ozkardeskaya Ipek Ozkardeskaya 21.08.2023 09:58
Jackson Hole & BRICS  This week, investors will have their eyes and ears on Federal Reserve (Fed) Chair Jerome Powell's Jackson Hole speech due Friday. The chances are that he will keep his hawkish stance despite falling inflation. The minutes from the latest FOMC meeting highlighted 'significant upside risks' on inflation. This being said, the fear of decidedly hawkish Fed is already priced in, and if there is no more hawkish surprise from this week's Jackson Hole meeting, tensions among investors could ease by next week, and give markets some breathing room.  Elsewhere, BRICS summit will take place this week between 22nd and 24rd of August. What's interesting with this summit is 1. A month ago, South Africa said that 40 more nations wanted to join BRICS, and 23 of them formally applied to become members including Saudi Arabia, Iran, and UAE. 2. They would like to drop US dollar and eventually start using member-state currencies to settle their trade terms between them, and 3. There are rumours that the BRICS countries could even issue a gold-based currency to replace the US dollar, as many nations are willing to free themselves from the risks of holding and using US dollars. Note that the rumours of a gold-based BRICS currency didn't necessarily boost appetite in gold lately. The price of an ounce is, on the contrary, mainly driven by US yields. The rising US yields weigh on gold appetite by increasing the opportunity cost of holding the non-interest-bearing gold. The yellow metal slipped below its 200-DMA last week for the first time since December. A downside correction in the US yields could slow the selloff and encourage a minor positive correction but given the Fed's undoubtful hawkish stance on its rate policy, gold bulls may need BRICS to say something about their currency plans. But I am afraid the latter might not be on the agenda of this week's summit.   
USD/JPY Weekly Review: Strong Dollar and Yen's Resilience in G10 Currencies

China Rate Cuts Fall Short of Expectations Amid Growing Economic Concerns: Focus on Jackson Hole and BRICS Summit

Ipek Ozkardeskaya Ipek Ozkardeskaya 21.08.2023 09:58
China rate cuts remain short of expectations, focus on Jackson Hole, BRICS  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The week starts with weak appetite as Chinese banks cut loan rates less than expected; the 1-year LPR was cut by 10bp to a record low versus 15bp cut expected by analysts, while the 5-year LPR was left unchanged despite pressure from Beijing. Chinese banks' decision to keep the 5-year rate steady is confusing for investors, in the middle of a property crisis. The Hang Seng index sank further into bear market, and the global risk sentiment is less than ideal as healthy economic data from the US, and darker clouds over China cast shadow on both stock and bond markets.   The US 10-year yield approached the highest levels since 2007, as the US 30-year yield hit the highest levels advanced towards levels last seen in 2011. The rising yields weigh on major stock indices. The S&P500 closed last week around 2% lower, and Nasdaq 100 lost 2.6% last week. Interestingly, the S&P500 has been down by around 3% since the beginning of this earnings season – while the earnings season was not that bad. Nearly 80% of the companies announced better-than-expected results and Refinitiv highlighted that the Q2 of 2023 had the highest rate of companies beating expectations since Q3 2021, and the earnings expectations rebounded to the highest levels since last October, when the major US indices bottomed out. This picture simply means that the fear of a further Fed tightening, prospects of higher interest rates, combined to the set of bad news from China simply didn't let investors enjoy the better-than-expected earnings.  
Pound Slides as Market Reacts Dovishly to Wage Developments

The Everything Selloff: Examining Global Market Trends Amidst Growing Concerns

Ipek Ozkardeskaya Ipek Ozkardeskaya 18.08.2023 08:00
The everything selloff By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The global selloff intensified yesterday, after the FOMC minutes released Wednesday highlighted that the Federal Reserve (Fed) continues to see significant risks to inflation. And if that's not enough, Atlanta Fed's GDPNow printed an eye-popping growth forecast of 5.8% for Q3 on Wednesday, up from 5% printed a day before. Atlanta Fed computes this number using the data available to them at a time t, therefore the number is not necessarily accurate, but it reflects the positive data released lately, and fuels worries that with such a strong growth, the US inflation could only make a U-turn and take a lift. Yesterday, the Philly Fed index printed a surprisingly strong number, as well. This is why, we continue to see the upside pressure in yields persist, in the US and around the world, though we saw some respite in the US 2-year yield that bounced lower from the 5% mark earlier in the week, and the 10-year yield spiked above 4.30% before falling back to 4.25% this morning.   But note that there is more to this story. Long story short, the US Treasury has been printing a lot of T bills lately, and fell well behind the government bond issuance, and the latter helped keeping US liquidity well contained since the US exited its debt ceiling crisis after which the Treasury started refilling its general account. That was supposed to pull liquidity away from the market. But in the meantime, the Fed was pushing liquidity into the system by reverse repo operations, allowing the money market funds to buy T bills and release cash. The problem is, nowadays, the percentage of T bills approaches the 20% level, which is a self-induced limit for the Treasury, and the Treasury will shift back to issuing bonds, instead of T bills. The latter will increase the amount of sovereign bonds in the system at a time the Fed is decreasing its balance sheet by QT, and the banks don't necessarily want to buy bonds either. So, the increasing supply, and the decreasing demand for US sovereigns will be one major force pushing the US yield curve higher. And if the strong economic data translates into higher inflation, the impact on yields will likely be higher. So, yes, the US 30-year yield is at the highest levels since 2011 and that looks appetizing, especially if the risk sentiment sours – due to multiple reasons ranging from geopolitical tensions to China worries – but the downside risks in the US sovereign bonds market prevails. And Bill Ackman said earlier this month that the 30-year yield could hit the 5% mark.  And the upside pressure in sovereign yields is true for other parts of the world as well, because obviously when the US coughs the world catches a cold. More precisely, higher US yields also translate into a stronger US dollar, and a stronger US dollar is inflationary for the rest of the world. If nothing, the energy and raw material prices that are negotiated in USD terms on international markets simply become more expensive when imports are reverted back to local currencies, and that, alone, is enough to push inflation higher in the rest of the world when the US dollar appreciates. The EURUSD fell to 1.0856, the AUDUSD slipped below 64 cents and the USDJPY spiked above 146.50. The correction is in play this morning and we could see the US dollar retreat further into the weekly closing bell, but the stronger dollar trend is clearly in play and it is worrying. Looking at yields elsewhere the US, the 10-year gilt yield has now surpassed the levels last seen during the Liz Truss induced disaster peak and is headed toward the 5% psychological mark while the German 10-year yield hit 2.70%, a level last seen in 2011 as well. Even the Japanese 10-year yield, which is controlled by the BoJ and should not exceed the 50bp benchmark by 'too much', goes up significantly.  As a result, the selloff in equities deepens. The S&P500 sank to 4370 yesterday and is getting ready to test the minor 23.6% Fibonacci retracement on October to July rally, and the base of that positive trend, while Nasdaq 100 is no more than 8 points from its own 23.6% retracement and already fell below the ascending trend base. The Stoxx600 slumped below the 200-DMA and is flirting with its own 23.6% retracement level, and the Japanese Nikkei, which was one of the rising stars of the year, and which recorded a rally past 30% since January, has fallen below its 23.6% retracement and is preparing to test the 100-DMA.   And note that this simultaneous selloff in stocks and bonds is a sign that the market liquidity is draining. Bitcoin, which is a gauge of market liquidity, slumped more than 7% yesterday and traded close to the $25K level. According to CoinGlass, $1 billion left cryptocurrencies over the past 24 hours and Bitcoin suffered almost half of the liquidations.   
From UFOs to Financial Fires: A Week of Bizarre Events Shakes the World

Assessing Europe's Slowing Growth Amidst Varied Economic Challenges

Ipek Ozkardeskaya Ipek Ozkardeskaya 17.08.2023 09:14
Slowing Europe  In Europe, the latest data released yesterday showed that growth and industrial production slowed, but slowed less than expected, while employment deteriorated less than expected – giving the European Central Bank (ECB) a good reason to continue its fight against inflation. But on a microscopic level, the Ifo said that Germany's skilled worker pool is worsening. The Netherlands unexpectedly slipped into recession after showing two straight quarter contraction, and Eastern Europe continues feeling the pinch of Ukrainian war; the Polish economy printed a 3.7% contraction. Plus, Europe's got a China problem. The European luxury goods have been supporting a rally in the European stocks as a result of higher Chinese purchases of the luxury products. But the souring economic conditions in China, falling home prices, rising unemployment and deteriorating sales growth weigh on valuations of companies like LVMH and Hermes. The Stoxx 600 is getting ready to test the 200-DMA, near 453, to the downside, and trend and momentum indicators hint that a deeper selloff could be on the European stocks' menu this quarter.   On the currency front, the weak data – even though it was stronger-than-expected, combined with a broad-based surge in the US dollar, kept the EURUSD below the 100-DMA yesterday, near 1.0930. The pair fell to the lowest levels since the beginning of July and the strengthening bearish momentum calls for a deeper downside correction. The next natural target for the EURUSD bears stands at 1.0790, the 200-DMA. The ECB will likely keep its hawkish stance unchanged, but when the Fed hawks step in, the other central bank hawks just need to wait before their hawkishness is reflected in market pricing
Assessing 'Significant Upside Risks to Inflation': Insights from FOMC Minutes

Assessing 'Significant Upside Risks to Inflation': Insights from FOMC Minutes

Ipek Ozkardeskaya Ipek Ozkardeskaya 17.08.2023 09:12
'Significant upside risks to inflation'  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  FOMC minutes released yesterday showed that most Federal Reserve (Fed) officials see 'significant upside risks to inflation that may require more tightening'. Policymakers cited a range of scenarios that included the rising commodity prices that could lead to 'more persistent elevated inflation'. Two of them favoured halting rate hikes, but the minutes showed no official dissenters. The Fed economists also expect a small rise (only) in jobless rate in the US, but they warned that commercial real estate fundamentals could worsen.   The regional banks are under a rising pressure, as a Fitch analyst warned that dozens of US bank credit ratings are at risk – just a week after the rating agency downgraded the US' credit rating, and Moody's downgraded 10 US small and mid-sized banks.   The US 2-year yield remained little changed at around the 5% mark, while the 10-year flirts with the 4.30% level, approaching last October's peak, raising questions among investors on whether levels above 4% are a good entre point in the US 10-year papers, or could it go higher? Looking at the net speculative positions, the rising US treasury yields attract investors. Asset managers' combined treasury positions hit a record in August, but that also means that these positions could be unwound and give way to a deeper selloff. The conclusion is, even though the actual levels look appetizing for US long-dated papers – especially with the Fed's nearing the end of its tightening cycle and trouble brewing in China. risks prevail. Activity on Fed funds futures gives less than 15% chance for a September rate hike in the wake of the latest FOMC minutes. That's slightly higher than around 10% assessed to a 25bp hike before the release of the minutes yesterday. But the pricing for a potential 25bp and even 50bp hike in November meeting are in play.   The US dollar extends gains, and the dollar index is now marching above its 200-DMA, into the overbought market territory, with little reason for investors to step back given the Fed's decided hawkish stance on its rate policy. The S&P500 extended losses below its 50-DMA yesterday and is preparing to test the 4400 support to the downside, while Nasdaq 100 closed below the 15000 level for the first time since end of June. Tesla dropped another 3% yesterday on news that it cut its car prices in China for the second time this year, and the shares closed the session at a spitting distance from the major 38.2% Fibonacci retracement, which should distinguish between the positive trend building since the beginning of this year and a bearish reversal.   Elsewhere, Target jumped nearly 3% yesterday after beating profit expectations when it released Q2 earnings yesterday. Lower costs boosted profit margins, and gross margins jumped 27% last quarter compared to 21.5% printed a quarter earlier, net income more than quadrupled. Shiny results helped investors overcome the 11% drop in online sales – vs. 5% growth nailed by Amazon, and the slashed sales and profit outlook. Again, despite the risk that US consumers may not spend much in the next few quarters, what we see in most data is that... they continue spending – and the resilience of spending starts weighing more on Fed expectations than the risks that don't materialize. 
CHF/JPY Hits Fresh All-Time High in Strong Bullish Uptrend

China's Surprise Rate Cut: A Band-Aid Solution for Deeper Economic Woes

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.08.2023 11:58
China's surprise cut won't be enough.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   China surprised by cutting its one-year medium-term lending facility (MLF) rates by 15bp to 2.50% today to give a jolt to its economy that has not only completely missed the expectation of a great post-Covid recovery, but that deals with deepening property crisis, morose consumer, and investor sentiment – which is worsened by Country Garden crisis and missed payments from the finance giant Zhongzhi Enterprises. Data-wise, things looked as worrying as we expected them to look when China released its latest set of economic data today. Growth in industrial production unexpectedly dipped to 3.7%, retail sales unexpectedly fell to 2.5%, unemployment worsened, while growth in fixed investments dropped further. Foreign investment in China fell to the lowest levels since 1998, and the 13F filings showed that Big Short's Michael Burry already exited Alibaba and JD.com, just months after increasing his exposure to these Chinese tech giants. People's Bank of China's (PBoC) surprise rate cut will hardly reverse appetite for Chinese investments as meaningful fiscal stimulus becomes necessary to stop halting.       The Hang Seng remains under pressure, the Chinese yuan fell to the lowest levels against the US dollar since last November, before the post-Covid reopening, and crude oil stagnates around the $82.50pb, close to where it was yesterday morning at around the same time. Tight supply and warnings of increased risk to shipping near the Strait of Hormuz, which is a strategic waterway for oil transit for exporters like Saudi Arabia and Iraq, certainly helped tempering the China-related selloff. But the demand side is weakening and that could stall the oil rally at the actual levels, forcing a return of the barrel of US crude toward the $80pb level, as worries regarding the Chinese recovery are real, and China will have to deploy further stimulus measures to fix things and bring investors back on their side of the table. If that's the case however, oil prices could take a lift.      Elsewhere, Argentina devaluated its currency by 18% to 350 per dollar and hiked its interest rates by 21 percentage points to 118% after populist Javier Milei won the presidential primary, while the dollar ruble traded past the 100 mark for the first time since Russia invaded Ukraine and the Indian rupee traded near record, as well. So all that helped the US dollar index shortly trade above its 200-DMA yesterday, a day before the release of the FOMC minutes which could hint that most Federal Reserve officials were certainly happy with the progress on inflation, but not yet convinced that the war against inflation is won just yet. And given the rebound in global energy and food prices, the Fed officials' careful approach to inflation looks like it makes sense. That's certainly why the US 2-year yield continued its advance toward the 5% mark yesterday, even though the latest survey from New York Fed showed that inflation expectations recorded a sharp drop to 3.6% for the next twelve months and fell to 2.9% for the next three years. The same survey showed that the mean unemployment expectation fell by 1 percentage point, giving support to goldilocks or to the soft landing scenario. Goldman now expects the Fed to cut rates in the Q2 of next year. It also said it expects core PCE to have fallen below 3% by that time.       Today, investors will focus on the US Empire manufacturing index and the retail sales data, and earnings from Home Depot will also hit the wire. While expectation for Empire manufacturing points at a negative number, consensus for July retail sales is a slight acceleration on a monthly basis. Any improvement on the US data is poised to further back the pricing of soft landing and give a further boost to both the US dollar and the US stocks.  The S&P500 recovered yesterday, as Nasdaq 100 advanced more than 1% with technology stocks leading the rebound. Nvidia was one of the best performers with a 7% jump after a Morgan Stanley analyst reiterated his $500 per share price target yesterday. But Tesla didn't benefit from the tech rally of yesterday and closed the session below $240 per share after cutting its car prices in China, yet again.    
US ISM Reports Indicate GDP Slowdown Despite Strong Construction; Manufacturing Continues to Contract

US Retail Sales Strength Boosts Inflation Expectations Amid Fed Hawkishness

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.08.2023 11:14
Resilient US retail sales fuel inflation expectations, Fed hawks  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Americans continue spending and that's bad news for the entire world. Announced yesterday the July retail sales data came in better-than-expected in the US. Sales grew 0.7% on a monthly basis and more than 3% on a yearly basis - the biggest figure since January, when sales soared by 3% as well. Amazon's Prime day apparently helped boost online sales, while demand for bigger items including furniture and auto parts declined. But all in all, the American consumer spent 3% more compared to a year ago, Home Depot reported small earnings beat yesterday and its CEO confirmed that 'fears of a recession have largely subsided, and the consumer is generally healthy... while adding that 'uncertainties remain'. Uncertainties remain, yes, but the resilience of the US consumer spending sapped investor sentiment by fueling inflation expectations and Federal Reserve (Fed) hawks, yet again. The US 2-year yield spiked above the 5% mark, but bounced lower, certainly helped by a big drop in Empire State manufacturing in August, the 10-year yield flirted with 4.30%, while major stock indices fell. The S&P500 closed below the 50-DMA, which stands at 4446, Nasdaq 100 remained offered below its own 50-DMA, at 15175, while Russell 200 slipped below the 50-DMA.  In the FX, the strength of the US consumer spending is reflected as a stronger US dollar across the board. The US dollar index remains bid, while Cable bulls resist to the bears around the 1.27, and above the 200-DMA, which stands near 1.2620, as the data released yesterday showed that wages in Britain accelerated at a record pace. Happily, this morning's inflation data poured some cold water on the fire, as the CPI fell from 7.9% to 6.8% in July, as expected, yet core inflation remained steady at 6.9%, while the core PPI came in higher than expected. On the food front, grocery prices also fell more than 2 percentage points to 12.7%. But 12.7% is still a very high number. As a result, odds for a 50bp hike at the Bank of England's (BoE) September meeting is given a 1 over 3 chance, the 2-year gilt yield is back above 5%, and looks like it's there to stay, as the peak BoE rate is seen at 6%.       Across the Channel, the 10-year bund yield is also pushing higher near a decade high, and all eyes are on the European GDP and industrial production data this morning. The European economy is weakening due to the rising rates, tightening credit conditions and high energy prices, but the fact that the labour market remains tight in Europe as well remains a major concern for inflation expectations for the European Central Bank (ECB), which will let the economy sink further if it doesn't take further control over inflation. Therefore, the EURUSD will certainly react negatively to a weak European data set today, and the pair could re-test the minor 23.6% Fibonacci retracement level, at 1.0870, but figures more or less in line with expectations should not change the ECB's hawkish tilt. The problem is, there is nothing the ECB could do - other than restricting financial conditions - regarding the energy and gas prices – which move parallel to completely external factors like the Ukrainian war and labour strikes in Australia.   In this sense, the Dutch TTF futures were again up by 12% yesterday, while US crude tanked near the $80pb level, pressured lower by 1. the surprise Chinese rate cut's inability to spark interest in risk assets, 2. news that China's imports of sanctioned Iranian hit a record high of 1.5mbpd this month - that oil trading at around $10 discount to Brent and 3. the latest data from the API hinting at an almost 7mio barrel decline in US crude inventories last week. The more official EIA data is due today, and the consensus is a 2.4 mio barrel fall. US crude could well slip below the $80pb on slow growth concerns, but Saudis will fight to keep the price above $80pb in the medium run.     Back to the inflation talk, the recent rise in energy and food prices is concerning for the euro area's inflation in the next readings. Therefore, the falling inflation trend remains in jeopardy, as the discussion of an ECB pause on rate increases.     The Reserve Bank of New Zealand (RBNZ) held its cash rate unchanged for the 2nd consecutive month but warned that there is a risk that activity and inflation measures do not slow as much as expected, and that they won't be cutting rates until the Q1 of 2025. The kiwi extended losses against the greenback, but the selloff remained contained.      Due today, the FOMC minutes will likely show that the Fed officials remain cautious despite the latest fall in inflation numbers, for the same reasons: rising energy and food prices that are sometimes driven by geopolitical events and that the Fed could only watch and adopt. The Fed is expected to hold fire on its rates in the September meeting, but nothing is less guaranteed than the end of the tightening cycle before the year end.      
Romania's Economic Growth Slows in Q2, Leading to Lower 2023 Forecasts

Assessing the Risk of Prolonged Economic Stagnation in China - Insights by Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank

Ipek Ozkardeskaya Ipek Ozkardeskaya 11.08.2023 08:09
Is China on path for longer economic stagnation?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Released yesterday, the latest CPI data showed that the headline inflation in the US ticked higher from 3 to 3.2%. That was slightly lower than the 3.3% penciled in by analysts, core inflation eased to 4.7% in July from 4.8% expected by analysts and printed a month earlier.   But the rising energy and crop prices threaten to heat things up in the coming months and inflation's downward trajectory could rapidly be spoiled. That's certainly why an increasing number of investors and the Federal Reserve's (Fed) Mary Daly warned that this was 'not a data point that says victory is ours'.   And indeed, looking into details, the fact that the 20% fall in gasoline prices is what explains the decline in headline number is concerning. The barrel of US crude bounced lower yesterday after a 27% rally since the end of June, and the latest OPEC data indicated that we would see a sharp supply deficit of more than 2mbpd this quarter as Saudi cuts output to push prices higher. And this gap could further widen as global demand continues growing and shift to alternative energy sources is nowhere fast enough to reverse that upside pressure.   On the other hand, we also know that the rising energy prices fuel inflation expectations and further rate hikes expectations around the world. And that means that oil bears are certainly waiting in ambush to start trading the recession narrative and sell the top. The $85pb could be the level that could trigger that downside correction despite the evidence of tightening supply and increasing gap between rising demand and falling supply.   Today, eyes will be on the July PPI figures before the weekly closing bell, where core PPI is seen further easing, but headline PPI may have ticked higher to 0.7% on monthly basis, probably on higher energy, crop and food prices.     In the market  Yesterday's slightly softer-than-expected inflation numbers and the initial jobless claims which printed almost 250K new applications last week - the highest in a month - sent the probability of a September pause to above 90%, though the US 2-year yield advanced past the 4.85% level, and the longer-terms yields rose with a weak 30-year bond action, which saw the highest yield since 2011.   Major stock indices stagnated. The S&P500 was up by only 0.03% yesterday while Nasdaq 100 closed 0.18% higher, as Walt Disney rallied as much as 5% even though Disney+ missed subscription estimates and said that it will increase the price of the streaming service. Disney is considering a crackdown on password sharing, which, combined with higher prices could lead to a Netflix-like profit jump further down the road.     In the FX  The USD index consolidates above the 50 and 100-DMAs and just below a long-term ascending channel base. The EURUSD sees support at the 50-DMA, near the 1.0960 level, and could benefit from further weakness in the US dollar to attempt another rise above the 1.10 mark.   European nat gas futures fell 7% yesterday after a 28% spiked on Wednesday on concerns that strikes at major export facilities in Australia could lead to a 10% decline in global LNG exports. Yet, the European inventories are about 88% full on average and the industrial demand remains weak due to tightening financial conditions imposed by the European Central Bank (ECB) hikes. Therefore this week's massive move seems to be mostly overdone, and we shall see some more downside correction.     Chinese property market is boiling  The property crisis in China is being fueled by a potential default of Country Garden, which is one of the biggest property companies in China and which recently announced that it may have lost up to $7.6bn in the first half of the year as home sales slumped and the government stimulus measures didn't bring buyers back to the market. Equities in China slumped further today, as property crisis is not benign. In fact, China's local governments have plenty of debt, and their major source of income is... land and property sales. Consequently, the property crisis explodes local governments' debt to income ratios- And the debt burden prevents China from rolling out stimulus measures that they would've otherwise, because the government doesn't want to further blast the debt levels.   Shattered investor and consumer confidence, shrinking demographics, property crisis and deflation hints that the Chinese economy could be on path for a longer period of economic stagnation. We could therefore see rapid pullback in investor optimism regarding stimulus measures and their effectiveness. Hang Seng's tech index fell to the lowest levels in two weeks yesterday, as all members fell except for Alibaba which jumped after beating revenue estimates last quarter.   
EUR: Stagflation Returns Amid Weaker Growth and Sticky Inflation

US Inflation Takes Center Stage: Expectations and Impact on Markets

Ipek Ozkardeskaya Ipek Ozkardeskaya 10.08.2023 09:10
All eyes on US inflation!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   US equities fell, while yields pushed higher in the run up to today's most important US inflation data. Inflation in the U.S. is expected to have rebounded from 3 to 3.3% in July and core inflation may have steadied at around 4.8%. Any bad surprise on the inflation front could revive the Federal Reserve hawks, but we are far from pricing another hike in September just yet; activity on Fed funds futures assesses more than 85% chance for pause in September FOMC meeting. Rising oil, crop and rice prices are the major upside risks, while potential downside pressure on shelter could counter higher raw material prices. According to a latest publication from SF Fed shelter prices could see significant disinflation or deflation in the months ahead. They wrote that their 'baseline forecast suggests that year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024', and that we could see 'the most severe contraction in shelter inflation since the Global Financial Crisis of 2007-09'.  The idea of further Fed hikes is not helping sentiment in bond markets, especially since Fitch downgraded the U.S. credit rating from AAA to AA+. That's bad news for two reasons. First a lower credit rating means that the US should compensate for the higher risk investors take while buying the US government bonds so it's an additional upside pressure on yields. And combined to Fed hikes, the US interest payments will become an increasingly growing burden. In numbers, the US spends $1.8 bn interest payments every day. According to Peter Peterson foundation this number will double in the next decade and interest payments will become the fastest growing part of the federal budget. And if that's not enough, Moody's downgraded credit ratings for 10 small and midsize US banks, citing higher funding costs, potential regulatory capital weaknesses and risks tied to commercial real estate loans. And speaking of banks, Italian banks also sold off earlier this week on news of a new windfall tax. The latter triggered some risk averse inflows into bonds until Italy issued a clarification of its new tax on banks' windfall profits, saying that the impact may be limited for some banks and the levy won't exceed 0.1% of a firm's assets. Banks that have already increased the interest rates they offer to depositors 'will not have a significant impact as a consequence of the rule approved yesterday'. Phew....  The U.S. 2-year yield rebounded past 4.80%, while the 10-year yield is back to around%, after a spike to 4.20% on Fitch downgrade.  Troubled China  Chinese indices are up and down. Up, thanks to measures that the Chinese government announced to support the economy, down because of plunging export/import, deflation worries following another round of soft trade, CPI and PPI numbers since the start of the week, and the jitters that the US could limit investments to China. One interesting point is that the Chinese stock market shows decorrelation from the stock markets of developed countries. KraneShares CSI China Internet ETF saw $342.23 million inflows last week, the biggest weekly inflow in 14 months. Yet impressive growth numbers are probably not in China's near future as the population is shrinking, the real estate crisis fuels the local debt crisis with Country Garden's potential default on its debt now making the headlines, investor and consumer confidence in Chinese government will take time to be restored, and further restrictions of US investments in China, especially in cutting-edge sectors like AI and quantum computing could further dampen appetite.   
US Inflation Rises but Core Inflation Falls to Two-Year Low, All Eyes on ECB Rate Decision on Thursday

Microsoft Falls, Google Jumps, and the Fed Makes a Decision - IMF Raises Global Growth Outlook

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.07.2023 08:23
Microsoft falls, Google jumps, Fed decides Surprise, surprise: Microsoft failed to meet investor expectations when it announced its Q2 results yesterday. Both revenue and earnings beat expectations, but the company reported a decelerating demand for its cloud computing services to 26%, and projected Azure to grow between 25%-26% for the current quarter. We are far from the 35% growth that we got used to in the good old days. Microsoft stock plunged up to 4% in the afterhours trading. Alphabet on the other hand a strong quarter for its search business advertisement, hinting that Google search withstood so far with the AI competition and its cloud business posted a 28% growth, more than Microsoft's. Google shares jumped 6% after the bell. Elsewhere, Snap tanked almost 20% as the overall sales declined and the forecasts remained short of analyst expectations, while GM lost 3.50% yesterday after raising its earnings forecast. But there is a catch: the forecast holds only if the workers don't go on a strike, and according to Evercore ISI, the chances of a strike is about 50-50. Today, Meta, Coca-Cola and Boeing will be among the big names that will report their earnings. The S&P500 advanced to the highest levels since April 2022, while Nasdaq 100 was up by 0.73% yesterday.    IMF raises global growth outlook  Zooming out, the IMF raised its outlook for the world economy this year and it now expects the global GDP to expand 3% in 2023. But it also warned that Germany will probably be the only G7 economy to suffer an economic contraction this year. Of course, the IMF also warned that there are some risks to their optimistic forecast, including the higher interest rates, the Chinese recovery that doesn't come, the debt distress and shocks from war and climate related disasters. But all in all, the US economy will likely end this year as the champion of soft landing – if all goes well.   I insist - if all goes well - because PacWest has been the latest US regional bank to succumb to this year's bank stress and its shares plunged 27% after Banc of California agreed to buy it.     Decision time!  Anyway, positiveness around the US economy is obviously giving some hawkish ideas to the Federal Reserve (Fed), which will likely announce another 25bp hike today, and warn that there could be more in the store. The US 2-year yield is in a wait-and-see more near the 4.90% level, either it will go back above the 5% with a hawkish Fed statement or it will retreat toward the 50-DMA, near the 4.65%, with a reasonably hawkish Fed statement, if the Fed opts for another 'skip' for example. The US dollar index pushes higher as expectations for other central banks soften due to the softer-than-expected economic data suggesting softer action from the likes of European Central Bank (ECB) and the Bank of England (BoE) in the coming months. The EURUSD continued its nosedive yesterday on IMF's less than ideal Germany outlook and the news that corporate loan demand plunged by the most on record in Q2, as higher rates started to bite European businesses.   Unfortunately, however, inflation expectations are getting stronger globally as the rising energy and crop prices hint that the upcoming inflation figures won't be a piece of cake. The barrel of US crude flirted with the $80pb level on Chinese stimulus hopes and the pricing of a soft landing, while wheat futures continue rising along with the escalating tensions in the Black Sea and Danube. Corn and soybean futures rise as well as hot weather in the US belt is adding to the positive pressure for corn.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
EUR Under Pressure as July PMIs Signal Economic Contraction

Fed Meeting and Microsoft Earnings: Economic Concerns and Market Expectations

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.07.2023 08:23
Fed meeting, Microsoft earnings  There was nothing in the list of flash PMI data released yesterday morning to make investors think that economic activity in Europe is doing fine. All numbers were in the red, they all missed expectations. German and French manufacturing plunged further in the contraction zone and German manufacturing PMI even plunged below 39, a number we have not seen since summer 2020, which was the heart of the pandemic. The war, the energy prices, and/or the European Central Bank (ECB) tightening are taking a toll on the German manufacturing. And even the German car sector is struggling. Tesla for example sold more cars in H1 than Volkswagen, BMW, Mercedes and Porsche combined. Cherry on top of the bad news, the Spanish PPI showed an 8% contraction versus -10% penciled in by analysts. The EURUSD plunged below the 1.11, the trend and momentum indicators turned negative hinting that the selloff in the runoff to Thursday's ECB meeting could extend toward the 1.10 mark, as the soft economic data brought forward the expectation that the ECB is certainly approaching the end the most aggressive tightening cycle of its relatively short history. But the softer-than-expected fall in Spanish PPI still keeps some hawks defending the idea that the ECB won't stop fighting inflation if inflation doesn't cool enough.     Don't look now, but across the Channel, the PMI numbers didn't look better. The UK manufacturing PMI fell to 45, while the composite PMI avoided the contraction territory by just a few points. Cable sold off to the lowest level in two weeks and is now testing the May to now ascending channel's base, as traders put more weight on the damage that the rising Bank of England (BoE) rates will do to the British economy, than on the good they might do to sterling holders.   Across the Atlantic Ocean, the picture was a little but more mixed. US manufacturing remained in the contraction zone but contracted much slower than expected by analysts, but services and overall activity grew more slowly than expected, still. The US dollar index gained for the 5th consecutive session and is consolidating above the 101 level at the time of writing, as investors continue positioning for the Fed meeting that starts today.   The Fed starts its two-day policy meeting in just a couple of hours from now, and will highly likely announce a 25bp hike on Wednesday. But what Fed officials will also do is to remind investors that the tightening cycle is probably not over and that there will probably be another rate hike on the US' horizon. So yes, there is a great chance that the Fed will spoil your mood if you are among those thinking that this week's rate hike will be the last for this tightening cycle in the US.     Markets  US stocks traded higher yesterday with the S&P500 adding 0.40% and Nasdaq 0.14% after its special rebalancing. The US 2-year yield advanced past 4.90% and fell this morning. While the VIX index shows no sign of a particular stress from equity traders, BoFA's MOVE index is close to 110 level, versus around the 60 level prior to the Q3 of 2021: bond traders remain very much uncertain about the number of additional rate hikes that the Fed could deliver. And there is no line in the sand, the Fed will continue hiking if the US jobs market, consumption and housing market remain resilient to interest rate hikes.    Microsoft earnings  Today, Microsoft is due to announce its Q2 earnings after the bell. Focus is on whether, and by how much Microsoft benefited from the AI craze and how much AI boosted growth for Azure – which was under pressure since a couple of quarters due to macro factors. On Friday, a Goldman Sachs analyst reiterated his buy rating for MSFT and revised his price target from $350 to $400 a share. But because  there is too much optimism in the market, it may be gently time to take profit, wait for the next bullish wave and rotate toward where the next action is expected to happen.  The Magnificent Seven thrived so far this year and the un-magnificent 493 other stocks remained mostly on the sidelines. What we see these days is that the un-magnificent other stocks are also catching up with the rally. Today, 70% of the S&P500 stocks trade above their 200-DMA. Morgan Stanley's Mike Wilson said that 'they were wrong' regarding their bearish stock market expectation this year, while JP Morgan's Kolanovic insists that a selloff is coming. And one day, he will be right!    By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank 
EUR: Testing 1.0700 Support Ahead of ECB Meeting

A Week of Earnings and Central Bank Decisions: Fed, ECB, and BoJ Meetings in Focus

Ipek Ozkardeskaya Ipek Ozkardeskaya 24.07.2023 10:20
A week packed with earnings and central bank decisions Last week ended on a caution note after the first earnings from Big Tech companies were not bad, but not good enough to further boost an already impressive rally so far this year. The S&P500 closed the week just 0.7% higher, Nasdaq slipped 0.6%, while Dow Jones recorded its 10th straight week of gains, the longest in six years, hinting that the tech rally could be rotating toward other and more cyclical parts of the economy as well.   This week, the earnings season continues in full swing. 150 S&P500 companies are due to announce their second quarter earnings throughout this week. Among them we have Microsoft, which is pretty much the main responsible of this year's tech rally thanks to its ChatGPT, Meta, Alphabet, Visa, GM, Ford, Intel, Coca-Cola and some energy giants including Exxon Mobil and Chevron.   On the economic calendar, we have a busy agenda this week as well. Today, we will be watching a series of flash PMI figures to get a sense of how economies around the world felt so far in July, then important central bank meetings will hit the fan from tomorrow. The early data shows that both manufacturing and services in Australia remained in the contraction zone, as Japan's manufacturing PMI dropped to a 4-month low in July. German figures could also disappoint those watching the EZ numbers.   On the central banks front, the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of Japan (BoJ) will meet this week, and the first two are expected to announce 25bp hike each to further tighten monetary conditions on both sides of the Atlantic.     Zooming into the Fed, activity on Fed funds futures gives almost 100% chance for this week's 25bp hike. But many think that this week's rate hike could be the last of this tightening cycle, as inflation is cooling. But the resilience of the US labour market, and household consumption will likely keep the Fed cautiously hawkish, and not announce the end of the tightening cycle this Wednesday. There is, on the contrary, a greater chance that we will hear Fed Chair Jerome Powell rectify the market expectations and talk about another rate hike in September or in November. Therefore, the risks tied to this week's FOMC meeting are tilted to the hawkish side, and we have more chance of hearing a hawkish surprise rather than a dovish one. Regarding the market reaction, as this week's Fed meetings falls in the middle of a jungle of earnings, stock investors will have a lot to price on their plate, so a hawkish statement from the Fed may not directly impact stock prices if earnings are good enough. Bond markets, however, will clearly be more vulnerable to another delay of the end of the tightening cycle. The US 2-year yield consolidates near the 4.85% level this morning, and risks are tilted to the upside. For the dollar, there is room for further recovery as the bearish dollar bets stand at the highest levels on record and a sufficiently hawkish Fed announcement could lead to correction and repositioning.  Elsewhere, another 25bp hike from the ECB is also seen as a done deal by most investors. What investors want to know is what will happen beyond this week's meeting. So far, at least 2 more 25bp hikes were seen as almost certain by investors. Then last week, some ECB officials cast doubt on that expectation. Now, a September rate hike in the EZ is all but certain. The EURUSD remains under selling pressure near the 1.1120 this morning, the inconclusive Spanish election is adding an extra pressure to the downside.   Finally, the BoJ is expected to do nothing, again, this week. Japanese policymakers will likely keep the policy rate steady in the negative territory and the YCC policy unchanged. The recent U-turn in BoJ expectations, and the broad-based rebound in the US dollar pushed the USDJPY above the 140 again last Friday, and there is nothing to prevent the pair from re-testing the 145 resistance if the Fed is sufficiently hawkish and the BoJ is sufficiently dovish.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
Alphabet Reports Strong Q2 2023 Results with Growth in Advertising and Cloud Services - 24.07.2023

Unveiling Market Insights: An Analysis by Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Ipek Ozkardeskaya Ipek Ozkardeskaya 24.07.2023 08:38
Stocks, bonds downbeat on earnings disappointment, jobs data  Stocks and bonds in the US fell yesterday. Stocks fell, sent down by a nearly 10% plunge in Tesla and more than a 8% dive in Netflix. Chip stocks fell as well around the world as TSM cut its annual outlook for revenue due to geopolitical tensions and weak global demand, and announced that its Arizona production plant will be delayed due to shortage of qualified labour that could build the plant. TSM shares fell 5% to below $100 a share in NYSE, while Nvidia lost more than 3% as investors started wondering whether the chipmaker will be able to deliver the $11bn revenue estimate that it announced last quarter! All in all, the S&P500 retreated 0.68% and Nasdaq 100 lost 2.28%.      Bonds, on the other hand, fell as well yesterday, as unemployment claims unexpectedly fell in the US. That strengthened the Federal Reserve (Fed) hawks' hand yesterday on the reasoning that the US jobs market just won't loosen and challenge the latest expectation where investors and economists, including the ex-Fed Chair Ben Bernanke, think that the Fed's next week rate hike will also be its last in this tightening cycle due to easing price pressures. There is no expectation of another hike in September, while some 20% predict that there could be another hike in November. The rising question is, when will the Fed start cutting rates, in January, or in March? It will depend on inflation, really. The rising geopolitical tensions between Russia and Ukraine in the Black Sea, where Ukraine also said that ships going to Russian ports may be military targets threatens the crop trade. Wheat futures jumped past their 200-DMA yesterday and are up by more than 20% since last week. If that's not enough, India bans shipments of non-basmati rice to contain domestic prices and rice futures are also upbeat right now. While succeed in crude tests the 200-DMA to the upside, and technicals hint that the bulls could succeed breaking the resistance this time, as trend and momentum indicators are positive, and we are not in the overbought market just yet. So there is room for further recovery. And the European nat gas futures gained nearly 4% yesterday. So all these jumps in commodity prices will certainly show up in next inflation figures as the favourable base effect will also gently fade away.       The US dollar index is better bid after hitting the lowest levels since April earlier this week. The US dollar index is up from its recent lows but is still at the lowest levels seen this year, the EURUSD is down below the 1.12 mark, on the back of a broadly stronger US dollar, and a lack of consensus. In one hand, the European Central Bank (ECB) members said that a 2nd rate hike following the next ECB hike is not guaranteed. On the other hand, the higher-than-expected core inflation and the positive revision in growth figures leave the ECB enough space to stay on a hawkish policy path. We will likely see a rangebound EURUSD between the 1.10-1.12 range into next week's policy meeting. Gold is upbeat on the back of rising geopolitical tensions as the price of an ounce stands around the $1970 this morning, while the USDJPY tests the 140 mark and the 50-DMA, after inflation in Japan came in higher than last month but softer than the expectations, and kept investors pricing the persistent divergence between dovish Bank of Japan (BoJ) and sufficiently hawkish Fed expectations.       One place where the doves are also very persistent is Turkey. The Central Bank of Turkey (CBT) increased its policy rate by 250bp at yesterday's policy meeting, versus 500bp hike expected by analysts. This is Turkey's new economic team's – who was supposed to normalize policy and regain investor confidence – second policy meeting and it's the second time the rate hike is well below expectations. Inflation on Turkey on the other hand will be skyrocketing in the coming releases as the lira took a dive since May. Official inflation, which fell below 40% in June, will likely spike above 50% in the coming readings, and if the CBT normalizes policy at the current speed, the divergence between where the Turkish policy rates will be, and where they should be will keep the lira under further pressure. And of course, the softer than expected action from the CBT's new team will hardly restore investor confidence and remedy worries that the CBT decisions remain highly influenced by political pressure. The USDTRY rallied by around 40% since May and risks remain comfortably tilted to the upside with the next targets sitting at 28, and 30 levels. Note that the USDTRY is expected to jump by chunks as the CBT relaxes FX interventions from time to time to let the lira find a fair market valuation after a year-and-a-half long heavy FX purchases. Therefore, the timing of price moves are unknown, but there is little doubt about the direction.    By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    
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FX Update: US Dollar Consolidates as ECB Dovish Comments Impact EURUSD, UK Inflation Eases, Sterling Faces Challenge

Ipek Ozkardeskaya Ipek Ozkardeskaya 19.07.2023 09:54
In the FX   The US dollar index consolidates at the lowest levels since April 2022, as the oversold market conditions certainly encourage short-term traders to pause and take a breather. Also helping are some dovish comments from European Central Bank's (ECB) Knot yesterday, who said that monetary tightening beyond next week's meeting is not guaranteed, while at least two 25bp hikes were seen as almost a done deal by markets until yesterday. Ignazio Visco also hinted that inflation could ease more quickly than the ECB's latest projections. So the comments sent the German 2-year yield to a 3-week low. The EURUSD bounced lower after hitting 1.1275, and rising dovish voiced from the ECB could keep the EURUSD within the 1.10/1.12 range into the next policy decision.   Across the Channel, inflation numbers freshly came in this morning, revealing that inflation in Britain eased to 7.9% in June versus 8.2% expected by analysts and 8.7% printed a month earlier. Core inflation on the other hand fell below the 7% mark last month. Cable slipped below 1.30 as a kneejerk reaction as softer inflation tempered Bank of England (BoE) hawks. But even with a softer-than-expected figure, inflation in Britain remains high and stickier than in other Western economies, and that keeps odds for further BoE action sensibly more hawkish than for other major central banks. The BoE raised its policy rate to 5% at its latest meeting, and is expected to continue toward 6.5 to 7% range in the next few months. If inflation slows, the peak rate will be pulled to 6-6.5% range, but not lower. And rising rates, that weigh on mortgages in Britain where Brits must renew mortgages every 2-5 years, pressure housing market and fuels the worst living crisis in decades, combined with political shakes into next year's elections are all factors that could stall the rally in sterling against major peers. Cable benefited from a broad-based weakness in the US dollar since last September dip, but gaining field above the 1.30 mark could prove difficult.    
Market Update: UK Inflation Softens, US Stocks Rally, Bank Earnings, and AI Dominate Headlines

Market Update: UK Inflation Softens, US Stocks Rally, Bank Earnings, and AI Dominate Headlines

Ipek Ozkardeskaya Ipek Ozkardeskaya 19.07.2023 09:51
Softer-than-expected UK inflation sends Cable below 1.30    The rally in US stocks extended on the back of good bank earnings and AI. BoFA and Morgan Stanley joined the club of big banks beating analyst expectations. BoFA's fixed income and equity trading posted a surprise gain and covered a slight miss on its net interest income, while Morgan Stanley's wealth management came to the rescue. Charles Swab on the other hand reported 7% deposit outflows but its shares surged 13%, yes 13% yesterday on expectation of deposit growth by year-end.    Then, Microsoft jumped up to 6% to a fresh all-time-high yesterday as progress on the regulatory front regarding the acquisition of Activision Blizzard, and the news that its Microsoft 365 Copilot, based on OpenAI's artificial intelligence, will be broadly available and cost $30 per month per user got investors rushing back to the stock and extend the November-to-date rally to 72%! Microsoft's AI bet has been disruptive this year, and the company is making huge progress in turning the buzz into profit as quickly as possible, and they have a great chance of success. Microsoft's AI will be a perfect assistant for $30 per month and Microsoft will cash in – and the weak dollar outlook could further help boost revenue.   Zooming out, the bank and AI rally pushed both the S&P500 and Nasdaq 100 to fresh highs since the first months of 2022. Nasdaq 100 is now in the overbought territory, the technical indicators call for correction, and the upcoming modification in the Magnificent Seven's weightings in the index should pull the valuation down, but the positive trend's strength remains impressive, and supported by both better-than-expected earnings, and economic data.   On the data front, the softer-than-expected retail sales and production data from the US came to soften the Federal Reserve (Fed) hawks' hands yesterday, and kept the US yields downbeat, which also helped boost stock valuations in parallel to earnings.   Today, Goldman Sachs will try to beat the expectations that it threw under a bus over the past few weeks, so that the stock price could get away despite a worst quarter in years, Netflix will reveal how well its password sharing ban ramped up subscriptions and Tesla will reveal how much money the company earned by selling a record number of cars at discounted prices to increase market share. There is potential for good surprises for both, but expectations for Netflix and Tesla are strong, so they will certainly be harder to beat than the banks – which had rather soft expectations walking into this earnings season.   Yet Goldman didn't only dampened expectations regarding its results but also lowered its recession odds from 25% to 20%. A latest survey of economists on Wall Street Journal also revealed that the probability of a downturn fell from 61% to 54% for the US. Weakening recession odds is good news for energy investors, and it keeps demand in oil upbeat. The barrel of US crude is back above the $75pb level this morning despite a smaller decline reported by the API report this week on US inventories compared to what was penciled in by analysts. But we need some good news from China for energy and mining assets to encourage some persistent rotation from AI, because AI just keeps on giving.    By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
Mexican Rate Spread: Tight vs. Central Bank's Rate Spread and Implications for Dis-inversion

Earnings Reports and Retail Sales Data Take Center Stage on the Menu du Jour

Ipek Ozkardeskaya Ipek Ozkardeskaya 18.07.2023 08:32
Menu du Jour  Anyway, today, Bank of America, Morgan Stanley and Lockheed Martin will be releasing their quarterly earnings. While BoFA and Morgan Stanley's investment branches may have taken a hit, investors will be looking at how well these banks benefited from rising rates. Lockheed Martin on the other hand will undoubtedly continue outperforming as war and geopolitical tensions only keep rising and increasing the defense budgets around the world.   On the macro calendar, the US retail sales will be in focus today, as the resilience of the US consumer spending is another headache in the Fed's fight against inflation, and the data could not surprise to the downside. According to Bank of America's card data, spending in June was down by 0.2% 'but not out' and the official numbers are expected to show a slow improvement. A better-than-expected read could fuel inflation expectations and slowdown the US dollar's selloff but unless we see seriously strong data, any improvement will unlikely to turn the bearish winds around in the medium run.      
US Stocks Extend Rally Amid Optimism Over Fed's Monetary Policy

US Stocks Extend Rally Amid Optimism Over Fed's Monetary Policy

Ipek Ozkardeskaya Ipek Ozkardeskaya 18.07.2023 08:31
US stocks extend rally  But it doesn't seem to be a concern for the US equities, as despite the morose mood in Asia and Europe yesterday, the S&P500 advanced yet to another high since April 2022, as Nasdaq 100 reached levels last since at the start of last year. The US 2-year yield which consolidates near the 4.70% level on hope that the Federal Reserve's (Fed) tightening cycle is soon over. And the 7-9% drop expected in S&P500 earnings is nothing compared to a chance that the US economy could avoid a hard landing following the Fed's steep interest rate hikes.   After all, the Fed's balance sheet only slowly drops, as the Fed's reverse repo operations tank, which means that the Fed is keeping the market liquidity in a sweet spot as the US Treasury general account is being refilled after the debt limit crisis. And all that liquidity continues to be supportive of stock prices, no matter how fast the Fed increases its interest rates.
Energy and Metals Decline, Wheat Rallies Amid Disappointing Chinese Growth

Energy and Metals Decline, Wheat Rallies Amid Disappointing Chinese Growth

Ipek Ozkardeskaya Ipek Ozkardeskaya 18.07.2023 08:29
Energy, metals fall, wheat rallies.    The week started with unpleasant news really. First, the Chinese growth numbers disappointed at yesterday's open, and sent the metal, energy, and European stocks down. A barrel of American crude fell 1.72% and slipped below the $75pb level, and is still consolidating below this level this morning, the European nat gas prices continue trending lower following an upbeat mood at the start of the summer on expectation that the European nations refilling their reserves for winter would push prices higher. But the disappointing growth numbers and the slowing activity in Europe hammered the positive trend and the prices remained under pressure despite the recent spike in oil prices. Then, Wisdomtree's industrial metals ETF dropped nearly 2% and Hermes slumped more than 4% below its 50-DMA and to its 100-DMA yesterday on worries that the Chinese costumers, who were the reason why the company announced juicy earnings in the past few quarters. In summary, energy and French luxury goods, and the British FTSE 100 index – full of energy and miners – didn't react well to the news.   Then, Russia cancelled the grain deal, which allowed the safe passage of around 33 million of crops from Ukraine via Black Sea since last June and wheat futures jumped nearly 3.50% yesterday. While Russia had only half-heartedly agreed to sign a Turkish brokered deal, the latest explosion in the bridge between Russian and Crimea and the Western sanctions that are taking a toll on the Russian exports brought Russia to drop the deal, turning all eyes to Turkish President Erdogan, who said that he will meet Vladimir Putin in August, but given the urging situation he will certainly call him before. There is one thing that could displease Russians though, and it is the fact that Erdogan gave a greenlight for Sweden joining NATO just a couple of days ago. The latter could make another crop deal harder to be sealed. So, all eyes are on Turkish President Erdogan. If he can't agree on a new deal, the Ukrainian crops must take a pricier detour to reach the international market and that extra cost could discourage farmers to keep supply steady. Lower supply could boost wheat prices and add to food price inflation worries that had just started easing.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
The Japanese Yen Retreats as USD/JPY Gains Momentum

Stock Rally Driven by Soft Inflation and Strong Earnings

Ipek Ozkardeskaya Ipek Ozkardeskaya 14.07.2023 08:30
Soft inflation, strong earnings fuel stock rally  We are having a great week in terms of US inflation news. After Wednesday's data showed that the US headline inflation slowed to 3%, and core inflation fell to 4.8% - both lower than what analysts had penciled in, yesterday's producer price inflation data also came in lower than expected. The monthly PPI eased to 0.1%, perhaps the last positive figure we see before sinking into negative territory in the coming months, and core PPI fell to 2.6%. One more good news, some underlying details in the PPI report, including health care and hotel accommodations, are used to compute the Fed's favourite PCE Price Index that will be released in the coming weeks – which could also benefit from softening inflation trend.    As a result, the US 2-year yield fell another 15bp yesterday and hit 4.60%, while the 10-year yield retreated below 3.80%. The US dollar index slipped below the 100 mark. This is the first time the US dollar index has traded below this level since April 2022, as the Federal Reserve (Fed) is not seen getting more aggressive than this when inflation is slowing. Plus, one of the most aggressively hawkish Fed members, James Bullard, resigned yesterday. The probability of another 25bp hike at the Fed's July meeting didn't change much. It's still given more than 90% probability. But the chances of another rate hike following the June hike are getting blurrier, so equity markets cheer the softening Fed expectations. The S&P500 extended gains yesterday and closed the session above the 4500 mark for the first time since April 2022, while Nasdaq 100 rallied another 1.73%. Amazon jumped to a 10-month high yesterday after reporting record sales during its Prime Day. Happily, this week's inflation numbers were sufficiently soothing, so that the record Prime Day sales didn't boost inflation expectations. MAMAA stocks were up by 1.72%. Crude oil on the other hand rallied past the 200-DMA, near $77pb, and consolidates at around that level this morning. Supply shortages in Libya and Nigeria are pushing price higher but the IEA says that global oil demand won't rise as much as they previously forecasted due to the weakened economies of developed nations. It will increase by around 2.2mbpd, +2%. This is 200'000 barrels less than previously forecasted. It could help bring the bears back to the market at around the 200-DMA. The $77/80 barrel resistance will be difficult to drill because the market is now approaching overbought conditions and a key technical level is generally a good moment to sell, and because otherwise it would be bad news for inflation expectations, and the Fed.    One good news is that, although the resilience of the US jobs market remains a major concern for the Fed, the stock market rally could be a much smaller concern because the Fed recently launched a financial conditions index, an index that takes into account bond yields, mortgage rates, the stock market, Zillow's house price index and the dollar's value on global currency markets to determine how the market conditions would impact growth. And the index showed that the financial conditions in the US became increasingly less favourable this year and hit an all-time peak in December when they were more of a drag on growth than at any time in recent decades, apart from the 2008 financial crisis. And at the current levels, the market conditions remain historically unfavourable to growth – and that despite the stock market rally.     Slow growth is bad for stock valuations, but investors remain focused on earnings, rather than the overall financial conditions, and we have good news on the earnings front so far. Delta Airlines for example jumped to the highest level since April 2021 yesterday after reporting after announcing record revenue and profit in Q2 andsaying that they are 'looking at a very, very strong Q3', as indicated by their guidance, and that they could have a strong Q4 as well. While PepsiCo rallied almost 2.40% after revealing a strong quarter thanks to higher prices they could ask from customers, and after raising its sales and earnings estimates. Today, some big US banks will go to the earnings confessional. The big banks benefited from ample deposit inflows following the Silicon Valley Bank (SVB) collapse in March, but their net interest income is expected to have declined, credit costs are normalizing, and they have increased expenses due to inflation. So, the numbers could be soft, but what matters for investors is the comparison between the numbers and expectations. If expectations are better than the actual numbers, stock prices will not be hurt. And that's why Goldman Sachs is out trying to dampen expectations, so that the results can more easily beat them!    By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    
Eurozone PMIs Weigh on Euro as US Data Awaited

US Dollar Plunges: Implications for Global Markets

Ipek Ozkardeskaya Ipek Ozkardeskaya 13.07.2023 08:36
US dollar plunges  The selloff in the US dollar accelerates post-CPI, with the dollar index approaching the 100 level with big and steady steps. This is good news for inflation in the rest of the world, because the softer the US dollar, the softer the energy and raw material prices negotiated in terms of US dollars. In the same way the dollar appreciation fueled inflation globally, its depreciation could help ease it as well.   The EURUSD spiked to 1.1150, Cable advanced past the 1.30 level, while the dollar-yen extended losses below the 140 psychological mark. In precious metals, gold is thriving on the back of softer yields and the softer dollar. The price of an ounce rallied past $1960 and consolidates near $1955 at the time of writing.   In energy, oil bulls target the 200-DMA, that stands near the $77pb level, yet the $77/80 range will be hard to drill as the higher the energy the prices, the higher the inflation expectations, and the higher the inflation expectations, the tighter the Fed policy. The tighter the Fed policy, the stronger the odds of recession, and the stronger the odds of recession, the softer the global energy demand, and the softer the energy prices.        In equities, soft US inflation and decline in US yields pushed the S&P500 to a fresh high since April 2022. The index flirted with the 4500 level on expectation that the Fed will hike one more time and stop, and that the actual tightening cycle could very well end with a soft landing. Nasdaq 100, on the other hand, rallied to the highest levels since the beginning of last year. Meta for example jumped 3.70% on the back of inflation optimism and the news that its Threads platform is growing while dampening traffic on rival Twitter.  On a side note, because Nasdaq 100 is now over-concentrated in Mega Cap stocks, there will be a rebalancing in the weightings of the index. Nasdaq has a rule stating that the aggregate total of individual weights above 4.5% in the index shouldn't exceed 48% of the total weighting. And today, the Magnificent Seven is worth around 55% of Nasdaq 100. So, the changing weights could weigh on Nasdaq, as the best performing stocks will see their weight drawn down.    
UK Economy Contracts, US PPI Slows, and Global Markets Respond

UK Economy Contracts, US PPI Slows, and Global Markets Respond

Ipek Ozkardeskaya Ipek Ozkardeskaya 13.07.2023 08:35
The fever is breaking.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   US inflation eased to 3%. It's still not the 2% targeted by the Federal Reserve (Fed), but it's approaching. Core inflation on the other hand eased more than expected to 4.8%. That's still more than twice the Fed's 2% policy target, but again, the US inflation numbers are clearly on the right path, the services inflation including shelter costs is easing, and all this is good news for breaking the Fed hawks back amid mounting tension over the past few weeks.   There hasn't been much change in the expectation of another 25bp hike at the Fed's next policy meeting, which is now given a more than 90% chance, but the expectation for a September hike fell, the US 2-year dropped to 4.70% after the CPI data, while the 10-year yield fell to 3.85%.   One big question is: if inflation is easing at a – let's say - pleasing speed, why would the Fed bother raising the interest rates more? Wouldn't it be better to just wait and see where inflation is headed?   Well yes, but the Fed officials certainly continue thinking that 4.8% is still too hot, and that the risk of a U-turn in inflation expectations, and inflation is still to be carefully managed. Because the favourable base effect due to energy prices will gently start fading away in the coming months and the result on inflation will be less appetizing. Then the rising energy prices today could fuel price dynamics again in the coming months, and if China manages to fuel growth thanks to ample monetary and fiscal stimulus, the impact on global inflation could be felt. And if you listen to Richmond Fed's Thomas Barkin, that's exactly what comes out: 'if you back off too soon, inflation comes back stronger'. But the possibility of two more rate hikes following the most aggressive hiking cycle from the Fed starts looking a bit stretched with the actual data. Due to release today, the US producer price inflation is expected to have fallen to the lowest levels since the pandemic, we could even see some deflation.   And a potential Chinese boost to inflation looks much less threatening today compared to a couple of months ago. Chinese exports plunged 12.4% in June, worse than a 7.5% drop printed in May and worse than the market forecasts of a 9.5% decline. The June decline in Chinese exports marked the steepest fall in sales since February 2020. Deteriorating foreign demand on the back of high inflation and rising interest rates continued taking a toll on Chinese trade numbers. In the meantime, imports fell 6.8%, the fourth straight month of decrease due to persistently weak domestic demand.   China will likely recover at some point, but we will unlikely see the Chinese growth put a severe pressure on commodity markets. That's one good news for inflation watchers. The other one is that the US student loan repayments will resume from October, and that should act as a restrictive fiscal action, and help the Fed tame inflation. Therefore, even though there could be an uptick in inflation figures in the coming months, we will unlikely see inflation spike back above 4-5% again. But we will also unlikely to see it fall to 2% easily.  
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Soft US CPI is not enough: Fed's hawkish stance remains strong

Ipek Ozkardeskaya Ipek Ozkardeskaya 12.07.2023 08:30
Soft US CPI is not enough.    The US dollar extended losses after breaking a long-term ascending channel base yesterday. The British pound rallied on yet another stronger than expected wages growth data released yesterday morning. Average weekly earnings excluding bonuses increased 7.3% in the three months to May. And although the unemployment rate ticked up to 4%, it was because more Brits started looking for jobs, and not because people lost the jobs they had.   But don't be jealous of Brits that get such a good jump in their pay because UK inflation is still too hot. The average mortgage rate rose to 6.6%, the highest since 2008, inflation in Britain is sitting at 8.7%, and according to truflation, prices grow at a speed that's faster than 11%. The thing is, the robust wages growth partly explains why the Bank of England (BoE) is having so much pain fighting inflation, and that's why yesterday's data fueled the expectation of another 50bp hike from the BoE at its next meeting. The BoE's policy rate is seen peaking at the 6.5/7% range by the Q1 of next year as predicted by many analysts. Cable hit 1.2970 level, the highest since last April, but whether this really could continue will depend on 1. where the US dollar will be headed after today's CPI data in the short run, and 2. where the UK economy is headed if the BoE hikes rates to 6.5/7% range in the long run. Because the BoE hikes will continue pressuring the British housing market, and growth, and that could limit Cable's topside potential following a kneejerk positive reaction.     Lower US CPI won't be enough to soften the Fed hawks' hand.  The consumer price index in the US is expected to have fallen to 3.1% from 4% printed a month earlier. But unfortunately, it won't be enough to prevent the Fed from further rate hikes, because the further fall in headline inflation to 3% is due to a favourable base effect on energy prices, while core inflation is expected to remain sticky at around the 5% mark - still more than twice the Federal Reserve's (Fed) 2% policy target.   Plus, the rebound in oil prices hints that the risk of an uptick in headline inflation is building stronger for the coming months. The barrel of American crude rallied past the 100-DMA yesterday and is flirting with the $75pb level this morning. Trend and momentum indicators remain positive, and we are not in overbought territory just yet, meaning that this rally could further develop. The next natural target for the oil bulls stands at the 200-DMA, at $77pb level. In percentage terms, we are talking about a 12% rally since the start of the month, and the rebound is a response to the further production restriction from Riyadh and Moscow that are determined to push oil prices to at least $80pb level, and also Beijing's stepping up efforts to boost the Chinese economy by fresh monetary and fiscal stimulus.   But despite the lower OPEC supply and news of fresh monetary and fiscal stimulus from China, US crude should see a solid resistance into $77/80 range as, yes, in one hand, OPEC+ is cutting supply to boost prices, and their supply cuts will dampen the global oil glut in H2 - even more so if China finally achieves a healthier recovery. But on the other hand, the Chinese recovery is not a won game just yet, while increased oil output outside the cartel helps keeping price pressure contained. American crude production is on track for a record year this year, and half of the new crude is coming from the US where companies like Devon Energy that deliver strong output thanks to improved efficiencies.     RBNZ stays pat, BoC to deliver a final 25bp hike  The Reserve Bank of New Zealand (RBNZ) kept its policy rate unchanged at 5.5%. Later today, the Bank of Canada (BoC) is expected to announce a final 25bp hike in this tightening cycle. The Fed however is seen hiking two more times as the strength of the US jobs data, combined with solid economic data, and little pain on US housing market thanks to life-long mortgages.   Therefore, it's interesting that the US dollar depreciates while there is nothing that hints at softening in the Fed's hawkish policy stance. That, and the fact that we will soon be flirting with oversold market conditions in the US dollar hint at a rebound in the greenback, if backed with robust core inflation and strong economic data.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
US Dollar Plunges Despite Hawkish Fed Expectations, Inflation Data and Sentiment Indicators in Focus

US Dollar Plunges Despite Hawkish Fed Expectations, Inflation Data and Sentiment Indicators in Focus

Ipek Ozkardeskaya Ipek Ozkardeskaya 11.07.2023 08:35
Other than that, it was a day of digesting and scaling back the recent rise in hawkish Fed expectations as used-car prices, which has been a good indication for inflation in this inflation cycle, fell 4.2% in June, the largest drop since the beginning of the pandemic. The prices came down by more than 10% in a year. Plus, according to the New York Fed's latest survey, inflation expectations for the next 12-month fell to 3.8% in June, from 4.1% printed a month earlier, although the 3-year expectations ticked higher to 3%. The same survey also showed that consumers were more pessimistic about the job market outlook, and median expected spending growth over the next year declined to the lowest levels since September 2021.   Capital flew into treasuries yesterday, the US 2-year yield for example declined about 10bp, while the US dollar plunged below a long-term ascending channel base despite the hawkish Fed expectations. The dollar bears are now targeting the 100 level as their next destination.   The dollar-yen plunged below the 141 level and is preparing to test the 50-DMA, which stands near the 140 level, to the downside. The EURUSD rallied past 1.10 mark despite a sentiment index that showed a faster deterioration for July in Eurozone. Today the German CPI will likely confirm a latest rebound in inflation – as the low-price train tickets that government had distributed last year are creating a positive base effect for inflation in Germany, and the ZEW index is expected to warn of worsening mood. Higher German inflation is positive for the euro, but I am not sure that Christine Lagarde or her colleagues at the European Central Bank (ECB) care much about sentiment indicators. The softening US dollar despite the hawkish Fed expectations, and hawkish ECB expectations could support a further rise in the EURUSD toward the 1.12 mark.  
Market Watch: Earnings Boost and Consumer Confidence Surge Ahead of Key FOMC Decision

US Dollar Slides Below Critical Support Amid Tougher Capital Requirements and Cautious Market Sentiment

Ipek Ozkardeskaya Ipek Ozkardeskaya 11.07.2023 08:33
US dollar slides below critical support.   The week started on a cautious note as European and US stocks eked out small gains, but appetite was limited appetite on news that the new capital requirements for the US banks would be tougher. And mega caps didn't give much support. Tesla lost up to 2% during the session, while Amazon closed the session more than 2% lower before its Prime Day – which now became an industrywide shopping day and will give us a hint on how much US consumers are ready to up their spending online. Meta, on the other hand, advanced 1.23%, as Threads already amassed 100 mio users since its launch last week, while internet traffic data from Cloudflare showed that Twitter use 'tanked'.   Tougher rules Michael Barr said yesterday that he will recommend tougher capital rules for banks with $100 billion or more in assets, as opposed to those that have $700bn and more so far concerned with the tough rules. More importantly, unrealized losses (and gains) on security portfolios will be considered when calculating regulatory proposal, a thing that could've helped avoiding Silicon Valley Bank's (SVB) collapse, but that will also put a bigger pressure on banks that bought tons of US treasuries and that are now sitting on significantly discounted portfolios. The good news is that big banks like JP Morgan and Citi didn't react aggressively to the news, and even more reassuring news is that the smaller, regional bank stocks tempered the news quite well as well. Pacwest for example lost only around 1% and Invesco's KBW index even closed the session slightly higher. What's less reassuring, however, is the fact that the Federal Reserve (Fed) will continue pushing the interest rates higher, and that will put an extra pressure on lenders, and the regional lenders are the most vulnerable to rate changes.   By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank
Chinese Deflation: Inflation Softens as Tech Giants Face Eased Regulatory Pressure, Oil Prices Rally

Chinese Deflation: Inflation Softens as Tech Giants Face Eased Regulatory Pressure, Oil Prices Rally

Ipek Ozkardeskaya Ipek Ozkardeskaya 10.07.2023 10:54
Chinese deflation The Chinese inflation came in unexpectedly soft in June. Consumer prices fell 0.2% m-o-m, as the decline in producer prices accelerated more than expected to 5.4% y-o-y. The Chinese efforts to boost economy and inflation are not working. That's maybe why the Chinese regulators chose to ease pressure on their tech giants. Last Friday, the regulators finally ended a yearlong inspection of Alibaba's Ant Group and said that the tech industry will see 'normalized supervision'. Alibaba shares jumped 8% in New York last Friday but would that be enough to bring investor confidence back is not sure yet. The morose Chinese inflation limited appetite in oil this morning in Asia, but the price of a barrel of crude rallied past the $73pb to the 100-DMA last Friday, as the fresh round of production cuts from Ryad and Moscow slowly but surely brought the oil bulls back to the battlefield as long-term supply worries started weighing on mood in the bears' camp. Trend and momentum indicators are now comfortably bullish, and hint that the rally could extend. The next natural target for the oil bulls is the 200-DMA, which stands near the $77pb level.  
Earnings Season Begins: US Bank Earnings and Challenges Ahead

Earnings Season Begins: US Bank Earnings and Challenges Ahead

Ipek Ozkardeskaya Ipek Ozkardeskaya 10.07.2023 10:52
Earnings season! The earnings season kicks off this week with big US bank earnings. JP Morgan, Wells Fargo and Citigroup will be reporting earnings on Friday. Earnings of large banks may have reached their peak last quarter due to several factors. 1: Net interest income is likely to continue declining, 2. credit costs are gradually returning to normal and increasing, and 3. inflation is putting pressure on expenses. Then, banks are preparing for anticipated regulatory changes by increasing their liquidity levels, raising debt capital, and holding back on share repurchases. These actions are negatively affecting earnings per share growth for banks in general and could have a parallel negative impact on stock prices as well. Also, we now observe steady deposit and loans, and a revenue increase in some US regional banks – which at the current price levels are considered as being undervalued. The major concern is the rising Fed rates that will continue putting pressure on the US banking system. And the regional banks remain the most in danger.  
Chinese Deflation: NFP Read, Wages Growth, and US Inflation Figures Impact Market

Chinese Deflation: NFP Read, Wages Growth, and US Inflation Figures Impact Market

Ipek Ozkardeskaya Ipek Ozkardeskaya 10.07.2023 10:51
Chinese deflation Asia began the trading week digesting the news of a softer-than-expected NFP read, faster-than-expected wages growth in the US, combined with deflation in Chinese consumer and producer prices. Lower job additions came as a relief for Fed watchers on Friday, but the wages grew faster than expected, and the unemployment rate fell slightly to 3.6%. All in all, the US jobs data was still hot, and backed the Federal Reserve's (Fed) campaign of policy tightening with further rate hikes. This being said, the US 2-year yield slipped below 5%, the 10-year yield consolidated above 4%, as the US dollar index was sold off aggressively below the 50 and 100-DMAs. Due Wednesday, US inflation is expected to have fallen from 4% to around 3% in June, with a possibly uptick in the monthly data. But core inflation could prove stickier at around the 5% mark. In all cases, softening, and ideally softer-than-expected inflation figures carry the potential of pushing the Fed hawks back. That could give quick support to the US stocks which ended the first week of July, and the first week of H2, in the negative.   By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank
Strong Jobs Data Spurs Fed Rate Hike Expectations, Pressures Equities

Strong Jobs Data Spurs Fed Rate Hike Expectations, Pressures Equities

Ipek Ozkardeskaya Ipek Ozkardeskaya 07.07.2023 08:52
Jobs surprise.  497'000 is the number of private jobs that the US economy added last month. 497'000. The number of quits rose to 250'000. But happily, the job openings fell by almost half a million, and more importantly for the Federal Reserve (Fed) – who is fighting to abate inflation and not necessarily jobs, the sector that saw the biggest jobs gains – which is leisure and hospitality which accounted for more than 230'000 of the jobs added – also saw the sharpest decline in annual pay growth. The pay for this sector's workers grew 7.9% last year, down from 8.4% printed a month earlier. But that detail went a bit unheard, and under the shadow of the stunning 497'000 new jobs added. And the too-strong ADP report that, again, hinted at a too-resilient US jobs market to the Fed's very aggressive rate hikes, ended up further fueling the Fed rate hike expectations. The US 2-year yield spiked above 5%, and above the peak that we saw before the mini banking crisis hit the US in March, while the 10-year yield took a lift as well, and hit 4%, on indication that, recession doesn't look around the corner... at least if you follow the US jobs numbers.  So today, the official US jobs data could or could not confirm the strength in the ADP figures, but we are all prepared for another month of strong NFP data, and lower unemployment. If anything, we could see the wages growth slow. If that's the case, investors could still have a reason to see the glass half full and bet that the US economy could achieve the soft landing that it's hoping for.     Equities pressured.  The S&P500 and Nasdaq fell yesterday as the US yields spiked on expectation that the Fed won't stop hiking rates with such a strong jobs data, as such a strong jobs market means resilient consumer spending, which in return means sticky inflation.   Other data confirmed the US' economy's good health as well. ISM services PMI showed faster-than-expected growth and faster-than-expected employment, and slower but higher-than-expected price growth in June. If we connect the dots, the US manufacturing is slowing but services continue to grow, and services account for around 80% of the US economic activity, so no wonder the US jobs data remains solid and consumer spending remains resilient, and the US GDP growth comes in better than expected, and we haven't seen that recession showing up its nose yet.   But the darker side of the story is, this much economic strength means sticky inflation, and tighter monetary conditions, and the dirty job of pricing it is done by the sovereign markets. And many investors think that when there is such a divergence of opinion between stock and bond traders, bond traders tend to be right.   But at the end of the day, the stock market's performance  will depend on how much pain the Fed will put on the Wall Street from the balance sheet reduction. If the Fed just continues hiking the rates and do little on the balance sheet front, it will only hit Main Street, and there will be no reason for the equity rally to stall. Voila.    By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
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OPEC and oil bears battle over price direction as production cuts persist

Ipek Ozkardeskaya Ipek Ozkardeskaya 06.07.2023 08:19
US crude clears important resistance.  US crude cleared the all-important 50-DMA yesterday. The barrel of US crude trades a touch below the $72bp level this morning. The next important resistance is seen near $73.50, where stands the 100-DMA.     There is a big fight going on between OPEC – who is ready to do anything to push oil prices above $80pb, and the oil bears, who aggressively fight OPEC and sell any price peak that follows an OPEC-led rally. But the persistent production cuts will at some point become a fundamental problem. And the longer the bears fight OPEC and the more OPEC cuts production, the more severe the impact on global oil glut, and the higher the risk of a decent jump in oil prices.     Yet another rally in energy prices would again interfere with the central banks' fight against inflation and get them to further tighten their policies. And that would apply further pressure on global economy and on asset prices.     A soothing argument is that energy prices cannot rally infinitely when the world is so sensitive to inflation because recession worries will rapidly wane the energy rally and settle the prices at reasonable levels. So even with the most optimistic scenario for oil, there is little chance we see oil prices spike above $90pb. Maybe we could get to the $80bp that will make Saudis happy, though.   
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US crude surges above 50-DMA as Fed minutes reveal hawkish stance

Ipek Ozkardeskaya Ipek Ozkardeskaya 06.07.2023 08:18
US crude jumps above 50-DMA  Minutes from the Federal Reserve's (Fed) latest policy meeting were more hawkish than expected. The minutes revealed that some officials preferred another 25bp hike right away instead of a pause. Almost all of them said that additional hiking would likely be appropriate, and the forecasts showed that they also expect mild recession.     The minutes came to confirm how serious the Fed is in further tightening monetary conditions, and boosted the Fed hike expectations. The US 2-year yield came very close to 5%, the stocks fell, but very slightly. The S&P500 closed the session just 0.20% lower, while Nasdaq 100 gave back only 0.03%. The US dollar gained however, the EURUSD slipped below its 50-DMA, as the Eurozone services PMI fell short of expectations. The June number still hinted at expansion, but the composite PMI slipped into the contraction zone for the first time since January, hinting that activity in Eurozone is slowing because of tightening monetary conditions in the Eurozone as well. On the inflation front, the producer prices fell 1.5% y-o-y in May, the first ever deflation since February 2021. The expectation for the 12-month inflation in EZ fell to 3.9% in May. It's still twice the ECB's 2% policy target, but it's coming down slowly. And the trajectory is certainly more important than the number itself.     Moving forward, further opinion divergence will likely appear along with softening data, but the ECB will continue hiking the rates because officials will be too afraid to stop hiking too early. And as the economic picture worsens, the credit conditions become tighter, the cheap loans dry up and the post-pandemic positivity on peripheral countries fade, we will likely see the yield spread between the core and periphery widen. And the latter could have a negative impact on the single currency's positive trajectory against the US dollar.     Due today, the ADP report is expected to reveal that the US economy added around 228K new private jobs in June, while the JOLTS is expected to have slipped below 10 mio job openings in May.      By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
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European Markets Flat as FTSE100 Lags, OPEC Meeting in Focus, Fed Releases Minutes

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.07.2023 08:27
European markets were mostly flat; the Stoxx600 remained close to its 50-DMA, while the FTSE 100 remained offered near its 200-DMA, near the 7544 level. The FTSE has been one of the biggest laggards of the year, as capital flew into the tech stocks. The slow Chinese reopening and the crumbling commodity prices didn't help FTSE extend the last year's outperformance to this year.   Happily, more rate hikes from the Bank of England (BoE) and the darkening economic and political picture for the UK is not a cause for concern for the British blue-chip index. A major part of their revenue comes from outside the UK. Therefore, a rotation from tech to value could throw a floor under the FTSE100's selloff near the 7300 level  if of course we don't see a global selloff due to recession and hawkish central banks-    OPEC meets industry heads  The barrel of oil remains sold near the 50-DMA as OPEC meeting with industry heads is due today. Everything that involves OPEC is an upside risk to oil prices. Yet any OPEC-related rally will attract top sellers and won't let OPEC reach stability around $80pb level. The major medium-term risk is that the unresponsive price action could hide a worsening global glut that could hit suddenly in the H2, and send oil prices higher. Until then, bears will keep selling.    Fed releases minutes  The Federal Reserve (Fed) will release the minutes of its latest policy meeting today, and there will clearly be a couple of hawkish sentences that will hit the headlines, given that the Fed officials paused their rate hikes in their June meeting, but their dot plot showed two more interest rate hikes before a real and a longer pause.   At this point, the Fed expectations went so hawkish that there is a growing chance of correction. Fed funds futures gives near 90% chance for a another 25bp hike in July, and another 25bp after that is more likely than not. No one expects or is positioned for a rate cut from the Fed this year. Unless there is another baking stress or chaos in the housing market, nothing could stop the Fed from pursuing its battle against inflation. And interestingly, Bloomberg research found out that interest rate increases in the US are benefitting savers more than they are costing mortgage payers, because many mortgages are on fixed rates for 30-years and they have yet to expire.  
Housing Cracks and Central Bank Considerations: Analyzing Vulnerabilities and Implications

Housing Cracks and Central Bank Considerations: Analyzing Vulnerabilities and Implications

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.07.2023 08:22
Housing cracks...  Note that that's not the case elsewhere. The UK, Hong Kong and Commonwealth countries including Canada, Australia and New Zealand are the most vulnerable to the cracks in the housing market because the share of houses bought on mortgages on shorter-term fixed rates or variable rates are higher. In New Zealand, for example, house prices fell the most in 8 months in June and are down by more than 10% since a year earlier.     Interestingly, the US dollar index remains broadly unresponsive to the Fed's hawkishness, but against the greenback could perform better against the Aussie, Kiwi, sterling, and the Loonie in the second half, because the central banks of all the cited countries will have to sit down and think of broader economic implications of a full-blast housing crisis. History shows that, going back to the 1990s' Japan, where the Bank of Japan (BoJ) raised rates to halt the housing bubble, and which then triggered a real estate crisis, the implications were a long and dark tunnel of asset devaluation, reduced consumer spending, bankruptcies, a weakened banking sector, deflation, and long-term economic stagnation. That's certainly why Japan prefers letting inflation run hot, rather than hiking the rates and send the country to another, and a very sticky deflationary phase.    USDJPY capped near 145  And speaking of Japan, the rally in dollar-yen remains capped at 145 level. The only direction that the BoJ could take from here is the hawkish path, therefore turning long yen will, at some point, become a star trade. Yet getting the timing right is crucial and it all depends on a greenlight from the BoJ. 
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Saudi Arabia and Russia Cut Oil Production, China Bans Metal Exports: Market Updates

Ipek Ozkardeskaya Ipek Ozkardeskaya 04.07.2023 09:07
Saudi, Russia cut oil production, China bans metal exports Saudi Arabia and Russia couldn't wait the next OPEC meeting to announce further production cuts. Saudi announced that it will extend the 1mbpd cut into August – and maybe further – while Russia said it will reduce its production by half a million. Further cuts came within the knowledge that the oil market will tighten in the H2 as world oil inventories are on track to drain at a quick pace of around 2mbpd. Pricewise? Not much. US crude shortly tested the 50-DMA to the upside, but gains remained limited, there is a crowd of sellers above the $70pb level, any OPEC-led price rallies are seen as opportunities to sell the top.   Elsewhere, China imposed restrictions on exports of two chipmaking metals, gallium and germanium, that are used in EVs, defense and displays. The Chinese exporters must apply for licenses at the commerce ministry and report details regarding to whom they are selling their metals. The direct implication of the export ban is higher gallium and germanium prices. These metals are not particularly rare, but China accounts for a good part of the world's production. China stands for 94% (!) of the world's gallium production, for example, as they can make them cheaper than the others. Therefore, restricting supply will undoubtedly put a positive pressure on global prices - and maybe on global inflation. Stock prices of companies that make compound semiconductors like Wolfspeed and NXP Semiconductors saw their prices boosted by the news yesterday.  Other than that, it was yet another day of gains – though moderate gains - in the US stock markets. Although the US ISM manufacturing index contracted for the 8th month in June to the weakest levels in more than three years, unemployment showed and ISM prices shrank faster, two things that the Federal Reserve (Fed) is certainly glad to see!    The RBA stays pat The Reserve Bank of Australia (RBA) kept rates unchanged at today's monetary policy meeting, as encouraging inflation numbers of late made policymakers think twice before putting more pressure on the already suffering housing market. The AUDUSD sold off from an important technical range of 0.6670/0.68 which includes all 50, 100 and 200-DMAs. No action from the RBA could give a certain relief to the Fed hawks as well, which pushed the US 2-year yield to very close to 5% yesterday before American markets closed for July 4th holiday. The probability of a 25bp hike in July is now at 90%. We shall see some buying at the short end of the curve, simply because the Fed expectations could hardly get more hawkish than this.    In the FX  The US dollar remains sold despite the robustly hawkish Fed expectations and rising yields. This could be because traders look past the Fed's hawkish words and sell the dollar as they remain focused on the risk of hawkish policies elsewhere that make the US dollar look less attractive against other currencies – like the euro for example. But the EURUSD remains in a wait and see mode at about the 1.09 level, while Cable remains downbeat on multiple political problems that hint at more trouble in the UK's grey skies.   In precious metals, gold traders feel the pain of gradually mounting US yields, but buyers are still willing to enter the market below the $1900 in hope that we are nearing a top in the US yields' upside trajectory.  Today, the US will be off due to Independence Day holiday, but the rest of the world will continue digesting the latest news and get positioned for the FOMC minutes due Wednesday and a series of US jobs data between Thursday and Friday. While the potential for further hawkish pricing for the Fed seems limited, there is a good chance of a dovish readjustment in the case of soft jobs data.    By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
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Equities Defy Expectations: A Strong First Half for Stocks and Bond Market Struggles

Ipek Ozkardeskaya Ipek Ozkardeskaya 03.07.2023 09:30
The first half of the year ends on a positive note for equities and not so much for the bonds. This is the exact opposite of what was predicted. The bond markets were supposed to recover due to economic pains which should have led to a more dovish central bank landscape, while equities should have suffered due to the economic woes, slowing spending and recession. But no. Equities did well. Even though profits fell, they fell less than expected and more importantly, AI saved the day sending the Big Tech stocks to a nice bull market. Bonds on the other hand tumbled as US spending and growth remained resilient. The latter convinced the Federal Reserve (FeD) that it should keep hiking the interest rates. The spread between the US 2 and 10-year yield hit nearly 110bp, as an indication of recession in the coming months.  But last week's strong economic data released in the US, combined with Friday's softer-than-expected PCE figures supported, yet again, the idea of a soft landing and further fueled the rally in stocks. As such, the S&P500 hit a fresh year high at the last trading day of the first half and gained more than 17% so far this year, while Nasdaq 100 soared more than 40%! Apple hit $194 per share, and closed last week with a valuation above $3 trillion.   Of course, this incredible performance makes many investors wonder whether the equit rally could continue in the second half.     On the data dock  The Reserve Bank of Australia (RBA) is expected to keep its rate unchanged at this week's policy meeting, after being partly responsible of the latest hawkish spree in global central bank expectations when it raised rates unexpectedly the last time. A no action from the RBA could calm down the nerves this week. But for that, we must also see loosening in US jobs data. Due Friday, the US NFP is expected to print more than 220K nonfarm job additions in June, with steady wage growth of around 0.3% over the month. The best scenario for stock investors is a strong NFP read combined with softening wages growth.   In China, Caixin manufacturing index for China came in slightly better than expected, and slightly above the 50 threshold, though sentiment weakened to an 8 month low and new orders rose at a softer pace. China could recover in the H2 amid People's Bank of China's (PBoC) efforts to boost growth, but we won't get the growth bang that we were looking for. That means that we will probably bypass a dangerous long-lasting rally in energy and commodity prices, which could help central banks contain inflationary pressures with more success.   For now, oil prices remain mostly ranged despite OPEC's malicious efforts to boost them artificially. The barrel of crude jumped past the $70 level on the back of a broad-based risk rally following the US softer than expected PCE read, which fueled some dovish central bank expectations. The Chinese data also give some support this morning, but the 50-DMA, near $71.30pb will likely act as a solid resistance. This week, risks remain tilted to the upside, as OPEC meets with the industry heads. This week's meeting is not a policy meeting so there won't be any production cuts, or any important decision from OPEC, but what we could well hear slowing demand forecasts, which would then bring traders to assess another production cut from OPEC down the road. In all cases, we have seen clearly that cutting production hasn't been enough for a sustained price rally so far. Therefore, any rally triggered by comments could be interesting top selling opportunities for short-term traders.   Tesla delivered a record number of cars worldwide in Q2, something like 466K cars, as Elon Musk is up to aggressively cutting prices to boost volume. It looks like it is paying off. The latest figures will likely keep Tesla shares on a positive path to challenge the $280 level again. But competition is not far. The Chinese BYD did better than Tesla, selling more than 700K cars last quarter, its best-ever quarter as well. BYD shares jumped 2.70% in Hong Kong.   
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US Economic Data Fuels Hawkish Fed Bets, US Dollar Gains Momentum

Ipek Ozkardeskaya Ipek Ozkardeskaya 30.06.2023 09:52
Economic data released in the US yesterday further fueled the hawkish Federal Reserve (Fed) bets. The US Q1 GDP was revised up from 1.3% to 2%, while analysts had penciled in an improvement to 1.4%. The surprise jump came from a quickened growth in exports and consumer spending, which jumped 4.2% in the Q1. 4.2%! Corporate profits fell, but they fell less than expected, as initial jobless claims fell by the most since 2021.   The only good news for the Fed, and its inflation battle, was a slightly softer than expected core PCE figure, which extended to 4.9%, a bit less than 5% expected by analysts. But the rest of the data pointed in the same direction than in the past days and weeks: the US economy seems to be doing FINE! Combined with the Fed's bank stress test results comforting that the big US lenders are in a position to shoulder further shocks, like recession and chaos in real estate, the US 2-year yield jumped more than 3% to 4.90% for the first time since the mini banking crisis. The probability of a 25bp hike from the Fed in the July meeting jumped to 87%, while the pricing in the market suggests that the Fed's two rate hikes are now likelier than not.   And perhaps because the aggressive Fed tightening doesn't impact economic strength as badly ass expected, stock investors saw no urgence in selling their stocks on rising hawkish Fed expectations. The S&P500 advanced 0.45%, Nasdaq was slightly lower, as the small caps of Russell 2000 outperformed with a 1.23% rise yesterday. The US dollar index rallied past its 100-DMA and broke above a one-month descending channel top. Trend and momentum indicators turned positive hinting that a further advance in the US dollar is likely against major currencies in the run up to next week's all important jobs report, especially if today's PCE data, the Fed's gauge of inflation, shows further advance in inflation from 4.4% to 4.6%.   Yet, a further rise in US yields could weigh on stock appetite before the weekly closing bell.   In the Eurozone, investor mood was a bit tricky because inflation data released this week in the Eurozone revealed that inflation in Italy eased more than expected, inflation in Spain eased below the European Central Bank's (ECB) 2% policy target, but inflation in Germany ticked higher this month, to 6.8%, because of an unfavourable base effect from last year, when Germany offered its citizens ultra-cheap rail tickets. French, and the eurozone's aggregate preliminary inflation data for June is due today.   The EZ inflation is expected to have eased to 5.6%, and the divergence between Germany and the others may not be a long-term concern, but the ECB will certainly remain well alert, and well hawkish into this summer.   More importantly, the end of ECB's cheap loans should increase the yield spread between the Eurozone's core and periphery and weigh on the EURUSD. The pair is now testing the 50-DMA to the downside, and if the Fed hawks continue gaining field, which seems to be the most likely scenario before next week's US jobs data, we could see the pair correct deeper toward the 1.08/1.0820 region.   In China, the latest economic data didn't enchant investors. Chinese manufacturing PMI remained below 50, in the contraction zone, for the third consecutive month, despite recurrent policy easing from the People's Bank of China (PBoC). Nothing seems to be boosting the Chinese recovery because consumer and investor confidence have been severely damaged as a result of government crackdowns and Covid.   The initial forecast for this year - US recession and Chinese rebound - is not happening. On the contrary, the US is growing, and China is slowing. At this point, the Chinese government has no choice but to regain people's and investors' confidence if it doesn't want to become too old before becoming rich enough.  
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Fed's greenlight for more rate hikes after stress test. Crude oil jumps on decline in US inventories, resistance at $70pb

Ipek Ozkardeskaya Ipek Ozkardeskaya 29.06.2023 09:28
Fed's got the greenlight for more hikes. US and European stocks were up on Wednesday. The US chipmakers dampened appetite across the Atlantic Ocean on news that the Biden Administration will bring more restrictions to the US chipmakers' exports toward China, but Nasdaq still eked out gains.     Unfortunately for Nvidia, its A800 chips which were launched as a response to last year's export ban could be included in the new set of restrictions. Nvidia stock fell yesterday, but not as bad as premarket trading suggested. Taking a closer look to Nvidia's revenue per region, revenue slowed by around $2bn in China amid the chip export ban last year, but the fall in Chinese revenue was compensated with a doubling revenue for the US. This means that, even though the Chinese growth potential is weakened, there is potential to grow business for Nvidia. For others, AMD was almost flat, and Micron was up following an upbeat forecast for the current period amid the easing chip glut.     Same, same  The major central bankers' speeches were the same background music. The Federal Reserve's (Fed) Powell, the Bank of England's (BoE) Bailey, and the European Central Bank's (ECB) Lagarde agreed that their fight against inflation wasn't done yet, and that more rate hikes are on the pipeline.   What was interesting however was that the Bank of Japan's (BoJ) Ueda didn't necessarily think that the Fed, the BoE and the ECB overtightened, while he, on his end, didn't move an inch to fight back inflation. What's even funnier is, Powell, Bailey and Lagarde acknowledged that their policy actions come with a lagging effect, but BoJ's Ueda joked saying that because Japan hasn't started hiking yet, the lag effect could be 'at least 25 years'. I don't know if it makes you laugh or cry, but it made the central bankers, and the yen shorts laugh.  The dollar yen is now at the highest levels since November last year, a touch below the 145 mark, and on its way toward higher waters. Yet, a rapid and extended period of yen depreciation remains concerning for Japanese officials and could end up with direct FX intervention to halt bleeding. That's one risk that the short yen positions carry right now, as the yield differential plays clearly in favour of further yen selling.   Elsewhere, sentiment in euro was weak yesterday on the back of a mixed set of data. The Italian PPI fell much slower than expected in May, but consumer price inflation eased more than expected. The ECB's money supply slowed, and loans to the private sector grew slower than expected as a sign of tighter credit due to higher rates. Germany will reveal its own inflation figures today, and we could see an uptick in German inflation according to a consensus of analyst expectations. It would be bad news for the ECB. So many hikes, and so many more promised by the ECB, and inflation is hanging around.   It is because the Fed, ECB and BoE's balance sheets remain the elephant in the room, and they are the reason why economies don't react efficiently to interest rate hikes, and inflation doesn't slow at the desired speed. Yes, the Fed, ECB and BoJ's combined balance sheet size has been shrinking since last year, but total assets remain indisputably HIGH - almost 50% higher than pre-pandemic levels. So, you bet, the higher rates don't do much harm to the economy, except for those who have to renew their mortgages.  For the ECB however, the fact that the cheap loans are drying out could achieve some faster results. But it could trigger a divergence between core and periphery, widen the spread between Germany and the periphery and the latter could slow down the euro's appreciation.     Fed's stress test gives the greenlight for more hikes  The US banks passed the Fed's stress test, giving a greenlight to the Fed for more rate hikes. The US banks gained in the afterhours trading, with Bank of America and Wells Fargo leading gains, but the new regulations regarding capital requirements will likely hold back investors from full heartedly going back to banks.     Crude jumps  Crude oil jumped off below the $67pb level on the back of an almost 10mio barrel decline in US crude inventories last week. There is now a triple bottom formation at around the $67pb level, and that could throw a floor under any short-term selloff in crude oil. But the $70pb resistance remains strong, and more offers are waiting into the 50-DMA, a touch below the $72pb level. The chances are that we will see some back and forth between $67 and $72 range, until one side gives in. 
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Strong Economic Data and Soft Inflation Boost Market Sentiment

Ipek Ozkardeskaya Ipek Ozkardeskaya 28.06.2023 08:12
Strong data and soft inflation boost appetite US stocks shrugged off the early week pessimism on the back as of a set of strong economic data released yesterday.   The durable goods orders rose – along with strong jobs data, this is a sign that the US businesses are not in cash-saving mode, Richmond manufacturing index fell less than expected, house prices recovered and house sales beat expectations – in line with the rest of the strong data from US housing market over the past few weeks. US consumer confidence jumped more than expected in June, to the highest level since the beginning of last year.     We would've normally expected sentiment to be dampened by strong data because of more hawkish Federal Reserve (Fed) expectations, but the S&P500 jumped more than 1%, Nasdaq rallied almost 2%, while the Russell 2000 advanced around 1.5%.      Easing inflation is maybe why stock investors are happy with strong data The Australian inflation fell to a 13-month low, and the Canadian inflation fell more than expected, in a sign that the central bank efforts to pull prices lower is paying off. The AUDUSD was sharply sold below its 50-DMA which stands near the 0.6680 level, while the USDCAD rebounded off a fresh low since September on the back of soft inflation and a 2% fall in crude oil prices.   Across the Atlantic Ocean, some encouraging news came in regarding inflation, as well. The British shop prices dipped to 8.4% this month, down from 9% recorded in May. That was the sharpest decline in prices since the end of 2021 – when prices took a lift, and it was not thanks to the Bank if England (BoE) hikes, but it was because Tesco, Sainsbury's, Asda and Morrisons were asked to 'behave' in their pricing to prevent them from passing the higher costs, and higher wages on to their clients more than necessary. So, it is possible that Jeremy Hunt rolling up his sleeves would be more effective to bring inflation down than any BoE hike at this stage.   The good news for the Brits is that, Rishi Sunak and Jeremy Hunt have all the motivation in the world to bring inflation down if they don't want to be minced at next year's election. The bad news is that, if they don't achieve fast results, they will still be minced because the BoE will continue hiking rates and that will leave millions of households facing an enormous rise in their housing costs.   And the Bank for International Settlements, known as the central bank of the central banks, warned that the final stretch of the monetary tightening will likely be the toughest, with some 'surprises' on the way. Another banking crisis, real estate chaos, a financial crisis? We will see. Today, the Fed will reveal the result of its stress test for the banks. If they see no issue, they will keep pushing, until something breaks.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank
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Fed rate cuts fade, stock markets slide: A closer look at market reactions

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.06.2023 10:44
Investors finally believe the Fed Financial markets kicked off the week on a weak note, but not because of the Wagner's mini, failed, or fake coup over the weekend, but because of the diminishing rate cut bets for the Federal Reserve (Fed) for this year - and the beginning of next year.   Activity on Fed funds futures gives more than 75% chance for another 25bp hike in July, and there is expectation for one more rate hike after that. A set of soft data could do the magic of bad news is good news, and that investors could gently return to longer-term quality bonds, as despite what the Fed says, the end of tightening is certainly near. We saw a heavy slump in open interest in US government bonds as a result of waning dovish bets, but we also see the US 2-year yield slump below a two-month rising trend this morning, as the 10-year yield remains paralyzed a touch below the 3.75% level. The dollar index hardly challenges the 50-100-DMA area, and the stock markets are down, with the S&P500 steadily giving back gains, while MAMAA stocks are seen most vulnerable to a further downside correction due to the recent AI-led rally. Nvidia for example lost almost 4% yesterday, while Tesla fell more than 6%. Small caps, on the other hand, were better bid this Monday, as a sign of a portfolio rebalancing effect before the quarter ends. In this respect, the Russell 2000 index saw support and traded above its 100-DMA despite a broad-basedselloff in big caps, and especially in Big Techs.      The softer US dollar maintains the EURUSD above the 50-DMA, near 1.0875. News from Germany were less than ideal yesterday. The German business climate and expectations deteriorated faster than expected in June, but the Spanish producer prices fell nearly 7% versus a steady deceleration of 4.5% expected by analysts. Slower inflation is the only way to soften the European Central Bank (ECB) rate hike expectations. The Italian PPI, due Wednesday, is expected to print a nearly 10% slump y-o-y in May, and more than 6% slump just in May.   Today, US durable goods orders and house prices will be under close watch while Canada will release the latest set of CPI data. Both headline and core inflation are expected to slow, as a result of continued policy efforts to bring price pressures lower. The dollar-CAD drifts lower, due to a hawkish Bank of Canada (BoC) stance and despite selling pressure in crude oil. The pair is now at the lowest levels since September and is preparing to test the 1.30 support shortly.   Speaking of oil, the barrel of US crude remains steady at around the $70pb level, bulls don't want to join in given the hawkish central bank stances and rising recession odds, while bears are not willing to push hard, as the geopolitical uncertainties maintain a high level of upside risks.   OPEC lately claimed that the global oil demand would rise to 110 mio barrels per day, with a 23% rise in overall energy demand expected by 2045. That goes perpendicularly against the IEA forecast of higher short-term demand but waning long term demand for oil because of energy transition to greener sources. You believe who you want to believe but the higher the traditional, dirty energy prices, the faster the transition will be.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
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Market Reaction and Potential Implications: Wagner Group's Rebellion, Inflation Reports, and Central Bank Policies

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.06.2023 08:06
Slow start following an eventful weekend.    The weekend was eventful with the unexpected rebellion of the Wagner Group against the Kremlin. Yevgeny Prigozhin's men, who fight for Putin in the deadliest battles in Ukraine walked towards Moscow this weekend as Prigozhin accused the Kremlin of not providing enough arms to his troops. But suddenly, Prigozhin called off the attack following an agreement brokered by Belarus and agreed to go into exile. The Kremlin took back control of the situation, but we haven't seen Vladimit Putin, or Prigozhin talk since then. The Wagner incident may have exposed Putin's weakness, and was the most serious threat to his rule in two decades. It could be a turning point in the war in Ukraine. But nothing is more unsure. According to Volodymyr Zelensky, there are no indications that Wagner fighters are retreating from the battlefield.  The first reaction of the financial markets to Wagner's mini coup was relatively calm. Gold for example, which is a good indication of market stress at this kind of moment, remained flat, and even sold into the $1930 level. The dollar-swissy moved little near the 90 cents level. Crude oil was offered into the $70pb level, as nat gas futures jumped more than 2% at the weekly open, and specific stocks like United Co. Rusal International, a Russian aluminum producer that trades in Hong Kong, gapped lower at the open but recovered losses.  Equities in Asia were mostly under pressure from last week's selloff in the US, while US futures ticked higher and are slightly positive at the time of writing.    The Wagner incident will likely remain broadly ignored by investors, unless there are fresh developments that could change the course of the war in Ukraine. Until then, markets will be back to business as usual. There is nothing much on today's economic calendar, but the rest of the week will be busy with a series of inflation reports from Canada, Australia, Europe, the US, and Japan.     Except for Japan, where the Bank of Japan (BoJ) doesn't seem urged to hike the rates, higher-than-expected inflation figures could further fuel the hawkish central bank expectations and add to the weakening appetite in risk assets.     The Federal Reserve (Fed) will carry its annual bank stress test this week, to see how many more rate hikes the baking sector could take in and the potential for changes in capital requirements down the road. The big banks are likely not very vulnerable to higher capital requirements, yet the profitability of the US regional banks could be at jeopardy and that could cause investors to remain skeptical regarding the US banking stocks altogether. Invesco's KBW bank ETF slipped below its 50-DMA, following recovery in May on the back of decidedly aggressive Fed to continue hiking rates, and stricter requirements could further weigh on appetite.    Zooming out, the S&P500 is down by more than 2% since this month's peak, Nasdaq 100 lost more than 3% while Europe's Stoxx 600 dipped 3.70% between mid-June and now on the back of growing signs that the aggressive central bank rate hikes are finally slowing economic activity around the world. A series of PMI data released last Friday showed that activity in euro area's biggest economies fell to a 5-month low as manufacturing contracted faster and services grew slower than expected. The EURUSD tipped a toe below its 50-DMA last Friday but found buyers below this level. Weak data weakens the European Central Bank (ECB) expectations, but that could easily reverse with a strong inflation read given that the ECB is ready to induce more pain on the Eurozone economy to fight inflation.     Across the Channel, the picture isn't necessarily better. Both services and manufacturing came in softer than expected. And despite the positive surprise on the retail sales front, retail sales in Britain slumped more than 2% in May, due to the rising cost of living that led the Brits back from loosening their purse string. One thing though. UK's largest lenders agreed to give borrowers a 12-month grace period if they missed their mortgage payments as a result of whopping costs of keeping their mortgages due to the aggressively rising interest rates. Unless an accident – in real estate for example, the Bank of England (BoE) will continue hiking the rates and reach a peak rate of 6.25% by December.   The only way to slow down the pace of hikes is to find a solution to the sticky inflation problem. And because the BoE has limited influence on prices, Jeremy Hunt will meet industry regulatory this week to discuss how they could prevent companies from taking advantage of inflation and raising prices more than needed, which adds to inflationary pressures through what we call 'greeflation'. But until he finds a solution, the BoE has no choice but to keep hiking and the UK's 2-year gilt yield has further to run higher, whereas the widening gap between the 2 and 10-year yield hints at growing odds of recession in the UK, which should also prevent the pound from gaining strength on the back of hawkish BoE. Cable will more likely end up going back to 1.25, than extending gains to 1.30.       By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
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Central Bank Surprises: BoE Hikes, SNB and Norges Bank Follow Suit - Analysis and Outlook

Ipek Ozkardeskaya Ipek Ozkardeskaya 23.06.2023 11:36
Keeping up with the central banks.  There were three major surprises from three central banks yesterday.     BoE hikes 50bp, peak rate seen unchanged past 6%.  The Bank of England's (BoE) decision to step up the pace of rate hikes at the 13th meeting since the start of the tightening policy has been broadly unwelcomed from households, to bond and stock investors, and to FX traders.   The 2-year gilt yield stabilized above the 5% mark, yet didn't take a lift on doubt that the BoE could hike by another full percentage point without wreaking havoc across the British economy, especially in the property market. The 10-year yield fell on the morose economic outlook. At this point, it would be a miracle for Britain to avoid recession, and even a property crisis.   The FTSE 100 slumped below its 200-DMA, and tipped a toe below the 7500 mark. Trend and momentum indicators are negative, and the index is now approaching oversold conditions. It is worth noting that falling energy and commodity prices due to a softish Chinese reopening didn't play in favour of the British big caps this year. The rising rates step up the bearish pressure. The outlook remains neutral to negative until we see a rebound in global energy prices - which is not happening for now.   The pound fell as a reaction to the 50bp hike. You would've normally expected the opposite reaction, but the bears remained in charge of the market, pricing the fact that the dark clouds that are gathering over Britain will destroy more value than the higher rates could create.   In summary, it was a disastrous week for Britain. But at least one person didn't get discouraged by the data and the BoE hike, and it was Rishi Sunak who said that the British economy is 'going to be ok' and that he is '100% on it'.     He is not scared of being ridiculous.  Moving forward, the Gilt market will likely remain under pressure, the longer end of the yield curve will do better than the shorter end. The British property market will be put at a tougher test, and could crack under the pressure at any time, in which case the economic implications would go far beyond the most pessimistic forecast. And any government help package to help people go through higher mortgage costs would further fuel inflation and require more rate hikes. The outlook for pound weakens and the FTSE100's performance is much dependent on China, which is struggling with low inflation and sluggish growth on the flip side of the world. Long story short, there is not much optimism on the UK front.  Elsewhere, the Swiss National Bank (SNB) raised by 25bp as expected, Norges Bank surprised with a 50bp hike, said that there will be another rate hike in August, while Turkey hiked from 8.5% to 15% vs 20% expected, raising worries that Turkey's new central bank team could not shrug off the low-rate-obsessed goventment influence. The dollar-try spiked above the 25 level, the highest on record, but not the highest on horizon.       Consume less!  The US existing home sales came in better than expected, adding to the optimism that the US real estate market could be doing better after months of negative pressure. The surprising and unexpected progress in US home data is welcomed for the sake of the economic health, but a strong housing market, along with an unbeatable jobs market hint that the Federal Reserve (Fed) will keep hiking rates. Powell confirmed that there could be two more rate hikes in the US before a pause at his semiannual testimony before the Congress, while Janet Yellen said she sees lower recession risks, but that consumer spending should slow.   The US dollar rebounded on hawkish Fed expectations. 
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BoE Faces Inflation Challenge, Expected to Hike Rates; Central Bank of Turkey's New Leadership Takes Action; Swiss National Bank Set to Raise Rates

Ipek Ozkardeskaya Ipek Ozkardeskaya 22.06.2023 08:08
BoE decides after another bad inflation report  The Bank of England (BoE) meets after another shocker inflation report, and is broadly expected to hike the rates by another 25bp points.   The BoE is the first major central bank that started hiking the rates to fight inflation. It proved to be the least efficient bank doing this job; British inflation is the worst among developed economies at nearly 9%. Consequently, the BoE will certainly be the last to finish hiking. The bank is expected to hike six more times, by 25bp, to reach a peak rate above the 6% by the end of this year, or the beginning of the next.   And I don't see how the UK will avoid recession in this morose macroeconomic setting.   The British pound didn't find an army of buyers after the UK inflation report yesterday. After an initial attack on the 1.28 resistance, Cable came back to pre-data levels and even traded at five-session lows. The EURGBP made a sharp U-turn from a nearly oversold market and jumped above 0.86. There is room for a hawkish surprise from the BoE (a 50bp hike?), and if not today, in one of the next meetings. The latter should keep Cable on path for more gains, in the actual environment of softening US dollar.    Let's see what's the new Team is worth!  The new leadership team of the Central Bank of Turkey (CBT) will give the first policy verdict of its new mandate today. The bank is expected to hike the rates from 8.5% to 20%. It looks like a big hike – and it is a big hike – but the Turkish Central Bank will have to   1. regain its credibility that has been shattered   2. repeat a similar operation in the next few meetings to bring the Turkish rates to where they should be in accordance with the economic fundamentals, and not where the government wants them to be.   3. if all goes well, get rid of the expensive and ineffective side measures – like FX interventions and FX protected savings – that served to keep the lira afloat while the monetary policy was no longer.   The USDTRY is again put to sleep near the 1.23 level after a tentative relaxation of FX interventions at the start of this month. Hiking interest rates, regaining credibility, then relaxing FX interventions sounds like a plan, but it will take ZERO verbal intervention from the government to conduct a healthy policy normalization.   Note that, in no case, do I expect the selloff in lira to stabilize or the reverse – without external intervention – below the 30/35 range – if left free.    Swiss will hike as well The Swiss National Bank (SNB) is about to announce a 25bp hike at today's meeting taking the Swiss policy rate to 1.75%. The dollar-franc sees resistance into the 0.90 psychological level, but most of the price action is driven by USD appetite. Given the sharp fall in Swiss inflation toward the 2% target, the SNB will unlikely let the franc run too strong from here. 0.88 seems to be a floor to franc appreciation.    
Bank of England Confronts Troubling Inflation Report; Fed Chair Powell's Testimony Echoes Expected Path

Bank of England Confronts Troubling Inflation Report; Fed Chair Powell's Testimony Echoes Expected Path

Ipek Ozkardeskaya Ipek Ozkardeskaya 22.06.2023 08:07
BoE decides after another bad inflation report.     Federal Reserve (Fed) Chair Powell didn't say anything we didn't know, or we wouldn't expect in the first day of his semiannual testimony before the American lawmakers yesterday. He said that the Fed will continue hiking rates, but because they are getting closer to the destination, it's normal to slow down the pace. He repeated that two more hikes are a good guess, and that the economy will suffer a period of tight credit conditions, below-average growth, and higher unemployment to return to lower inflation.   The US 2-year yield pushed higher. The 10-year yield was flat given that higher short term yields point at higher recession odds for the long term. The gap between the 2 and the 10-year yield is again at 100bp.  In equities, the S&P500 gave back some field, but not all sectors suffered. Tech stocks pulled the index lower, financials and real estate were down, but energy stocks led gains as US crude jumped past $72pb on news that the US inventories dipped by around 1.2 mio barrel last week. Industrial, materials and utilities were up, as well, as a sign that a rotation toward the laggards could be happening rather than a broad-based moody selloff.  In currencies, the US dollar fell and is now testing the April-to-date ascending base - not because the Fed's Powell sounded more dovish, but because what's happening beyond the US borders makes the Fed look more dovish than what it really is.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank
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The Resilience of Equities and Bond Correlation: Fed Testimony, Inflation Pressures, and Housing Market Surprises

Ipek Ozkardeskaya Ipek Ozkardeskaya 21.06.2023 08:33
Risk takers are not out dancing on the Wall Street this week before the Federal Reserve (Fed) President Powell's semiannual congressional testimony scheduled for today and tomorrow. Equities are down, oil is down, sovereign bonds are up. And the rally in equities versus a selloff in sovereign bonds is a pattern that we have been seeing since the rebound following the mini banking crisis, and the correlation between stocks and sovereign bonds are reestablished, again, after last year's visit to the positive territory.   This – the return of negative equity-bond correlation - is what we expected to happen this year, but for the exact opposite reason. We were expecting the sovereign bonds to recover, as the US was supposed to be in recession by now, whereas the sovereign bonds were supposed to find buyers as a result of softening, and even reversing Fed policy. But none of it happened. Equities rallied, the Fed became more aggressive on tightening its monetary policy, and now the American housing market starts printing surprisingly positive data, with housing starts and building permits flashing strong figures for May, defying the rising mortgage rates in the US due to the rising Fed rates. I mean housing starts jumped more than 20% in May, but loans for residential real estate slumped. We no longer know what to do with this data, and that's a cause for concern per se... not understanding the data.     What we know and understand very well, however, is, a strong housing market and tight jobs market will encourage Fed to hike more, and encourage other central banks to do more, as well. But not everyone is as lucky as Powell, because in Britain, the skyrocketing mortgage rates are turning into a serious headache that no one can solve for now. The UK home-loan approvals have been dropping after a post-pandemic peak, the refinancing costs took a lift, and political dispute is gaining momentum with Liberal Democrats asking for a £3 billion mortgage protection package to help people keep their homes, and their mortgages, while Jeremy Hunt says there is no money in the coffers for such fiscal support. The 2-year gilt yield slid below 5% yesterday, as a result of a broad-based flight to safer sovereign bonds, but the relief will likely remain short-lived and the outlook for Gilt market will likely remain negative with further, and significant rate hikes seen on the BoE's horizon.   Released this morning, the British inflation was expected to ease from 8.7% to 8.4% but did not ease... while core inflation unexpectedly jumped past the 7% mark again. These numbers warn that inflationary pressures in the UK are not under control and call for further rate hikes which will further squeeze the British households, without a guarantee of easing inflation. We will see what the BoE will do and say tomorrow, but we know that they now have a few doubts regarding the reliability of their inflation model which was pointing at a steep fall in H2 this year – a scenario that is unlikely to happen.   Cable jumped past the 1.28 mark following the inflation data, then rapidly fell back to the pre-data levels. The short-term direction will depend on a broad US dollar appetite, yet the medium-term outlook for the pound-dollar remains positive on the back of more hawkish BoE expectations, compared to the Fed's, and an advance toward the 1.30 is well possible, especially if the dollar appetite remains soft.     In the US, profit taking and flight to safety before Powell's testimony sent the S&P500 and Nasdaq stocks lower yesterday. The S&P500 slipped below the 4400 mark, while Nasdaq 100 tipped a toe below the 15000 mark but closed above this level.    The US dollar index traded higher for the 3rd session and is now testing the 50-DMA to the upside, while gold pushed below the 100-DMA as rising US yields and stronger dollar weigh on appetite for non-interest-bearing gold.    Yet, any hawkishness from Powell's testimony will likely be tempered by counter-expectation that the Fed may be going too fast too far, and could stop hiking before materializing the two rate hikes they revealed last week in their dot plot. It's true that the surprising data on housing and jobs front don't give a respite to the Fed, but a part of it is still believed to be the post-pandemic effect. For housing for example, insufficient number of homes due to the rising WFH demand, the retreat in material costs that exploded during the pandemic and the fading supply chain pressures help to explain why the market is not responding to the skyrocketing mortgage rates.   But the risk is there – it's not even hidden, and the meltdowns tend to happen without telling.   I mean, no one could tell that the US regional banks would go bankrupt a week before they did! Anyway, the risks are there, but the resilient eco data hints that Jerome Powell will confidently remain hawkish, and that could lead to some further downside correction in US big stocks which are now in overbought market. 
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Central Banks, Mortgage Rates, and Market Volatility: Challenges Ahead

Ipek Ozkardeskaya Ipek Ozkardeskaya 20.06.2023 07:46
Asian stocks were moody, European indices traded lower, and US futures were under pressure on Monday. The rest of the week will likely prove to be challenging both in the US and elsewhere, as central bankers continue pressing economies like lemons, while signs of pain are just before their eyes. It's not because the stock markets are driven higher by the AI-speculation that the underlying fundamentals are doing well. Average mortgage rates in the US are at the highest levels since the subprime crisis whereas mortgage rates in the UK are again above 6%. The last time we saw these levels was back during Liz Truss mini-budget crisis.   The UK 2-year yield spiked above 5% and has more to rally given the expectation of at least another 125bp hike from the Bank of England (BoE) before the end of this year, the first 25bp being due this Thursday.    What's funny is that the Reserve Bank of Australia (RBA) minutes released earlier today showed that the RBA rate hike – which was the first hawkish shock in a series of hawkish central bank decisions this month – showed that the decision to hike rates by a surprise 25bp was 'finely balanced' and further decisions will depend on inflation outlook and home market. The minutes softened the RBA expectations but will likely undo the pledges of more policy action from the other central banks.    The central-bank-induced stress has been well visible in the sovereign bond yields. Besides the sharp rise in UK yields, the US 2-year yield pushes decidedly toward the 5% mark, and the German 2-year yield tops at around 3.20%, the highest levels since the March banking stress. The Stoxx 600 fell more than 1% yesterday and slipped below the 50-DMA. It's yet too early to call for a peak in equities, both in Europe and across the Atlantic, but there are all the reasons to believe that the rally could not carry on given the morose economic outlook and the aggressive central bank stances.     In China, the People's Bank of China (PBoC) cut its one- and five-year LPR rates for the first time in ten months in hope to bolster economy, boost inflation and reverse the property crisis. But a targeted fiscal support is most probably needed because slashing rates when investment and consumption weaken due to a confidence crisis may not do much alone. Chinese stocks are under pressure since yesterday as investors were expecting stimulus measures last Friday, and they got nothing instead, as a proof that Xi remains against the Chinese kind of stimulus that we got used to. But that could be the only way to post the kind of Chinese growth numbers that we used to.       European nat gas prices correct, but...  The European nat gas prices fell nearly 15% on Monday, after they almost doubled since the start of the month on the back of hot weather and a series of outages. The beginning of this summer reminds us of last summer, when the water levels in European rivers and dams fell alarmingly, causing drought and risk of energy shortage.    Pricewise, we are at about a tenth of last summer's peak levels, but the extreme weather conditions will likely keep the pressure to the upside, which in return keep inflation worries alive, the European Central Bank (ECB) hawks alert, and the euro bid.    We see the EURUSD's positive momentum post the ECB meeting gently fade into the 1.10 mark, and we could see some more profit taking before Jerome Powell's testimony this week, but the medium-term outlook remains positive for the EURUSD. 
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Geopolitical Talks and Fed Uncertainty: Market Updates and Expectations for Rate Hikes

Ipek Ozkardeskaya Ipek Ozkardeskaya 19.06.2023 09:45
The week kicks off on positive geopolitical vibes as the weekend talks between the US and China went well, and more senior level talks, including Xi Jinping are expected in the next few hours.  Despite this, Asian indices remained mostly sold on Monday, while US futures traded in the negative. It's certainly because last week was a bit confusing in terms of where the Federal Reserve (Fed) is headed to, after the dot plot showed two more possible rate hikes before the year ends, versus a final rate hike expected in July.   Activity on Fed funds futures gives more than 70% for a July hike, and more than 75% for a September hike on fear that inflation wouldn't slow as much as expected, and that the US jobs market will remain too robust to call the end of the US rate hikes. Fed Chair Powell will testify before the Senate this week and will certainly stick to the Fed's hawkish stance.      The S&P500 and Nasdaq both fell on Friday, but the S&P500 ended last week having gained 2.6%. It was the 5th straight week of gains for the S&P500, while Nasdaq closed the week 3.3% higher than where it had started. Both indices are now at the highest levels since last spring, and both are in overbought territory. Volatility continues fading, while any investors questions whether this is the calm before storm.   On good thing is that the Fed's reverse repo operations are trending lower, as a result of a flood of US bond issuance following the debt ceiling agreement and keep market liquidity sustained for equities.   But the US 2-year yield is headed toward the 5% mark – which is negative for equity valuations, whereas upside potential remains contained at the long end of the curve. And the widening spread means that bond investors continue pricing in recession in the foreseeable future, which is, in theory, negative for equity valuations as well.   Big Tech is responsible for around 80% of the gains in the S&P500 this year due to the AI-rally, but Russell 2000 gives signs of willingness of joining the rally as well. And because there is nothing much encouraging happening on the Fed end, the overall direction of the market, and market mood, will depend on the performance of the Big Tech. And they are now in the overbought market.       Soft dollar  The US dollar trades below its 50-DMA, as other central banks are as aggressive as the Fed – if not more! The Bundesbank President Nagel for example hinted that the ECB hikes could extend into autumn and may persist beyond September if core inflation doesn't slow persistently. The EURUSD is back on track for further gains and will likely continue pushing into the 1.10 psychological mark. Price pullbacks are interesting opportunities to strengthen long positions for a further rise toward the 1.12 mark.      Across the Channel, Cable consolidates above the 1.28 mark ahead of the next inflation update, due Wednesday and the next Bank of England (BoE) decision due Thursday. Inflation in Britain is expected to have eased from 8.7% to 8.4%, but the BoE – which has been telling us since a while that these numbers would get smashed by the H2, is now questioning their inflation forecast model – as a clear sign that even they don't believe that inflation will take the direction their model says it will. The BoE expectations remain comfortably hawkish, with another 125bp hike priced in before the end of this year. The latter could help push Cable toward the 1.30 mark.    In Switzerland, the Swiss National Bank (SNB) is also preparing to hike the rates by 25bp this week to follow the European peers, while in Turkey, the central bank, with its new leadership, is expected to hike the one-week repo rate from 8.5% to 20% in an effort to normalize the monetary policy that has been put to coma since around two years. Normalization will be painful, both for the economy and the lira, and the dollar-TRY will be left to float free from time to time to test the strength of the negative pressure from the market. The USDTRY remains – is kept - steady around the 23 mark, while the upside is the only direction that the pair could take even despite a monstrous rate hike that will hit the fan this week.  
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Hawkish ECB Raises Rates Amidst Slowing Eurozone Growth and Surging Inflation Forecasts

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.06.2023 09:34
It was mostly a good day for the global markets, except for Europe, which saw the European Central Bank (ECB) expectedly raise interest rates by 25bp, but unexpectedly raised inflation forecast, as well.   European policymakers now expect core inflation to average past the 5% mark, while in March projection this forecast was only at around 4.6%. This could sound a bit counterintuitive, because we have been seeing slower inflation and slower activity across the Eurozone countries, with the latest growth numbers even pointing at a mild recession. Yet the strength of the jobs market, and the stickiness of services and housing prices keep ECB officials alert and prepared for a further rate hike in July... and maybe another one in September.       Euro rallies  At the wake of the ECB meeting, the implied probability of a July hike jumped from 50% to 80%, sending the EURUSD rallying. The pair rallied well past its 50-DMA and hit 1.0950, and is up by more than 3% since the beginning of this month. The medium-term outlook remains bullish for the EURUSD due to divergence between a decidedly hawkish ECB, and exhausting Federal Reserve (Fed). The next bullish target stands at 1.12.  The US dollar sank below its 50-DMA, impacted by softening retail sales, rising jobless claims, slowing industrial production and perhaps by a broadly stronger euro following the ECB's higher inflation forecasts, as well.   Elsewhere, rally in EURJPY gained momentum above the 150 mark, as the Bank of Japan (BoJ) decided to do nothing about its abnormally low interest rates today, which seem even more anomalous when you think that the rest of the major central banks are either hiking, or say they will hike. The dollar yen is back above the 140 mark, as traders see little reason to buy the yen when the BoJ outlook remains blurred. Note that some investors expected at least a wider YCC policy to 1% mark, but the BoJ didn't even bother to make a change on that front.       Japanese stocks overbought near 33-year highs  Good news is, Japanese stocks benefit from softer yen and ample BoJ policy, and consolidate gains near 33-year highs. The overbought market conditions, and the idea that Japan will, one day in our lifetime, normalize rates could lead to some profit taking, but it's also true that companies in geopolitically sensitive sectors like defense and semiconductors have been major drivers of the rally this year, and there is no reason for that appetite to change when the geopolitical landscape remains this tense. The former US Secretary of State just said he believes that a conflict between China and Taiwan is likely if tensions continue their current course.   By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    
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Fed's Rate Hike Guessing Game: Managing Market Expectations. Inflation Concerns and Tightening Credit Conditions: Fed's Decision and Market Reaction

Ipek Ozkardeskaya Ipek Ozkardeskaya 15.06.2023 08:52
The Federal Reserve (Fed) refrained from raising interest rates at this week's monetary policy meeting. Yet the median forecast on the Fed's dot plot suggested that there could be two more rate hikes before the end of this year. That came as a slap on the face of those expecting a rate cut by the end of the year, even though, I think that the doves haven't said their last word just yet. The credit conditions in the US are tightening, inflation is falling. Yesterday's PPI data revealed a faster than expected contraction in producer prices in May, while both headline and core CPI figures continued to ease over the same month.    Why, on earth, has the Fed started playing a guessing game, instead of hiking the rates right away?   It is because the US policymakers know that the idea of a 25bp hike - or two 25bp hikes - is more powerful than a 25bp hike itself, as future rate hikes are more effective in managing market expectations. The market is keen to go back to pricing the end of rate hikes - and rate cuts - when they know that the Fed is coming toward the end of the tightening cycle. To avoid that end-of-tunnel enthusiasm from jeopardizing tightening efforts, the Fed keeps the tightening suspense alive, without however acting on the rates. If all goes well - if inflation continues easing, and tighter financial conditions begin weighing on US jobs market - the Fed will have the option to step back and simply... not hike.  But for now, 'nearly all policymakers' remain concerned with the moderate cooling in core inflation, and they don't see inflation going below 3% this year.       Mild reaction  The US 2-year yield continues pushing higher, while enthusiasm at the long end of the yield curve is lesser, as higher rates increase recession odds. The S&P500 hit a fresh high since last year but closed almost flat. The US dollar rebounded off its 100-DMA, and the EURUSD rallied above its own 100-DMA and holds ground above the 1.08 mark this morning, into the widely watched European Central Bank (ECB) decision.    A hawkish ECB hike?  The ECB is broadly expected to hike the interest rates by 25bp when it meets today, and ECB chief Lagarde will likely sound hawkish at the press conference following the decision and insist that despite the recent easing in inflationary pressures – and perhaps the deteriorating economic outlook, the ECB will continue its efforts to fight.  Note that 500-billion-euro TLTROS will mature on June 28th and will pull a good amount of liquidity out of the market. While there is still around 4 trillion euros of excess liquidity in the financial system, the draining liquidity could cause anxiety among investors, especially if some European banks fail to find enough financing in the market to replace their TLTRO funding – a scenario which could sap investors' confidence and appetite in the coming weeks.     In this respect, Italian banks are under a close watch as they are behind their European pears in repaying their TLTRO and the funding through TLTROs are more than the excess cash its lenders parked with the ECB. That means that Italian banks must find money somewhere else – but where? – to repay their TLTROs.   I am not particularly worried about the stability of the European financial system, but I can hardly imagine European stocks extend rally in the environment of draining liquidity and rising rates. The Stoxx 600 index spiked above its 50-DMA yesterday, as a stronger euro may have reinforced appetite, yet European stocks will likely return to the 435-450 area.       China cuts.  In China, we have a completely different ambiance when it comes to inflation and monetary policy. The Chinese inflation remains flat and under pressure near 26-month lows, growth is not picking up the anticipated post-Covid momentum, and the People's Bank of China (PBoC) cut its one-year MLF rate by 10bp today, as broadly expected, to give a shake to the depressed Chinese economy. The problem is, there is now a talk that China could be entering a liquidity trap, meaning a period where lower rates fail to boost appetite and don't translate into faster growth.  
US Inflation Eases, Fed Holds Rates; BoE Faces Dilemma Amid Strong Jobs Data; China Implements Stimulus Measures

US Inflation Eases, Fed Holds Rates; BoE Faces Dilemma Amid Strong Jobs Data; China Implements Stimulus Measures

Ipek Ozkardeskaya Ipek Ozkardeskaya 14.06.2023 08:32
US inflation data gave investors a good reason to cheer up yesterday. The headline number fell more than expected to 4%, and core inflation met analysts' expectations at 5.3%. The biggest takeaway from yesterday's CPI report was, again, that easing in inflation was mostly driven by cooling energy prices, but shelter costs remained sticky – up by more than 8% on a yearly basis.   Yet because these shelter costs represent more than 40% of the core CPI, and private sector data is pointing at cooling housing costs, investors didn't see the sticky core inflation as a major issue. The producer price inflation data is due today, before the Federal Reserve's (Fed) policy decision, but the latter will unlikely change expectations for today's announcement. A softer-than-expected PPI number – due to soft energy and raw material prices, could, on the contrary, further soften the Fed hawks' hand.     In numbers, the expectation of a no rate hike at today's decision jumped past 90%, while the expectation of a no rate hike in July meeting rose from below 30% to above 35%. The S&P500 extended its advance to 4375, while Nasdaq 100 rallied past the 14900 level. Small companies followed suit, with Russell 2000 jumping to the highest levels since the mini banking crisis.     Tough accompanying talk?  The Fed's decision for today is considered as done and dusted with a no rate hike. But the chances are that Fed Chair Jerome Powell will sound sufficiently hawkish to let investors know that the war is not won just yet, because 1. Core inflation remains well above the Fed's 2% target, 2. US jobs market remains too strong to call victory on inflation, and 3. Equity valuations point at an overly optimistic market, at the current levels, the S&P500 trades at around 18 times its earnings forecast over the next year, and these levels are typically associated with times of healthy economic growth and rising corporate profits. But we are now in a period of looming recession odds, and falling profits.     Ouch, BoE!  Yesterday's jobs data in Britain printed blowout figures for April and May. The employment change rocketed to 250K in April, while the expectation was a fall from 180K to 150K. The unemployment rate unexpectedly dropped to 3.8%, and average earnings excluding bonus rose from 6.8% to 7.2%. Then, the jobless claims fell by more than 13K – while analysts expected a surge of more than 20K – hinting that the British job market will likely print solid figures for May as well.     While these are excellent news for Brits who could at least see their purchasing power partly resist to the terrible cost-of-living crisis – where eggs, milk and bread for example saw their prices rise by a whooping 30-and-something per cent, it makes the end of the BoE tightening look impossible for now.     The market prices in another 125bp hike this year, which will take the British policy rate to 5.75%, and there is around 20% chance for an additional 25bp by February next year.     And all this in a market where mortgage rates rise unbearably, and house prices tumble. The 2-year gilt yield took a lift yesterday and is preparing to flirt with the 5% mark. We are now at levels above the mini-budget crisis of Liz Truss, while the spread with the 10-year yield is widening, suggesting that the UK economy will hardly come out of this unharmed. On top, the FTSE 100 index has fallen well behind the rally recorded by the US and European stocks this month because of falling energy and commodity prices due to a disappointing Chinese growth. The only good news for the Brits is that the pound is being boosted by hawkish BoE expectations. Cable rallied past the 1.26 level and is slowly drilling above a long-term downtrending channel top. The trend and momentum indicators remain tilted to the upside, and the divergence between the Fed – preparing to call the end of its tightening cycle sometime in the coming meetings, and the BoE – which has no choice but to keep raising rates – remains supportive of further gains in Cable. We could see the pair regain the 1.30 level, last seen back in April 2022.      China cuts.  The People's Bank of China (PBoC) lowered its 7-day reverse repurchase rate by 10bp to 1.9% yesterday, a week after asking the state-run banks to lower their deposit rates. These are signals that the PBoC is preparing to lower its one-year loan rate tomorrow to give a jolt to its economy that has been unable to gather a healthy growth momentum after Covid measures were relaxed by the end of last year.     Copper futures jumped above their 200-DMA yesterday, though they remain comfortably within a broad downtrending channel building since the second half of January, while US crude rebounded from a two-week low yesterday but remains comfortably below its 50-DMA.     Final word.  Because the rally in tech stocks now looks overstretched and China is getting serious about boosting growth, we will likely start seeing investors take profit on their Long Big Tech positions and return to energy and mining sector to catch the next train which could be the one that leads to profits on an eventual Chinese reopening.   
Chinese Manufacturing PMI: Accelerating Contraction Raises Concerns! What if Russia didn't follow OPEC's output cuts?

Chinese Manufacturing PMI: Accelerating Contraction Raises Concerns! What if Russia didn't follow OPEC's output cuts?

Ipek Ozkardeskaya Ipek Ozkardeskaya 31.05.2023 08:15
The US 2-year yield fell sharply, while the S&P500 ended flat after hitting a fresh high since last summer on optimism that the US will finally agree to raise the debt ceiling.     The House will vote today to decide whether the debt limit bill gets approved at time to get a Senate approval by next Monday deadline.     The deal between Biden and McCarthy freezes discretionary spending for the next two years, which excludes weighty plans like Medicare or social care, and will only have a minor impact on around $20 trillion budget deficit projected for the next decade. Frozen spending means a spending cut in real terms as long as inflation remains high. The higher the inflation, the higher the spending cut in real terms.   But the problem is that at least 20 conservative Republicans of the House rejected Kevin McCarthy's compromise on debt ceiling, saying that spending cuts are not enough. One hardcore Republican, Dan Bishop of North Carolina, threatened to vote to oust McCarthy because he 'capitulated' to Democrats. Democrats, on the other hand, are not fully happy either as they don't want to freeze or to cut spending.     This is what a compromise is: accepting something without being fully satisfied to avoid a self-induced world economic crisis!    Anyway, any misstep at today's House vote could send the US yields higher and stocks lower.     So far, there has been a widening gap between the way the stock and bond markets priced the threat of a US government default. While the US sovereign bonds cheapened across the board, and violently at the short end, stock investors were confident that a ceiling deal would be reached and weren't discouraged by the rising US yields to stop buying.     And even the fact that the Federal Reserve's (Fed) hawkish stance has a material impact on yields' upside trajectory since the bank-stress dip, stock markets kept on climbing. Looking at how Nasdaq behaved since the bank stress rebound in yields, you could barely guess that there are rate-sensitive stocks in it.    But the reality check is that Nasdaq stocks are rate sensitive, and cannot be rate-hike proof if the Fed continues hiking the rates. It would, however, also be a good thing for the Fed members to consider pulling some liquidity out of the market as the Fed's balance sheet is still worth more than before the bank crisis.    What if Russia refuses to cut output?  In energy, US crude tanked nearly 5% yesterday, and tipped a toe below the $69 pb mark on worries that Russia may not follow OPEC's output cuts, in which case the internal conflict may prevent the cartel from reducing supply in a way to give a jolt to oil prices.   There is little chance that we see the kind of discord like back in 2020, as the Ukrainian war strengthen the ties between two allies. But any Russian veto could materially reduce OPEC's power of hit on oil prices.    Elsewhere, the Chinese manufacturing PMI showed that contraction in activity accelerated in May instead of stepping back to the expansion zone. The faster Chinese manufacturing contraction also weighs on the sentiment this morning.     We shouldn't expect China to post growth numbers comparable to levels pre-2020 because China under Xi Jinping's rule is willing to avoid euphoric, and unhealthy growth.   This is why the government put in place severe crackdown measures on real estate, tech and education. That does not mean that China won't get back in shape, but recovery will likely take longer, and growth will likely be more reasonable and a better reflection of the reality of the field.    
Would Federal Reserve (Fed) go for two more rate hikes this year? Non-voting Bullard say he would back such variant

Would Federal Reserve (Fed) go for two more rate hikes this year? Non-voting Bullard say he would back such variant

Ipek Ozkardeskaya Ipek Ozkardeskaya 23.05.2023 11:21
Yesterday was just another day with the same topics. The US debt ceiling talks continued; US President Joe Biden expressed optimism about reaching a deal. US Treasury Secretary Janet Yellen said that the Treasury will soon be running out of money and won't be able to service its debt.   The US 2-year yield pushed higher to above 4.30%, the S&P500 was little changed near levels last seen last summer, while Nasdaq 100 advanced to levels above last summer peaks and is now trading at the highest levels since April 2021.   Interestingly however, gold doesn't see much demand despite the looming debt ceiling talks. Inflows remain limited and the price pressures are to the downside. The stronger US dollar and higher yields weigh on gold appetite at a time investors would be ready to take on higher opportunity costs due to rising default risk.   But the fact that equities remain strong despite the rising yields, and that gold sees limited safe-haven inflows point that investors watch the US debt ceiling saga as an American film knowing that there will eventually be a happy ending...  Two more hikes?!  Federal Reserve (Fed) officials remain surprisingly hawkish. It's just yesterday that St Louis Fed President Bullard – who is happily not a voting member this year – said he would back two more rate hikes in 2023. Minneapolis Fed's Kashkari said that even if the Fed decided to bypass a rate hike in June, it should make sure to investors that tightening is not over.   That, with the fact that the US Treasury will be refilling its General Account as soon as a debt ceiling deal is reached, means that the financial and liquidity conditions will tighten in the next few months, rather than the contrary.   And that's not necessarily good news for stocks.   In the short run, however, a resolution to the debt ceiling saga will likely trigger a further positive push in stocks before the liquidity headache kicks in. In this context, we will likely see the S&P500 clear the 4200 resistance with the news of an eventual debt ceiling deal, before the winds turn south.  Flash PMIs  In Japan, the flash PMI data showed that services expanded faster in May, while manufacturing unexpectedly turned to expansion. With such a massive support from the Bank of Japan (BoJ), it's good news that the Japanese manufacturers are feeling better despite the soft yen which makes the cost of raw material more expensive by the day. The USDJPY is approaching the 139 level. Softer yen means that inflation in Japan will only get worse if the BoJ doesn't step in. But until then, the widening spread between the Japanese and US rates support a further advance in USDJPY toward the 140 psychological mark.   Read next: Nasdaq Golden Dragon has underperformed Nasdaq since the start of the year| FXMAG.COM Elsewhere, the EURUSD remains bid around the 1.08 mark, with manufacturing PMI seen slightly less in contraction than the previous month. A better-than-expected set of data could help fuel the European Central Bank (ECB) hawks and give a positive spin to the euro at the current levels. The ECB Chief Lagarde and Spanish central bank head de Cos reiterated their hawkish stance over the past couple of days saying that the ECB is already at an advanced tightening level, but that the bank will continue raising rates and will keep them at restrictive levels to bring inflation back to the 2% policy target. Given that the ECB doesn't deal with a banking crisis and political shenanigans, the hawkish call from its members is more credible than their colleagues across the Atlantic Ocean. Therefore, the medium-term outlook for the euro remains positive, yet the short-term direction will mostly depend on the US dollar appetite into the US debt ceiling deadline. The rising US yields and safe haven demand support the US dollar in the actual context of uncertainty, and the dollar could hold on to its gains in the coming days.   In energy   US crude remains in a tight range above the $70pb level. Bulls are skeptical as the looming debt ceiling talks in the US are not ideal for appetite, but bears are rare below the $70pb level as the lower the price the higher the risk of another OPEC intervention at the next meeting which will take place at the beginning of next month.   Until then, we will likely see strong resistance into the 50-DMA, which stands around $74.50 mark, and into the 100-DMA, which is just shy of $76pb. 
Markets under Pressure: Rising Yields, Strong Dollar, and Political Headwinds Weigh on Stocks"

Nasdaq Golden Dragon has underperformed Nasdaq since the start of the year

Ipek Ozkardeskaya Ipek Ozkardeskaya 22.05.2023 10:51
The European stocks were up and the S&P500 hit a fresh high since summer, until Garret Graves, who was negotiating for the Republicans abruptly walked out, calling the White House 'unreasonable' and declaring that the discussions are on a pause.   Equities sold off and yields rose.   Happily, US President Joe Biden and House Speaker Kevin McCarthy had a 'productive' call Sunday and agreed to resume talks today, to avoid what could be a very damaging US default.   The market mood is sweeter this Monday on news that the US politicians will at least resume talks after Friday's crisis. They will likely strike a last-minute deal to avoid a catastrophic outcome.   But Treasury Secretary Janet Yellen reminds that the US will receive taxes by mid-June, but that she is not sure there will be enough money in the coffers to carry on until that date.   The US Treasury General Account, that US government now taps in to pay the bills, has no more than $116 bn.   The US 2-year spiked past 4.30% on Friday, even though Federal Reserve (Fed) Chair Jerome Powell said on Friday that rates may not have to rise as much as expected to curb inflation, as the bank stress is playing a nice role restricting credit conditions. Beyond Powell, the Fed members look undecided on whether to keep raising the rates or to pause. But none see the US rates being cut this year.   The US dollar is down for the second day after a more than 2.50% rebound since the beginning of May. The safe haven demand due to the debt ceiling saga is one of the reasons why the US dollar saw inflows over the past couple of weeks, and an eventually lower liquidity once the crisis is over could be supportive of the greenback. But the divergence between the Fed, which has certainly come to the end of its tightening cycle, and the European Central Bank (ECB), that still has a couple of rate hikes left on the pipeline, hint that the recent weakness in the EURUSD could see a bottom. From a technical standpoint, 1.0730, the minor 23.6% retracement on September to May rally, should give support to the actual bullish trend for a renewed rally above 1.10 and to 1.12.   Read next: Ipek Ozkardeskaya: A sudden jump in dollar-try is a possibility| FXMAG.COM In Japan, the selling pressure on the yen continues. Yet, the latest data from Japan revealed that the national CPI rose to 4.5% in April, up from 3.2% printed earlier, and defying analyst expectations of a fall to 2.5%. Core inflation rose from 3.1% to 3.4% as expected.   Cheap yen, the Bank of Japan's (BoJ) ultra-supportive policy, Japanese corporate reforms, and some help from Warren Buffett who has recently invested in Japanese stocks, helped the Nikkei to hit a 3-decade high this month. The inflows could continue as according to the latest BoFA survey, portfolio allocations to Japanese stocks fell to net 11% underweight.   The question is, what will happen when the BoJ will finally reverse its ultra-easy monetary policy to adopt to rising inflation and the hawkish global winds? The yen will certainly gain, and the equities will certainly give back gains. But no one knows how long the BoJ plans to remain absurdly dovish!  What we know however is that tensions between China and the West get worse by the day. The G7 meetings over the weekend revealed that the UK is willing to follow US in curbing business investments in China. China on the other hand hit back saying that Micron chips failed to pass a cybersecurity review and the government warned Chinese operators against buying the company's chips.   Nasdaq's Golden Dragon China index has clearly underperformed Nasdaq since the start of this year and there is no apparent improvement in appetite for Chinese stocks despite a supportive monetary policy and return to growth following the end of the Covid measures. Investors are scared that Xi Jinping's national security obsession could scrap investor friendly measures and leave investors on the back foot.  
Ipek Ozkardeskaya: A sudden jump in dollar-try is a possibility

Ipek Ozkardeskaya: A sudden jump in dollar-try is a possibility

Ipek Ozkardeskaya Ipek Ozkardeskaya 15.05.2023 11:08
The People's Bank of China (PBoC) kept the interest rates unchanged at today's monetary policy meeting, but extended long-term liquidity to boost anemic Chinese growth.   Many analysts expected a rate cut from the PBoC today, after the latest set of economic data revealed slowing exports and a faster-than-expected fall in Chinese inflation – both being a strong sign of insufficient growth momentum for the EM giant.   Today's status quo in PBoC rate policy strengthens odds for an imminent PBoC rate cut. The first rate cut is expected in June.  But interestingly, the higher PBoC liquidity and looser PBoC rate expectations couldn't boost global growth optimism this Monday. Crude oil slipped below $70pb, while copper futures slipped below the 200-DMA last week, and remain under decent selling pressure despite the PBoC news.   US inflation expectations jump!  Data released Friday showed that the US consumer sentiment fell to a 6-month low, as long-term inflation expectations jumped to a 12-month high, fueling worries that the Federal Reserve (Fed) may not stop hiking the interest rates, or, it won't be able to cut the rates anytime soon.   The June rate hike expectations rose to around 16%, the dollar index rallied past the 50-DMA and equities fell.  Selloff in equities were also fueled by a renewed pressure on US regional bank stocks as the selloff in PacWest shares extended to a second day after the bank revealed having lost nearly 10% of its deposits last week.   Read next: Copper prices hit lowest level this year. Crude oil decreased second day in a row. BoE went for a 25bp hike| FXMAG.COM The S&P500 tested the 4100, but closed the week a few points above this psychological mark, while Nasdaq advanced to a fresh high since last summer, but gave in to higher yields and close the session 0.37% lower.   While the Fed rate discussions swing in both directions, the ongoing stress on the US regional bank level will likely bring the Fed to inject liquidity into the system to keep the financial system sound and stable. In this context, excess liquidity will likely continue being supportive for stock valuations.   Debt ceiling saga  Rising US yields and the US debt ceiling impasse are major drags to investor appetite.   The meeting that was supposed to take place between Biden and McCarthy on Friday was postponed to this week. The latter has been partly taken as a sign that the staff level negotiations progress, and that an eventual agreement on spending could pave the way for an agreement on debt ceiling.   But nothing is less sure, and the debt ceiling suspense will likely continue until the last minute, keeping investors cautious, looking for safety in long-term US sovereign bonds and gold.   Tight, tight...  Sunday's Turkish election results were tight. According to the latest results, no candidate, including President Erdogan got a majority of votes to avoid a runoff.   It looks like Turks will go back to voting in two weeks to decide who between Recep Erdogan and Kemal Kilicdaroglu will be the next president.   Political uncertainty is never good for investor sentiment and the next two weeks will be marked by uncertainty, low predictability and high volatility in Turkish assets.   The USDTRY is holding up so far, but the pair advanced to the highest levels on record. The central bank of Turkey (CBT) is putting a lot of weight and money to keep the lira stable against the greenback.   Turkey's 10-year yield jumped more than 8% this morning, while the BIST 100 is down by 1% at the time of writing.   The major risk is the lira. Will the CBT keep its FX strategy unchanged and defend the lira? Will it be able to counter an eventually increased selling pressure on the lira? If no, what happens to the lira?   A sudden jump in dollar-try is a possibility, a severe devaluation of the lira could inject further volatility to Turkish stock and bond markets. 
FX Daily: Resuming the Norm – Dollar Gains Momentum as Quarter-End Flows Fade

BIST100 index increased by almost 8% yesterday. BoE Bailey left the door open for further rate hikes

Ipek Ozkardeskaya Ipek Ozkardeskaya 12.05.2023 12:22
As expected, the Bank of England (BoE) raised the rates by 25bp for the 12th time yesterday, and Governor Bailey left the door open for further rate hikes.   Bailey said that the lagging effects of the past rate hikes will weigh more on the economy in the coming quarters, that the BoE expects inflation to fall quickly this year, but reckoned that 'inflation remains too high' and that 'repeated surprises' pointed to the resilience of the economy and added to price pressures. As a result, the BoE will 'stay the course' to bring it down with further rate increases, he said.   British policymakers also made the biggest upgrade to their growth projections since the BoE gained independence since1997 – added Bloomberg.   Cable fell, and tipped a toe below the 1.25 mark, but the selloff was mostly driven by a broadly stronger US dollar.   Even though the US PPI data came in softer than expected, and US jobless claims reached the highest since October 2021 and PacWest slumped 22% after announcing that its deposits fell nearly 10% last week, and the US 2-year yield fell - all these factors normally being bearish for the dollar -, the US dollar jumped above a two-month bearish trend top.   Was yesterday's move just a flight to safety, is it sustainable?   Looking at the EURUSD chart, it looks like the failure to clear the 1.10/1.11 offers now leads to a toppish sentiment, and that we could see a further downside correction in the EURUSD before a rebound to bring us to the 1.12 medium term target area.  In equities, the S&P500 was little changed yesterday, the S&P500 was slightly downbeat on renewed bank selloff, but Nasdaq100 extended gains to fresh highs since last summer. The falling yields clearly boost appetite in Big Tech stocks.  Decision Time for Turkey!  In Turkey, the BIST100 rallied almost 8% yesterday, as Muhammer Ince, one of the candidates to the presidential election, withdrew from the race, a day after he denied the 'authenticity of an alleged sex tape and claims that he took bribes to run for president and split the opposition vote'.   His votes will still count – because there is also a parliamentary election happening simultaneously, but Mr Ince leaving the presidential race ramps up the chances for a defeat for the running President Erdogan, although Ince didn't favour a candidate when he retreated.   On the currency front, the USDTRY continues gently to push higher.   Note that despite the ultra-lose monetary policy, abnormally low interest rates and deeply negative real rates, a massive FX intervention program from the Central Bank of Turkey kept the Turkish lira at levels significantly above the fair market value against major currencies.   It is a timebomb ready to explode in any misstep.   And a misstep could be an eventual Erdogan defeat – which would smash the castle of cards.   Read next: Ipek Ozkardeskaya: BoE will certainly leave the door open for further hikes| FXMAG.COM Right now, the actual President Erdogan's defeat is being priced in as the base case scenario. No one knows what that means for the lira, but if the lira is left to move free, it would certainly face a significant devaluation.  In the base case scenario, the formation of a new government is expected to end Turkey's ultra-loose monetary policy, halt heavy FX intervention, and readjust interest rates significantly higher to restore an understandable and orthodox monetary policy. In this case, not only that we would see a wild volatility in lira which could send the USDTRY all the way up to the 35/45 range, but we would also see Turkish policy rate lifted to 40/45% in the months following the election to match the official inflation level, while inflation would pop higher due to a potentially devastating devaluation in the lira.   Elsewhere, the Turkish equities would jump, not because investors are happy with higher rates, but because the valuation of the companies should also readjust to a new exchange rate - a significantly more expensive US dollar, hence a significantly higher valuation for Turkish stocks in terms of Turkish liras.  On a personal note, for me and my generation who have never seen Turkey ruled by anyone else than Mr. Erdogan, and any government other than his AKP party, the shock of a change would go well beyond what we could see in the markets. 
Ipek Ozkardeskaya: BoE will certainly leave the door open for further hikes

Ipek Ozkardeskaya: BoE will certainly leave the door open for further hikes

Ipek Ozkardeskaya Ipek Ozkardeskaya 11.05.2023 10:46
Inflation in the US came in slightly better than expected by analysts. The headline inflation slipped below the 5% psychological mark – to 4.9%. Core inflation eased to 5.5%, and the monthly headline figure jumped to 0.4% from 0.1% printed a month earlier, as expected.  The only surprise was the yearly headline figure that slipped to 4.9%.   Falling US inflation is feeding into higher demand in treasuries. The US 2-year yield slipped back below the 4% mark on expectations that the Federal Reserve's (Fed) latest rate hike was certainly the last.   Fed rate cut expectations jumped again. The consensus is that the Fed's latest rate hike was certainly its last for this cycle, and the Fed will cut the rates by 75bp before the year ends.  Is it reasonable? Yes and no.   No, because inflation is cooling but inflation is still more than twice compared to where the Fed wants it to be, and the downside potential from the actual levels is certainly lower, as most of the decline is due to the decent fall in energy prices, which have however mostly stabilized since a couple of months now. Therefore, if we consider the inflation fight alone, the Fed should continue hiking rates.   But we also know that the bank stress is tightening credit conditions and helping the Fed to do its job – restrict credit in a way to slow growth and ease inflation.   Today, the consensus is that the Fed's latest rate hike was certainly its last for this cycle. And if that's the case, looking at what happened over the past 40 years, five over the past six tightening cycles ended with the Fed immediately cutting the interest rates after a peak, except in 2018 where the rates remained at peak for 5 months before being pulled down again.   In this context, expecting a rate cut in the next few months is reasonable and the negative outlook for the USD makes sense, even more so when inflation numbers hint that the trend is in the right direction.   Read next: Crude oil - is inflation good for black gold? Why? Why not?| FXMAG.COM Though I can almost guarantee you that we won't see US inflation back at 2% anytime this year, and any time before the Fed re-starts cutting rates. This is why, the price rallies in the USD remain interesting opportunities for topsellers for a further slide toward fresh ytd lows.  BoE will hardly close the door for further rate hikes!  The Bank of England (BoE) is expected to raise its interest rate by 25bp when it meets today, but it will certainly leave the door open for further hikes.   Mr. Bailey and Mr. Sunak think and communicate that inflation in Britain will fall sharply in the second half of this year. But for now, nothing, in terms of hard data, points in that direction. Released yesterday, a report from Reed showed that average wages in the UK grew 10%, matching the rise in cost of living. While that's good news for workers, a 10% rise in salaries means that inflation will likely be stickier and harder to combat and require further rate hikes.   On the currency front, the divergence between the Fed – which is getting concrete results on its inflation fight, and the BoE – which still deals with double-digit inflation, should support the medium term bullish outlook for Cable. The pair is about to break above a long-term down-trending channel top, if successful, we could see traders set their eyes back on the 1.30 mark. 
The Commodities Feed: Specs continue to cut oil longs

Crude oil - is inflation good for black gold? Why? Why not?

Ipek Ozkardeskaya Ipek Ozkardeskaya 10.05.2023 14:24
No one was naïve enough to expect an agreement on the US debt ceiling yesterday, when US President Joe Biden met Kevin McCarthy. But some hoped that there could be at least an extension of the debt ceiling to September, until the end of the current fiscal year, which would allow both parties to engage in deeper talks about what to do with the 2024 budget and the debt ceiling altogether.   But no.   Biden and McCarthy couldn't agree on much, but they agreed that there would be no extension to the debt ceiling.   Biden doesn't want to push US to default – that would be a disaster – but he can't agree on severe budget cuts either. His electors would be too angry. The leaders will meet again on Friday. Debt ceiling discussions will certainly extend toward the last minute, and the chances are that we see a last-minute goal to avert a possible US government default. Until then, uncertainty will loom, and risk appetite will likely remain limited.  US treasuries remain under a decent selling pressure especially on the short end of the yield curve as investors dump US short term papers due to the rising US default risk. The US 1-month bill yields around 5.60%, the US 2-year yield advanced past the 4% mark, the S&P500 slid 0.46%.   The US dollar popped higher on Tuesday, boosted by the rising US yields, but gold is certainly a better alternative for hedging a potential US default risk, as a potential default would clearly put pressure on growth prospects, Federal Reserve (Fed) expectations and weigh on the dollar as a result.   Gold is a better choice for hedging against rising tensions with China, as well, as Italian PM Meloni told McCarthy yesterday that she wants to exit the Chinese Belt and Road Initiative. The price of an ounce trades around the $2030 this morning and could find the force to test the $2080 offers to the upside and clear them. Upside potential extends to $2200 per ounce.   Similarly, the long end of the US yield curve could be an interesting refuge for risk averse investors, given that a potential US default would immediately send the Fed rate cut expectations to the moon, and would apply a decent pressure on the long end of the yield curve. US 10-year papers now yield around 3.50%. In case of a problem, we could see them fall all the way to 2.80/3%.   Read next: China's trade data show Chinese exports increased faster than expected in April| FXMAG.COM Looking at Bitcoin, it doesn't seem to offer any relief to actual stress. The price of a coin is down below the $28K mark, and could remain under pressure, parallel to sentiment in tech stocks.  And US inflation?  The US will reveal a much-important update to its CPI today, and the data could also shake sentiment at today's trading session.   Core inflation is expected to have slightly eased from 5.6% to 5.5% in April, headline inflation is seen steady at 5%, while we might see an uptick in monthly headline figure, to 0.4% from 0.1% printed a month earlier due to the spike in energy prices after OPEC cut production last month.   In all cases, whatever we see in US CPI report today, it's important to note that inflation expectations are falling. The NFIB survey showed yesterday that there is a severe decline in the number of small companies that are expected to raise prices. That should, at some point, play in favour of slowing price pressures.  For today, a CPI report in line with expectations will keep focus on debt ceiling, but a report that diverges from expectations could give an extra spin to market pricing. A softer-than-expected CPI report should further fuel the Fed rate cut expectations into this fall and relieve a part of the positive pressure on US yields, whereas a stronger-than-expected read will hardly boost any hawkish bets at this stage. Concerns regarding the US regional banks and the unresolved debt ceiling issue hint that the Fed can no longer walk alone and hike rates. Therefore, a stronger inflation report would only hint at lower real returns on US denominated assets. The latter would weigh on the US dollar, help the EURUSD rebound past 1.10, and keep Cable upbeat near a long-term trend negative trend top.   Is inflation good for oil?  One frequent question is how would oil react to inflation data. Is inflation good for oil prices, or is it bad?   Some argue that inflation is good for oil, because oil tends to perform well in periods of high inflation. This is true. But if oil performs better during periods of high inflation, it could be because higher oil causes higher inflation.   And the opposite – higher inflation is good for oil – may not be true.   There are two reasonings.  If inflation is higher because of strong growth and robust demand, a period of high inflation could be supportive of oil.   But today, we are mostly talking about a looming recession and tightening monetary conditions. In this context, higher inflation may not translate into better appetite for oil, if a scary inflation number fuels the hawkish Fed expectations.  The barrel of US crude is trading around $73pb this morning. The $75/76 range, which shelters the 50, 100-DMA, will likely act as a solid resistance to price advances.   In the medium run however, crude oil outlook remains neutral to positive, as tighter supply from OPEC and rising demand, especially due to the rebound in travel demand, should continue giving support to the bulls. But whether we would see levels above $80pb sustainably is yet to be seen.
Disappointing activity data in China suggests more fiscal support is needed

China's trade data show Chinese exports increased faster than expected in April

Ipek Ozkardeskaya Ipek Ozkardeskaya 09.05.2023 17:03
The week started on a mixed note. Bank stress further eased with PacWest and Western Alliance, which were the two banks that were on the chopping block after the First Republic Bank got swallowed by JPM, rallied, but gave back most of earlier gains. PacWest – which was up by more than 30% pre-market, ended the session with a 3.65% gain and Western Alliance with a 0.60% advance. But the SPDR's US regional bank index lost 2%, as a confirmation that this type of wild price volatility is bad, even though it is on the top side.   Tighter credit conditions  Federal Reserve's (Fed) senior loan officer opinion survey, which became the new hot data to watch for investors who are trying to put a hand on how much this whole crisis impacted credit conditions - came in worse than expected. The data showed that the banks who tightened credit conditions were higher than expected, around 46%, versus 44.8% expected. Tighter standards, weaker demand for commercial and industrial loans, less favorable macro conditions, reduced tolerance for risk, deterioration in collateral values and concerns about banks' funding costs and liquidity positions were among key words and phrases that flashed out of that survey.   Debt ceiling impasse  On the political front, tensions regarding the US debt ceiling impasse remain high as US President Joe Biden meets congressional leaders today to discuss about a possibility to lift the debt ceiling to avoid a default which could hit the US as early as June 1st.   While suspense is killing everyone, Bill Gross, Pimco's ex CIO says it's a good idea to buy short term US papers at the current prices, as the debt ceiling discussion is 'ridiculous, it always gets resolved'. Buying one, two-month treasury bills at a much higher rate than longer term papers is a good opportunity, according to him.  Indeed, the US 1-month bill now yields around 5.50%, while the 10-year paper is still around 3.50%. Note that this is not a risk-free trade, there is always a chance that an agreement on debt ceiling is not reached quickly and the risk is default gets real, but that's the price you pay for taking the risk. No risk, no return!  Read next: According to Warren Buffet, loss of confidence in the US dollar doesn't mean BTC will become a global reserve currency | FXMAG.COM In the FX  The US dollar outlook remains soft due to the bank stress and the debt ceiling impasse, which both increase the chances of slower growth and soften the Fed expectations. The dollar index has been slightly better at the start of this week, yet strong economic data, closely related to US inflation, could further weigh on the US dollar, as strong data means higher inflationary pressures, at a time when the Fed cannot keep raising the rates due to stress on banks. As a result, expected real returns for US denominated assets would fall, the natural preference for US denominated assets would decline, so would the value of the US dollar.    Buy euro at a dip?  Despite a solid selling pressure above the 1.10 mark, price pullbacks in the EURUSD remain interesting opportunities for those looking for dip-buying opportunities.   Released yesterday, the 3.4% slump in German industrial production – which was the highest in a year - certainly came a slap on investors' face, as the expectation was a 1.5% fall only. So the disappointing German data also revived the odds that the Q1 GDP could also be revised lower, and weigh on ECB rate hike expectations. On top of that, the euro area's investor confidence index unexpectedly slumped as well.   But, despite signs of slowing economy, the European Central Bank (ECB) will remain focused on fighting inflation, and the latter means higher rates despite slowing activity – if of course slowing activity doesn't lead to slower price pressures.   For now, ECB's Chief economist Philip Lane warns that 'there is still momentum in food and core inflation, which is for this year running in the opposite direction to the decline in energy inflation.' It sure needs to be addressed. Therefore, I keep my medium-term target unchanged at 1.1225 for the EURUSD.   China imports slump.  The latest trade data from China showed that the Chinese exports grew faster than expected in April, and imports fell faster than expected as well. As such, China's trade balance hit $90bn, versus around $70bn expected by analysts. Rising Chinese exports is good sign for global economy, while lower Chinese imports is a bad sign for companies exporting to China. Maybe but just maybe, it could be time to slow down bets for further gains in French luxury brands, as the likes of LVMH, which had a stellar year, partly thanks to the returning Chinese demand? Other news from China is less encouraging.   Crude rebounds.  In energy, American crude advanced past $73.50 per barrel yesterday, but slipped below the $73 level on worries that the Chinese recovery may not be as strong as predicted, and that slower global growth could further hit demand. Price advances into $75/76 will likely see strong resistance.
Brent hits one-month high! Saudi and Russian cuts supporting recent moves

S&P 500 ended Friday session 1.85% above-the-line. US NFP hit 253K

Ipek Ozkardeskaya Ipek Ozkardeskaya 08.05.2023 12:58
Friday's US jobs data was nowhere sad. The US economy added 253K new nonfarm jobs in April, beating analyst expectations for the 13th straight month! The unemployment rate unexpectedly fell to 3.4%, a multi-decade low, and wages grew 0.5% on a monthly basis, and 4.4% on a yearly basis. Both, higher than expected.  Strong jobs data reversed expectation of a Federal Reserve (Fed) rate cut in July. The expectation that the Fed would cut rates fell from 85bp to near 79bp after the data, and we even saw a slim expectation that the Fed could hike the rates again in June, of 10%.   The US 2-year yield rebounded from last week's lows, but stayed below the 4% mark, as the dollar index remained offered at session highs, on the unresolved US debt ceiling debate, and despite some relief on regional banks front.   US President Biden will meet some congressional leaders on Wednesday but will unlikely compromise on spending. US treasury Secretary Yellen urges Congress to lift the debt ceiling, as the government could run out of money by June 1st and that Biden taking unilateral action would provoke a constitutional crisis.   On the data front...  We have two CPI reports and one more jobs data to go before the Fed's next decision.  The next US CPI report is due this Wednesday. The expectation is that the US core inflation may have eased from 5.6% to 5.5% in April, headline figure may have steadied around 5% but the monthly headline figure may have ticked from 0.1% to 0.4% due to the jump in energy prices after OPEC cut production. Any upside surprise in inflation figures would bring the Fed hawks back to the market and help scale back the Fed cut expectations.   In the FX   The US dollar remains under a decent selling pressure. The debt ceiling and the ongoing stress in US regional banks help keep the Fed doves in charge of the market despite economic data calling for a tight hand from the Fed.   Read next: Apple's overal sales decreased for the second quarter in a row, but iPhone sales turned out to be better than expected| FXMAG.COM As a result, the EURUSD – which dropped below the 1.10 mark after the strong US jobs data, quickly rebounded and remains bid above the 1.10 mark in Asia this morning. Sentiment remains upbeat for the euro bulls although there is a solid resistance into the 1.11 mark.  Cable tests the ceiling of a long-term down-trending channel, as economists and markets can't agree on what the Bank of England (BoE) should do, or what it WILL do.   Economists bet for one more rate hike from the BoE and pause, whereas the interest rate markets price in a 25bp hike this Thursday, followed by one, and possibly two more rate hikes until September – which would push the British policy rate to the 5% psychological mark.   Given how scary UK inflation looks, the BoE should continue hiking the rates. Even though BoE Governor Bailey thinks that price pressure will drastically cool later this year, he should consider the risk that... they might not.   As such, expectations between the BoE and the Fed are diverging in favour of the latter, and that should keep Cable on a path toward further gains.   S&P500 had a good quarter, after all.  The S&P500 closed with a 1.85% gain on Friday, as US regional banks closed a turbulent week with a decent rally. PacWest shares rallied more than 80%, Western Alliance jumped nearly 50% and SPDR's regional bank index was up by more than 6% on Friday.   Zooming out, overall, 85% of the companies in the S&P 500 have reported results for Q1. According to FactSet, 79% of them revealed earnings above estimates, which also helped keep the S&P500 afloat despite the fuming regional bank stocks.   US crude jumps, gains could remain capped into $75pb   US crude jumped nearly 4% on Friday, along with the US equities, and is bid above $71pb this morning.   We are now far below the price level when OPEC announced cutting production to boost prices.   Consequently, the OPEC boost to oil prices remained short-lived. The latter means 1. market is strongly concerned about the deteriorating growth outlook that weighs on oil demand outlook, and  2. OPEC could surprise with another production cut announcement to keep the price pressure on the upside.   In the absence of such a surprise, upside potential in US crude will likely remain capped near $75/76, region that shelters the 50 and 100-DMA.  
Apple's overal sales decreased for the second quarter in a row, but iPhone sales turned out to be better than expected

Apple's overal sales decreased for the second quarter in a row, but iPhone sales turned out to be better than expected

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.05.2023 13:08
There was nothing particularly unusual or unexpected about yesterday's European Central Bank (ECB) decision and its Chief Christine Lagarde's presser, other than the fact that Lagarde didn't wear a scarf!   The ECB slowed the pace of rate hikes to 25bp this month. The strong decline in bank lending – as a result of bank stress, and signs of slowing inflation – despite last month's rally in energy prices, justified the 25bp hike announced yesterday. The bank announced that it will no longer reinvest in APP from July, as well.  The key takeaway was, again, that inflation outlook in the Eurozone remained 'too high for too long'.   Lagarde left the door wide-open to more rate hikes in the coming months, she pledged to lift the policy rates to sufficiently restrictive levels and to keep them there as long as necessary.   No one knows what 'restrictive enough' means, but the 'decisions' – in plural – reinforced expectations that there will likely be two more rate hikes on the wire before the ECB eventually pauses tightening after summer.  This is important because, it means a clear hawkish divergence between the Federal Reserve (Fed), which is weakened and handcuffed by the ongoing regional bank crisis, and the ECB, which isn't facing the same intensity of bank stress than the US and which could continue to focus on inflation to make decisions.    The growing divergence between the ECB and the Fed policy outlooks builds a stronger case for a significantly higher euro against the US dollar; price pullbacks continue to be interesting opportunities to strength long positions in the single currency.  Contagion.  Stress around the US regional banks don't seem to be abating.  Lately on the chopping block are PacWest and Western Alliance. PacWest couldn't avoid that 50% slump after the bank said that it considers strategic options the day before. Western Alliance slumped as much as 60%, before closing the session 38% down. First Horizon on the other hand tumbled more than 33% as the Canadian TD walk away from its acquisition plan, Goldman Sachs slid more than 2% on news that it's under review regarding its role in Silicon Valley Bank's (SVB) attempt to raise funds in March.   All in all, US banks slid close to 3% yesterday.   The FDIC now plans to 'hit big banks with fees to refill the deposit insurance fund, leaving smaller lenders exempt'.   Bank stress fuels Fed doves. As of today, the market is not only expecting three rate cuts in the second half of this year, but price in the first potential rate cut for July.   A bit stretched? It depends on how messy the bank situation gets.  Apple beats.  Happily, Apple results gave a smile to investors after the bell. Apple's overall sales fell for the second quarter in a row, but iPhone sales were stronger than expected and helped Apple beat both revenue and profit expectations.   Apple's share gained 2.5% in the afterhours trading. The announcement of a $90bn share buyback plan, unchanged from last year, also helped.   Read next: Strong US NFP print would keep the prospect of another Fed rate hike in June| FXMAG.COM Note that Apple and Microsoft, together, made up around half of the gains in the S&P500 this year. And thanks to their sizeable balance sheets – and the falling yields, big tech companies remain a refuge for equity investors. That certainly explains why the S&P500 has been relatively resilient to the bank turmoil. What's risky however is that, if winds change direction for the Big Tech, we could rapidly see gains in the S&P500 crumble.  US jobs.   Data released yesterday revealed that US unemployment benefit applications jumped the most in six weeks, as a sign that the US labour market could be loosening.   Earlier this week, job openings data also came in softer than expected, yet ADP report released on Wednesday came in double the expectations, at 300'000 new private jobs.   Today, the NFP data is expected to reveal that the US economy added around 180K new nonfarm jobs last month, for a steady wage growth at 4.2% on annual basis, and a slight uptick in unemployment from 3.5% to 3.6%.  A soft NFP read, and ideally softening wages growth could further fuel the Fed doves and boost Fed rate cut expectations.  
ECB's Christine Lagarde not to announce the end of rate hikes?

ECB's Christine Lagarde not to announce the end of rate hikes?

Ipek Ozkardeskaya Ipek Ozkardeskaya 04.05.2023 11:34
As expected, the Federal Reserve (Fed) raised the interest rates by another 25bp yesterday, and hinted at an eventual pause 'to wait and see' what happens from now.   Fed Chair Powell said that the Fed is 'prepared to do more', and that a decision on a pause 'was not made' this week, and that the future of the US rate policy would depend on the economic data.   And he said that 'conditions in the banking sector improved since early March'.   BUT PacWest, another US regional bank, saw its share price slump by more than 50% in the afterhours trading, after the bank announced that it considers strategic options like a breakup, capital raising or a sale. It looks like more trouble is brewing for the US banking sector, on the contrary of what Powell said yesterday.   Anyway, the idea of a pause may have pleased investors - because the bank failures help tightening the lending conditions and throw a solid ground for a pause in rate hikes. But what pleased investors less is Powell pushing back on a potential rate cut later this year. It's normal. For him, there is no problem with the US regional banks, and all is fine.   The problem is, yes, the equity markets sold off on the very-predictable announcement that there would be no rate cuts, and yes, the S&P500 slid 0.70%, and Nasdaq 100 gave back 0.64% yesterday, but there are two markets that don't believe Powell.   One is the US sovereign bond market, where the US 2-year yield plunged to 3.80% yesterday, as traders priced in at least three rate cuts in the second half of this year.   And two: oil markets, that fully take into account the banking crisis and that refuse to buy the idea of a possible 'soft landing' in the US economy.   The barrel of US crude slumped to $63pb yesterday; even the EIA revealing a 1.3-mio-barrel fall in US inventories, or the blowout ADP report showing that the US economy added almost 300'000 new private jobs in April, almost double the 150'000 penciled in by analysts didn't help.   ECB to hike, but not hint at a pause.  In Europe, the European Central Bank (ECb) is also expected to announce a 25bp hike when it meets today. The strong decline in bank lending – as a result of bank stress, and signs of slowing inflation – despite last month's rally in energy prices, hint that a 25bp hike could be more appropriate in Eurozone this week than a 50bp hike.   This being said, ECB Chief Christine Lagarde will certainly not announce the end of the rate hikes in the Eurozone. She will likely stay firm on the ECB's determination to fight inflation, and insist that the economic data will determine the size of the upcoming ECB actions.   Read next: Expect the ECB to keep increasing rates at the short-term, at least until the summer| FXMAG.COM The EURUSD rallied to 1.1090 after the Fed decision, as the US dollar sold off on the idea that the Fed will now take a breather and pause the rate hikes, and perhaps on the idea that the ongoing bank stress will likely make the Fed change its mind regarding a rate cut later this year.   While I still don't believe that a Fed rate cut will be on the menu for this year, the back-to-back US regional bank failures make me wonder if I am not too stubborn.   Anyway, the divergence between a softer Fed, and a fairly decided ECB to fight inflation, should continue pushing the EURUSD higher. The next target for the euro bulls stands at 1.1254, the major 61.8% retracement on 2021-2022 selloff.  Across the Channel, Cable rallied past 1.2590 as Credit Suisse increased its estimate for the peak Bank of England interest rate from 4.50% to 4.75% saying that recent positive surprises to growth, high inflation and labour market do back a higher end rate. The BoE will announce its own decision next Thursday.   In precious metals, gold spiked to $2080 on the back of a slide in US yields, the softer dollar after the Fed announcement and further bank stress. At the current levels, the upside potential depends mostly on what will happen on the US yields front. There is a strong negative correlation between the US yields and gold's valuation. It's normal. Lower yields decrease the opportunity cost of holding the non-interest-bearing gold and increases appetite for gold investors. And we see that this correlation is even stronger at the time of rising bank stress. Therefore, a potential escalation in bank stress could support gold, but gold needs persistent downside pressure in the US yields to reach and to breach the $2100 resistance.
Nasdaq 100 posted a new one year high. S&P 500 ended the day unchanged

S&P 500 earnings are forecast to decrease by 6% in Q1 compared to 1Q22

Ipek Ozkardeskaya Ipek Ozkardeskaya 17.04.2023 11:20
Despite the softer-than-expected inflation data released earlier last week, US inflation expectations shocked investors at last Friday's release; the 1-year expectation jumped from 3.6% to 4.6% due to the surprise surge in energy prices. The expectation was a further easing to 3.5%.  And energy bulls remain in charge of the market, as besides the tighter OPEC supply, the US Energy Secretary Jenifer Granholm said that the US could begin buying oil to refill the strategic reserves and the EIA warned that the global oil demand will rise by 2mbpd to almost 102mbpd. Both helped keeping the price of American crude at around its 200-DMA, a touch below the $83pb level.  Therefore, despite the easing inflation pressures on the CPI figures, the positive pressure building on energy prices and the surging inflation expectations boost the Federal Reserve (Fed) hawks. Combined to waning bank stress, the US 2-year yield – which is a good proxy of what investors think the Fed will do - rose last week, although we are still far below the 5% level before the Silicon Valley Bank (SVB) collapsed. The expectation of a 25bp hike at the next FOMC meeting is given a good 83.5% chance.   In the FX, the US dollar index tested the lowest ytd levels, and formed a triple bottom near the 100.75/100.80 range.  The major peers continue benefiting from a softer dollar to consolidate gains. The EURUSD tested waters above 1.10 last week, and even though the pair is below the 1.10 mark this Monday morning, the recovery could continue toward the 1.1225 mark, the major 61.8% retracement on 2021 to 2022 selloff, as the European Central Bank (ECB) chief Christine Lagarde reminded traders that the bank is ready 'to act in light of elevated inflation'.   In precious metals, gold trades a few dollars below its all-time-high levels. Resistance is seen into the $2050 level, but a further dollar weakness could push the price of an ounce to a fresh all-time high in the coming weeks.  In equities, the S&P500 was boosted by stronger-than-expected earnings from big US banks. JP Morgan, Citigroup and Wells Fargo took advantage of rising interest rates for two reasons.   Higher interest rates allowed the big banks to make more money out of lending, which resulted in significant gains in net interest income.   Deposit outflows from the small US banks following the SVB collapse, were directed toward the big banks. JP Morgan's deposits, for example, rose 2% last quarter.     JPM stock rallied more than 7.5% on Friday after the results, Citi rose by almost 5%. Bank of America, Goldman Sachs and Morgan Stanley are due to report their latest quarterly results this week. And investors will be watching how their deposits were impacted by the latest bank stress and how much they benefited from the rising interest rates.   Read next: Raw sugar traded in NY and White sugar in London both trade near a decade high on persistent worries about tight global supplies | FXMAG.COM Though, as their peers that reported results last Friday, the remainder of the big US banks could also warn of deteriorating economic conditions, and higher provisions for potential loan losses.  Earnings pessimism is good for stock prices.  Earnings expectations for this quarter are not brilliant. The S&P500 earnings are expected to fall around 6% in Q1 this year compared to the Q1 of 2022. And if that's the case, that will be the first time that y-o-y earnings fall since Covid shock.   That's bad news. But the good news is, the expectations are driven by conversations with corporate executives which love sounding pessimistic, so that when the results come in better-than-expected, the market reaction could be positive despite soft results.  Besides the big bank earnings, Netflix, Tesla, TSM, Johnson and Johnson and P&G will be among companies that will walk into the earnings confessional this week.
Federal Reserve splits highlighted by May FOMC minutes

What could soft US jobs data do to the short-term yields and the US dollar?

Ipek Ozkardeskaya Ipek Ozkardeskaya 06.04.2023 12:16
Yesterday was a typical risk-off day in the financial markets. The US treasuries rallied, the yields fell, and the stocks fell as well, as the latest set of economic data from the US showed further weakness.   The latest US ISM data revealed that the slowdown in US services was slower than expected – although services still grew in March, growth in employment and new orders slowed sharper than expected. The trade deficit grew, and the ADP report showed that the US economy added around 145K new private jobs last month, versus around 200K penciled in by analysts.   The soft data spurred the expectation that the Federal Reserve (Fed) could soon be done with the interest rate hikes. The US 2-year yield dipped below the 3.70% level, and the 10-year yield is now below 3.30%. The dollar index hit a fresh 2-month low before rebounding in Asia, and the probability of a 25bp hike for May FOMC meeting is now given around a 50-50 chance when looking at the activity on Fed funds futures.   And if the probability of no rate hike is not much higher, the Fed's Mester has certainly a finger in it. She said that the Fed should move the rates above 5% this year – come hell or high water – to fight inflation. Her words have also been reinforced by a surprise 50bp hike from the Reserve Bank of New Zealand (RBNZ) earlier this week.  Mind the Vol  Today, we don't have an important data release from the US – as the US decided, for a reason that we don't know – to release the latest jobs data on Good Friday! The expectation is that the US economy may have added around quarter of a million new nonfarm jobs last month, the unemployment rate is seen steady at a multi-decade low of 3.6% and earnings may have grown slightly stronger on a monthly basis, but slower on a yearly basis.   The combination of a sufficiently weak NFP figure, and a sufficiently weak salaries growth should further cement the idea that the Fed should stop hiking further and let the nearly 500bp hike since last year work its way through the economy, along with some tightening in credit conditions due to the bank stress. If the data is stronger-than-expected, which is not the base case scenario, the pricing of a 25bp hike should slightly improve, but investors won't run to conclusions before next week's inflation release.  PS: The fact that the US jobs data – which is the most watched data point in the entire world - is scheduled on Good Friday is disquieting. With many traders from developed economies out of office, many stock markets will be closed. And for those markets that will still be up and running, the trading volumes will be thin, therefore the price action posterior to the data will likely be exacerbated by the lack of volumes.   And the higher the gap between the expectation and the data, the wilder the price action could be.   What to expect?  Soft jobs data from the US will likely send the short-term yields to levels that were tested when the Silicon Valley Bank (SVB) collapsed last month, and the dollar index to a fresh year-to-date low.  Unfortunately for the stock markets, the softer yields will likely not be a catalyzer of a further rally, as the recession fears should weigh on earnings expectations and the latter should weigh on the valuations and outweigh the positive impact of softer yields.   For the S&P500, a downside correction below the 4000 handle, and into the 200-DMA is reasonable.  Unless we see a significant improvement in US inflation, stock traders don't have a strong foundation to build a sustainable rally on. The economic data is weak, and we don't know how fast inflation will slow. A consensus of analysts' expectations on Bloomberg suggests that inflation remained steady in March at around 6% for the headline figure and around 5.5% for the core figure, with a slight improvement on a monthly basis for both figures.   Read next: Rising food price inflation to play in favour of further rate hikes from the European Central Bank?| FXMAG.COM But we know that the downward path in inflation is at risk, now that OPEC is actively fighting the softening oil prices, which will, in the coming months, have a boosting effect on inflation figures.  The barrel of crude oil jumped nearly 30% since the second half of March – as energy traders brushed off the banking stress, and OPEC cut production by more than a million barrels per day.  Good news is that the oil rally must be coming to exhaustion at around the $80/82 range, as the weak economic data and the rising recession worries will likely act as a solid resistance to the post-OPEC rally. Released yesterday, the 3.7-mio-barrel decline in US crude inventories could hardly find buyers above the $80pb level. So, the chances are that the barrel could be returning toward the 50-100-DMA levels, around $75/76 in the short run.   Think long-dated, inflation protected  What's happening right now - increased appetite for sovereign bonds and decreased appetite for equities due to the rising recession positioning - is exactly what we thought would happen this year.   In this context, one of the most interesting plays could be long positioning in long-dated and inflation protected US papers; they will likely outperform your regular long-dated papers, given that we don't know when and by how much inflation will ease, but we guess that at the current state of things, most of the treasury selloff is likely done.  
The Commodities Feed: US announces SPR purchase

OPEC+ decision moved the market. Increased oil prices prevent inflation worries from going away

Ipek Ozkardeskaya Ipek Ozkardeskaya 03.04.2023 13:15
Surprise, surprise! OPEC cut its production by 1 mbpd yesterday.   The news fell like a bomb on Sunday. The barrel of American crude rallied past $81pb, jumped above the 50 and 100-DMA levels – which would otherwise acted as a decent resistance, and will likely be looking to challenge the 200-DMA offers, a touch below the $84pb.   Why did OPEC+ make such move? Officially, the cartel wants price stability in oil markets. But in reality, they simply want higher prices. As the Nigerian Minister of State for Petroleum Resources said: the group 'wants prices at around $90pb'.   Fair enough. From July, combined with Russia's own output cut as a result of a response to Western sanctions, the amount of oil barrels available for the global markets will be around 1.6 mio less.   That's enough to revive geopolitical tensions with the US – which already called the decision ill-advised, and more than enough to spur the inflation worries across the world.  What's the upside potential?  Is it possible that OPEC+ pushes the price of a barrel to $90 and keep it stable there?   What about a rise to $100pb?   Well, it's possible, but it will be hard. If the rising oil prices hit the global demand prospects at quite an uneasy time for the world economy (due to the bank stress) and further spurs recession worries, there is a chance that the rally in oil prices fades quickly.   The oil bulls' determination will depend on how much the OPEC+ is willing to push prices higher by cutting output. How much OPEC+ is willing to push prices higher will depend on whether the world economy could absorb higher energy prices.   The latest Caixin PMI data released in China this Monday revealed that manufacturing in China unexpectedly fell in March, to the 50 level, which is the limit between expansion and contraction.   If China can't boost global growth expectations, it will be hard to imagine a strong rally in oil prices to $90/100 range.   At this point, the 200-DMA will likely act as a solid resistance to the post-OPEC rally and oil prices could stabilize within the $75/80 range.  Shaky start to the week  The OPEC+ decision gave a shake to global financial markets, as – obviously, higher oil prices revived the inflation worries and the interest rate hike bets.   The US 2 and 10-year yields ticked higher in Asia – whereas the yields had fallen on Friday on the back of softer-than-expected PCE and core PCE figures from the US.   US futures are in the negative with Nasdaq futures leading losses, as a sign that a part of the Friday rally in US equities – which was triggered by softer inflation figures could easily be wiped out today.   But oil stocks will likely hail the decision.   In the FX  Revived hawkish Federal Reserve (Fed) expectations will likely reverse the selloff in the US dollar, and bring other majors under pressure.   But the Canadian dollar is in a good position to outperform the complex of G7. The USDCAD was already under the pressure of a softer US dollar over the past two weeks. Now, the oil bulls could take over, and push the pair below the 1.35 mark. The move could easily extend toward the 200-DMA, around the 1.3380 level.  Elsewhere, however, the broadly stronger US dollar won't be a gift for the others. The EURUSD already slipped below the 1.08 level in Asia. Cable is below 1.23 and gold tests $1950 per ounce to the downside. Read next: This Friday the US Non-farm payrolls and unemployment rate go out - what a strong report will do to expectations about rates?| FXMAG.COM
Unraveling the Path Ahead: Gold and Silver Prices Amidst Fed Expectations

The US GDP release points to a 2.6% economy growth in Q4. PCE data to be released later today

Ipek Ozkardeskaya Ipek Ozkardeskaya 31.03.2023 11:33
First CPI figures from Spain and Germany confirmed that headline inflation in Europe eased by a big chunk in March, thanks to the base effect - as we now compare war months to war months.   Released yesterday, the German inflation fell from 9.3% to 7.8%, and inflation in Spain halved, from 6% to 3.1%.   Chic, but not enough.  When we filter out the energy and food prices – which exploded with the war – the inflation picture is not as optimistic. In fact, core inflation in Spain barely fell this month, from 7.6% to 7.5%.  And core inflation in the Eurozone is expected to rise to a fresh record high.   If the upside pressure in core inflation persists, no matter how fast we see the headline inflation fade, the European Central Bank (ECB) will stick to its guns to abate inflation and the euro will continue its journey higher.   The EURUSD will likely win over the 1.10 offers in the next few sessions, partly because the ECB hawks remain in charge of the market with the solid inflation, but also partly because the US dollar remains under a decent selling pressure.   The US dollar index is sitting at the low levels of the Silicon Valley Bank (SVB) collapse, and despite hawkish comments from Federal Reserve (Fed) officials – hinting at further rate hikes to tame inflation – the banking stress and soft economic data prevent the hawkish Fed pricing from taking effect.  Released yesterday, the US GDP data showed that the US economy grew 2.6% in Q4, slightly less than the 2.7% penciled in by analysts. Yet, the GDI – the gross domestic income – fell 1.1% during the same quarter, down from 2.8% printed in Q3. That was the largest decline since the pandemic.   Read next: Stock market: GER40 may finish the quarter 10% above-the-line| FXMAG.COM Moreover, the US corporate profits fell 2% in Q4 – the most in the past two years – and the profit margins fell from around 15% to 14%.   As a result of soft economic data, the US 2-year yield stagnates a touch above the 4% mark – rejecting the further rate hike comments.   Soft yields continue giving support to stock indices despite warnings from the economic data front. The S&P500 will be closing the month with gains and Nasdaq 100 will step into the new quarter having stepped into the bull market.   Quarter in a nutshell  We had a quarter full of surprise and unexpected events.   We expected recession to show up, equities to fall and sovereign bonds to rally.   Instead, equities rallied, sovereign bonds fell until the SVB collapse and recession was ... clearly not on the menu of the Q1.   Energy and commodities didn't get the boost we expected from the Chinese reopening, and more importantly, money flew into money market funds with investors seeking higher returns with low-risk assets.   The technology stocks did the heavy lifting this quarter, as the Big Tech names like Apple, Microsoft and Google gained big. The FAANG stocks rallied almost 30% since the start of the year. That rally partly hid the bank selloff and saved the quarter for the S&P500. The S&P500 would be in the negative year-to-date, if Big Tech was not part of the game.   That, to me, means that the actual stock rally is certainly too sensitive to yields. If the yields push higher, due to an undesirably high inflation for example, we could see the recent equity gains crumble.  And the higher yields, which also boosts appetite for cash could be the next headache for banks, and for equities.  One last thing before we go...  Today, the US will release the February PCE data – the Fed's favourite gauge of inflation. Core inflation may have eased on a monthly basis but is expected to remain steady on a yearly basis around the 4.7% mark. A read in line with expectations, or ideally lower than expected could keep the Fed hawks at bay, and let the dollar further relax.  In the dollar-yen, we see the quarter end flows feed into a softer yen and a stronger dollar-yen. The pair is testing an important resistance zone, around 133, including the 50-DMA and the minor 23.6% Fibonacci retracement on October to January retreat.  With the softening Fed expectations, and increasingly pressure on Bank of Japan (BoJ) – to end its no-longer-adopted easy monetary policy under the new Governor Ueda, there is certainly not much positive potential in the dollar yen. The price rallies could be interesting top selling opportunities for a fall toward the 125/127 range.
Hawkish comments and a decline in continuing unemployment claims below 1.8 mln boosted chances of a June rate hike rose rose to 37%

Today, the US GDP goes public. Eurozone inflation expected to reach 7.1%

Ipek Ozkardeskaya Ipek Ozkardeskaya 30.03.2023 09:03
Treasuries were flat to cautiously sold on the short-end and capital flew into riskier assets as bank stress further waned on Wednesday.   The US 2-year yield consolidated above the 4% mark, gold retreated to $1955 per ounce this morning, whereas the S&P500 rallied 1.42%, pulled out the 50-DMA offers and closed above the 4000 mark. Nasdaq 100 rallied nearly 2% and entered bull market.  If you look at the equity markets today, you could hardly guess that there is still a bank stress going on underneath, which threatens credit availability and calls for a potential recession.   The falling yields, and more importantly the waning volatility on bonds help keeping the bulls in charge.   But it's important to remember that sentiment remains fragile after such a shaky month for banks; commercial bank deposits are trending lower, as higher-yielding savings alternatives like treasury bills and money market funds amass decent inflows. That's not only messing with the broad-based market pricing, but also blurs the central bank expectations.  And more importantly, if attention could finally shift to economic data, and economic data is not ideal, we could see the winds change rapidly direction in sovereign bonds pricing.   And when I talk about unideal economic data, I really think of a sticky inflation – which would require further rate hikes from the Federal Reserve (Fed), and other central banks.   US GDP and EZ CPI in focus  Due today, the US will reveal its latest GDP update. The expectation is that the US economy grew 2.7% in Q4 with a stable GDP price index at around 3.9%.   While higher-than-expected inflation indicator is bad, resilient growth could see a positive market reaction on thinking that... we are almost done with Fed rate hikes, and the economy is at a significantly better place compared to where we thought it would be by now.  If that's the case, the sovereign yields could continue to trend higher, without necessarily weighing on equity appetite.   A soft data, on the other hand, could further push the Fed hawks away, and boost equity appetite on softening Fed expectations.  But building long positions expecting recession is not the best strategy in the medium run.  In the Eurozone, March CPI data that will be coming in from this morning till Friday. And what makes the March numbers so special is that, from March, consumer prices of today will be compared only to the war months.   The latter is expected to have a significant cooling effect on the inflation data.   Read next: European indices - FTSE 100, DAX and CAC40 expected to open higher| FXMAG.COM The EZ inflation is expected to ease from 8.5% to 7.1% in March. BUT core inflation, which filters out energy and food prices, is expected to trend higher. The latter would keep the European Central Bank (ECB) hawks ready for a further rise toward 1.10 against the greenback.   In energy, tensions in Kurdish region of Iraq which leads to a 500'000 barrel decline in supply and the surprise 7.5-mio barrel decline in US crude inventories last week helped pushing the price of American crude to $74 per ounce. We are now back to the levels before the Silicon Valley Bank (SVB) collapse.  Yet, because the bank stress is not over just yet, and the impact on the real economy is yet to be seen, we could encounter a decent resistance into the $75/77 range, which shelter the 50 and 100-DMA.
Asia Morning Bites - 04.05.2023

Australian inflation dropped to 6.8% fuelling dovish RBA expectations

Ipek Ozkardeskaya Ipek Ozkardeskaya 29.03.2023 13:06
Investor sentiment improves as price action in bank stocks point at waning stress.  Treasuries give back gains on the back of weaker risk aversion. The German 2-year yield is back to around 2.60% - after falling to around 2% during the worse of the latest banking stress, while the US 2-year yield settles above the 4% mark.   The S&P500 and Nasdaq come under the pressure of rising yields, which means – if banking stress wanes, the US will go back to fighting inflation, and that could mean another 25bp hike from the Federal Reserve (Fed) in May.   For now, activity on Fed funds futures still point at 'no hike' as base-case scenario, with around 60% chance for status quo. But we know that, the pricing could change rapidly in case of a strong US GDP update on Thursday, and a disappointing PCE read on Friday.   End of the beans?  The S&P500 – which benefited from falling yields due to the Silicon Valley Bank (SVB) collapse - is now sitting above the 200-DMA. But a move above the 4000-4200 range will likely be challenging unless the next earnings season comes with a positive surprise. Therefore, we could see gains in the S&P500 rapidly fade if the US yields trend higher with the waning bank stress.   But maybe not today!   Investor mood in Asia was not bad this Wednesday. Alibaba – which jumped more than 14% in New York yesterday, boosted sentiment in Hong Kong. Investors loved the idea that the $220 billion worth Alibaba would be split into 6 little AliBabas which could then be individual units with capacity to raise funds and explore IPOs.   In FX  It could be time for the US dollar to halt selloff and consider a potential rebound, if the US yields recover a part of losses related to bank stress.   The latter could slow the EURUSD's positive momentum, but the euro is still expected to benefit from the European Central Bank's (ECB) strong determination to abate inflation despite the bank worries.  From tomorrow, the most recent eurozone inflation figures for March will start coming in. On Friday, the Eurozone's March preliminary CPI will tell whether the base-effect magic will finally operate. The Eurozone inflation is expected to fall from 8.5% to 7.1% from last March - the first full war month of last year. And soft inflation, if soft enough, could soften the ECB expectations and get some bears to sell the euro. But the medium-term outlook for the EURUSD remains positive.  Read next: Next announces final dividend of 140p. Full-year profit before tax guidance increased by £20m| FXMAG.COM Elsewhere, inflation in Australia fell more than expected in February, from 7.4% to 6.8%, versus 7.1% expected by analysts. The AUDUSD fell on the back of a broadly stronger US dollar and a softer-than-expected CPI read that fueled dovish Reserve Bank of Australia (RBA) expectations.   In the UK, however, shop prices rose 8.9% this month, a record high going back to 2005 when the data was first collected, and grocery inflation hit a fresh high of 17.5%. Rising UK inflation fuels the Bank of England (BoE) hawks. Sterling bulls have their eyes set on the $1.25 target. But a potential recovery in the US dollar posterior to the bank stress could build a solid wall of resistance at this level. 
US core inflation hits 5.5% and it's the second lowest reading since November 2021

S&P 500 ended the day 0.17% above-the-line. Nasdaq lost more than 0.5%

Ipek Ozkardeskaya Ipek Ozkardeskaya 28.03.2023 09:56
Recovery in bank stocks improved market sentiment on Monday.  In Germany, Deutsche Bank shares gained more than 6%.   In the US, First Citizens BancShares jumped more than 50% after agreement to absorb the remains of the Silicon Valley Bank (SVB). Meanwhile, the First Republic Bank recovered nearly 12% yesterday.   Calm, and rally in bank stocks yesterday stabilized the market mood. Gold tipped a toe below $1950 per ounce, while the US 2-year yield flirted with the 4% mark – on bet that if the bank crisis is over, we could go back to our lives and worrying about inflation, again.   The S&P500 closed 0.17% up, while the rate-sensitive Nasdaq fell 0.74%.   Of course, if the banking stress further eases, we should see sovereign yields recover a part of the recent retreat.   Yet, the pricing of recession is now in play, and should keep the upside limited at below the pre-SVB levels, when the Federal Reserve (Fed) was expected to hike the rates all the way up to around 5.5%.   This is no longer the expectation.  That's why the equity markets, which have been relatively resilient to the bank stress – partly due to higher liquidity injected in the market to deal with it, remain vulnerable as earnings estimates will more likely than not revised lower in the foreseeable future.  Bitcoin narrative shifts from safe-haven on bank stress to shaky on Binance stress  Bitcoin fell sharply to below $27K per coin on news that Binance and its CEO were sued by CFTC for allegedly failing to properly register. The firm is said to have allowed its clients to trade derivates since at least 2021, and these derivatives are not subject to American jurisdiction, and that Binance should've registered with the agency years ago, and that they continue to violate CFTC's rules.   The news doesn't call for the end of Binance, the world's biggest crypto exchange, but it could well cool appetite for safe haven flows to Bitcoin – which came along with the bank crisis, reminding crypto investors that cryptocurrency exchanges are not necessarily safer than a bank.   FX and energy  The US dollar index remains under the pressure of softer US yields as mounting recession worries keep the hawkish Fed expectations at bay.   The EURUSD has so far managed to rebound from a critical 50-DMA, near 1.0725, even though Mario Centeno, a member of the European Central Bank's (ECB) Governing Council said that the bank must consider recent financial-market stress when taking decisions on interest rates - an idea that Lagarde simply rejected at her latest press conference saying that the ECB has other tools in hand to deal with a potential stress concerning the banks and liquidity. The door for a further rise to $1.10 remains open for the euro bulls.  In energy, improved sentiment in banks and a legal dispute that halted around 400,000 barrels a day of oil exports from the Ceyhan port in Turkey pushed the barrel of US crude past the $70pb yesterday. The price of a barrel flirted with the $73 level.   Yet, the mounting recession odds and the resilient Russian supply, which partly absorbs the rising oil demand from China, are expected to keep the topside limited into the $75/77 area, where stand the 50 and the 100-DMA respectively.
Lagarde's Dilemma: Balancing Eurozone's Slowdown and Inflation Pressure

US stock market: S&P 500 index ended the day 0.56% above-the-line

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.03.2023 15:29
Sentiment is mixed, as the Deutsche Bank selloff revived the banking stress on Friday.  The DBK shares fell 8% and its CDS spiked after the bank announced to redeem a tier 2 subordinated bond earlier.  The announcement was supposed to restore confidence regarding the bank's balance sheet. But it revived a confidence crisis instead.  Despite the bank stress on both sides of the Atlantic, both, the Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England (BoE) and the Swiss National Bank (SNB) haven't refrained from hiking the interest rates over the past two weeks, weighing – not necessarily on the health of the banks' balance sheets, but on worries regarding the health of the banks' balance sheets.   Today, it appears that the banking crisis is more of a confidence crisis than a fact-based panic – as it was the case in 2007 when banks really had a bunch of toxic assets in their balance sheets.   But confidence is the bread and butter of the banking sector. And watching the 166-year-old Credit Suisse go under did no good to anyone last Monday.   And even though Mr. Powell, Madame Lagarde, Mr. Bailey and Mr. Jordan kept their policy stance unchanged despite the mounting stress in banks, if other banks, the size of Deutsche Bank, get sucked in this confidence crisis, we could well see the interest rate expectations point more seriously at a pivot in major central banks' tightening plans.   In numbers  The German 2-year yield fell on Friday, on DBK stress, and the US 2-year yield tanked to 3.55%, the lowest since last September.   Activity on Fed funds futures gives more than 85% chance for a no rate hike in May.  Besides the Fed, the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) are also seen as central banks that could rapidly go back to cutting the interest rates.   And the ECB could well be next on that list.  The EURUSD got hit with the freshly emerging DBK stress on Friday, the pair fell to 1.0713 on Friday, after it was preparing to flirt with the 1.10 offers last week, on the back of persistently hawkish ECB and increasingly dovish Fed expectations.   But if stress over DBK gets worse, we could well see the ECB rate hike expectations hammered. And that could put the single currency under a renewed downside pressure.   Of course, the dovish swing in major central bank expectations, except for the Bank of Japan (BoJ) which cannot go more dovish than it already is, are supportive for the Japanese yen - not because the yen is a safe haven currency but because the dovish other central bank expectations simply reduce the gap between the BoJ and the others. The USDJPY is testing the 130 support to the downside, and could clear it sustainably depending on how much more stress is waiting the market in the next few days, and weeks.  If you are looking for the best performing assets of the bank crisis, I'd say, consider gold, which gained almost $200 per ounce since the SVB collapsed, and Bitcoin, which gained around $10K during the same period.   And that equity appetite?!  For equities, it looks like the falling yields overweigh the recession fears right now, even though the yields are falling due to recession worries which are triggered by the banking crisis which should restrict credit.  It is therefore a bit surprising to see the stock indices navigate this well the bank turmoil.   Yes, the Stoxx 600 lost 1.37% on Friday thanks to DBK, and yes the S&P500 looked ugly on Friday's open, but the index closed the session 0.56% higher, above the 200-DMA.  And US and European futures point at a positive start to the week.  Besides the banks?   Besides the banks, we will still keep an eye on a couple of important data points this week, including the latest GDP and PCE update from the US, fresh inflation estimate for the Eurozone, Australia and Japan.   But how much they will matter depends on what happens on the... banks front.
Unraveling the Retreat: Exploring the Future of Gold Prices Amidst Dollar Weakness

FAANG stocks noticeably up. According to Ipek Ozkardeskaya, banking stress can be a potential threat to gold price

Ipek Ozkardeskaya Ipek Ozkardeskaya 24.03.2023 14:07
The US stocks first fell then gained yesterday. The price action was, again, mostly driven by the bank stocks, both because of, and thanks to Janet Yellen's comments to US lawmakers.   Remember, on Wednesday, US Treasury Secretary Janet Yellen had said that they don't consider providing "blanket insurance" for banking deposits after the collapse of Silicon Valley Bank (SVB) – causing renewed pressure on banks, especially on the US small regional banks.   Then yesterday, Janet Yellen said that the US regulators are ready to take additional steps to protect deposits if needed.   Her comments helped stocks recover early-session losses.  Likes of JP Morgan, Goldman Sachs and Citi rebounded after the comment. But trading in Asia hints that the stress over banks is not over just yet. HSBC lost more than 3% in Hong Kong, as news that UBS and Credit Suisse were among banks under the scrutiny of the US DoJ for having helped Russian oligarchs to evade sanctions.   If we summarize...  The new market game is being played between two camps: 'the financial stress and how the authorities are dealing or promising to deal with potential renewed turmoil' camp, and 'the recession worries' camp.  While the recession worries are not entirely bad for the stock valuations – at least in the immediate term, as they pull the yields lower, the financial stress is much less welcome, and there is a much stronger consensus among investors that... financial stress is bad.   The US 2-year yield is now headed to the levels, around 3.80%, that were tested when the SVB collapsed.   Whereas Jerome Powell has been quite clear at his post-FOMC speech Wednesday that the Federal Reserve (Fed) will continue its fight against inflation, that there is certainly one more rate hike on the horizon before the Fed pauses and keeps the rates steady.   But in vain, swap traders give no more than a 50-50 chance for another rate hike, activity on Fed funds futures hints that there will probably be no rate hike at the FOMC's next meeting, with around 67% chance, and the more worryingly, the bets for a 75 to 100bp cut before the year end is being cemented.   Read next: UK economy: inflation exceeded expectations, Nasdaq 100 finished higher yesterday| FXMAG.COM Why? Because last year, on March 21st 2022, Jerome Powell had said that 'there's good research by staff in the Fed system that really says to look at the short – the first 18 months – of the yield curve. That's really what has 100% of the explanatory power of the yield curve. It makes sense. Because if it's inverted, that means the Fed's going to cut, which means the economy is weak'.   And bingo, the expected 3m T-bill rate in 18 months and the 3m T-bill today is inverted. The only times this happened in the past was the 2000 tech bubble, the 2007/2008 subprime crisis and the Covid pandemic. So either you believe what Jerome Powell says today, or you believe what he said a year ago. But the markets put more weight to what he said a year ago, and bet on a coming recession.  On the data front, the US durable goods orders and the flash PMI data will be closely monitored for further signs of potential weakness after the weekly unemployment claims came in below expectations yet again, and continue to hint that the US jobs market is doing fine despite tens of thousands job cuts, especially in the tech companies.  The FAANG stocks are up by more than 13% since 10 days For now, though, the falling yields, and the banking turmoil, is a boon for the tech stocks. The FAANG stocks are up by more than 13% since 10 days, and Bitcoin gained up to 50%.  Crude oil shortly spiked above the $70 mark, but saw decent resistance at this level given that the financial stress seriously deteriorated global growth prospects, and demand outlook. Plus the weekly stock inventories data showed that the US crude inventories increased by 1.1 mio barrels last week, while analysts were expecting a 1.7 mio barrel decrease. That's also not excellent news for the bulls, and also explains why the bears are convincingly selling above the $70 mark.  In the FX, the lower yields keep a decent pressure on the US dollar's shoulders, giving other pairs field to extend gains. The EURUSD extended gains to 1.0930 yesterday, while Cable rose to 1.2343 after the Bank of England (BoE) raised the interest rates by 25bp as expected, adding that there could be further hikes if the bank sees signs of persistent inflation. For now, they probably also see that inflation in the UK is not headed toward the right direction.   In precious metals, gold continues flirting with the $2000 offers, though I still believe that an eventually waning bank stress is a threat of a decent downside correction, which could pull the price of an ounce all the way down to $1900.
Fed goes for a 25bp hike, S&P 500 ended the day 1.65% lower, Bank of England decides today

Fed goes for a 25bp hike, S&P 500 ended the day 1.65% lower, Bank of England decides today

Ipek Ozkardeskaya Ipek Ozkardeskaya 23.03.2023 10:31
Yesterday's Federal Reserve (Fed) decision was relatively hawkish.  The Fed raised the rates by 25bp, as broadly priced in, but Fed Chair Jerome Powell signaled that there would be another 25bp hike on the wire before this tightening cycle ends. That was hawkish.   The Fed confirmed that the Quantitative Tightening (QT) is up and running at the speed of $95bn per month.   The latest dot plot was unchanged with most members expecting the Fed rate to reach 5.10%. That would've been interpreted as being dovish if the meeting took place two weeks ago, before the Silicon Valley Bank (SVB) debacle – when Powell was still hinting that the Fed would speed up rate hikes to abate inflation.   Now, it's not even sure that there would be another rate hike.   The Fed's policy no longer depends on inflation only, it also depends on how the latest bank stress will impact credit availability. As Powell says, a decent 'credit tightening from baking troubles' in a way 'substitutes for rate hikes'.   And uncertainty regarding a potential credit tightening brings confusion on the table regarding the Fed policy.   S&P 500 below-the-line For equity traders, the combination of a 25bp hike, the hint of another 25bp, and the risk of credit tightening was too much to cheer. The S&P500 lost 1.65%.   But, on the bonds front, the perception of the latest Fed decision was different. The US 2-year yield fell despite Powell insisting that the tightening may not be over due to 'inflation still running too hot'.   Moreover, the markets went on pricing a 100bp cut for the year end. The gap between the dot plot and market pricing widened, yet again, raising, one more time, the credibility issues that Powell is encountering right now.   Read next: Telegram adds Tether transfers support. According to Raoul Pal, it's the right time for Bitcoin to take its place alongside gold | FXMAG.COM And activity on Fed funds futures tells that the chance of another 25bp hike is no more than 35% in the wake of Powell's comments.   In other words, bond traders don't believe Powell. And Powell's job has just gotten more complicated with financial stress joining the inflation headache.   The US dollar index fell after the FOMC decision yesterday, along with the yields.  US futures are in the positive at the time of writing. It is well possible that the post-FOMC equity selloff quickly reverses, at falling yields are supportive of equity valuations – if financial stress is contained and economic data is not too bad.  ECB, BoE expectations remain hawkish  The dollar's sharp fall led to a strong rally in the EURUSD yesterday. The pair traded past the 1.0910 level as a couple of hours before the Fed decision and Powell's speech, the European Central Bank (ECB) President Christine Lagarde repeated that the ECB will keep a 'robust' approach to respond to inflation risks, and that the 2% inflation target is non-negotiable.   Oh, how the tables turned!   This year, we are faced with a decidedly hawkish ECB and a weakened Fed. And the sufficiently hawkish ECB and softening Fed expectations hint that the EURUSD has potential to extend gains above the 1.10 mark in the coming months. The 1.1275 is now a reasonable target for the bulls.   Across the Channel, Cable also rallied yesterday. It rallied because the latest inflation report from the UK was a shocker. The headline inflation unexpectedly ticked above the 10% mark, as food prices rose 18% last month. But core inflation, which doesn't take into account food and energy prices, unexpectedly rose as well, and sat above the 6% level, again.   The latest set of CPI figures threw Mr. Bailey's prediction of a 'sharp fall' in inflation under the bus.  And because inflation won't ease by itself, it is almost certain that the Bank of England (BoE) will hike its own policy rate by 25bp when it meets today.   Cable is preparing to test the January highs as the softening Fed expectations due to bank stress and hawkish BoE expectations due to high inflation hint that the pair could continue its advance to 1.25 in the continuation of the actual positive trend.
US core inflation hits 5.5% and it's the second lowest reading since November 2021

Softer Federal Reserve could play in favour of S&P 500 index

Ipek Ozkardeskaya Ipek Ozkardeskaya 22.03.2023 09:11
It looks like the Federal Reserve (Fed) will announce its latest monetary policy decision to a public with relatively calmer nerves compared to a few days ago.   The VIX index eased sharply from last week's levels on bank relief, gold tanked to $1935 per ounce and indices on both sides of the Atlantic Ocean were comfortably higher on Tuesday. The Stoxx 600 gained 1.33%, as the S&P500 closed the session above the 4000 mark.  The pressure on US treasuries eased, as well, and the US 2-year yield is now around the levels it was before Fed President Jerome Powell's speech to the Senate which spurred the expectation of a 50bp hike for week's meeting.  And even if Powell's testimony looks like it was ages ago, the bank stress that hit the fan during the pre-Fed silent period prevented the Fed members to give their opinion about an adequate policy response,  As a result, investors have been left to themselves to shape the expectations for today's decision.   And even though activity on Fed funds futures looks like it finally is pointing at a solid-ish consensus that the Fed should hike rates by 25bp today, no one really knows how much importance the Fed will assess to the latest banking stress, which, in reality, resulted in an uptick in Fed's balance sheet due to additional liquidity, but which also tightened the financial conditions sharply.   Read next: Bitcoin amid recent banking sector situation: simply put, it is no longer a question of yield but safety| FXMAG.COM Because banking crisis raised worries that credit flow from the US regional banks into the economy would slow. The premium that lenders ask for lending to high risk borrowers popped, while the flight to safe US treasuries pulled the US sovereign yields lower.   Gap between high yield and sovereign bonds popped above the 5% psychological mark – which traditionally served as a red flag hinting at higher-than-average credit risk in the maret.   And the higher credit risk, and tighter credit availability hint that the US economy could indeed continue to slow, and eventually step into recession – which would, in return, slow demand and pull inflation lower without further intervention from the Fed.  That's why, the chances are that the Fed hikes by a final 25bp to stick to their promise to bring the US interest rates to around 5%. But we could certainly forget about a further advance to 5.5-6%.   For equities, a softer Fed and unexpected liquidity is supportive in the short run. In this respect, we could see the S&P500 rally extend.   Yet, recession fears, and recession itself could catch up investors, weigh on revenue and earnings expectations and limit the upside potential.   In numbers language: it could be interesting to consider selling a potential S&P500 rally into the 4200 peak – if of course we don't have data pointing at flourishing US economy despite all challenges.   In the FX, the US dollar is expected to continue its journey to the south, if, of course, the Fed doesn't come with a hawkish surprise at today's decision.   The US dollar index has been giving back field since last September. We saw a rebound between February and March due to the rising hawkish Fed expectations, but the dollar index never breached a key Fibonacci resistance to challenge the past 6 months negative trend, the major 38.2% Fibonacci retracement on the depreciation that started end of September.   So, if all goes according to the plan – meaning the Fed hikes by 25bp and signals the end of rate hikes – we will likely see the US dollar return below the 100 level.
FX Daily: Resuming the Norm – Dollar Gains Momentum as Quarter-End Flows Fade

JP Morgan, GS and Morgan Stanley ended the day above the line. On Monday, S&P 500 increased by almost 1%, Nasdaq gained 0.34%

Ipek Ozkardeskaya Ipek Ozkardeskaya 21.03.2023 09:55
Bank stocks had a volatile session on Monday. UBS lost up to 16% after the Credit Suisse deal but closed the session more than 1% higher.   In the US, JP Morgan, Goldman Sachs and Morgan Stanley closed the day with 1 to 2% of gains. The regional US banks also had a calm session, except for the First Republic Bank - which plunged 47% after a second credit downgrade in just a week from S&P.   JP Morgan is reportedly in talks with other leading banks to do more, after big US banks put a combined $30 billion in the First Republic Bank as a show of support last week.  In bonds, the announcement of full write-down of Credit Suisse's AT1 bonds got bond investors confused, as equities should be written down before any other paper in the 'bonds' category. Authorities said that equities will be written down first to end confusion. JP Morgan and Morgan Stanley said that they are willing to buy CS's AT1 bonds for 2 cents to sell them back 'somewhere' for 5 cents.  The BoFA's implied bond volatility index MOVE is lower than last week's peak but is still at the highest levels since 2007/2008 subprime crisis.   Equity traders, however, are focused on waning bank stress; the S&P500 closed the day 0.89% up, as Nasdaq 100 gained 0.34%.   Fed meets.  The Federal Reserve (Fed) begins its two-day policy meeting today in the middle of a storm.   If the European Central Bank (ECB) decision serves as a cheat sheet, the Fed could hike by 25bp and say that it has tools to inject liquidity in the system to contain crisis.   Investors are also focused on what the Fed will do with the Quantitative Tightening (QT). I don't think that the Fed will reverse its balance sheet unwinding strategy, or to pause it – because the crisis intervention is a tactical and a short-term move, while the Fed's huge $8.6 trillion balance sheet must be unwound sooner rather than later.  In this context, the Fed's balance sheet ticked higher since the SVB collapse, but the Fed members couldn't comment on the latest events, because the trouble hit the fan while they were in their pre-Fed quiet period.   Read next: Dow Jones and S&P 500 closed near the recent highs. Positive finish of the US markets has helped Asian markets| FXMAG.COM As a result, all the comments that have not been made since the SVB collapse will come out from Fed Chair Jerome Powell's mouth, and the March dot plot tomorrow after the decision.   This morning, activity on Fed funds futures assesses a 75% chance for a 25bp hike. This probability tipped a toe below 50% yesterday. In the FX, the US dollar index slipped below the 50-DMA yesterday on expectation that the Fed will stay cautious at this week's meeting given the turmoil across the financial place.   Gold traded above the $2000 psychological mark on Monday, but the price of an ounce is back to below $1980 this morning, thanks to the calming nerves regarding the price action on the banks front. A further improvement in sentiment could rapidly pull the price of an ounce to $1900 mark.
Lagarde's Dilemma: Balancing Eurozone's Slowdown and Inflation Pressure

Microsoft, Amazon and Google increased by nearly 15% last week

Ipek Ozkardeskaya Ipek Ozkardeskaya 20.03.2023 12:20
UBS bought Credit Suisse (CS) in a government-brokered deal for 0.76 cents of franc per share, or CHF3bn in total.  The Swiss National Bank (SBN) offered UBS $100 billion in liquidity to make sure that the takeover would go smoothly, and Swiss government offered 9 billion francs guarantee on CS losses. The deal triggered a complete write-down of all CS's additional tier 1 bonds.   US dollar weakened and US futures opened in the positive but reversed losses while the Japanese Nikkei fell 1.42%, Hang Seng dropped more than 3%.  The next few hours of trading will give us a better picture on whether the crisis is contained. In theory, there is no reason for the Credit Suisse crisis to extend, as what triggered the last quake for Credit Suisse was a confidence crisis – which doesn't concern UBS - a bank outside of the turmoil, with, in addition, ample liquidity and guarantee from the SNB and the government.   Fed decision time!  So, if all goes well, shaky days across banks will soon be left behind and investors could concentrate on the Federal Reserve (Fed) decision.   One thing is important to note: the Fed's Quantitative Tightening (QT) was clearly out of the window since the Silicon Vally Bank (SVB) debacle. The Fed's balance sheet ticked higher last week, to help easing stress across banks.   But the QT and last week's emergency intervention are conceptionally different.  And more interestingly, while we could think that the reverse-QT, could have some negative implications for inflation – because the Fed is adding liquidity into the system - an index on financial conditions in the US suggests that the financial conditions have tightened sharply since last week, to the tightest levels since last fall and that could be an argument for the Fed to pause its rate hikes. Read next: UBS buys Credit Suisse for $3.2bn. Last week was the worst one for equity markets in 2023| FXMAG.COM   But perhaps not from this week. The expectation for this week's meeting is still a 25bp hike from the Fed. Activity on Fed funds futures gives around 60% chance for a 25bp hike this Wednesday.   The March dot plot and Powell's accompanying statement will be as important as the rate decision. On the data front, US short-term inflation expectations fell in March to the lowest levels since 2021. That's excellent news for the Fed's inflation battle as inflation expectations have a material impact on where inflation, itself, is headed.   A boon for the Big Tech  The banking turmoil has been a boon for the tech stocks last week. The sharp fall in rate hike expectations which resulted in a sharp fall in yields drove more than $500 billion in market value to Microsoft, Apple, Google and Amazon last week.   Microsoft rallied more than 15%, Amazon gained almost 15% as well and flirted with the $100 psychological mark. Same with Google, it also gained around 15% and closed the week above the $100 for the first time since the beginning of February, while Apple added 6%.   And Bitcoin, which has a strong correlation with tech stocks, gained 45% since the March 10 dip – and more importantly, showed that it could act as a hedge to a global bank stress.   It's yet to be seen whether the Big Tech could hold on to their gains if the Fed brings its inflation battle back on the table.  Oversold.  Crude oil kicked off the week under pressure, below the $70pb level as the bank stress weigh on global growth prospects and sent the price of a barrel below this psychological level. The RSI indicator suggests that the American crude stepped into oversold market conditions, meaning that crude oil has been sold too fast in a too short period of time, and a positive correction would be healthy at the current levels.
Rates Spark: Balancing data and risk factors

According to Ipek Ozkardeskaya, European indices reacted positevely to yesterday's ECB decision

Ipek Ozkardeskaya Ipek Ozkardeskaya 17.03.2023 11:39
The European Central Bank (ECB) decision yesterday was important as it offered a first indication of what the banking stress meant for the monetary policy.   And it did not mean much –  a relaxing news for markets.   The ECB chose not to fan the banking worries and went ahead and announced a 50bp hike at yesterday's policy decision pointing at high inflation.   The opening sentence of ECB Chief Christine Lagarde's speech was that the bank predicts 'inflation to remain too high for too long'.   And indeed, the final CPI data due out today is expected to confirm a February inflation at around 8.5% - which is high, but not bad compared to double-digit levels printed a couple of months earlier, but core inflation is now at record, and it needs to be addressed.   Regarding the bank turmoil, Lagarde said that the European banks are strong and resilient, they have ample liquidity, and, in all cases, the ECB has a toolkit – other than the interest rates and broad monetary policy - that could help address liquidity issues if needed.   That was clear, and well played.  What was unclear however was, what will happen next to the ECB policy. Lagarde gave no indication on the future. She said the future decisions will depend on economic data.  The lack of conviction for further 50bp hikes is certainly what held the euro back from recording a better rally after the ECB's 50bp hike yesterday.   The EURUSD gained ground, but the advance was barely noticeable. The next natural target for the bulls is the 50-DMA, which stands around the 1.0730 level, and whether the pair could break it depends on what will happen on the Fed front.   What will the Fed do?  The ECB's clear focus on inflation, and not on bank stress, reinforced the expectation of a 25bp hike from the Federal Reserve (Fed) next week.   The ECB decision came as a hint that the Fed could also play down stress in banking sector, highlight that the liquidity issues could be addressed with available tools and keep focus on economic data.  At the wake of the ECB decision, activity on Fed funds futures gives more than 80% chance for a 25bp hike. This probability was around 65% before the ECB's decision.   What does that mean for the US dollar? It probably means a further wind down of the early-year gains as we are now back to the scenario where the Fed would hike by a final 25bp and pause. That was the expectation as we stepped into this year, before the Fed's peak rate expectations shot up to 5.6%. That bet is nearly dead. It could come back to life, but the impact of Fed tightening on banks could help to restrict borrowing from here and ease inflation, and need for further Fed action.  There's your pivot, ladies and gentlemen.   Licking the wounds  The US bond markets are now licking the past week's wounds. The US 2-year yield is up but remains well below the pre-SVB collapse levels. BoFA's MOVE index, which is the implied treasury volatility, hasn't been this high since the 2008 subprime crisis, which calls for caution.   Caution, but stock markets are on a full-cheer mood. European indices loved the dovish 50bp hike from the ECB yesterday.  Plus, the relief on Credit Suisse in Switzerland and the First Republic Bank boosted sentiment across the Atlantic as well. The Stoxx 600 bounced off the goal post and rebounded after testing  the major 38.2% Fibonacci retracement on October to February rally, the S&P500 rebounded around 1.75% and closed the day above the 200-DMA, whereas Nasdaq 100 spiked nearly 1.70% higher, as Amazon, Alphabet and Microsoft jumped more than 4%, Nvidia gained above 5%, Intel above 6%, and AMD nearly 8% after US big banks decided to deposit $30 billion with First Republic Bank as a show of support.   Bitcoin – which tends to move closely with the tech stocks, rallied more than 30% since last week and is now above the $25K psychological level, looking for a further advance to the $30K mark.  Will the joy last? Jim Cramer tweeted 'short this Nasdaq and invite me to your funeral'.  The volatility index on stocks is at reasonable levels, but a 4, 5, 6, 8% jump in big stock prices is a sign that volatility is threatening and calls for caution.   Anyway, the last trading day of a chaotic week could be a calm one (tough you never know !) Investors will monitor the US industrial production and the University of Michigan's sentiment index, expect some further, upside correction in yields and pray that nothing major happens before next Wednesday's FOMC decision.
Euro and European bond yields decreased after the ECB decision. The end of tightening may be close

S&P 500 shrank 0.7% yesterday, Nasdaq gained 0.42%. European Central Bank decides on the interest rate today

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.03.2023 10:24
Banks were on the chopping block on Wednesday, after Saudi National Bank's Chairman Mr. Al Khudairy told Bloomberg TV that they wouldn't inject more money to Credit Suisse (CS) as they already hold 9.9% of the bank and going above 10% would mean further regulatory and statutory requirements.   Credit Suisse stock sold off to a fresh record. At its worst, the stock was down by more than 30% and closed the session with a 24% loss.   The selloff in CS shares spread to other bank shares as well, and the bank stocks pulled the market down with them.   The SMI index lost 1.87%, the Stoxx 600 dived 2.92%, the DAX plunged more than 3%, the bank-heavy FTSE 100 shed almost 4%. In the US, the S&P500 was also under a decent selling pressure led by banks, yet the news that the Swiss National Bank (SNB) would provide liquidity to Credit Suisse in case of need, and the confirmation from the Swiss watch-dog FINMA that CS meets the higher capital and liquidity requirements applicable to systemically important banks – that both came after the European market close - helped the US stocks paring some losses.   The S&P500 closed the session only around 0.70% down, while Nasdaq gained 0.42%. If the bank risk is contained, the falling yields look appetizing for stock investors.  The global yields were on a sharp decline again yesterday. The US 2-year yield slumped more than 8.5% to 3.72%, while the German 2-year yield fell to the lowest since the beginning of the year, to around 2.35% as investors cut their European Central Bank (ECB) rate expectations, again.  According to the latest news, Credit Suisse agreed to borrow as much as 50 billion francs from the SNB and offered to repurchase debt to improve market confidence.  What will the ECB do?!  With yesterday's fresh stress on bank stocks, a 50bp hike from the ECB at today's monetary policy meeting is less than certain.   Although the hotter-than-expected inflation data from France would've granted a 50bp hike, and a few more to come, the ECB may opt for a softer rate hike, or no rate hike at today's meeting, to let the dust settle before acting further.   But maybe, the ECB will remain on course and hike by 50bp today.   It's hard to tell. The visibility on monetary policies from the big central banks is heavily lessened by the banking stress and it's difficult to foresee how much weight the policymakers will give to the bank stress versus inflation.   Read next: Meta announced another job cuts. New Zealand releases Q4 GDP tonight, FedEx reports on earnings tomorrow| FXMAG.COM Today, the ECB has the difficult task to be the first major central bank to decide what to do amid the banking crisis. It's decision could change the expectations for other central banks.   For now, the base case scenario for next week's Bank of England (BoE) meeting is no hike.   While activity on Federal Reserve (Fed) funds futures still points at a 25bp hike next week, with around 65% chance, as of this morning.   But swaps now price in a 100bp cut from the Fed by December, and the peak rate is now seen at 4.85%, down from 5.6% last week, after Fed Chair Powell's speech to the US Senate, when Powell didn't know that winds would abruptly change direction a few hours later.  On the data front, happily for the Fed, a soft set of data from the US yesterday showed that the producer price inflation unexpectedly fell in February. Retail sales, which jumped 3.2% last month and fueled inflation fears, fell more than expected in February. And the Empire Manufacturing index plunged to -24, much worse than a decline to -8 expected in March.   FX and energy  The US dollar index rebounded after hitting 50-DMA earlier this week.   The rebound in the US dollar sent the EURUSD shortly below its 100-DMA. The pair is around the 1.06 mark at the time of writing.  Where the euro is headed next will depend on the ECB decision. A 50bp hike from the ECB should help the single currency extend gains against the greenback, while anything less than a 50bp hike today could encourage a further selloff. The major support on the EURUSD daily chart stands at 1.0473, the major 38.2% Fibonacci retracement on September to February rally. A fall below this level will send the euro into the bearish consolidation zone against the greenback.   On the energy front, the bank stress weighed heavily on energy prices as it worsened the prospects of global growth – and that despite the set of good economic data from China.   The barrel of American crude slumped to $65 per barrel yesterday. Saudi Arabia energy minister Prince Abdulaziz bin Salman said that OPEC+ will stick to production cuts agreed upon in October until the end of the year, but the attention is heavily on the demand side right now. Therefore, it is well possible that the $70pb level, which acted as a strong support since the end of last year becomes the new resistance.
According to InstaForex analyst, demand for British pound may not increase soon

On Tuesday S&P 500 increased by 1.65%, Nasdaq gained 2.30%. US inflation in line with expectations

Ipek Ozkardeskaya Ipek Ozkardeskaya 15.03.2023 10:56
Global banks, including the US regional banks, rebounded sharply on Tuesday.   As such, the past days' banking stress has been rapidly contained after the US government put in place the necessary measures to restore confidence.  The return of confidence in the banking sector sent the US bond prices lower, and the yields higher. But the big jump in US yields was the countercoup of a historic slump and didn't prevent the S&P500 from recording a 1.65% advance on Tuesday. Nasdaq 100 rallied 2.30%.  A collision between a Russian jet and a US drone over the Black Sea – denied by Russia, and the US inflation report came to tame a part of the joy over the banking relief.   US futures hint at a flat open.  US inflation cements 25bp hike expectations  The US inflation data came in line with expectations on a yearly basis. The headline inflation fell from 6.4% to 6% as expected, and core inflation eased from 5.6% to 5.5%, as expected.   Yet, the uptick in core inflation on a monthly basis to 0.5% - a five-month high, and the stickiness of services inflation above the 7% mark, revived the Federal Reserve (Fed) hawks on fear that we may no longer see inflation trend lower in the coming months, if the Fed stopped tightening now and here.   Read next: Aluminium smelter shutdowns threaten Europe's green transition| FXMAG.COM Discomfort regarding the US inflation data, combined with the gently waning stress in banks, brought the expectation of a 25bp hike back on the table.   Note that, if we hadn't had the SVB debacle, that expectation would've easily been stuck around 50bp. And this is something that we could see reflected in the Fed's March dot plot.    Today, investors will keep an eye on US PPI data and the Empire Manufacturing index.  ECB will likely stick to 50bp hike  The EURUSD is drilling above its 50-DMA, 1.0730, in the run up to Thursday's European Central Bank (ECB) meeting.   Many wonder whether the ECB will soften its tone in the wake of tensions across bank stocks over the past week.   But the chances are that the ECB will maintain its plan to raise the rates by 50bp at tomorrow's policy meeting, and the divergence between a more dovish Fed due to the US banking stress, and a confidently hawkish ECB could help the euro recover against the greenback, and bring the 1.10 target back in sight.   Budget Day!  In the UK, the Chancellor of Exchequer will make a budget statement to the MPs in the House of Commons today.  At today's statement, there will likely be no tax cuts despite a terrible cost-of-living crisis, however the government will likely keep the £2500 per year limit on energy bills for three more months, instead of letting them run to £3000 from April.   The latter would be good news for inflation as inflation in Britain is worse than in Europe or in the US. Goldman Sachs predicts that if the government kept the limit at £2500, inflation in Britain would fall to 1.8% in the Q4, which is below the Bank of England's (BoE) 2% target.   On the investment side, Jeremy Hunt will likely announce measures to boost investment in the UK, including generous tax incentives to attract businesses back to the UK to make sure that growth in Britain catches up its European peers, now that Sunak's government seemed to have eased a part of the Brexit headache that prevented investors from full heartedly invest in the UK.   What's important for investors today is how the UK will boost growth, how it will finance it, and how the bond markets will react to the budget statement. There will probably not be an unexpected reaction, or a meltdown as was the case in September with Liz Truss' budget disaster. The confidence in Sunak's government is strong and the actual government's sense of budget discipline should ensure a smooth budget day.   On the currency front, Cable jumped above the 50-DMA as a result of a broadly weaker US dollar on the US banking stress, but a correction in the dollar's value will likely keep the topside limited at 1.22 and encourage a correction toward the 100-DMA, which stands a couple of pips below the 1.2050 mark.
ECB enters final stage of tightening cycle

Traders see less than a 50% chance for a 50bp European Central Bank rate hike

Ipek Ozkardeskaya Ipek Ozkardeskaya 14.03.2023 08:44
Monday was yet another ugly day for bank stocks around the world, as the selling pressure continued following the SVB debacle in the US last week.   The money flew into the safe havens.  Treasury yields around the world tumbled sharply. The US 2-year yield tipped a toe below the 4% mark, from above the 5% level last week, after Federal Reserve (Fed) Chair Jerome Powell hinted at potentially faster rate hikes in the US to abate inflation.   That expectation is no longer on the menu du jour.   On the contrary, there is now a massive lack of consensus in the market regarding what the Fed should do, and what the Fed will do. Some think that if today's inflation data is not sufficiently soft, the Fed should continue hiking by 50bp. Some others think that the Fed should simply hike by another 25bp this month and signal a pause starting from the next meeting – which would be the smoothest solution of all for the market. An increasing number of investors and bank analysts including Goldman Sachs believe that the Fed will skip the March rate hike. Others stretch the 'no rate' idea further and think that we will finally get the pause in the US rate hikes that many were hoping for as soon as this month – meaning that the rate hikes will be over for this cycle for the US. And there are some extreme opinions, like Nomura, which think that the Fed could cut by 25bp at next week's meeting to contain the crisis in the banking sector.   Now, in theory, the worst of the crisis should be behind us, as the US government guaranteed all depositors of the banks that collapsed last week. But the crisis will surely get the Fed to think twice about what to do at next week's meeting.   For now, the pricing on Fed funds futures suggests that there is slightly more than 70% chance of a 25bp hike next month, and slightly less than 30% chance for no rate hike.   This is a big, big change since last week.   How will the market react to US CPI?  The US CPI data due today could reshuffle the Fed expectations regarding what will happen next week.   Both headline and core inflation are expected to have eased in February, but investors are cautious given that last month's disappointment could be repeated this month, as the base effect – where we will finally start comparing the war months to the war months won't be in play until March – as Russia invaded Ukraine by end of February last year.   Read next: The softening in some of the metrics in the February jobs report is easing fears of a more hawkish Fed, especially in light of the failure of SVB| FXMAG.COM Plus, Manheim's used car index, that serves as an indicator of US inflation (though much less powerful than it used to be during the pandemic months) spiked significantly higher in February.   Therefore, it could be another month of a challenging CPI read for the US.   But the logic this time could be different than before last week. A CPI data in line, or ideally softer-than-expected could fuel the expectation of 'no hike' from the Fed this month, whereas a stronger-than-expected CPI figure may not fuel the expectation of a rate hike from the Fed, as many investors will be urging the Fed to stop hiking the interest rates and be patient about the impact on inflation that could come with delay.   Volatility mounts but we are nowhere close to panic levels.  Turmoil in the market is also reflected through the spike in the volatility index. The VIX hit 30 level yesterday, the highest since October, but note that we are nowhere near the levels that were seen during the 2007/2008 subprime crisis, or the European debt crisis, or the pandemic selloff.   The S&P500 gapped lower on Monday, gained, then gave back gains to close the session slightly in the negative, while Nasdaq 100 – which also gapped lower at the open - closed the session 0.79% higher as the technology stocks rallied on the back of tumbling rate hike expectations and tumbling yields as a result of it.   Apple for example gained 1.33%, while Microsoft rallied more than 2% yesterday. And indeed, a surprise pause in Fed's rate tightening could further boost the tech stocks that are rate-sensitive, and that have been hammered by the higher rate expectations over the past year.  Another asset that benefits from the sharp decline in risk appetite, and the sharp decline in US yields is gold. The price of an ounce rallied by more than $100 since last week, and hit $1914 per ounce yesterday. Yet, the rally will likely lose its power as soon as the calm returns to the market. A correction below the 50-DMA, around $1875, is likely in the next few sessions.  What about the ECB's 50bp hike?  When the US sneezes, the world catches a cold. The tumbling rate hike expectations in the US are spreading through other parts of the world.   Traders now see less than a 50% chance for another 50bp hike from the European Central Bank (ECB) this Thursday, and the expectation of the peak ECB rate fell below 3.5%, from around 4% last week.   But despite the softening ECB expectations, the EURUSD flirted with 1.0750 yesterday, as the US dollar sank deeper across the board.   And well, in periods of strong price action in the US dollar, the dollar is the main catalyzer of market pricing. Therefore, the ECB expectations could temper the FX moves, but could hardly reverse the direction of the market dictated by the USD.
US Inflation Eases, but Fed's Influence Remains Crucial

USA: Non-farm payrolls hit 311K. Headline and core US inflation expected to decline

Ipek Ozkardeskaya Ipek Ozkardeskaya 13.03.2023 11:22
The Silicon Valley Bank (SVB) went bust on Friday, around 44 hours after announcing that they would raise capital to fill in an almost $2 billion hole, after the bank sold its loss-making portfolio, rich in US treasuries, to pay their depositors – who are mostly tech startups – back in the actual environment of rising interest rates.   Signature Bank also collapsed abruptly this weekend, as regulators said that keeping the bank – which has a big real estate portfolio and law firms' money, could threaten the stability of the entire financial system.  SVB's flash crash raised questions that other similar local banks in the US could also experience liquidity issues and may not be able to pay their depositors back, unless they also start selling their probably loss-making portfolios.   So, the likes of First Republic Bank, PacWest Bancorp and Signature Bank suffered heavy losses on Friday.   Across Europe, big banks pulled indices down on Friday, as well – even though they are not expected to have similar liquidity issues as the Silicon Valley Bank. Most big banks have a diversified client base and more importantly don't have the same exposure to tech startups, which are extremely rate sensitive.  The contagion risk remains for small banks with highly rate-sensitive clients, but the US authorities now step in to avoid contagion. They said that SVB depositors could access their money today.  The bank crisis changes the landscape for Fed expectations.  The bank crisis will be sitting in the headlines, as solutions and possible contagion beyond the banking sector and beyond the US borders will be on the menu of the week.  The latter will likely interfere with Federal Reserve (Fed) rate hike expectations, as well, as the Fed may want to think twice before stepping on the gas this month; Mr. Powell certainly doesn't want to go down in history as the clumsiest Fed President in the history of the Fed.   So, it is well possible that the Fed may simply FORGET about a 50bp hike this month or may not hike at all.   Activity in Fed funds futures now assesses more than 98% chance for a 25bp hike in March, not because the US jobs data was soft enough to overhaul rate hike expectations last Friday, but because the Fed can't ignore the issues caused by the steep interest rate increases in the banking sector and can't afford to trigger a financial crisis to bring inflation back to 2%.   Read next: Icahn Battles Illumina For Three Board Seats| FXMAG.COM Economic data will be important, but the developments across the banking sector could overshadow the data.   Last Friday, the US released a mixed jobs report. The NFP printed another strong 311'000 new nonfarm jobs additions in February, versus around 200'000 expected by analysts. But the unemployment rate ticked higher from 3.4% to 3.6%, as the participation rate improved, and the wages grew less than expected.   The kneejerk market reaction was a swift decline in the US dollar, and the yields. But of course, a major part of the decline in the US short term yields is due to the expectations that the Fed may have its hands tied faced with the banking crisis and could forget about another rate hike in the immediate future.   The latest fall in US yields is not necessarily based on the best foundation for a stock rally. And indeed we saw the S&P500 dive on Friday to the bearish consolidation zone below the major 38.2% Fibonacci retracement on the October to February rally. But at the time of writing, the S&P500 futures hint at an almost 2% rise at the open.  Tomorrow, the US will release the latest inflation figures for February, and the expectation is a further decline both in headline and core inflation. A sufficient decline in US inflation will cement the idea of a 25bp hike, or no rate hike from the Fed this month. But even disappointing inflation figures may not fuel the Fed rate hike expectations, depending on how the situation evolves on the banks' front.
National Bank of Poland Meeting Preview: Anticipating a 25 Basis Point Rate Cut

The Collapse Of Silvergate Capital And A Severe Rout In SVB Stock Plunged The Banking Sector Into Darkness Yesterday

Ipek Ozkardeskaya Ipek Ozkardeskaya 10.03.2023 09:16
Thursday could've been a calm trading session. Especially given that after a deluge of strong economic figures concerning inflation and jobs, the little uptick in the US weekly jobless claims to above 200'000 for the first time since January – and which sent the US short-term yields tumbling - could've given some piece of mind to investors and lead to a minor correction in equities before today's all-important US jobs figures. But, no. A severe rout in banking stocks spoiled what could've been a calm session on Thursday. The collapse of Silvergate Capital and a severe rout in SVB stock plunged the banking sector into darkness yesterday. While Silvergate Capital's fall was mainly crypto-related and didn't spur worries for the rest of the banking sector, SVB's plunge fueled fears that the rest of the banks could also experience similar issues. Why? Because SVB bank launched a stock offering of around $2 billion to strengthen its balance sheet, because the bank needed to close a hole due to the sale of around $21 billion loss-making assets to ensure that they could pay depositors in the actual environment of rising interest rates. And the SVB's portfolio had a lot of US treasuries and mortgage-backed securities in it. This is an issue that could hit all the banks, including the big banks, because the banks amassed a lot of assets since the 2007/2008 financial crisis at rising prices, and they had to pay nearly no compensation for bank deposits, as interest rates have been near zero for such a long time. And in theory, the rising interest rates would've been a boon for the banking sector as it would top their net interest income, as they would start making money on deposits, yet again. But the problem is that the interest rates rose too fast. The Fed raised the rates by 450bp since last year. And now, with inflation hanging at multi-decade highs, bank depositors ask higher compensation for their deposits, and to pay them, banks could be brought to sell their assets. But the assets must be sold at a severe loss, because the asset valuations sank severely from their all-time-high levels as a result of an aggressive Federal Reserve (Fed) tightening. This is why JP Morgan lost more than 5%, Wells Fargo and Bank of America lost more than 6% as SVB plunged 60%. As a result, the S&P500 didn't wait for today's NFP print to slip below both the 100 and 200-DMA and below the major 38.2% Fibonacci retracement on October to February rally. Weak US jobs data could slow bleeding. Bank stocks will likely remain under the pressure of higher, and rising interest rates, as the rate hikes in the US could get more aggressive again, if the US jobs market doesn't weaken, and inflation doesn't cool down. The expectation of a 50bp hike in the next FOMC meeting spiked above 80% earlier this week, as Fed Chair Jerome Powell told the US Senate that the Fed could increase the pace of interest rates if the 'totality of the data' requires so. Activity in Fed funds futures currently gives slightly less than 60% chance for a 50bp hike. Today's US jobs data could keep the 50bp hike expectations alive, or tilt the balance to 25bp hike again. It all depends on the strength of the latest jobs data. The expectation is that the US economy may have added around 200K new nonfarm jobs in February, after last month's whooping half-a-million NFP print. The wages are seen going up from 4.4% to 4.7%, and the unemployment rate is seen steady at 3.4% - a more-than-50-year low. A good thing would be to see the US jobs figures weaken. Otherwise, the Fed will be brought to action a 50bp hike this month, and the latter could accelerate the equity selloff. As such, soft, and ideally softer-than-expected jobs data from the US today could reset the Fed rate hike expectations back to a 25bp hike, whereas another set of strong jobs data will likely cement the idea of a 50bp hike from the Fed later this month, send the US yields and the US dollar up, and equities down.
US Flash, that is to say preliminary, PMI for April came in at a better-than-expected 50.4 versus a downwardly revised 49.2 in March and a forecast 49

Fed Chair Jerome Powell said that no decision has been made yet

Ipek Ozkardeskaya Ipek Ozkardeskaya 09.03.2023 10:00
Bulls in European equities didn't' really get washed out by the Federal Reserve (Fed) hawks; the DAX index closed higher at the wake of Powell's first day of testimony before the Senate – which went badly hawkish on the other side of the Atlantic.   The better-than-expected jump in January industrial production in Germany may have helped send the DAX higher on Wednesday, along with a further decline in the German 10-year yield from the March peak levels.   But beyond Germany, the GDP growth in the Eurozone was null in Q4, and slowed more than expected on a yearly basis, and the European Central Bank 8ECB) won't move a finger to boost economy because all the European policymakers want is... to abate inflation.   And the expectation is that, not only that the ECB will hike by 50bp at this month's meeting, but there will be 150bp hike from now till summer.   The ECB hawks fueled the European yields to fresh highs since the Eurozone's debt crisis– which is fundamentally not good news for equity traders.   And the euro is losing ground against the US dollar, as the hawks on the other side of the Atlantic Ocean look very threatening.   Even though a softer euro could be good for some businesses as a cheaper euro boosts sales abroad, it is obviously bad for abating inflation; it makes the cost of energy and raw materials more expensive for European businesses and boosts inflation. And rising inflation means higher rate hikes, and prospects of slower economy.  As a consequence, the European stocks should be more worried faced with a sinking euro and rising yields.  No decision yet.  Fed Chair Jerome Powell's second day of testimony was as hawkish as the first one, with one little exception.   Powell added a very small tweak to his Tuesday language, and said that the data will determine whether the Fed would increase the pace of the interest rate hikes, BUT that 'no decision has been made on this' yet.   If Powell's intention was to cool down the 50bp hike bets yesterday, it didn't go according to the plan. That probability went above 80% yesterday, as both the ADP report and the JOLTS data came in hotter-than-expected. The ADP printed 242K new private job additions in February versus 200K expected by analysts, while job openings in the US eased from last month's peak, but not as much as expected.   In other words, the jobs data was again too strong to soften the Fed hawks' hand.   Read next: ADP payrolls report hit 242K. Japan: YCC may remain unchanged| FXMAG.COM The US 2-year yield extended its advance above the 5% mark, the 10-year yield hovered around the 4% level. The widening gap between the 2 and the 10-year yield boosts recession odds.   Note that the 4% mark for the US10-year yield  has become a line in the sand that bond investors don't want to breach.   The S&P500 swung between small gains and small losses yesterday, as the strong jobs data didn't let much space for funded gains, but Powell's 'indecision' about the next rate hike helped the S&P500 eke out a small gain to the end of the session.   In the FX, the US dollar index extended gains above the 100-DMA.   Catch your breath before Friday!  Today, investors will mostly spend the session digesting Powell's hawkish testimony, the major shift in US rate expectations, and the strong jobs data. They will also watch the US weekly jobless claims and pray that the February NFP print doesn't surprise to the upside as did the ADP report.   As such, we could see some relief, and correction after two difficult days for risk assets, but investors will likely refrain from opening fresh positions before Friday's US jobs data, because only God knows what could happen when the data falls in. Risks are two-sided, as soft data could easily spur a risk rally.  Gold and energy  The rapid surge in the US dollar and the rising US yields weigh on precious metals. Gold, which was supposed to have a great year, is now in the bearish consolidation zone, below the major 38.2% Fibonacci retracement on November to February rally, and is now testing the 100-DMA, which stands a couple of dollars above the $1800 level, to the downside. A strong data between today and Tuesday could rapidly send the price of an ounce below the $1800 mark. The next natural target for gold bears is the 200-DMA, at $1775 per ounce.  American crude on the other hand failed big time holding on to the gains above the 100-DMA and dropped nearly $5 per barrel although crude oil inventories in the US unexpectedly fell last week.   Rising recession odds due to hawkish Fed expectations is why the bears are out and selling.
The RBA Raised The Rates By 25bp As Expected

The RBA Raised The Rates By 25bp As Expected

Ipek Ozkardeskaya Ipek Ozkardeskaya 07.03.2023 08:40
The week started with worries that China setting its growth target to 5%, a meagre target for a post-pandemic kick-off, could mean a slower global growth ahead.   Today, the latest, and mixed trade figures further raised a couple of eyebrows regarding whether we are expecting too much from China. The decline in Chinese exports was less dramatic than expected, but imports fell more than 10% in February from a year ago.     Nasdaq's Golden China Dragon index kicked off the week down, while the S&P500 was better bid at the open, with gains up to 1%. But the gains melted to the close and all three major US indices closed Monday's session flat to very slightly positive. Still the S&P500 is heading to Powell's semi-annual testimony above the 4000 mark.   Today, all eyes and all ears are on  Federal Reserve (Fed) Chair Jerome Powell and what he thinks about the latest set of economic data.   Since the latest FOMC meeting, we saw a blowout NFP number, an uptick in inflation figures, lower-than-expected decline in the S&P500 earnings, and overall encouraging economic activity data.   And that's a problem. The fact that the US jobs market, or economic activity don't react to higher Fed rates is a problem for Fed, because it makes the Fed's arms less efficient for fighting against inflation. Many would argue that changes in rates take time to filter into the economy but the Fed's tightening campaign began in November 2021 - 17 months ago, the rate hikes began roughly a year ago. It's about time we start seeing the impact of higher rates through data.   Alas, half-a-million NFP read, with the lowest unemployment rate of the past half a decade and uptick in inflation are indeed worrying.  US crude above 100-DMA  Disenchanting growth target from China was expected to keep the oil bears in charge of the market, but the 100-DMA got surprisingly cleared to the upside yesterday.   Warning of tight global supply and rising Chinese demand from CERAWeek conference and Estonian foreign minister's idea that the EU should halve the Russian oil cap helped pushing the price of a barrel above the critical 100-DMA level.   Tight global supply, war, sanctions on Russia oil and the rising Chinese and global demand tilt the balance for higher oil prices in the medium run. But higher energy prices mean higher inflation, and higher inflation means tighter monetary policies which, in return, increase the global recession odds, and could weigh on oil prices.   Elsewhere  The Reserve Bank of Australia (RBA) raised the rates by 25bp as expected and said that there could be more rate hikes on the pipeline depending on the data, but the AUDUSD slipped below 67 cents.   The EURUSD extended gains and flirted with the 1.07 mark yesterday on the back of a surprisingly softer US dollar into Powell's testimony.   Gold sold off into the $1860 mark.   Hawkish Powell could reverse losses in the dollar later today. 
Rates Spark: Bracing for more

The RBA, Bank Of Canada And Bank Of Japan Will Be Announcing Their Latest Interest Rate Decision This Week

Ipek Ozkardeskaya Ipek Ozkardeskaya 06.03.2023 08:26
There are plenty of reasons that should push equities lower, but equities continue trending higher. Both European and American stocks closed last week with gains, and futures hint at a positive start to the week despite China's announcement of a modest 5% growth target. But the 5% growth target raises concerns about the amount of stimulus that the Chinese will put on the table, and the possible continuation of the government crackdown. The Chinese officials said that they don't want a disorderly growth in real estate – which is a major ingredient for the Chinese growth. Plus, the local governments could borrow and spend less, even though the Chinese as a whole increased their fiscal deficit projection. This means that China is on its way for more centralization of the power around Xi Jinping and less freedom for local entities. Combined with Xi's fight against euphoric growth and the West's limitation on investment and technology exports to China, we shall see investors reluctant to return to Chinese equities. China's modest 5% growth target weigh on energy and commodity prices. Iron ore and copper futures are down, and US crude's 100-DMA resistance, around the $80pb level, will likely remain strong. On this week's agenda FED talk Federal Reserve (Fed) Chair Jerome Powell will deliver his semi-annual testimony before the Senate this week, and he will certainly reiterate that the Fed is not yet done with its fight against inflation, that the labour market remains particularly strong, that a soft landing is possible, yet the Fed won't hesitate to sacrifice growth to abate inflation as soon as possible. Looking at the latest set of data, the U-turn of easing inflation and last month's blowout jobs figures, we don't expect to hear anything less than hawkish from Mr. Powell. But it's always possible that a word like 'disinflation' slips out of his mouth, and that we get a boost on risk. US jobs The US economy is expected to have added around 200'000 jobs, with the possibility of a negative surprise after last month's above half a million read. Unemployment is seen steady around 3.4% - a more than 50-year low, while average earnings are seen going up from 3.4% to 3.7% over the year. Nothing encouraging for the Fed doves. But who cares? RBA, BoC, BoJ The Reserve Bank of Australia (RBA), the Bank of Canada (BoC) and the Bank of Japan (BoJ) will be announcing their latest policy verdicts this week and among them, only the RBA is expected to hike the rates by another 25bp despite last week's surprise softening in latest inflation and growth numbers. More than 40% of the companies in the ASX 200 posted negative earnings surprise last quarter, up from 28% a year ago. The latest figures from macro and micro fronts raise questions about how far the RBA could go in terms of rate hikes. On the currency front, since the end of February, the AUDUSD slipped into the bearish consolidation zone, but the pair has been following the 100-DMA slightly to the upside, as the Chinese reopening sustains iron ore prices – except for today, of course, as China's 5% growth target hasn't been a boon for energy and commodity stocks. China could still rescue the Aussie from falling further, but the Chinese winds could hardly reverse the negative trend in AUDUSD as the Fed-supported US dollar is certainly not done its positive push yet.
Brazilian President suggesting replacing US dollar with own currencies of developing countries

ISM manufacturing index shrinks less than in February. Fed members comment on hikes

Ipek Ozkardeskaya Ipek Ozkardeskaya 02.03.2023 08:49
Europe is not having a good week in terms of economic news.   Today, investors will be focused on the flash CPI estimate for February, but there is not much suspense about the fact that the data will disappoint. On Tuesday, the data showed that French inflation hit a record, Spanish inflation ticked higher as well, and yesterday, it was Germans' turn to announce the bad results. Inflation in Germany ticked higher to 9.3% last month, even after the country limited household heating costs. Therefore, it's very likely that the Eurozone CPI, due this morning, is not going to hit the 8.2% mark expected by analysts.   The euro depreciation is to blame.  But the pricing in European markets already reflect, at least, a good part of the inflation disappointment: the European Central Bank's (ECB) peak rate is expected to reach 4% into next year, and some ECB members now back the idea of a more rapid reversal in bond buying to tighten the financial conditions faster. Bundesbank Nagel is one of them. He also thinks that the ECB should speed up the rate hikes and reach the peak rate around September.   As a result, the hotter-than-expected inflation data pushes the European yields higher. The higher yields support recovery in the euro. The EURUSD spiked to 1.0690 yesterday, while the European stocks fell after the German CPI figures and the disappointing PMI data flashed the bulls out of the market.   Note that today's inflation data may not make things worse; we could even see 'buy the rumour sell the fact' type of move, where the yields soften, the euro gives back some strength and equities rebound.   But the medium-term outlook for the European yields remains tilted to the upside. The latter should support the euro, but not the stock valuations.   The grass is not greener elsewhere.  Across the Atlantic Channel, the news is not great, either. The ISM manufacturing index revealed a slower contraction in February, but the improvement compared to the last month was less than expected.   A slowing economic growth is not bad news for the Federal Reserve (Fed), but the mounting price pressure is. This is what the ISM report revealed yesterday.  Fed's Neel Kashkari, who was once one of the most dovish Fed members, said that he may back a 50bp at this month's FOMC meeting, while Raphael Bostic said that the Fed should hike the rates to 5-5.25% territory, and keep them there until next year.   Activity on Fed funds futures now gives more than 30% chance for a 50bp hike at the next meeting, and Fed swaps price in a peak Fed rate of around 5.5%. This number was around 4.9% at the start of the year.  Consequently, the US 2-year yield continues its steady climb toward to 5% mark, and the 10-year spiked above the 4% psychological level yesterday.  Read next: Stock market has been calm thanks to a belief that peak rates are near. The US jobless claims are forecast to hit 196K| FXMAG.COM  The S&P500 tested the critical 200-DMA to the downside. There is major speculation about an aggressive selloff below this 200-DMA level. And given the persistent positive pressure on the yields, clearing the 200-DMA support is not a matter of if, but a matter of when.   The higher yields are supportive of the US dollar. The dollar index swings up and down, above the minor 23.6% Fibonacci retracement on the September to February retreat.   If the dollar's reaction to the hawkish Fed expectations is not more aggressive, it's certainly because other major central banks are also gearing up the rate talk. The Bank of Japan's 8BoJ) Ueda said he would consider normalizing policy if inflation remained sticky in Japan, while the Bank of England's (BoE) Bailey warned that if they do 'too little with interest rates now', they will 'have to do more later on.' Sure thing. The latest BRC report showed that shop prices in the UK indeed hit a record. But traders are not necessarily in to keeping the pair above the 1.20 level. The next natural target for the Cable bears stands at 1.1920, near the 200-DMA, and if cleared could pave the way for a further slide to 1.1650/1.17 region.   In energy and commodities, US crude jumped more than 1% yesterday as the EIA data was much less scary than the API data released a day before. While the API hinted at around a 6-mio-barrel build in US inventories last week, the EIA printed a 1.2-mio-barrel build.   But the 50-DMA is still not cleared, and even if it did, offers into the 100-DMA, slightly below the $80pb level, still look particularly strong.   As a result, the energy stocks were the worst performing in February, despite their record profits. There are worries that the Chinese reopening may not be enough to push prices higher... after all, and latest news suggest that Western companies are racing to quit the country, as tense geopolitical relations with China, and Xi Jinping's economic and political agenda don't inspire confidence. 
The RBA’s aggressive rate tightening cycle will be continued

Inflation In Australia Eased More Than Expected

Ipek Ozkardeskaya Ipek Ozkardeskaya 01.03.2023 10:48
Uh oh! Inflation in Europe took the wrong direction in February. The data released yesterday printed a record inflation of 7.2% in France and ticked higher to 6.1% in Spain. Both were higher than expected, of course, and cranked up the hawkish European Central Bank (ECB) rate expectations.   For the first time, the market pricing pointed out that the ECB's deposit rate would reach 4%, 150bp higher than where it stands right now. That means more 50bp hike will be on the mene after the next ECB meeting's almost certain 50bp hike.   What does that mean for investors?  First, it means higher bond yields, as the hawkish ECB expectations directly impact the bond yields, sending them higher. As such, German, French, Italian and Spanish 10-year yields are now at the highest levels in more than a decade. They are at levels reached during the European debt crisis at the start of 2010s.   Higher yields are good for the euro - even if it won't necessarily reverse the negative trend against the dollar, it should at least slow the selloff.   But hotter-than-expected inflation is not necessarily good for the European stocks, as higher inflation means higher ECB rates, higher ECB rates mean higher bond yields, higher bond yields mean more expensive financing for companies, more expensive financing for companies means less projects, less manufacturing, less services, and that, in return, means lower revenues for companies.   Though a stronger euro helps companies eke out better profits as a stronger currency makes raw material and energy costs more affordable for European businesses, higher yields could weigh more on the balance than a stronger euro. Therefore, what's probably next for the Stoxx 600 is a downside correction, following a 23% rally between last October and this February.  Today, we will get hold of the German inflation figures along with the final manufacturing PMI data for the Eurozone countries, and tomorrow morning, the Italian CPI numbers will fall in before the Eurozone flash CPI estimate for February. The expectation is that inflation in the Eurozone may have slowed to 8.2% from 8.6% printed a month ago. Or it may have not slowed as much.   Higher inflation combined with soft growth is the worst possible scenario for stocks.  Slower Aussie inflation, stronger China PMI  Inflation in Australia eased more than expected in January, from last month's record 8.4% to 7.4% versus 8% expected by analysts. But growth also slowed in Q4.   The Aussie-dollar first dipped then rebounded. The better-than-expected PMI data from China boosted iron ore prices, and helped throw a floor under the Aussie's selloff, at around the 100-DMA, 0.6740. But clearing support at this level would only take another wave of hawkish Federal Reserve (Fed) pricing, which would boost the dollar appetite and send the pair below the 100-DMA. The downside risks prevail.  Speaking of the Fed expectations  Cooling US house prices for a seventh straight month, and ugly Richmond manufacturing index cooled the hawkish Fed pressures yesterday, but the S&P500 couldn't hold on to its gains above the 50-DMA, and closed yesterday's session below this level. As a result, the month of February ended with a 2.7% loss for the S&P500, and with mounting pressure from the bears.   The key support to watch in S&P500 is the 200-DMA, near 3940. There are warnings that a fall below this level could trigger a $50 billion selloff, according to JP Morgan.  Elsewhere, well crude oil jumped yesterday, although the latest API data showed another 6.2 million barrel build last week in the US crude inventories. The strong PMI data from China certainly helped keeping the oil bulls alert, but the 50-DMA offers, a touch below the $78pb, may be hard to clear defying the massive builds in US crude inventories week after week. The more official EIA data is due today, and remember last week, the EIA data was even bigger than the API. 
FX Daily: Time for the dollar to pause?

Swissquote's Ipek Ozkarderskaya points to 1.0470/1.0475 as the next key level to watch in EUR/USD

Ipek Ozkardeskaya Ipek Ozkardeskaya 28.02.2023 11:07
The Europeans and the Brits finally found an agreement on the very complicated Northern Ireland issue yesterday.   Apparently, the war in Ukraine, and the fact that they had to collaborate reminded both sides of the Channel that they share common values – and a common enemy helped increasing the willpower to reach an otherwise impossible agreement.   The deal requires a lot of extra work and resources, but it's the best it could get. So yesterday was a remarkably successful day for Rishi Sunak, even though the DUP expressed some concerns.   Most currencies gained against a broadly weaker US dollar yesterday, so the fact that Cable traded above the 1.20 mark was not necessarily due to the so-called 'Windsor Framework', but the EURGBP remained offered below the 50-DMA, as the deal could be a gamechanger for the UK economy.   It is said that British businesses amassed around £100 billion since the pandemic but didn't invest due to uncertainties. With a comprehensive deal, this cash could flow back to the UK economy, and lead to a 10% investment growth.   For now, Invesco's manager said he remains 'underweight UK equities' and that 'this deal is not going to change that', while BlackRock and Aberdeen also warned that they don't necessarily expect the deal to remove only all of the uncertainty weighing on prices.  And in all cases, if the deal could help sterling and small British stocks recover, all the FTSE 100 wants is a rebound in energy and commodity prices, rather than a Brexit deal...  Energy update  Occidental Petroleum missed earnings and revenue expectations when it announced its Q4 results yesterday, and fell 1.2% in afterhours trading, despite announcing a 38% increase in its dividend and a $3 billion share buyback.   Shell, on the other hand, bounced almost 2% higher in Amsterdam yesterday despite a 1% decline in crude oil, as Goldman Sachs upgraded Shell from neutral to buy citing 'highest quality combination of assets with a leading global LNG and marketing businesses and strong chemical presence'.   The barrel of American crude remained offered into the $75bp yesterday, as oil bears remain in charge of the market at the current levels. But solid support is expected before the $70bp level, as – like it or not - the global oil supply remains tight, China reopens, demand increases and Americans will have to refill their reserves.  Too much optimism?  European and US markets traded in the green yesterday, but the news other than the Windsor Framwork was not necessarily encouraging for the central bankers.  US core durable orders expanded more than expected, and pending home sales surged 8% thanks to softer mortgage rates on a broad-based decline in yields. The latter data remained consistent with the strong and the resilient US economy, calling for more rate hikes from the Federal Reserve (Fed) to slow inflation.  And more importantly, Manheim's used car prices index jumped more than 4% in the first half of February. That was the largest gain since 2009. So yes, the Fed must do more to slow inflation.  Despite yesterday's relief, the US yields will certainly remain under a decent positive pressure. And higher yields will, at some point, weigh on equity valuations. That's a mathematical certainty.   The S&P500 tested the 200-DMA, which stands at 3940, to the downside last Friday. A fall below that level is expected to accelerate the selloff.  In the FX.  The US dollar index gave back some gains, but given the strength of the economic data, yesterday's price action was likely a correction. We see this morning that the dollar is stronger across the board.   The EURUSD sees decent resistance above the 1.06 mark even though the hawkish bets regarding the European Central Bank (ECB) rate hikes intensify. Swap markets now price in a rise in the ECB's deposit rate to 3.90%, while this pricing was just around 3.5% last summer. Plus, for the first time, traders bet that the ECB rate hikes will extend to the next year.   The European Stoxx looked zen yesterday, faced with rising European yields, and a couple of disappointing data points including morose industrial and services sentiment in the Eurozone in February, low consumer confidence and lower-than-expected private loans growth.   Read next: Altria Is Trying To Purchase E-Cigarette Startup NJOY| FXMAG.COM The hawkish ECB bets are normally positive for the euro, but the Fed hawks say the last word. We could eventually see the euro selloff slow on the back of higher ECB rate bets, but not reverse.   Technically, the next key level to watch in the EURUSD is the 1.0470/1.0475, including the 100-DMA and the major 38.2% Fibonacci retracement on the September to February rally, and which, if cleared should send the pair into the medium term bearish consolidation zone.   A few European countries will reveal their latest CPI updates before Thursday's flash estimate for the zone, while Australia will also announce the latest CPI figure tomorrow. Inflation in Australia is expected to have fallen to 8.1% from 8.4% printed a month earlier. A stronger-than-expected read could fuel the Reserve Bank of Australia (RBA) hawks, but could hardly reverse the Aussie's trajectory against the dollar. The pair fell sharply after clearing the major 38.2% Fibonacci retracement and the 200-DMA, and is now in the bearish consolidation zone.
Britain's Rishi Sunak And EU's Ursula Von Der Leyen Will Meet Today To Finalize The Northern Ireland Drama

Britain's Rishi Sunak And EU's Ursula Von Der Leyen Will Meet Today To Finalize The Northern Ireland Drama

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.02.2023 08:56
The week starts on a cautious note, as the Federal Reserve (Fed) rate hike expectations intensify the selloff in global stocks and bonds, while pushing the US dollar higher against most majors.   Friday's US PCE data was bad. We knew, from the earlier releases that US inflation wouldn't slow as much as expected, but Friday's PCE data showed that not only inflation didn't slow in January, but headline figure ticked higher to 5.4% from 5.3% printed a month earlier, and core inflation ticked higher to 4.7% from 4.6% printed a month earlier. The latter fueled the Fed hike expectations, because a slower-than-expected easing in inflation is one thing, but rebound in inflation is another thing. And the latter is much less cool for the Fed, and the Fed expectations. A rebound in inflation is the worst nightmare for the Fed.   And if the PCE drama was not enough, personal spending surged 1.8% in January, the strongest burst since March 2021, and the University of Michigan's consumer sentiment index hit a 13-month high this month. It's still much lower than the pre-pandemic levels, yes, but it also means that it has ways to recover.   In summary, the tight US jobs data, strong spending and improved sentiment may sound nice to you, but it sounds horrendous to the Fed.  A new study that was presented at a conference in New York on Friday now suggests that the Fed should maybe hike rates all the way up to 6.5% to win its battle against inflation in the US.  As a result, the US 2-year yield is pushing above the 4.80% mark, the 10-year yield is flirting with the 4% mark. Activity on Fed funds futures now assesses just slightly less than 30% probability for a 50bp hike at the FOMC's March meeting. This probability is up from below 10% at the start of this month.   The S&P500 slipped below the 50-DMA (3980) and tested the 200-DMA (3940) to the downside, and closed what was the worst trading week since the start of the year 2.7% down, and below the 4000 psychological mark. Nasdaq, on the other hand, pulled out the major 38.2% Fibonacci support on the latest rally, tested its own 200-DMA to the downside, and closed the week in the bearish consolidation zone and below the 12'000 psychological mark.   And all indicators point at a deeper selloff as long as the higher Fed discussions remain heated.  Read next: The Effect Of Shifting The Aggregate Demand Curve - Demand Shocks| FXMAG.COM FX and commo  It becomes increasingly  clear that we will see a pause in the USD downside correction. The US dollar index is now clearly headed higher.   In EURUSD, a further fall to and below 1.05 is just a matter of time, and the last support to the September to February rally stands near 1.0470, if cleared will send the pair into the medium term bearish consolidation zone, with prospect of further fall to 1.02-1.03 range.  And a softer euro will then make the energy imports more expensive for the Europeans yet again, and spur the European Central Bank (ECB) rate hike expectations.   Hawkish ECB bets will certainly not do much to tame the strong-USD-led inflation, but a more aggressive policy rate response from the ECB would be bad for European businesses, and weigh on European stocks.   Rising US yields and the stronger US dollar hint at further decline in gold prices, as well. Gold cleared a key Fibonacci support, the 38.2% retracement on the November to February rally, and starts this week in the bearish consolidation zone, with the next natural target for the bears standing at $1775, the 200-DMA.  Crude oil continues struggling. Oil bulls never really bought the Chinese reopening story, nor the sharp decline in Russian output. But they might well play the rising recession odds that come along with the tighter central bank policies around the world. As such, sellers are certainly waiting to sell US crude into the 50-DMA, a touch below the $78 per barrel.   Copper futures, on the other hand, sank below their 50-DMA for the first time since November in COMEX, as the higher rate prospects weigh on copper appetite, which is a good gauge of global growth.  Finally?!  In Europe, Britain's Rishi Sunak and EU's Ursula von der Leyen will meet today to finalize the Northern Ireland drama, which could soften barriers in a country that is willing to remain half seated in Europe and half seated in the United Kingdom, while the UK and Europe part ways.  There is however little chance today's annoucement, if any, solves the problem entirely. DUP is expected to oppose.  Mr. Sunak was expected to make an announcement last week. He didn't. And even if it did, I am not sure it would change the course of sterling. The pound is now below 1.20 against the US dollar as a result of a broadly stronger greenback, and is about to slip below the 200-DMA. Further retreat to 1.1650/1.17 band is on the cards.  
Nasdaq 100 posted a new one year high. S&P 500 ended the day unchanged

The DAX Index Is Now At Pre-War Levels, Nasdaq 100 Saw Support

Ipek Ozkardeskaya Ipek Ozkardeskaya 24.02.2023 09:03
S stocks had a wobbling trading session yesterday. The S&P500 tipped a toe below its 50-DMA yesterday, near 3980, then rebounded to close the session around 0.50% higher, above the 4000 psychological mark. Nasdaq 100 saw support into the 12000 psychological mark and gained almost 1% into the close. The 14% jump in Nvidia certainly helped improve the overall market mood, whereas the US economic data was mixed and was not supposed to pour water on the equity bears or improve sentiment regarding the Federal Reserve (Fed) hawks. The latest GDP update from the US revealed that the US economy expanded 2.7% in the Q4, instead of 2.9% penciled in by analyst. A softer economic growth could have been encouraging for easing inflation and softening the Fed's hand. BUT NO, because the GDP price index – another gauge of inflation which was released along with the GDP update, showed that inflation in the Q4 eased but eased much less than expected – as a perfect reflection of the CPI and PPI data released last week. The cocktail of slower-than-expected growth and higher-than-expected inflation is the worst possible outcome, and we could see the latter reflected in the corporate earnings. The S&P500 companies now all reported their results and earnings fell 1% in the latest quarter. At first glance, this is not a good number, but these earnings are compared to the blockbuster post-pandemic numbers, and despite a fall, they remain high. The question is, how far they will fall. It will depend on several factors, including how aggressive the Fed will continue tightening policy. How aggressive the Fed will continue tightening policy will depend on how sticky inflation is. We have one more important data point to watch before the week ends... and that's the US PCE index, the Fed's favourite gauge of inflation. Given the previous inflation data, we know that inflation has certainly eased, but not as much as expected. If there is not a big surprise, there should be no bloody market reaction to a slightly higher than expected PCE index. The S&P500 could close the week above the 50-DMA, and Nasdaq above its major 38.2% Fibonacci retracement. There is one more thing that probably helps equities hold their ground, and that's the easing US yields. I believe that the US yields have been easing since a couple of days due to the rising geopolitical tensions between the US and China – after China screamed loud and clear their support to Russia this week. These rising tensions certainly increase the safe haven flows to the US treasuries and interferes with the hawkish Fed pricing. As such, the US 2 and 10-year yields are softer compared to a peak earlier this week. European stocks up, euro down on record inflation!? The European stocks gained and the euro fell on Thursday, even though the latest inflation data from the eurozone revealed that the core inflation advanced to a record high. The rising inflation is normally a boost for the European Central Bank (ECB) hawks, who increase the bets that the ECB will raise the rates more forcefully. The latter should weigh on equity valuations and support the euro. But no. The contrary is happening because the major driving force of the market is the Fed and the dollar. So, the EURUSD fell as low as 1.0577 yesterday, while the European stocks were upbeat. The DAX index for example is now at pre-war levels, whereas the latest data is less than encouraging for the German economy. The European exports are recovering to the pre-pandemic levels, but the German exports are clearly lagging behind the zone's average. Spain and Italy are doing much better than their German peers. Why? Because the energy crisis has taken a toll on German manufacturing, whereas the post-pandemic reopening benefit Spanish and Italian tourism. As a result, the headline data is strong, but the underlying factors warn that the Eurozone growth is perhaps vulnerable. Sticky inflation and hawkish ECB are major risks to the actual European equity rally. 41-year high, Mr. Ueda! Speaking of inflation, the data released this morning showed that inflation in Japan rose to 4.3%, a 41-year high, and gave a rapid boost to the yen, sending the USDJPY down to the 134 mark. But we know that the Bank of Japan (BoJ), under the leadership of its new head Ueda, is not necessarily concerned about the rising inflation. The BoJ prefers keeping rates below zero, for now, and that should continue playing in favour of USDJPY bulls, at a time when the Fed members continue showing the world how serious they are in taming inflation.  
Assessing 'Significant Upside Risks to Inflation': Insights from FOMC Minutes

The US Policymakers Signaled That There Might Be Two More Rate Hikes

Ipek Ozkardeskaya Ipek Ozkardeskaya 02.02.2023 08:55
'It is gratifying to see the disinflationary process now getting underway' said the Federal Reserve (Fed) President Jerome Powell at his press conference yesterday.  'Disinflation process is getting underway'.   That was the major - and the only take - of his speech yesterday, and sent the markets rallying. The US yields fell, the S&P500 reversed course and rallied more than 1% higher, while Nasdaq jumped more than 2%. The dollar index slumped.   But besides the 'disinflationary process', things went quite according to the plan at yesterday's FOMC meeting. The Fed increased the interest rates by 25bp, as expected. Powell said that they are happy with the falling inflation, but warned that the US jobs market remains tight, and wages growth is still too strong.   Powell didn't call the end of the rate hikes, just yet. On the contrary, the US policymakers signaled that there might be two more rate hikes before a pause, and that the tightness in the jobs market is a risk on inflation.   But all that fell on deaf ears after investors heard that 'disinflationary process started'.   Maybe the surprisingly low ADP report – that revealed that the US economy added a little more than 100'000 jobs last month, suggested that the labour conditions in the US might be easing just before Powell announced the latest FOMC decision? But the weakness in ADP report was mostly due to harsh winter conditions, and the job openings jumped past 11 mio.   Anyway, the Fed meeting was a boon for risk investors.   Note that, at the wake of the meeting, activity on Fed funds futures gives around 83% chance for the next FOMC meeting to deliver another 25bp hike, which would take the rates to 5% mark, as promised by Fed members.   But for equities, there is no reason to think that the bullish sentiment would reverse anytime soon. The S&P500 will certainly make an attempt on its 100-week moving average which stands a couple of points above the 4200 mark, and the 20% rally in Meta shares in the afterhours trading could keep the rally going today.  Apple, Amazon, Google, Ford and Qualcomm are due to announce their earnings today.  
Jerome Powell Will Certainly Try To Calm Down Market Joy

Jerome Powell Will Certainly Try To Calm Down Market Joy

Ipek Ozkardeskaya Ipek Ozkardeskaya 31.01.2023 13:18
Stock investors kicked off the week on a cautious note, as the Federal Reserve (Fed) is expected to kill joy when it announced its latest decision tomorrow, and earnings announcements may not save the day.   Some profit taking  US equities kicked off the week on a negative note, as many investors preferred booking profits before the deluge of earnings announcements and the Fed decision.    And they are certainly not wrong to be scared, because the Fed expectations became increasingly dovish in January, as investors saw the easing inflation figures combined with softening economic activity.   The S&P500 gave back 1.30% on Monday. The  index is still above the 2022 bearish trend and above the 200-DMA, but we can't rely on Jerome Powell to keep the party going; only stronger-than-expected earnings, and ideally sufficiently good profit guidance from companies could do it – and spitting out a good guidance won't be a piece of cake for a good amount of them.   Crude oil down despite strong China PMI, encouraging IMF growth forecast   US crude fell 2% yesterday and slipped below the 50-DMA this morning.   Interestingly, however, the latest news on the macro front is not bad, at all. The Chinese reopening is now well reflected through the first set of economic data. Released today, both the manufacturing and services PMI jumped into the expansion zone.   And the cherry on top, the IMF raised its growth forecast for this year by 0.2% to 2.9% citing the resilience of US spending and the Chinese reopening.   This is the kind of news that the energy markets normally cheer. But not this time, apparently.    Read next: The Government Pension Fund Global Suffers Losses| FXMAG.COM Won't call victory over inflation...  The US dollar is gaining some positive momentum into the Fed meeting, as investors know that the Fed won't declare victory over inflation despite the falling inflation, and position accordingly.  Why? Because the trend could reverse suddenly.   The Spanish inflation came as a punch to the Europeans' face yesterday as it advanced to 5.8% in January instead of falling to 4.7% as expected. French and German readings could reveal similar surprises.  And nothing guarantees that the same U-turn won't happen in the US. Gasoline prices surged 12.5% over the past month on the back of winter storms and a rising global demand – partly thanks to the ban on Russian oil and the Chinese reopening, and food price inflation remains high.   So, the Fed will certainly hike by 25bp, but there is little chance it will announce the end of the tightening.   And Jerome Powell will certainly try to calm down market joy – given that the actual market environment suggests that the financial conditions in the US have become as loose as last February, before the Fed started tightening its purse's strings.   And the more the market fights the Fed, the more aggressive the Fed should become to achieve what they need to achieve.   In summary, the Fed will likely reveal that there will be at least one more rate hike, or two more rate hikes to go before pause.  And that simply 's' could make all the difference.   
Oil Prices Soar on Prospect of Soft Landing, Eyes Set on $80 Breakout

The S&P500 Rallied Past Its 2022 Bearish Trend Top

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.01.2023 13:36
eur to usd, eur usd, eur/usd, convert eur to usd, 1 eur to usd, eur vs usd, 100 eur to usd, euro to usd, what is euro?, what is dollar?, what is us dollar? US equities rallied on Thursday, boosted by a decent rally in Tesla and Chevron stocks, and a better-than-expected GDP read in the US.   The latest US GDP update was a strong beat. The US economy grew 2.9% in Q4, down from 3.2% printed a month earlier, but significantly better than the 2.6% penciled in by analysts.   But be careful! The US growth number was good, but not necessarily for good reasons.   Inventory adjustments and government spending were the main boosters of the GDP in the latest quarter, while domestic purchases increased just around 0.2%, down from 2% printed in Q1.   Plus, the housing sector took a massive 27% hit on annual basis, business inventories grew around 0.6% versus 6% printed a quarter earlier, and trade with other countries was good, but not because Americans exported more, but because they imported less.   In summary, the latest GDP data was boosted by government spending and inventory adjustments, but the growth engines, which are consumption and investment - that hint at the health of the future economy did quite poorly.   So what do you make of the data?  In one hand, slowing demand is great news for the Fed because their aggressive tightening policy hammers demand, and that should further ease inflation and further soften the Fed's policy. And all that, with the weekly jobless claims headed further down as a sign that the jobs market is still not feeling the pinch of the higher rates and the slower demand – although IBM announced it will cut 3900 jobs, and SAP 3000 this week. But oops, IBM is down 4.5% after the news. Too bad.  On the other hand, weaker demand is not great news, as it means that your favorite companies will be selling less stuff and will be making less money.   But there is always this hope that the Chinese could fill in the gap this year, thanks to the pandemic savings that will be flowing into the stuff that Chinese like to buy the most in the coming months. In this sense, Burberry and Swatch shares look nothing less exciting than the tech stocks during the pandemic. And that despite the war and a global cost-of-living crisis.  Focus on US PCE  The US will reveal another gauge of inflation, the PCE data, that is closely watched by the Federal Reserve (Fed). A slower than expected core PCE would be a cherry on top for closing a week where the S&P500 rallied past its 2022 bearish trend top, and which could soon confirm a cup and handle pattern above the 4100 mark.  But beware, Intel slumped 10% in the afterhours trading after revealing a worse-than-expected quarterly loss due to a steeper than expected fall in PC chip sales, and giving a weaker-than-expected forecast for the current quarter.  Aussie shines  The US dollar is better bid on the back of a strong GDP report, while gold is down from the $1950 resistance.   The EURUSD is again below the 1.09 mark, while Cable consolidates below 1.24, with a clear resistance forming into the 1.2450 mark.   The AUDUSD on the other hand extends gains above 71 cents level as the heated inflation report this week boosted the Reserve Bank of Australia (RBA) hawks. The 50-DMA crossed above the 200-DMA, confirming a golden cross formation on the daily chart, while the market remains strongly short the Aussie, meaning that if the Aussie gains further momentum to the upside, we could see a short covering that could further emphasize the bullish trend.   
Issue on the US debt ceiling persists, Joe Biden goes back to the US

Intel, Mastercard and Visa are ones of the companies who take over stage today

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.01.2023 13:33
The S&P500 was flat yesterday, as investors tried to make sense of the deluge of company earnings that hit the fan before, during and after the session. Microsoft didn't gain on better-than-expected earnings, and Tesla announced record profits, but the share price jumped only 5% in the afterhours.   We are apparently stepping into a period where earnings projections outweigh the better-than-expected results. It makes the price moves harder to predict, however, it also gives us a hint that the S&P500 may have topped a couple of days ago, and more importantly, the market may soon get the fading recession odds straight, if the economic data continues surprising to the downside, as it has been the case at many prints since the start of the year.   The positive price action in stocks, and the positive price action in bonds suggest that the recession odds became less for stock traders, and more for bond traders since the start of this year.  In this sense, the odds for central bank policies are also evolving to the dovish side – or mostly.   Bank of Canada hiked its bank rate by 25bp yesterday and announced to pause.   The BoC decision spurred the expectation that the Federal Reserve (Fed) could do the same: hike by 25bp next week then pause.   Read next: McDonald's earnings: Currently, it is anticipated by several analysts that the EPS forecast for the quarter ending December 2022 is $2.44 | FXMAG.COM This is certainly why the dollar index remained under pressure yesterday. The EURUSD is again above 1.0920, as the RSI index warns that the rally is extending into the overbought territory.   For the Bank of England (BoE), investors are almost sure that the year will end with a 25bp hike due to slowing economy, but Cable is above 1.24 this morning, as some traders still think that the BoE will have to address higher inflation before slowing economy.   In Australia, however, the surprise rebound in Australian inflation, spurred the Reserve Bank of Australia (RBA) hawks yesterday, and accelerated the Aussie's appreciation against the dollar.   In summary, investors' hearts will continue to swing between slowing economy and easing inflation, and the bumps in inflation along the way.  But the data will tell who is right and who is wrong. Today, the US will reveal the Q4 GDP data, and the US economy may have grown at a slower pace of 2.6%, versus 3.2% printed earlier. Core durable orders on the other hand may have contracted in December. So any softness, or worse, any disappointment could further weigh on stocks.   Or not! The direction is very blurry at the moment and the deluge of economic data and earnings could tilt market sentiment in either way.   Intel, Mastercard, Visa and American Airlines are among companies to report their Q4 earnings today in the US, Volvo and LVMH will report their results in Europe. Chevron and American Express will be going to the earnings confessional tomorrow.   Elsewhere, news from China is not bad. Both travel and box office numbers show that Chinese people are spending money for travel and leisure. And the latest reports suggest that Chinese households added a massive $2.6 trillion to their bank accounts last year. All this money could be spent on new iPhones, new Louis Vuitton bags, new Tesla cars, and could temper the recession odds.  
The Bank Of Canada Is Preparing To Announce Its Final 25bp Hike

The Bank Of Canada Is Preparing To Announce Its Final 25bp Hike

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.01.2023 09:27
Trading in the US was eventless, except for the wild moves that marked the opening bell at the NYSE.  The S&P500 swung around the 4000, without any major moves up or down, as investors remained undecided faced with mixed company earnings, and mixed economic data.  Both US services and manufacturing PMI came in better than expected in January, but both remain in the contraction zone. While the Richmond Manufacturing index fell to -11, significantly lower than -5 expected by analysts.   In summary, the data confirmed a certain slowdown in US economic activity, but it didn't point to a free fall.   The US 2-year yield fell for the second straight session, as the soft data kept the Federal Reserve (Fed) doves at a soft and warm spot.   But at the current levels, the swap market suggests around 48 bp rate increase over the next two FOMC meetings. This means that the present activity in the swap market gives around 8% probability for no rate hike at all after the Fed's February meeting.   And if that's what keeps the S&P500 bid around the 4000 mark, it's worrying.  Earnings, earnings  The S&P500 could or could not get a boost from Microsoft at today's session, as Microsoft announced better-than-expected results yesterday after the market close, but the results were not all rosy. The revenue – which grew at its slowest pace since 2016 - slightly missed expectations, but the earnings beat estimates. The Intelligent Cloud segment grew 18%, as the Azure services grew 31% - slower than the past quarter but better than expected with the prospects of being further boosted by the ChatGPT deal. The shares rallied 5% in the afterhours, but gains were mostly given back.   S&P500 futures are down -0.40% at the time of writing.  Today, it's Tesla's turn to go to the earnings confessional after the bell, and nobody can tell you with confidence what will happen to the share price once the results are freshly out of the oven.   Tesla is doing very well, the company announced record car deliveries quarter after quarter, but the record deliveries weren't enough to meet the market expectations over the past three quarters. And unfortunately, the expectations make the market price, and missing them is no good thing for the share price.  In the FX  The US dollar remains under the pressure of soft data, and worryingly softening Fed expectations, while the euro got the boost that we were hoping for at yesterday's PMI release.   The EURUSD is again testing the 1.09 level to the upside this morning. And the gently widening divergence between the hawkish European Central Bank (ECB) expectations and the dovish Fed expectations remains supportive of a further advance. But be careful, the pair is about to step into the overbought market, which could slow the rally into the 1.10 target.  Across the Channel, the numbers were not as enchanting as on the main continent, and no one is surprised I guess to see the services PMI plunge to 48 in January with all the strikes going on. The manufacturing PMI on the other hand contracted less than expected but a new report suggested that the number of UK firms facing collapse jumped by more than a third at the end of last year.   Cable plunged below its year-to-date ascending channel, and the euro-pound is bought without much hesitation at the 50, 100-DMA levels, and should continue pressuring higher on a broadly stronger euro.   In Canada, the Bank of Canada (BoC) is preparing to announce its final 25bp hike. The dollar-CAD puts more weight into clearing the 1.3350 support, but crude oil is not helping, as the price of a barrel of American crude continues bumping its head against the solid $82pb wall, the 100-DMA, without being able to break it to the upside.   The API data showed almost 3.4-million-barrel build in the US inventories last week, hinting that the more official EIA data could also disappoint the bulls at today's read.   But the medium term outlook for crude oil remains positive, therefore, price pullbacks remain interesting dip buying opportunities as long as the 50-DMA support, which stands a touch below the $78pb mark, holds. 
UK PMIs Signal Economic Deceleration, Pound Edges Lower

Every Microsoft Product Will Have A Certain AI-Capability

Ipek Ozkardeskaya Ipek Ozkardeskaya 24.01.2023 11:35
The week started with more news of layoffs, and further gains in the S&P500.   Spotify was the latest tech company to announce it will let go of 6% of its workforce – around 600 jobs. Shares gained 2%  Ford announced it will cut 3200 jobs, mostly in Germany. Shares jumped more than 3%.  Easy. Companies slash jobs, investors buy shares.   But job cuts and cost-saving measures may not be all positive; they could also be a sign of a slowing demand. Just saying.  Anyway, the persistent optimism from investors, and the urge to call the end of the bear market pushed the S&P500 above the 200-DMA, yet again. Earnings will decide whether the latest gains will be sustainable.  All eyes are on Microsoft  All eyes are on Microsoft – not only because it will release Q4 earnings after the bell, but also because it's been making a great buzz since the start of the year thanks to its bet on ChatGPT.  The company confirmed yesterday that is putting $10 billion into the now-very-famous ChatGPT.   And given the traction that ChatGPT has gained since the start of the year, Microsoft could be on a winning path with its AI-bet.   The company's CEO said last week in Davos that every Microsoft product will have a certain AI-capability. The bots will be able to analyze Excel spreadsheets, to create AI art to illustrate a PowerPoint presentation, or even draft a whole email in Outlook. This is good news for everyone.  As such, it could well secure Microsoft's position as exclusive cloud computing provider to one of the world's leading – or at least the most famous to date - AI start-ups; it is a boost to its Azure cloud business, and perhaps to its search engine Bing, as well, which has remained well under the shadow of Google since ever.   Let's see if Microsoft will be the one to push the S&P500 above the year-long down trending channel top – despite the looming recession chatter.   PMI  PMI data released this morning showed that the manufacturing activity in Japan didn't improve in January, and remained in the contraction zone, although the services PMI printed a better-than-expected expansion. The dollar-yen advanced past the 130 level on Monday, but finds sellers above that level, as traders continue betting against the Bank of Japan's (BoJ) dovish policy, which makes little sense in the actual market environment. Buying the yen against US dollar remains a popular trade.  In Australia, the manufacturing PMI slipped below 50, into the contraction zone for the first time in 32 months, but business confidence improved to a three-month high, on hopes that China's reopening will make sure that activity doesn't stay depressed for long. The Aussie-dollar broke above the 70 cents level, as predicted, and consolidated above that level despite the weak PMI read this morning. The pair should continue its journey north on the back of a globally softer US dollar, and prospects of a better Chinese demand that boost commodity prices, including iron ore – which matters for the Aussie.  In other currencies, the EURUSD couldn't consolidate gains above the 1.09 mark yesterday. But today's PMI data could help give another boost to the single currency.   And, if not, the message from the European Central Bank (ECB) is crystal clear: the rate hikes will continue and that's positive for the euro.  Fun fact: The ECB went from one of the most dovish central banks last year – except the Bank of Japan and the Turkish central bank – to one of the most hawkish central banks in just a year.   If the euro weakened to below parity last year because of the dovish ECB divergence, the hawkish rectification in the ECB's policy stance should help it to recover further. 
US Stocks Extend Rally Amid Optimism Over Fed's Monetary Policy

For The First Time Since Last April The EUR/USD Pair Is Above 1.09

Ipek Ozkardeskaya Ipek Ozkardeskaya 23.01.2023 10:20
The week started slowly in Asia, as many markets were closed due to the Chinese New Year holiday. But those that were open benefited from the positive vibes from the US markets last Friday.  US equities rally, led by tech stocks  The S&P500 rallied 1.89% and flirted with the 200-DMA again, and closed the week a stone's throw from the ceiling of the 2022-to-date bearish trend.   Nasdaq did even better. The index rallied 2.86%, boosted by a well-deserved 8.50% rally from Netflix - which not only announced better-than-expected results in the Q4, but also a mouth-watering beat on the subscription growth end, with 7.7 mio new subscribers – a number that we thought we would hear only during a pandemic!   Google, on the other hand, jumped 5.72%, but for a less glamorous reason. The company said it will fire 6% of its workforce, which is around 12'000 jobs globally. Investors heard 'yes, that will clearly improve the cloud profitability!'   In total, Amazon, Microsoft and Google will be cutting 40'000 jobs.   Fed's quiet period  The quiet period for Federal Reserve (Fed) officials will help us digest what has been said over the past weeks.   In summary, we know that the Fed will further slow the size of its rate hikes in the coming months. $  But the fact that the Fed will raise by only 25bp next meeting doesn't mean that it won't continue hiking the rates. The rates will likely go above 5% in the Q1.  Focus on earnings  Microsoft, Johnson&Johnson, General Electric,Texas Instruments, Intel, Tesla Mastercard, Visa, Chevron and American Express are among companies that will go to the earnings confessional this week.  Big Tech earnings projections are down by about 5% since October.   Yet, expectations went sufficiently low that there is plenty of room for a positive surprise, as has been the case with Netflix.   FX & energy  The dollar kicked off the week under pressure. The EURUSD already hit the 1.09 mark early in the session, for the first time since last April, and is just a couple of pips away from the major 50% retracement on 2021-2022 selloff.   PMI data due tomorrow could confirm that the European economies took a softer hit thanks to mild start to the winter, and cheaper energy prices as a result of it.   And sufficiently strong PMI data, combined to the negative pressure in the US dollar into the Fed meeting, could help the EURUSD take a chance on the 1.10 resistance in the coming sessions.   In energy, crude oil posted its second straight week of gains on Friday, as the Chinese reopening story and prospects of higher global demand, and around 1 mbpd gap between supply and demand outweighed the recession fears.   The latest rebound in European nat gas prices, and the fact that we now have cold and snow in Europe could also tilt the balance further to the upside.   The barrel of American crude spent last week above the 50-DMA, now around $78pb, but couldn't clear the 100-DMA, which stands around $82pb.   The next target for the oil bulls is a move above the $82pb, for a potential extension of gains toward the $87/88 range.  
A Further Rise In Gold Is Very Likely, The Dovish Expectations Are Feeding Well Into The Bond Markets

A Further Rise In Gold Is Very Likely, The Dovish Expectations Are Feeding Well Into The Bond Markets

Ipek Ozkardeskaya Ipek Ozkardeskaya 19.01.2023 13:41
There was good, and less good news for investors on the wire yesterday.   The latest PPI data showed that the producer price inflation in the US fell way faster than expected. The expectation was a slowdown in factory gate inflation from 7.3% to 6.8%. And the data printed a sexy 6.2% for December – which meant a 0.5% retreat instead of a 0.1% decline. Core PPI also slowed. That's the good news.   The bad news is the US retail sales fell 1.1% in December – marking the biggest monthly drop of last year.   On the jobs front, Microsoft said that it will cut 10'000 jobs while Amazon started cutting jobs in the context of 18'000 job cuts announced a couple of weeks earlier. Exactly what the Fed wants.  The bad news would normally be good news for the stocks, if the Federal Reserve (Fed) members weren't there to spoil the dovish Fed expectations by saying that the US rates should go higher. Loretta Mester said more hikes are needed, and James Bullard reminded that the rates would have to stay 'on the tighter side this year' to help the Fed reach its 2% inflation goal.  S&P500 is an easy short at the current levels  The S&P500 didn't like the mix of slowing economic data, and still a hawkish Fed, and dived more than 1.50% yesterday.   And traders didn't hesitate much sending the index below the 200-DMA, and below the bearish trend building since the start of 2022, given that there is nothing encouraging for stock investors out there, other than the softening Fed expectations – which don't help filling the company's coffers.  Stock/bond divergence is happening!  The dovish expectations are, however, feeding well into the bond markets: the US 2-year yield is diving toward the 4% mark, while the 10-year yield hit 3.30%, the lowest level since September.   This means that the positive divergence in the sovereign space, compared with the stocks, is happening. Investors return to US sovereign bonds on expectation that the Fed would soften its policy due to recession jitters, while stock markets don't benefit from the expectation of softer financial conditions, as slowing economic activity is bad for profits.   And speaking of profits, Procter & Gamble and Netflix are due to release their Q4 earnings today!   Crude oil swings between gains and losses  US crude advanced past the $82 mark on Chinese reopening optimism and IEA predicting that the oil demand will hit a record in 2023, before falling back below the $80 on recession pessimism, and the news that the US crude inventories jumped by 7.6 million barrels last week, while the expectation was a drop in inventories.   The more official EIA data is due today, and the expectation of a 2.1 million barrel fall will likely disappoint the bulls. But I continue believing that the bulls will take the upper hand and carry the rally higher, though on a bumpy road.   Falling stocks + falling yields: a boon for gold diggers  Gold is bid above the $1900 level, and the positive pressure is supported by lower US yields – which decrease the opportunity cost of holding the non-interest-bearing yellow metal, and the softer US dollar.   The overbought conditions hint that we could see a minor downside correction in the short run, but levels between $1855 and 1900 are interesting for amassing gold.   There is potential for a further rise in gold, especially if the stocks fall, while the US yields continue easing. 
The ECB Has Made It Clear That Rates Will Remain High Until There Is Evidence That Inflation Is Falling Toward The Target

The Euro-Area Economy Is Performing Better Than Many Anticipated

Ipek Ozkardeskaya Ipek Ozkardeskaya 18.01.2023 11:41
Holy Bank of Japan! The Bank of Japan (BoJ) kept its below-zero interest rate and its faltering yield curve control policy unchanged.  No-action sent the Japanese 10-year yield tumbling by up to 14 bp – that's almost a 30% plunge. The dollar-yen spiked above the 131.50 level, losing more than 2.50% against the greenback.   The BoJ revised its GDP lower for this year, but kept its inflation forecast unchanged at around the 3%. And yet, the producer price inflation in Japan spiked above the 10% in December.   It feels like the BoJ doesn't want to face the reality, and isn't acting according to the market's needs.   Anyway, I think that traders will continue defying the BoJ's YCC strategy and try to break its back, but we will likely see more volatility in the yen, as the policymakers keep fighting the market – perhaps not to lose face?   On the currency front, we can't rule out the possibility of an advance above the 133 level, the minor 23.6% Fibonacci retracement on Oct to January retreat. The negative trend in USDJPY will remain intact below the 136 level, the major 38.2% retracement level.   Yen selloff supports the dollar index.  If the yen changes direction, the impact on the dollar index will also be felt – and it will be positive.   The dollar index is stronger this morning.  The EURUSD is below the 1.08 mark, and could extend losses toward the 1.0630, the lower end of the actual positive trending channel.   And yet, the ZEW data released yesterday showed that investor expectations for the German economy jumped to the highest level in almost a year and German Chancellor Olaf Scholz said that he is sure Germany will avoid recession this year, thanks to China's reopening and growing confidence that the energy-price squeeze is easing.   And now that the Euro-area economy is performing better than many anticipated in the face of record inflation and the energy crisis, the European Central Bank (ECB) is expected to raise the rates by 50bp in February and in March, and by another 25bp in May or in June. That should throw a floor under the euro weakness and may not let the euro slide too low against the dollar.   Across the Channel, Cable does particularly well, since Britain revealed a near-record pace of 6.4% in wages growth between September and November year on year. The latter will unlikely ease the anger of those striking for a better pay – headéine inflation in Britain came in at 10.5% in December, as core inflation didnt ease as expected - dwarfing the near-record pay rise. The latest numbers will only force the Bank of England (BoE) to deliver yet another rate hike next month to avert a further wage-price spiral. And that's positive for sterling.   S&P500 struggles finding buyers above 4000  Confusion and lack of direction best described yesterday's sentiment in the US.   US futures were pointing at a negative start, then turned higher in early trading as we heard a lot of talk about "green shoots" and "bright spots" in the economy when Chinese Vice Premier talked in Davos yesterday saying that he expects China's economy to return to normal this year.  The S&P 500 shortly traded above the 4000 level, but reality soon hit the fan with mixed earnings from Goldman and Morgan Stanley, and brought the top sellers in.   And the top sellers kept selling into the 4000 level to the end of the session. Finally, the index closed the session 0.20% lower, spot on the 2022's down-trending channel top and above the critical 200-DMA.  But the first set of earnings doesn't support a sustainable move above that 200-DMA level.   If we dive into the latest bank earnings, Goldman Sachs and Morgan Stanley earnings were mixed. Golman reported a 69% drop in Q4 profit as the slump in deal-making and its wealth management business weighed on Q4 results. Goldman shares closed the session almost 6.50% lower.   Morgan Stanley was also hurt by weakness in deal-making, but the wealth management and trading revenue grew. The shares closed almost 6% higher.   Note that Morgan Stanley set aside $85 mio for credit losses compared to only $5 mio a quarter ago, as proof that the bank is not optimistic about what's to come this year, either. Therefore, the 6% rally was certainly a bit exaggerated. 
USDX Will Try To Test And Break Below The 103.50 Level

Swissquote expect Euro against US dollar to recover along the year

Ipek Ozkardeskaya Ipek Ozkardeskaya 17.01.2023 09:24
European stocks kick off the week on last week's positive vibes, adding more gains to their best ever start to a year.  But sentiment in Asia was mixed; futures point at bearish start.  On the data front, China grew 3%, well below the government's 5.5% target last year, but the Q4 rebound was well above market expectations. Retail sales contracted significantly less than expected as well, while unemployment unexpectedly fell.   Could the European stock rally extend?  The DAX extended its advance above the 15000 mark, to the fresh highs since before the war in Ukraine started.   And the French CAC40 took over the 7000 resistance, and is only around 4% below the 2022 peak.   The recovery in European stocks is impressive, and coincides with the rebound of the euro against the US dollar since end of September – which makes the energy and raw material costs more affordable for European companies, and boosted by a mild start to the winter, which gave a broad comfort to the Europeans that the energy shortage will certainly not be on this winter's agenda.  Could the European stock rally persist? It depends.   Read next: China's economy grows 3%. FTSE 100 expected to open at 7,860, DAX to begin the day lower, at 15,106. What about CAC40?| FXMAG.COM We expect a further recovery in the EURUSD throughout this year, but the looming interest rate hikes in Europe, and the base-case scenario that energy and raw material costs will rally – due to the Chinese reopening, hint that the recovery could meet some obstacles along the way.    And the rally in material costs is also not a given, as fear of global recession could also hinder rally at this end. In this sense, we see that oil prices have hard time picking up upside momentum since the China reopening news. The barrel of US crude is now above the 50-DMA for the third day, but appetite above the $80 level is decidedly limited.  Copper futures also took a 2% dive yesterday, as recession was the major topic in WEF.   Anyway, recession expectations – per se – are not bad news for the markets. Decline in profit expectations, as a result of recession, is. So, all eyes are on corporate earnings!  In the FX  The US dollar was better bid yesterday, but the price recoveries in the dollar could be interesting opportunities to sell the tops, as the dollar is set to give back last year's gains against most majors, due to the softening Fed expectations, that come along with the recession worries.   The dollar-yen, where some interesting FX action is expected to happen this week, is steady-ish around the 128 mark, with JPY bulls waiting in ambush to push the pair lower in case we hear a hawkish development from the Bank of Japan (BoJ) due tomorrow.   Elsewhere, the Canadian inflation – due today, is expected to have eased 0.5% month-on-month in December. A soft inflation read could weigh on the Loonie in the shorter run, but the USDCAD should continue trending lower on the back of a broadly softer US dollar, and a potential recovery in oil prices.  
There’s still life in the US jobs market, but challenges are mounting

USA: Judging from activity on Fed funds rate, 25bp Fed rate hike is almost certain

Ipek Ozkardeskaya Ipek Ozkardeskaya 13.01.2023 08:15
US inflation came in line with expectations. The kneejerk market reaction to the data was surprisingly negative, but the major US stock indices extended rally, while the US dollar dropped sharply.  Why was the kneejerk reaction bad?   Because investors were expecting nothing but a softer-than-expected figure; the hidden expectation was a read below 6.5% for the headline CPI, and a negative number for the monthly core CPI.   That didn't happen.  Still, inflation eased. And it eased for the 6th straight month, from 9.1% in summer to 6.5% to the end of the year. During this time, the US jobs market remained tight. So, tight that the US economy added 4.5 million jobs in a year, and the unemployment rate fell to 3.5% in December.  Goldilocks?   We will see.   Looking closely into the data, services and food costs, which make inflation stickier and give a headache to the Fed rose; services inflation even soared to the highest levels since September 1982. That's not good news.   Shelter inflation recorded its largest advance since 1990s. That's also not great news – although it is said that shelter costs now overstate inflation and is the reason why core CPI accelerated on monthly basis, and there are some lag effects which would fade in the coming months.   Decline in energy prices, on the other hand, explained a part of the easing in inflation, thanks to lower gasoline prices, but energy, especially natural gas and electricity costs didn't retreat. On the contrary, electricity prices rose nearly 15% over a year, while nat gas prices rose 20%!  This, to me, is the major risk to the future inflation prints, as the Chinese reopening should further boost energy prices, hence inflation in the coming months.   This is also why I don't expect inflation to continue easing smoothly this year.  25bp is almost certain...  All things said, the latest CPI update justifies a 25bp hike from the Federal Reserve (Fed) in February, although the tight jobs market will certainly make the rate hike discussion heated at the heart of the FOMC.  The market's position is clear. Activity on Fed funds futures now assesses more than 95% chance for a 25bp hike.   The latter, however, doesn't change the fact that the Fed will continue saying that they will push the rates above the 5% mark.   Whether investors believe them is a completely other story...  In numbers...  Despite the negative kneejerk reaction, the S&P500 and Nasdaq both closed the day higher following CPI data in line with expectations.     The S&P500 ended the day 0.34% higher, and at a very important technical level: the index is now testing the ceiling of the 2022 bearish trend and the 200-DMA to the upside.   The 200-DMA has not been broken since April 2022, and has, so far, acted as a sign to sell the top. It could take more (...better-than-expected earnings) to clear resistance around 3990-4000 range.     Earnings expectations are low, but low expectations are easier to beat.    According to FactSet, the S&P500 companies could post earnings growth of -4.1% for the Q4.    Energy companies and tech stocks are an exception to this, of course. Energy companies will likely reveal another excellent quarter due to high energy prices, while tech stocks will likely deliver their second straight quarter of negative growth, with a decent 9.5% contraction expected across the sector.     But don't forget that high expectations are difficult to beat, while low expectations are easier to beat, and the prices move according to where the results fall compared to expectations.    Today, big US banks including JP Morgan, Citigroup, Bank of New York, Bank of America and Wells Fargo will reveal their Q4 results. The US financial sector is also expected to post negative earnings growth for last quarter.    Even higher interest rates are good for interest income, a too-rapid rise in the rates threatens credit quality, loan growth, and net interest margins.
ECB enters final stage of tightening cycle

Euro: ECB's Schabel talks further rate hikes. Australian inflation hits 7.3% - Australian dollar can be supported by a 25bp rate hike

Ipek Ozkardeskaya Ipek Ozkardeskaya 11.01.2023 09:27
US equities first struggled to find direction, as the Federal Reserve (Fed) Chair Jerome Powell kept mum on monetary policy in Stockholm yesterday, worried about the World Bank's morose growth projections, but then turned north on hope that a softer US inflation print tomorrow could boost the Fed doves and enhance appetite in US equities.   The S&P500 found support at the 100-DMA and closed the session above the 50-DMA, while Nasdaq advanced 0.88%. We could see some more optimism into tomorrow's CPI print in the US.  Gold benefits from softer US yields, and softer dollar on expectation that a softer inflation could soften the Fed's policy stance. So, a softer inflation could indeed send the price of an ounce above $1900 to the end of the week.  Stop fighting the Fed!  What's happening right now is absurd. The market is fighting back the Fed. The Fed says 'we will hike the rates above 5%', and investors reply 'we don't believe you; we think that you will NOT raise the rates above 5%!'    As a result, the financial conditions in the US are now neutral, while inflation, though easing, remains more than three times higher than the Fed's 2% target. This means that the Fed will continue hiking rates even if it means slower economic growth.   World Bank forecasts aren't cheery  The World Bank predicts a global growth of about 1.7% this year, about half the pace it predicted last summer. It would also be the third worst year in three decades after 2009 and 2020 slowdowns.  Read next: According to Euromonitor, 2022 Value of Buy Now Pay Later transactions is predicted to hit $156bn| FXMAG.COM The US is expected to grow by only 0.5%, the Eurozone should not grow nor contract, while growth in China will be around 4.3% according to their latest forecasts for 2023.   Although the slowing economic growth softens the rate expectations – and boost equities, a weaker global economy should weigh on corporate profits and should not let the rally run too far.   Have you gone out of your mind, Goldman?!  Then you have Goldman Sachs, which predicts that the Eurozone will finally not enter into recession... after all.   The bank said yesterday that the European GDP should grow by around 0.6%, versus a 0.1% contraction predicter earlier. And oh, they also see inflation easing faster than expected to around 3.25% by the end of this year.   Why? Because the boost from Chinese post-Covid reopening, and the sharp fall in natural gas prices thanks to the Weather Gods which prevented the continent from cold weather so far should help tempering slow down. ¨  ... then unicorns will invade Europe and we will all leave happily ever after.   ECB remains determined to hike rates  European Central Bank (ECB) officials stand behind their hawkish view despite the latest softening in inflation. ECB's Schnabel said at her speech yesterday that the ECB will have to raise the rates much further because 'inflation will not subside by itself'.   The EURUSD tested the 1.0760 resistance again yesterday, forming a triple top since mid-December. The positive pressure is the fruit of the divergence between softening Fed expectations and hawkish ECB bets.   Read next: 2023 Predictions: Central banks were buying gold at the end of the year at the highest rate since 1955 | FXMAG.COM Strong Australian inflation revives RBA hawks   In Australia, inflation advanced more than expected to 7.3% in Q4 fueling the expectation that the Reserve Bank of Australia (RBA) could opt for another 25bp hike in its February meeting. The AUDUSD is ready for fighting the 0.70 offers, if, of course, tomorrow's inflation read in the US doesn't reveal a bad surprise.  Crude under pressure  In energy, crude oil is dragging its feet below the $75 this morning and will likely remain under pressure as yesterday's API data showed that the US oil inventories rose by a little less than 15 mio barrels last week as the refining activity returned to normal following weather-related shutdowns. I still believe that price pullbacks could be interesting dip-buying opportunities as there are many supportive factors, including the Chinese reopening, and the globally tight supply.
According to Althea Spinozzi, it's clear that inflation remains Fed most significant focus

US stock market optimism diminished by Fed rhetoric hinting at keeping rates at 5%. S&P 500 didn't exceed 3900, Nasdaq finished a bit higher

Ipek Ozkardeskaya Ipek Ozkardeskaya 10.01.2023 09:51
Good news is that Asian stocks entered bull market. Bad news is that the Federal Reserve (Fed) President Jerome Powell could hammer the post-NFP stock rally in US stocks. Sentiment is mixed and investors are tense before Powell's speech, and Thursday's US inflation data.  Asia enters bull market  Asian stocks entered the bull market, as China's post-covid reopening, the weakening US dollar, and stimulus from the Chinese government and central bank supported a sustained rally in Chinese, and the Asian stocks since last October.   As a result, the MSCI Asia Pacific index gained more than 20% since the October dip.   Plus, China announced that it will continue supporting growth with unheard amounts of stimulus packages. It is on the news that the Chinee officials are discussing a record 3.8 trillion yuan quota for local government bond issuance this year – it equals $561 billion US dollars.   Many investors expect the Asian equities to diverge positively from their Western peers through this year.  Tense before Powell  In the US, the good mood is more difficult to justify and to extend. The euphoria around Friday's jobs data faded on Monday, when Fed officials came up and said that... the Fed rates will go above the 5% level and stay there for some time.   Sounds familiar? Yes, it does, because the Fed officials have been saying that they will push the rates above 5% and keep them there for a long time to make sure that inflation is on a solid path toward the 2% target.   The S&P500 was unable to extend gains above the 3900, rapidly started erasing early-session gains and ended the session 0.08% lower. Nasdaq also gave back early-session gains, though closed the session 0.60% higher.  Read next: Tesla Is Expected A Temporary Rally| FXMAG.COM US equity futures are in the negative this morning, as the King of market disappointment, the Fed Chair Jerome Powell, will be speaking at an event in Stockholm today, and he will probably not pop the champagne just because the wages grew less than expected last month, especially when you think that the US economy added a near record 4.5 million jobs last year, and that the unemployment rate fell to 3.5%.   Looking at the activity on Fed funds futures, the pricing suggests that the Fed will raise the rates by 50bp at the beginning of February. This means that there is a good margin for hawkish pricing in the coming weeks, into the Fed decision. Thursday's inflation read will be key in tilting the balance to one side, or to the other. A soft enough inflation figure could get investors to further go against the Fed.  In the FX   The US dollar index remains under a decent selling pressure, as a result of the dovish Fed expectations since last Friday's US jobs data. While any hawkish readjustment could give a minor boost to the dollar, the US dollar is set for further weakness this year. If the Fed shifts to a more dovish tone, the dollar should weaken, and if not, the dollar should still weaken on rising recession odds.   The EURUSD advanced to 1.0760 yesterday, which is the highest levels since last summer, while Cable flirted with 1.22 this morning. Gold consolidates gains above $1870, while we are about to see a golden cross formation on the daily chart, where the 50-DMA will shortly go past the 200-DMA.   Other supportive factors of gold prices these days are the softening US yields, and the cheapening US dollar. A softer inflation report on Thursday could get the bulls to target a rally above $1900.  Read next: 2023 Predictions: Central banks were buying gold at the end of the year at the highest rate since 1955 | FXMAG.COM In energy, crude oil remains under pressure despite the Chinese reopening talk, and the falling Russian supply. We see that the European sanctions weigh on Russian oil supply, as the 4-week average shipments decline despite a small gain posted last week. That means that the lower Russian supply will be another supportive factor of oil prices, besides the Chinese reopening, the tight global supply, the rising global demand defying recession odds, the fact that the Americans will have to refill their reserves, and the fact that oil companies underinvest to increase capacity. Despite the actual selling pressure, levels into $70 could be interesting dip buying opportunities for those looking for a sustainable recovery.   Likewise, commodities see a decent boost thanks to the Chinese recovery story. Copper futures – which are a barometer for global economy, are on a strong positive trend since the beginning of October, but they remain vulnerable to any deterioration in the global outlook. In this respect, the World Bank is expected to release its latest global economic prospect report this Thursday, and the projections may not be rosy. 
Federal Reserve splits highlighted by May FOMC minutes

US labour market data deliver us with NFP print of 223K. BlackRock, JP Morgan and Citigroup to announce their earnings on Friday

Ipek Ozkardeskaya Ipek Ozkardeskaya 09.01.2023 17:28
Friday's jobs data in the US, and more specifically, the market reaction to Friday's jobs data helped stock markets to record their best boost since more than a month on Friday. However, Friday's jobs report was rather... mixed, and spurred a lot of discussions and debates regarding whether the data was soft enough to convince the Federal Reserve (Fed) officials that the inflation battle is over, or it was strong enough to make them further scratch their heads.   The NFP printed 223'000 nonfarm job additions last month versus 200'000 expected by analysts.   But the average job additions for the last three months of last year was a touch below 250'000, down from 366'000 from the prior three-month stretch, and less than half of around 540'000 jobs added each month in the first quarter of 2022.   Plus, the tech industry shed job - in line with the headlines we have been reading since months. Goldman just announce it will be cutting 3200 positions, on top of 18'000 job cuts announced by Amazon last week, among others.   So, the trend in the US jobs market is on a slowing path, even though, monthly job addition prints above 200'000 are far from numbers you expect to see in recession.   Read next: Current market gains could be partly due to people returning from holiday breaks and reentering the market, leading to increased demand and trading activity| FXMAG.COM But that's the good news. The Fed is not looking to push the US economy into recession for fun, it wants to see the jobs market tighter because, in theory, a tighter jobs market should help ease inflation.  But if inflationary pressures ease with little negative impact on jobs, that's what we call the goldilocks scenario: a soft-landing from the ultra-supportive monetary policy euphoria, easing inflation without too much pain on jobs market.  In other words, it's jackpot for the Fed!   This is why, the US markets gave such a strong positive reaction to Friday's jobs data. Both the US 2 and 10-year yields fell more than 4% after the data, pulling the US dollar index lower along with them. The S&P500 jumped around 2.30%, while Nasdaq 100 rallied near 2.80%.   Gold price boosted by lower US yields Gold reached our $1880 per ounce medium term target, boosted by lower US yields, which made the opportunity cost of holding the non-interest-bearing gold lower, and increased appetite.   But we should still not forget one thing: the US economy added around 4.5 million jobs last year- That was the second best year on record after 2021 – where 6.4 million Americans found jobs following the pandemic-shattered economy. The unemployment data hit 3.5%, a multi-decade low, and Atlanta Fed President Raphael Bostic said that the central bank still needs to keep raising the rates despite the cooler-than-expected wages data.  'Good' bad news is that the December services PMI fell to below 50, the contraction zone, in December, adding some more evidence that the US economic activity is slowing. And that's something that the Fed is happy to hear.   Activity on Fed funds futures now price in a 25bp hike at the next FOMC meeting at around 75%, but the Fed has not hesitated to disappoint markets since last year to cool down the optimism and send the stocks to turmoil. So the dovish pricing in Fed expectations make the latest gains a bit bitter-sweet, as the slightest news, or hints that the Fed would not step back from its hawkish tone could vanish the latest rally.   Read next: We are preparing to see the S&P500 decline in the first weeks of the new year down to 3600 | FXMAG.COM So, this week's US inflation data will be key in either giving the bulls a further boost or bringing back the bears with revenge.   On Tuesday, Fed Chair Jerome Powell  will speak, and he may not hesitate to abate the Fed doves on rate expectations.  On Thursday, the US CPI data will likely reveal an encouraging easing. The US CPI is expected to have eased to 6.5% in December from 7.1% printed a month earlier, and from 9.1% printed last summer. If that's the case, the rapid fall in inflation figures could further boost the Fed hawks and help stocks and bonds extend rally, and the dollar extend drop. But if we see a smaller easing in December inflation, or a figure higher than last month's, the latest gains could rapidly vanish.   Earnings season kicks off Earnings season kicks off this week, with Jefferies and Tilray due to report their latest earnings today, Bed, Bath and Beyond – which warned last week that it could go bankrupt – is due to reveal its latest results on Tuesday, while JP Morgan, Bank of America, Wells Fargo, Blackrock, Citigroup, Bank of New York and Delta Air Lines will announce their Q4 earnings on Friday.  For banks, investors will focus on the level of bad loan provisions and mortgages, as rising interest rates are good for earnings, but higher-than-expected interest rates threaten credit quality, loan growth, and net interest margins.
According to Althea Spinozzi, it's clear that inflation remains Fed most significant focus

FOMC minutes affect S&P 500 and Nasdaq. Federal Reserve warns investors. Today it's time to discover ADP report

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.01.2023 11:01
Released yesterday, the FOMC minutes were hawkish enough to get the S&P500 erase early gains, but not hawkish enough to get the index to close in the red. The index closed the session 0.75% higher. Nasdaq gained 0.50%.   The Federal Reserve (Fed) repeated its determination to keep fighting inflation with further rate hikes, and warned that this determination should not be underestimated by investors.   No one talked about a rate cut in the foreseeable future, even though pricing in the market still shows that investors continue to bet that the Fed will start cutting rates before the end of this year.   Yes, there are some data pointing at slowing economic activity in the US, but the jobs market – which is closely watched by the Fed - remains surprisingly tight – while the Fed keeps saying that bringing inflation back to the 2% target requires some 'softening' in the jobs market.  Helas, a softening that has not showed up its nose, so far. Released yesterday, the US jobs opening data was again stronger than expected. The JOLTS data showed that there were still around 10.5 million job openings in November – little changed from last month, and a bit less than half a million less than the market expectation.  Read next: Samsung Suffers From Weakening Demand, Amazon Will Increase The Total Number Of Layoffs To Over 18,000| FXMAG.COM ADP Today, we will see what the ADP report tells about new hirings in December. Analysts believe that the US economy may have added around 150'000 new private jobs last month.   Note that the latter is not a good indication regarding what's to come on Friday. Last month, the ADP printed a weak 127'000 figure, while the NFP came in at 263'000. Therefore, even the avalanche of layoff news from big companies, and a soft ADP print may not be enough convince that the US jobs market is cooling.   On the rates front, there will likely be at least another 50bp hike this quarter, and perhaps one or two more 25bp hikes. Right now, activity on Fed funds futures gives a higher chance for a 25bp hike in the next Fed meeting.   To me, that means that there is room for a hawkish readjustment in expectations through January.  Oil tanks  Weaker nat gas prices, combined to the past few days' recession fears, and news that OPEC output increased in December thanks to the recovery in Nigerian supply from outages – despite the OPEC+ will to cut output to keep prices sustained - pulled the price of American crude 5% lower yesterday. The $75/76 support has been broken; I revise my short-term view from bullish to neutral, and expect the new support, around $70/72 range, to hold on tight supply, and the Chinese reopening story.   In the FX  The Australian dollar is surfing on the positive Chinese vibes. The Aussie-dollar shortly traded above the 200-DMA, near 0.6850, yesterday, but gains remained capped into the major 38.2% Fibonacci resistance on 2021-2022 selloff, if cleared, should hint at a bullish reversal in Aussie-dollar's medium term trend. And I think that a bullish reversal in AUDUSD is a matter of time, as the rally in iron ore prices triggered by the Chinese reopening should continue giving support to the Aussie in the coming weeks.   Elsewhere, the US dollar index couldn't extent the early week gains, and we are about to see a death cross formation on the daily chart, where the 50-DMA will cross below the 200-DMA very shortly.   A death cross formation is closely watched by investors and is seen as a bearish sign. Although it is a lagging indicator, it is in line with our 2023 outlook of softening US dollar against many currencies, and gold.  The EURUSD is bid around 1.0550, as Cable sees buying interest below 1.20 despite its worse economic fundamentals compared to other G7 economies.   One of the most popular trades of the moment is long the Japanese yen against EUR, USD and pound, as the BoJ's latest decision to double its cap on JGB yields spurred hawkish Bank of Japan (BoJ) expectations. Even though the BoJ warned that this doesn't mean that a rate hike is imminent, the BoJ won't be able to maintain rates below zero while rates are soaring elsewhere. Sooner or later, the BoJ will hike, and that's enough for traders to pile into the yen, which has been the worst performing major currency last year.
FX Daily: Resuming the Norm – Dollar Gains Momentum as Quarter-End Flows Fade

Softer ECB expecteations made European stocks increase. DAX increased by 0.8%, EuroStoxx50 gained 1%

Ipek Ozkardeskaya Ipek Ozkardeskaya 04.01.2023 10:53
European investors got an energy boost from lower inflation reads, and the falling nat gas futures, but US investors didn't follow up on the cheery market mood.   However, US sovereign bonds gained yesterday as an indication that the latest market moves were backed by recession fears, rather than hawkish Federal Reserve (Fed) expectations... And that could be a gamechanger for the stock-bond correlation this year.   Softer inflation won't change ECB's stance...  If European stocks were cheery yesterday, it was certainly due to an unexpected drop in German inflation below the 10% mark, a softer Spanish inflation, and a further slide in nat gas futures due to an abnormally mild winter – which also boosted the idea that inflation could further ease if energy prices – which are mostly responsible for the sky-high European inflation eased.   And if inflation starts falling at this speed in Europe, the European Central Bank (ECB) won't need to worry about fighting it so aggressively.   As such, the softer ECB expectations were mostly responsible for yesterday's rally in the European stocks. The DAX gained 0.80%, while EuroStoxx50 jumped 1%.   The problem with all this is, a single data point won't change the ECB's policy stance.  More importantly, yesterday's German CPI data was because the government paid some energy bills, and the headline figure obscured the increase in food costs across the country, along with tighter than expected job conditions, which could also make inflation stickier than ideal.   And finally, if we think that the euro appreciation helped the European stocks gain weight since October, the slowing appreciation may pull the rug from under their feet.   Could negative stock-bond correlation come back?  The US indices didn't follow up on their European peers' gains... at all. And the pain for the US risk assets started in the European session.   Combined to the dovish ECB bets, the EURUSD was trading 1.50% down at some point yesterday, Cable slipped below the 1.20 and tested the 50-DMA to the downside, while the Japanese yen couldn't extend strength below the 130 against the US dollar.   Read next: 2023 Predictions: Peter Garnry - Our target for S&P 500 is still around the 3,200 level sometime during the year leading to an overall drawdown of around 33% from the peak in early 2022 | FXMAG.COM What's interesting in all this is that the US yields were lower, meaning that investors bought treasuries while selling stocks, and the US dollar didn't really react to softer yields.   If the first trading day of the year is any indication, could we see the holy negative correlation between stocks and bonds come back in 2023? This is what many investors think will happen. The risk-off investors will likely continue exiting stocks on profit recession – and not on hawkish Fed expectations, and they could go back to bonds instead.  In summary, if the major market catalyzer becomes recession, rather than hawkish Fed, we could see the negative correlation between stocks and bonds come back.  And, if the falling yields couldn't boost sentiment in the US stocks yesterday, they certainly boosted appetite in the non-interest-bearing gold, which saw the opportunity cost of holding the yellow metal fall. The price of an ounce rallied to $1823, and could well benefit from a further fall in US yields – in which case we would also see gold become an effective hedge against fresh market routs.  Data watch  But let's not cry victory so fast, because the US economic data will say the last word on whether the Fed expectations will remain on the back seat. Due today, the ISM manufacturing index will reveal if and how fast US manufacturing contracted last month. If yesterday's PMI is any hint, we could see a fastening contraction in ISM manufacturing, which would then boost recession worries, hit the stocks, but not necessarily the bonds and gold.   Also, JOLTS data will show if, and by how much the US job openings fell in November.   But regardless of the ISM data, and the US job openings, the FOMC minutes will likely confirm that the Fed remains serious about further tightening policy, even if it slows the pace of interest rate hikes. Remember, if the Fed decided to go slower on its rate hikes, it's to be able to go higher! And the more resilient the US economy and the US jobs market, the more eager the Fed will be to continue its journey north... 
Asia Morning Bites - 22.05.2023

Poor data from China - Caixin manufacturing PMI fell to 49. IMF Chief Georgieva forecasts noticeable part of the world to be in recession in 2023

Ipek Ozkardeskaya Ipek Ozkardeskaya 03.01.2023 12:01
I know, all we hope is to leave the horrible 2022 behind, and lick our wounds this year, but the New Year started with the IMF Chief Georgieva warning that the global economy faces 'a tough year, tougher than the year we leave behind'. Great... The IMF expects a third of the world economy to be in recession this year, as the US, the EU and China are slowing. Good news for the US is that the Americans could avoid recession, but the bad news for the Europeans is that, the EU will hardly be as lucky; half of the union will be in recession this year, according to the IMF.   China will also be facing a 'tough year' - even the sudden U-turn from the Covid zero policy won't be enough to boost growth, as the incredibly disastrous management of both pandemic, and the exit from pandemic measures cause hundreds of millions of infections at the same time, and millions of death... and you can see the ravage in economic data. China's Caixin manufacturing PMI fell the most in 3 months, from 49.4 to 49 in December. It was slightly better than the expectations, but it was the fifth straight month of drop in Chinese factory activity. Output, new orders, and export sales all declined. Employment dropped for the 9th month, and there was no sign of a rebound.  Elsewhere, the German PMI data pointed at a faster than expected contraction in manufacturing activity in December, while the European manufacturing PMI came in at 47.8, in line with expectations.   We will have more PMI data today, but don't expect to see anything brilliant.   Read next: New Record For Electric Car Manufacturer - Tesla Deliveries Increased By 40% Year-On-Year| FXMAG.COM This being said, trading in European markets was rather optimistic on the first trading day of the year, as European nat gas futures eased on mild weather.   The DAX gained 1%, and held ground near the 14000 psychological mark, which also coincides with the 50-DMA, and the minor 23.6% Fibonacci retracement on September to December rally, while the French CAC 40 jumped nearly 2% for a reason I don't really know.   Activity in European futures hints at a bearish start on Tuesday, while the US futures are in the positive at the tie of writing.  Forex market In the FX...  The US dollar index kicked off the year on a subdued note, letting the dollar-yen tip a toe below the 130 mark. The EURUSD however, couldn't build on gains above the 1.07 mark, while Cable remained steady-ish a touch above its 200-DMA, which stands near 1.2030 level.   Gold jumped to $1843 per ounce despite the positive pressure on the yields recently, while oil remained offered into the 50-DMA, which stands a touch below the $81 per barrel mark.   This week's news and events...  The first week of the year will be marked with a couple of important data and events, which will start giving some justifiable direction to market moves after weeks of slow trading.   First, the FOMC minutes on Wednesday will likely confirm, again, the Federal Reserve's (Fed) tough stance to fight inflation.   But more importantly, Friday's jobs data will give an insight on whether the Fed is being successful fighting inflation.   Besides, the FOMC minutes and the US jobs data, the OPEC meets this week.   US crude is struggling to take over the 50-DMA resistance, as the slowing China story – despite the reopening, and the mild winter in Europe weigh on the bulls' appetite to boost the price rally.   But the oil bulls may have not said their last word yet. The limited oil supply, OPEC's willingness to keep oil prices sustained to fill in the coffers, the switching demand from gas to oil, the Americans who sold 180 million of their strategic petroleum reserves last year, but who will also need to refill them as soon as possible – and possibly around $70-80pb levels, and the slow green transition, all hint that the downside in oil will likely remain limited.   How limited? Levels around $75-76 could give support to price pullbacks for a potential rise toward the $88pb level.
Markets under Pressure: Rising Yields, Strong Dollar, and Political Headwinds Weigh on Stocks"

US tech stocks losses are huge - Netflix and Facebook are more than 70% down from Autumn peaks

Ipek Ozkardeskaya Ipek Ozkardeskaya 30.12.2022 10:18
US indices rallied yesterday, in an effort to recover a part of the past few session losses, rather than a fresh move, on fresh news, as there was no fresh news yesterday.   But yesterday's jump in US indices was relatively strong, perhaps due to thin trading volumes that make look the year-end moves impressive, while they are not.   Anyway, the S&P500 gained 1.75% yesterday, and could maybe finish the year with less than a 20% loss, while Nasdaq jumped more than 2.50%, but will still end the year with more than a 30% drawdown.   Things have changed so much in one year!  The Pivot  Remember, last year at this time, we were about to see Apple become the world's first $3 trillion company. The S&P500 and Nasdaq were running from record to record, and no one imagined how bad the hangover would be.   We didn't know it at that time but the 2022 bear market officially kicked off just a couple of days after the year started, when the first FOMC minutes release of the year showed that the Federal Reserve (Fed) was no kidding about the rate hikes, and that the financial conditions would get real tighter over the year.   And man, they got tighter... way tighter than we expected a year ago, with the Fed raising its interest rates 425bp starting from March.   As a result, Apple lost a third of its value, Amazon lost half of its valuation since the beginning of the year and, this month, became the first US big cap to lose more than $1 trillion in valuation. Netflix lost up to 75% of its value compared to November 2021 peak, and Facebook scraped 77% of its value since September 2021 peak.  Read next: 2023 predictions: All in all I forecast the S&P to fall 5% on the year but the Nasdaq will fall 10% says Ivan Brian, Chief Equity Analyst at FXStreet | FXMAG.COM It has been a terrible year for chipmakers as well. Nvidia, one of the most promising and hyped chipmakers in the US has also lost half of its valuation as, on top of slowing post-pandemic demand, the US blocked exports to the fructuous Chinese market.  And last but not least, Tesla contributed greatly to the fall of the S&P500, losing almost half of its valuation only since the start of the year. And the share price is down by more than 70% since its November 2021 peak, as Elon Musk made the headlines again this year, but not for good reasons. Twitter has in fact taken a huge toll on man's reputation. 2022 hasn't been his year.   A bad year...  In reality, 2022 hasn't been the year of no one, I guess. A was started in Ukraine as soon as end February and wreaked havoc in the markets. The Western nations imposed sanctions on Russia in March. Ruble lost half of its value against the dollar at the wake of its first attack in Ukraine, but only to close the year flat, and even slightly stronger against the dollar compared to before the war, as the skyrocketing oil prices filled the country's coffers.   Oil on the other hand soared to $130pb at the wake of Russia's first attacks on Ukraine. We had all kind of speculation that it would rally to the $180-200pb area. But Thank God that didn't happen. We are preparing to end the year below $80pb instead, as the recession fears took a toll on bullish bets.   But energy stocks had a great year. Exxon Mobil, Chevron, BP, Shell did so great that the desperate Western governments watching inflation cause a huge cost of living crisis decided to impose windfall taxes on these companies who announced jaw dropping earnings throughout the year and Exxon ended up suing the EU for this decision just a couple of days ago.  While all this was happening, the US' national debt went above the $30 trillion mark.   But the US dollar gained, as the Fed raised rates. Others raised rates as well, but the dollar kept rising.   Cryptocurrencies saw massive outflows, and the outflows revealed the cracks in the system, causing the collapse of the major institutions like Terra Luna, and FTX lately.   And gold hasn't been great in tempering inflation, but at the end of the year, and despite the soaring yields, the yellow metal managed to recover yearly losses, and is even preparing to end the year around 1% higher than where it started in US dollar terms.   So voilà. Everything looked ugly this year, except for energy and the US dollar.   The major take of 2022  The most important take of the year is: the era of easy money ended, and ended for good. It means that the financial markets won't look like anything we knew since the subprime crisis.   This is the beginning of a new era, when central banks will be playing a more subdued role in the markets, with less liquidity available to fix problems – a more than necessary move that came perhaps too late, and too painfully.   And given that there is still plenty of cheap central bank liquidity waiting to be pulled back, the situation may not get better before it gets worse in the first quarters of next year. Recession, inflation, stagflation will likely dominate headlines next year.   Happy New Year!
Asia Morning Bites - 22.05.2023

China's reopening seems to be a double-edged sword as energy and commodities prices will go up

Ipek Ozkardeskaya Ipek Ozkardeskaya 29.12.2022 10:28
The good news with China's reopening is that it should boost global growth.   The bad news with China's reopening is that it will not only boost global growth, but also energy and commodity prices - hence inflation, the interest rate hikes from central banks and potentially the global Covid cases – which could then give birth to a new, and a dangerous Covid variant, which would, in return, bring the restrictive Covid measures back on the table, and hammer growth.   Note that the reasoning stops here right now, the risky markets are painted in the red, but we could eventually go one step further and say that if the Chinese reopening hits the global health situation – hence the economy badly, the central banks could become softer on their rate hike strategies. But no one is cheery enough to see silver lining anywhere.   This year really needs to end, now!  So, Wednesday was marked by further selloff across European and US markets. The S&P500 slid 1.20% and closed below the 50% Fibonacci retracement on the latest rally. The index gave back half of gains collected from October to November. Trend and momentum indicators, and more importantly market sentiment remain supportive of a deeper dive to meet the major 61.8% Fibonacci retracement, at 3724 mark.   Likewise, Nasdaq lost another 1.32%, and the dips don't look like anyone wants to grab them right now.  In Europe, the DAX struggles to keep its head above the 50-DMA, near 13925.   Across the Channel, despite political shenanigans and Brexit's knock-on effects, high inflation and the cost-of-living crisis, Britain's 100 biggest companies are preparing to close the year with small gains, while the S&P500 has lost more than a fifth of its value.   Why?  First, the British companies had to compensate for the weakening sterling this year –  but that's also true for the DAX, for example, but the DAX is also preparing to end the year around 15% lower. So, it's not only an FX story.   Second, and the most relevant, the fact that the FTSE 100 is heavily crowded in energy and mining stocks is what made the FTSE 100 perform so well this year.   Among the biggest market caps, BP and Shell are up by more than 40% each ytd.  Plus, British big caps make most of their revenues in terms of US dollars; a good thing for a year when sterling lost up to 23% against the greenback at some point and is still down around 10% right now.  And I believe that the FTSE 100's outperformance could stretch into the new year. If the Chinese reopening brings along another bump in inflation due to higher energy and commodity prices, the FTSE 100 could continue offering a good shelter to those willing to hedge against an energy-led global inflation to temper the negative effects.  Of course, the biggest British companies do not reflect the underlying British economy, so the FTSE 100's good performance won't change the fact that smaller, and domestic focused companies will likely continue to suffer from high inflation, recession and perhaps another year of political turmoil as a cherry on top. 
The Commodities Feed: Specs continue to cut oil longs

Russian crude oil export ban seems not be a game changer as imports by affected countries were stopped beforehand

Ipek Ozkardeskaya Ipek Ozkardeskaya 28.12.2022 10:09
Yesterday, Russia finally responded to the EU's price cap on its oil exports, saying that they will simply stop exporting their oil to parties that 'directly or indirectly use the mechanism of setting a price cap'.   The Russian oil export ban will reportedly last at least until July 2023. Fair enough.  The latter announcement gave a minor boost to crude oil yesterday, but the barrel of American crude remained offered into the 50-DMA, near $81.60pb, and the price is back below the $80pb this morning.   Why? Because most countries that are pointed by Putin's finger have already stopped majority of oil imports from Russia.   Plus, the Russian crude is already trading below the $60pb price cap - meaning that there is no direct implication on the Russian supply – at least in the immediate future.   The country produces around 10 mio barrels per day, although the Russian Prime Minister said that the output may fall by 500'000 to 700'000 barrels a day early next year, which would be around 5-6% of the current production.   Read next: Dallas Mavericks' (NBA) owner, Mark Cuban, praises Bitcoin, willing to buy more when it gets cheaper| FXMAG.COM BUT, an eventual decrease in Russian oil supply gives support to the oil bulls' in the medium rub.   Other factors like Chinese reopening, and the cold weather in America should also help throw a floor under a further selloff in oil, and even encourage a rise above the 50-DMA, and toward the $88pb target.   Chinese reopening story is not all rosy.  If the Chinese reopening story is positive for oil and commodity prices - and for the massively battered Chinese stocks, it's bad news for global inflation.   This is why we don't see the US stocks gain on China reopening news, but we rather see them under a decent pressure, as the surge in Chinese demand will certainly boost inflation through higher energy and commodity prices.   And in response to higher inflation, the central banks will continue hiking rates.   And the stronger the positive impact on growth from Chinese reopening, the faster the global inflation, and the faster the global inflation the more aggressive the central bank actions will be.   The 10-year yield jumped 2.5% yesterday to above 3.85% and the German 10-year yield spiked more than 4.50% to above 2.50%. The rising global yields gave some support to the US dollar yesterday, but gains in greenback remained limited at some places.   The EURUSD for example was flat to slightly positive as the European Central Bank 8ECB) hawks didn't let the Federal Reserve (Fed) hawks take the upper hand.   Gold rallied $33 per ounce, to $1833, defying the rising US yields, while the Aussie-dollar pushed higher as well, parallel to the positive pressure in iron ore futures thanks to the improved prospects of Chinese demand.   Nevertheless, the Chinese reopening story doesn't do good to sentiment in stock markets.  The S&P500 slid 0.40% yesterday, where gains in energy stocks helped temper headwinds in rate-sensitive technology stocks, while Nasdaq, which is plenty of tech stocks, slumped 1.50% yesterday, and is certainly headed toward the next bearish target that stands at 10'200.   And the overall bearish sentiment, and endless news about FTX Sam Bankman Fried, which also raises concerns regarding the financial health of other cryptocurrency companies, pushed Bitcoin under the $17K mark, again.   And besides the global macro headwinds, and the sector-specific worries, there is also a growing headache regarding the impact of current price action on mining activities. Bitcoin's hash rate has been falling sharply since the FTX collapse, as some miners default under the pressure of globally squeezed margins.
Fed's "favourite gauge of inflation" - Core PCE - reached 4.7%

Fed's "favourite gauge of inflation" - Core PCE - reached 4.7%

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.12.2022 09:30
It has been quite a quiet start to the week with many major markets still closed for Xmas holiday, but no one saw Santa coming this year, have you?  On the contrary, the Bank of Japan led drama across the global financial markets reminded that the year will certainly not end on a positive footage, even though the last trading week of the year is expected to be marked by a 'Santa rally'.  A few encouraging news, however, could give a minor boost to equity markets.  Read next: Residents Of Brazil Will Not Be Able To Use Cryptocurrencies As Legal Tender| FXMAG.COM First, released last Friday, the US PCE data, the Federal Reserve's (Fed) favourite gauge of inflation fell to 5.5% in November, the core PCE slipped below 5% to 4.7%. Still more than twice the 2% policy target, but on the right path after all the tightening drama of 2022.   The latter gave a very small boost to US equities before Xmas, but it really didn't help the S&P500 to reverse weekly losses. The index closed the week 0.20% lower than where it started. It is now below the major 38.2% Fibonacci retracement, meaning that we are now in the bearish consolidation zone and could expect a further and possibly a sustainable selloff below 3796, which is the 50% retracement level.  Second, the Chinese reopening continues, with news that the country will scrap Covid quarantines and lower Covid to a lower-threat disease. The news help the Chinese stocks gain at the start of the week. Yet, there is reportedly around 250 million new cases since the reopening, which will likely throw a shadow on the reopening glow.  But crude oil is up by around 15% since the December dip, and the Chinese reopening news could give a helping hand to oil bulls for an extension of the rally to the $88pb level.
"SD/JPY Nearing Intervention: Japanese Officials Prepare for Action

Euro bonds benefit from Christine Lagarde's rhetoric. Euro touched 1.0736

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.12.2022 09:30
I should admit that I thought the major event of this week would be Federal Reserve (Fed) President Jerome Powell's speech and a dot plot from the FOMC members, which would look significantly more hawkish than the expectations, and a couple of eventless 50bp hikes from the other major central banks including the European Central Bank (ECB), the Bank of England (BoE) and the Swiss National Bank (SNB).   But the week's central bank surprise came from Christine Lagarde yesterday.   Lagarde's 'whatever it takes' moment  The ECB raised its interest rates by 50bp as expected yesterday, and hinted at the accompanying statement that there would be more rate hikes on the pipeline.   And President Christine Lagarde killed all hope that the ECB would take into account the slowing economy, and recession, when hiking rates.   Instead, Lagarde kept telling reporters that the rates in the Eurozone will continue to rise 'steadily and significantly' over the next meetings. She said that the ECB will raise the rates by another 50bp at the next meeting. Then by another 50bp in the meeting after that. And another 50bp in the meeting after that. Then another one!   No central banker has given such 'forward guidance' before. The idea of 'meeting to meeting adjustment to the monetary policy', the concept of 'we will be watching the data to decide the next steps' got hammered, yesterday. Christine Lagarde made the most hawkish speech since she came to the office. And yesterday's meeting was one of the most important ones since Mario Draghi's 'whatever it takes', back in July 2012.   Lagarde's speech was the 'reverse whatever it takes', or the new 'whatever it takes to bring inflation to 2%'.   And oh, the ECB will also start unwinding its balance sheet from March, but the officials sound like they don't have a clue about how that will play out, because they have never done it before. This is what they said.   Merry Xmas!  European yields spikde during Madame Lagarde's speech. The German 10-year yield jumped more than 10%. The French and the Spanish 2-year yield did the same. The Italian 2-year yield soared more than 13%.  Christine Lagarde's speech also sent the markets to hell yesterday, and smashed whatever hope was left for a year-end stock rally.   The DAX and the CAC fell more than 3%.   Of course, the ECB's hawkish announcements – that came a day after the Fed's hawkish decision - wreaked havoc across the US equities as well. The S&P500 slipped below its 100-DMA, as Nasdaq fell below its 50-DMA.   Read next: EU economy expected to grow 0.8% in 2023. Following ECB hikes can be higher than Fed ones | FXMAG.COM Here in Switzerland, the SMI also paid the price of a 50bp hike from the SNB and the ECB. The index fell around 2.50%, although some breathed a sigh of relief that the EURCHF stayed relatively stable, not the get the Swiss franc more expensive for European clients.   Go, euro!  Even though the euro was relatively stable against the franc, the single currency got a nice initial boost from the ECB decision and especially Lagarde's cruelly hawkish press conference against the US dollar.   The EURUSD spiked to 1.0736, the highest level since April, then gave in to the broadly stronger US dollar, and is back below the 1.07 mark this morning.   But the significant hawkish shift in ECB's policy stance, and the determination of the European leaders to shot inflation to the ground should continue giving some more support to the euro, therefore, price pullbacks in EURUSD could be interesting dip buying opportunities for a further rally toward the 1.10 mark.  And if the US dollar strengthened yesterday, it was certainly due to a heavy selloff in stocks and bonds that ended up with investors sitting on cash. Other than that, the data released in the US yesterday was not brilliant! The retail sales fell by most in a year; holiday shopping apparently didn't help improve numbers. The Empire Manufacturing index tanked from 4.5 to -11, versus -1 expected by analysts. Both data hinted at a slowing economic growth in the US, which should normally boost recession fears and keep the Fed hawks at bay. And that could mean a further downside correction in the dollar in the run up to Xmas.
Canada's Inflation Expected to Ease in May, Impacting BoC's Rate Decision

Fed Chair Powell bears in mind inflation prints, but they seem to be insufficient for FOMC

Ipek Ozkardeskaya Ipek Ozkardeskaya 15.12.2022 08:19
We knew that the Federal Reserve (Fed) Chair Jerome Powell would not tell investors 'Ho ho ho, inflation is now 7%, we will stop tightening policy and hiking the rates. So, you can buy stocks, bonds, cryptocurrencies, meme stocks, whatever you find. Merry Xmas!'   No, he was not going to do that, and he did not.   As expected, the Fed raised its interest rates by 50bp to 4.25/4.50% range, the dot plot showed that the Fed officials' median forecast for the peak Fed rate rose to 5.1%.   Plus, the distribution of rate forecasts skewed higher, with 7 officials out of 19 predicting that the rates could rise above 5.25%   Moreover, the inflation forecast for next year was revised higher DESPITE the latest decline in inflation.   And the median rate forecast for 2024 was revised higher to 4.1%.   In summary, the FOMC message was very clear: the Fed is not ready to stop hiking rates - even though they will be hiking by smaller chunks.  Jerome Powell said yesterday that the last two CPI reports were 'a welcome reduction in the monthly pace of inflation', however, 'it will take substantially more evidence to have confidence' that the job is done.   Crystal clear. No pause, no cut, no softening in sight.   Waking up from a dovish dream  US equities woke up from a dovish dream with a cold shower yesterday.   What's interesting is, some investors still wanted to ignore the hawkish Fed comments and buy the dips, because the new Fed trade is no longer about how high the Fed rate will go but 'how soon the Fed will start cutting the rates again'.  But that reasoning has limits, as it ignores the additional pain that the stock markets should endure due to an eventual recession – the trigger for rate cuts expectations - which could trigger a fresh wave of sharp selloff. As a result, the S&P500 closed the session 0.60% lower, and there is a stronger case building for a deeper downside correction toward and below the 100-DMA, 3930, than a ytd trend reversal with a third, and successful push above the 4100 resistance. The falling earnings expectations and slowing economic activity is the next challenge for stock investors as the risk of another, and a sharp selloff is still very much alive. Same for Nasdaq. The index closed 0.80% lower after the Fed decision, and will likely re-test the support at 11430/11450, and eventually clear it.   Read next: The Australian Dollar Held Above $0.68, Today The Fed Will Make Its Last Decision Of The Year| FXMAG.COM So for those who wanted to see Santa come around this Xmas: he will probably be stuck somewhere in the snow.  USD rebound should remain limited  The US dollar index rebounded from the lowest levels since summer, yet the dollar appetite will likely remain soft, and the rallies will likely be seen as interesting opportunity to sell the top against other majors, given that the Fed's hawkishness has been wildly priced since mid-2021, and a further downside correction would not be surprising, even though it's somewhat counterintuitive to rush back to majors like the euro, which deals with a terrible energy crisis and faces a severe recession if it's not already in one, the pound, which is hammered by economic and political disasters in the UK, amplified by the Brexit's consequences, and the yen, where the BoJ refuses to take a policy action, letting inflation run hot by keeping rates in the negative territory...  Not the same 50bp...  Today, the European Central Bank (ECB), the Bank of England (BoE) and the Swiss National Bank (SNB) are also expected to hike the rates by 50bp to tame inflation in Europe.  But the ECB's and especially the BoE's 50bp hike will likely sound more dovish than the Fed's 50bp hike.  The ECB is expected to revise its inflation forecast higher – which justifies a rate hike, but pull its growth predictions lower – which doesn't make a rate hike seem 'that' right.   If the ECB officials could spit out a date for the start of the QT, that would be a good thing.   The tighter ECB policy – and if all goes well, a softer US dollar - is expected to give further support to the single currency in the coming months, and help the pair extend gains toward the 1.10 mark.   And the euro recovery is one thing that could tame a part of inflationary pressures, making the raw material and energy costs more affordable for European businesses and households.  Across the Channel, the BoE is also expected to hike by 50bp, but try not to boost the BoE hawks. Data released yesterday showed that inflation in Britain slowed to 10.7% in November, which is not a victory, but the economic difficulties in Britain will likely keep the BoE's hands tied.  And finally in Switzerland, the National Bank is also expected to raise the rates by 50bp to keep up with the others. The strong franc has been the SNB's best arm in its fight against inflation. And a 50bp in Switzerland - where the inflation is around 3%, which makes it three times lower than inflation in Europe and around two times lower than inflation in the US - is a bigger hike in real terms, and should further support the franc. The dollar-franc is expected to fall to 0.88/0.90 range in the continuation of the actual bearish trend.
Jerome Powell wasn't that dovish yesterday, hinting at acceleration of rate hikes and higher rate peak

Fed Jerome Powell is said to switch investors' mood at the press conference later today

Ipek Ozkardeskaya Ipek Ozkardeskaya 14.12.2022 12:21
The softer-than-expected inflation print in the US sent the stocks higher and the US dollar lower, but the S&P500 couldn't clear key resistance levels, as investors know that the Federal Reserve (Fed) Chair Jerome Powell could coldheartedly kill the market joy at his post-FOMC press conference today.  On the right path, but...  Yesterday's inflation report in the US filled investors with joy and further hope that  1. Inflation in the US may have peaked this summer and we will be heading lower from here, and,   2. The Fed will adopt a softer monetary policy stance and hike, yes, by 50bp today, but certainly not more than another 25% in February.   The problem with that is, swap pricing now points at a peak Fed rate of less than 4.90% in Q1, while the Fed will likely carry on pushing the rates at least to and above the 5% mark.   Therefore, the chances are that Jerome Powell will seem satisfied regarding the falling inflation  - because it means that whatever turmoil the Fed has been causing in the markets is at least working through to the end goal of taming inflation.   Read next: $1 Trillion As Part Of Barclays Efforts To Accelerate The Transition To A Low-Carbon Economy | FXMAG.COM But Powell could also stress the fact that inflation remains significantly high compared with the 2% policy target, and that relaxing the tightening measures prematurely is not a good idea.   Therefore, there is no guarantee that the latest fall in US inflation will lead to a softer terminal rate on the dot plot. The Fed officials will likely plot a terminal Fed rate of above 5%, and the gap between where the Fed sees its peak rate next year, and where the market thinks the Fed rate will be a risk for investor appetite.   This is maybe why we saw a great kneejerk reaction to the CPI print yesterday, but the S&P500 didn't rally as much as expected. The S&P500 futures gapped higher at the open, but gently softened to close the day with less than a 1% advance, without being able to clear the 4100 resistance and the ytd bearish trend top.   This means that investors are cautious before Jerome Powell's press conference and the dot plot. They know that the last thing the Fed wants is to reverse slowing inflation by triggering a bullish market euphoria.   And at the end of the day, it's Jerome Powell, and the Fed, who will either give a green light for a modest Santa rally, or tell investors that Santa is stuck in a snow storm this year.  Significance of the dot plot  It's important to note that the dot plot projections give an idea on how the feeling and the expectations change at the heart of the FOMC.   But it's not rocket science.   If you look at the rate projections last year, the Fed funds rate was expected to advance to 0.90% by the end of this year. But the rates advanced far beyond that level. Assuming that the Fed will hike by another 50bp today, the Fed rates will finish the year at 4.25/4.50%. It's more than five times compared to the projections.   The softer-dollar joy   The US dollar index fell following the softer-than-expected CPI print, and hit a fresh low since summer.   The EURUSD spiked to 1.0673, Cable advanced to 1.2444 and the dollar-yen re-tested the 200-DMA to the downside, and gold spiked to $1824 per ounce.   The softer US dollar, and stronger euro sent the European indices to fresh highs since summer. The DAX flirted with the June peak, and the Eurostoxx50 traded at the highest level since February  Crude oil rallied more than 2.50% yesterday, on hope that the Fed could slow down the rate hikes, and not push the US into a deep recession to fight inflation – in which case, the scenario of a soft landing could materialize and prevent demand outlook from becoming too morose.   But the rally in US crude remained capped at around $76pb, and the surprise US inventory build last week, pre-announced by API, may have capped the topside. The more official EIA data is out today and could mark the end of a series of 4 consecutive months of significant decline in US inventories.   Read next: John Hardy (Saxo Bank): I don’t think any single inflation print will unsettle the BoE here, just look at the huge recovery in sterling from the lows | FXMAG.COM Bitcoin can't care less about the FTX, Binance drama  The FTX drama continues with the arrestation of Sam Bankman-Fried in the Bahamas, and news that investors withdrew $3.7 billion worth of funds since last week, the last $1.9 billion being withdrawn over the past 24 hours.   Plus, Binance reportedly stopped the stablecoin USDC withdrawals.   But Bitcoin couldn't care less. The price of a coin advanced more than 3% yesterday, and tested the 50-DMA to the upside, showing that the FTX drama has been priced in and out and further drama should not hit the coin harder.   The same is not true for cryptocurrency exchanges, however, which remain at a hot seat with the drama spilling over to other exchanges. Coinbase shares lost more than 9% yesterday.
US stocks gain on hopes of a softer inflation print released later today

US stocks gain on hopes of a softer inflation print released later today

Ipek Ozkardeskaya Ipek Ozkardeskaya 13.12.2022 11:02
European equities traded in the red at the start of the week, but equities in the US rebounded as investors are hanging on to hope of slower inflation and reasonably hawkish Federal Reserve (Fed) by their fingernails.    Today and tomorrow will tell whether they are right being optimistic or not.   The latest US CPI data will reveal whether inflation in the US eased, and by how much. It's highly likely that we will see a number below the 7.7% printed a month earlier. But a number below 7.7% won't be enough as analysts expected it to ease all the way down to 7.3%.   Last Friday, the PPI figure showed that the US factory gate prices eased in November, but not as much as penciled in – leading to some disappointment among investors. Today, a similar disappointment could erase yesterday's 1.43% rebound in the S&P500 and could easily send the index below its 100-DMA. Read next: Microsoft (MSFT) rose 2.89% after announcing it will purchase a 4% stake in London Stock Exchange Group| FXMAG.COM  But if, by any chance, we see a softer CPI figure, then the S&P500 could easily jump above its 200-DMA, and even above the ytd descending channel top.   But, but, but...  Today's US CPI data, unless there is a huge surprise, will probably not change the Fed's plan to hike the interest rates by 50bp this week. Activity on Fed funds futures gives 77% chance for a 50bp hike, and a slim chance of 23% for another 75bp hike.   What will probably change is where investors see the Fed's terminal rate, and for how long.   More importantly, it will give us an idea on how the market pricing for the Fed's terminal rate will clash with the dot plot projections that will come out tomorrow, and that will, in all cases, hammer any potentially optimistic market sentiment.   Therefore, even if we see a great CPI print and a nice market rally today, it may not extend past the Fed decision on Wednesday.   Energy up.  European stock investors are uncomfortable this week due to the icy cold weather, that will get the countries to tap into the natural gas, and other energy supplies.   The US nat gas prices jumped more than 30% since last week due to a powerful Pacific storm bringing cold and snow to the norther and central plains in the US.   In the UK, power prices hit another ATH yesterday. Read next: An incoming cold spell in the US has seen the cost of US gas surge 27% during the past three trading session while (...) Dutch TTF gas contracts remain below €150| FXMAG.COM   Happily, we haven't seen a significant rise in the European nat gas futures, which in contrary kicked off the week downbeat.   But crude oil rallied as much as 2.60% on Monday as Russia said that the EU's $60 cap on its oil could lead to supply cuts, as Goldman said that Chinese reopening could boost demand by 1mpd - which would mean a $15 recovery in crude's price - and as a key pipeline supplying the US closed following a spill discovered last week.   I think that the oil rebound due to these three factors could be short-lived and may offer interesting top selling opportunities for medium term bears looking for a further dip in oil prices to below $70pb. Because, the Russia is not harmed by $60pb currently, US supplies will be restored and  the Chinese reopening may not be smooth due to potential disruptions in economic activity, because people are sick.   Don't count on strong UK GDP  The British GDP grew more than expected last month and that was mostly due to the rebound in activity after Queen Elizabeth's death slowed activity earlier. But strikes across the country are so severe that they could wipe half a billion pounds off the hospitality industry's pre-Xmas earnings. PM Rishi Sunak thinks that military staff could help cover for striking workers.   Cable consolidates gains below 1.23 but is at the mercy of the US dollar. The Bank of England (BoE) is expected to hike by 50bp at this week's MPC meeting, but the hike will certainly be accompanied by dovish statement as the UK economy is not strong enough to withstand a Fed-like tightening in the middle of an energy, and cost-of-living crisis.
Oanda expect next rate hikes as Bundesbank and ECB predicts will accelerate

It's going to be an outstanding Thursday as ECB, Bank of England and Swiss National Bank decide on interest rates

Ipek Ozkardeskaya Ipek Ozkardeskaya 12.12.2022 13:24
Friday's US PPI print was soft, but not soft enough to meet market expectations. The US producer prices in November rose 7.4% since a year ago, from 8% printed a month earlier, and more than 11% printed in summer. But still slightly higher than 7.2% that analysts predicted.   The kneejerk reaction was as expected. The US dollar spiked following the data, closed the week on a strong footage in America and opened the week on a strong footage in Asia. Trend and momentum indicators turned positive last week, and the dollar could gain more field before two important events that will mark the trading week: US November CPI on Wednesday, and the FOMC decision on Wednesday.   Another disappointment?  Looking at the expectations, inflation is expected to have slowed to 7.3% in November from 7.7% printed a month earlier. But because the consensus number is relatively low, we may have another Friday's PPI-like disappointment at tomorrow's US CPI release, which could further boost the Federal Reserve (Fed) hawks before Wednesday's FOMC decision, fuel the US dollar, send the US yields higher and the stocks lower.   One good news about inflation, however, is that the 1-year inflation expectation unexpectedly declined to the lowest levels since September 2021. This is excellent news for the Fed, as inflation expectations are self-fulfilling, and have the power to bring inflation down just by changing the way people make their decisions.   But in reality, none of it will matter for the Fed's policy decision this week.   Important note before the FOMC decision  There is a gap between what the Fed says it will do, and what the market thinks, and prices the Fed will do, even a tiny hawkish message could already weigh on the mood before Xmas.   For now, the pricing in the market matches a terminal Fed rate of less than 5%, while the dot plot is expected to reveal a higher median rate forecast for 2023 of around 5.125%. This means that there is room for a hawkish rectification in market pricing both in the US dollar, and in equities.   In the medium-run, while I believe that a hawkish correction should not change the dollar's medium-term outlook - which is bearish, I think that the stock markets could take another dive, as the recession worries should keep appetite limited.   Read next: An incoming cold spell in the US has seen the cost of US gas surge 27% during the past three trading session while (...) Dutch TTF gas contracts remain below €150| FXMAG.COM The S&P500 failed to clear an important ytd resistance last week, and slipped 3% during the course of the week. While Nasdaq tumbled 4%, having flirted with the 100-DMA the week before.   We shall see both indices extend losses this week.  Other than the Fed...  The European Central Bank (ECB), the Bank of England (BoE), the Swiss National Bank (SNB) and Norges Bank are all due to raise interest rates this Thursday.  In the Eurozone, the ECB will probably raise its policy rates by 50bp. But given that inflation advanced to double-digit numbers this year, we can't really rule out the possibility of a third consecutive 75bp hike from the ECB.   The European policymakers are expected downgrade their growth forecasts, and upgrade their inflation projections. If that's the case, a too-fast rate hike may not be ideal, and we shall end up with a 50bp hike, with the hint that the QT in Europe would start by March next year – which is an extra hawkish announcement.   The EURUSD recovered more than 11% since the end of September, thanks to a broadly softer US dollar, and we shall see the single currency aim for a stronger recovery. Although the direction in the short run could be blurred by the Fed decision, and the reaction to a probably hawkish decision.   Across the Channel, the Bank of England (Bo) is also expected to raise its rates by 50bp, to push the lending rate to 3.5%, the highest since 2008. Even though the BoE should keep raising rates to fight its double-digit inflation, the freefall in British home prices and the rapid slowdown in economic growth hint that the BoE cannot push too hard, either.   Cable rebounded almost 20% since the Liz Truss dip back in September, and could extend gains toward 1.30, not because the pound will do great thanks to a flourishing British economy, but because the US dollar is expected to depreciate in the coming months. And as it is the case for the euro, the short-term direction for sterling-dollar is unclear, as the US dollar's move into and posterior to the Fed decision will determine the next short term direction in Cable.  Here in Switzerland, the National Bank is also expected to hike the policy rate by 50bp to 1%. Inflation in Switzerland has been much more moderated compared to Europe or to the US thanks to a strong franc. The dollar-franc lost more than 8% since end of December, and the pair should extend losses to 0.88-0.90 region.
ECB's Hawkish Move and Risk Appetite Propel Major Currencies, Leaving Dollar in the Dus

Crude oil touches $71, gold rises thanks to weaker greenback. China inflation drops to 1.6%

Ipek Ozkardeskaya Ipek Ozkardeskaya 09.12.2022 08:18
The US initial jobless claims for employment benefits rose last week, and continuing claims advanced to their highest levels since February, meaning that people who are out of work take more time to find a job.   It sounds terrible to a normal ear, but it's music to the Federal Reserve's (Fed) ears, as it is a sign that the jobs market in the US could be weakening – and that could help weaken inflation.  So, yesterday's trading session was a bit better than the previous five sessions. The US indices eked out small gains after taking over a mixed session from European traders.   The Eurostoxx index was flat yesterday, while FTSE 100 fell despite a good session for the mining stocks, which rallied on a jaw-dropping $7 billion profit announced by the commodity trader Trafigura.  Activity on FTSE and European index futures hint at a slightly positive start on Friday. The US PPI data will, however, say the last word.  The Data of the Week   The US will release its November PPI figure today and expectations are low.   Released earlier, the Chinese inflation fell to 1.6%, the lowest since March in line with expectations; the factory gate prices fell 1.3%. Prices of production materials shrank as the cost of extractions and processing cost continued to decline. A sharp slowdown in the cost of raw materials also helped cooling the Chinese PPI.   The consensus of analyst estimates on Bloomberg survey shows that the US PPI is expected to have slowed to 7.2% in November from 8% printed a month earlier. The core PPI is also seen down from 6.7% to 5.9%.   Read next: BMW Was Fined 30,000 Pounds By CMA, Google Wants To Become More Productive| FXMAG.COM If this is the case, if the factory gate inflation in the US slowed last month – which would also hint at a potentially slower CPI data next Tuesday before the FOMC decision – we could see the risk assets shrug off some of this week's weakness. The S&P500 could rebound back to its 200-DMA and close the week above the 4000 mark.   But if the US PPI figure is higher than expected – which is well possible given that the low expectations are harder to beat, then we will probably see the US stocks sink back in the red.   The key bearish targets for the S&P500 stands at 3900, which has acted as a pivot a couple of times this year, and the 3870 mark, the major 38.2% Fibonacci retracement on the latest bear market rally, if broken, would hint at a medium term bearish reversal.   More potential for hawkish price action  The US dollar index remains under a decent selling pressure against many majors. The US dollar index hasn't extended losses below last week's lows but remained clearly offered into its 200-DMA this week, meaning that the conviction that the US dollar should fall sustainably strengthens among traders.   A US PPI figure in line, or ideally softer-than-expected, could boost the US dollar bears, and help the dollar close the week at fresh lows since summer. Whereas disappointment on the PPI front will likely give a boost to the dollar, as it would boost the hawkish Fed expectations and the rate bets.  It's important to note that the Fed is given around 80% probability to hike the interest rates by 50bp next week. But the inflation data will hardly change that expectation. It will change the bets on the Fed's terminal rate, instead. The market pricing still points at a terminal Fed rate below 5%, which means that, in case of PPI disappointment, there is more potential for a hawkish price action, than a dovish one.  In commodities, gold is also pushing higher thanks to a broadly softer US dollar. The precious metal is above its 200-DMA this morning and is flirting with the $1800 mark. Soft PPI data could help extend the yellow metal's rally above $1800, whereas a stronger-than-expected figure will likely lead to some profit taking before the weekly closing bell.   Crude to $65pb?  The barrel of American crude extended losses to $71 per barrel. Trend and momentum indicators remain comfortably bearish, inviting traders to sell the tops for a further fall in oil prices in the short run. A fall below the $70 psychological level could pave the way for a further decline to $65, in continuation of an ABCD pattern building since end of September.  But the price should rebound back above $82 sometime in the first quarter of next year.
The Loonie Pair (USD/CAD) Bounces Off An Upward-Sloping Support Line

On Wednesday stocks lost, but sovereign bonds increased. Decline of oil prices affect Canadian dollar

Ipek Ozkardeskaya Ipek Ozkardeskaya 08.12.2022 15:12
Stocks fell for a fifth day, but the sovereign bonds gained, a hint that the market catalyzer shifted from the hawkish Federal Reserve (Fed) pricing – where stocks and bonds fall at the same time, to recession fears, where stocks remain under pressure, while investors seek refuge in safer sovereign assets.   The latest data showed that around $5 billion flowed into US bond ETFs over the past week. Ishares 7–10-year Treasury bond ETF is up by more than 7% since the October dip, up by 3% since the beginning of December and should recover further as investors are expected to return to bonds before they return, sustainably to equities.   The S&P500's latest bear market rally is weakening by the day. The index gave back another, though a slim 0.20% yesterday, and closed near its 100-DMA.   The US 10-year yield slipped below its own 100-DMA for the first time since August – when investors were pricing recession fears remember – although at that time recession fears fed into softer Fed expectations and boosted the stock valuations. Today, it's not the case. The recession fears only increase worries about the future health of the economy, as Fed expectations remain relatively hawkish.   The falling yields kept the US dollar under pressure below the critical 200-DMA, which stands at 105.75.   The EURUSD hovers around the 1.05 mark following the dollar's waltz, while Cable is holding on to its gains above the 200-DMA, near 1.2125, but remains perfectly at the mercy of the next move from the greenback.  Oil's dive  One big move of the day is oil. The barrel of American crude slipped below the $73 floor and fell to $71.70 on the back of rising recession fears.   The fact that the Europeans revised their Q3 GDP higher, that Germany revealed a weaker-than-expected contraction in industrial production, that the Chinese continue relaxing Covid measures, and that the Chinese central bank promised to keep financial conditions soft enough to boost economic growth – and reverse the economic disaster, did nothing to improve the mood. The latest news and data remained fully in the shadow of a sharp 8.7% fall in Chinese exports in November released yesterday. The US crude oil inventories fell more than 5 mio barrels last week, but the gasoline inventories rose more than 5 mio barrels, making the data difficult to give direction.   Read next: BMW Was Fined 30,000 Pounds By CMA, Google Wants To Become More Productive| FXMAG.COM But note that we have started seeing a structural change in the oil markets. Crude price curve was in backwardation up until a month ago. But over the past weeks we started seeing the front-end of the price curve falling and even going back to contango. That means that immediate demand for oil is weakening due to recession fears, and that we may not see a soft landing in the US economy, even less in the world economy next year. The latter could further weigh on crude prices, and we could see the price of a barrel slip below $70 before the year-end.   The 'only' good news...  The softening US dollar gives other pairs space to breathe. This is perhaps why we see the European companies posting mild losses. The German Dax index lost only about 2% since it peaked early December, whereas the S&P500 lost the double that amount, a bit more than 4%.   And if the softer dollar helped some majors like euro and sterling keep their head above water, the USDCAD advanced to 1.37 yesterday, even after the Bank of Canada (BoC) decided to go ahead with a 50bp hike, instead of 25bp, but didn't say that there will be more rate hikes – an absence which has been interpreted as 'maybe there will be no more hikes'.   Of course, the sharp drop in oil prices does impact Loonie negatively as there is a clear positive correlation between oil prices and the Canadian dollar. Therefore, if crude oil continues its journey south, there is little to prevent the USDCAD to advance past the 1.38 level. The only thing that could slow down the Loonie's fall, is the dollar's global depreciation. Otherwise, the year-end outlook for the Loonie looks rather bearish.    If all this is not depressing enough...  Russian President Vladimir Putin said that the nuclear threat is rising and didn't say he wouldn't use a nuclear weapon to defend itself, giving a fresh boost to geopolitical tensions.   Gold may have benefited from rising safe haven flows – although the US dollar remains the ultimate safe haven if you fear a further escalation of military tensions with Russia.   Read next: The Euro Benefited From The Weakening Of The US Dollar, A Potential Downside Risk For The Australian Dollar Over The Next Few Weeks| FXMAG.COM What also made gold and silver shine yesterday – besides from the softer US dollar - was news that China increased its bullion reserves for the first time in three years, in an effort to diversify away from the US dollar. The price of an ounce rebounded to $1790. In this short run, gold bulls will likely see further resistance above the 200-DMA, and the $1800 psychological resistance. But the weakening US dollar outlook strengthens appetite for gold in the medium run. There is potential for around $100 rise to $1880, May peak.
USA: Final Q3 GDP amounts to 3.2%. Subtle Micron earnings

Turbulent times on crude oil market. Nasdaq shrank by 2%, Apple and Amazon lost more

Ipek Ozkardeskaya Ipek Ozkardeskaya 07.12.2022 10:24
Equities extend the downside recovery, following the failure to clear an important year-to-date resistance last week, which was the S&P500's year-to-date descending channel top at around the 4080 level. The index cleared the first bearish target, at 3956 level, the minor 23.6% retracement on the latest rebound and tested its 100-DMA to the downside, but managed to close above that level. Nasdaq slumped 2%, with Apple retreating more than 2.50% while Amazon lost 3% as investors dumped technology stocks faster than the others.   And even oil giants joined the selloff this week. Exxon lost more than 2.50% both on Monday and on Tuesday, as the latest drop in oil prices didn't help improve the mood.   The American crude lost more than 7% since the weekly open. If Monday's fall was mostly driven by a global market selloff, yesterday's selloff was definitely due to the EIA revising its oil production forecast higher for next year, after having cut this prediction for the past five months.   Read next: Presumably, stronger-than-expected ISM affected stocks. Aussie gained from the RBA decision | FXMAG.COM So, now, the EIA expects the US to pump around 12.34 mio barrels per day in 2023, approaching the historical high production of 2019.   Yesterday's selloff sent the barrel of Brent crude below the $80 mark for the first time since the very beginning of this year, and pulled the barrel of American crude a couple of cents below the late November dip, at around $73.40. And even the API data – which showed a 6.4-mio-barrel drop in US oil inventories couldn't bring the oil bulls in. The more official EIA data is due today. Trend and momentum indicators hint that the recession fears could well push the barrel of oil toward the $70pb despite falling oil reserves in the US.     Russian oil price cap is a warning for OPEC  What's good about the falling oil prices is that the Russian oil cap becomes somehow meaningless as prices fall, though the Europeans said to revise the cap every two months. For now, there is not much to worry apart from a couple of vessels carrying Russian oil that are stuck near Turkey as Turks ask insurance apparently to let them sail away.   But here is the thing. The fact that the G7, the EU and Australia agreed to cap the price of Russian oil gave a strong message to the rest of the oil producers: they could do the same with OPEC.  So far, US President Joe Biden reassured OPEC that this is not a 'buyers' league' and that the decisions apply only to Russia. But we can't stop thinking that if OPEC goes severely against the US' will to stop messing around with oil prices, there is no reason we won't see a buyers' league emerge from the darkness.
Stronger-than-expected ISM could have affected stocks. Aussie gained from the RBA decision

Presumably, stronger-than-expected ISM affected stocks. Aussie gained from the RBA decision

Ipek Ozkardeskaya Ipek Ozkardeskaya 06.12.2022 08:09
Stocks fell and the US dollar strengthened on Monday.   One of the reasons that could have triggered the move was a stronger-than-expected ISM services read in the US, which came in above expectations, and hinted that the economic activity, at least in the US services sector continues growing, and growing un-ideally faster-than-expected despite the Federal Reserve's (Fed) efforts to cool it down.   So, the economic data may have fueled the Fed hawks yesterday, although I just want to note that another data, which is PMI services remained comfortably in the contraction zone at around 46.   In the short run, the S&P500 may have seen a top near 4100 But the fact that the S&P500 was flirting with critical yearly resistance may have played a bigger role in yesterday's selloff.   The S&P500 shortly traded above the year-to-date bearish channel top last week without a solid reason to do so. The pricing in the markets barely reflects the scenario that the US rates will go above the 5% mark. Therefore, a downside correction was necessary to reflect the reality of the Fed game. Read next: Vodafone Shares Fell By 45%, Apple May Be Moving Production Outside Of China | FXMAG.COM Some people say that it's because the market sees the Fed's bluff. But at the end of the day, if Fed's bluff of tighter policy doesn't do the job, then the Fed will have to do the job itself.   In the short run, the S&P500 may have seen a top near 4100 and could opt for a further downside correction, with the first bearish target set at 3956, the minor 23.6% Fibonacci retracement on the latest rally, then to around 3870, the major 38.2% retracement level and which should distinguish between a short-term bearish reversal, and the continuation of the latest bear market rally.   It is possible we will see the EURUSD recover to 1.10 and Cable to 1.30 within the next 3 to 6 months Looking at the FX, the Aussie was slightly better bid after the Reserve Bank of Australia (RBA) raised its rates by another 25bp today, and took the rates to levels last seen a decade ago.   Elsewhere, the US dollar strengthened as a result of the hawkish Fed rectification. The dollar index first eased to a fresh low since June, then rebounded. It has way to recover above its 200-DMA, which hints that some majors, including EURUSD and Cable could return below their 200-DMA as well.   Yet, even if we see rebounds in the US dollar, the medium to long term direction of the dollar will likely be the south in the coming months.   Read next: The reduction of fears related to a possible frosty winter may support the euro exchange rate | FXMAG.COM The currency markets are not like the equity markets, or the cryptocurrency markets. The valuation of one currency cannot go to the moon, forever. Therefore, it is possible we will see the EURUSD recover to 1.10 and Cable to 1.30 within the next 3 to 6 months.   Even the Japanese yen, which has been the black sheep of the year, is expected to do much better in the coming months.   Analysts at Barclays and Nomura expect the yen to rally more than 7% next year - which is not a big deal if you think that the US dollar gained up to 30% against the yen since the beginning of this year.   Vontobel sees the yen's fair value below the 100 level against the US dollar, which, on the other hand, is a bit stretched as the dollar-yen hasn't seen that level since 2016, and it was a short visit. The last time the dollar-yen was really below 100 is before 2013.   What's more realistic is, we see the dollar-yen trend slowly lower. In the short-run, resistance at 140 should keep the pair within the bearish trend with the next downside target set at 130.
Market Focus: US Rate Hikes, Eurozone Inflation, and UK Monetary Policy Uncertainty

The latest dollar selloff is a hint that the US dollar has certainly peaked this year, and next year will be, (...) , a year of softening for the greenback

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.12.2022 13:36
US stocks fell on Friday, after the latest data showed that Americans got more jobs in November, and more importantly they got a better pay. Wages grew by 0.6% over the month, which was the biggest monthly gain, and the double of what was penciled on by analysts.   Of course, the news was great for the American workers, but much less so for the Federal Reserve (Fed), who is dreaming of a softer US labour market, and weak wages so that people could just STOP spending in hope that inflation would fall.   Read next: If ECB policymakers should make a decision between fighting inflation and avoiding recession, they will likely choose fighting inflation says Ipek Ozkardeskaya| FXMAG.COM But nope, it's just another month of strong US jobs data which certainly got Mr Powell to scratch his head.  Investors just... don't want to price Fed rate at 5%!  More, and better paid jobs fueled US inflation expectations, boosted the Fed hawks, and brought forward the idea that the Fed could be attracted by another, a fifth 75bp hike in the December meeting,   US equities fell and the dollar gained.  But then, the S&P500, which gapped lower at the open closed the session almost flat, and the US dollar index gave back all post-jobs gains to close the week where it was before data, and even came lower in Asia this morning.   Why?   Probably because investors priced in the fact that the Fed won't increase its rates by 75bp this month. It will probably increase them by more in the first half of next year. But that information doesn't go through for some reason, and the pricing for the Fed's terminal rate is still below 5%.   So be careful, even though the rally in equities looks like it could continue, and the weakness in the US dollar is what could mark the last weeks of a chaotic trading year, we will certainly see these forces reverse in the first weeks of January, if not before.  S&P500 at crossroads  The S&P500 closed what was normally supposed to be a week of losses with gains. The index added more than 1% last week, and closed the week right at the top of the year-to-date descending channel, and above its 200-DMA.   The RSI index doesn't point at overbought conditions, the MACD index is slightly positive, and the volatility index slipped below 19, low volatility being a sign of improving risk appetite, and potentially sustainable gains.   Is there a possibility for this rally to extend despite all the red flags? Yes! There is, though, with the risk of Jerome Powell sounding like at the Jackson Hole speech back in summer – which had destroyed the market mood in a couple of minutes.   The next big data is due next week, on Tuesday, a day before the FOMC decision. Until then, investors could give themselves the luxury to dream about a dovish future.   The freefalling dollar  Until then, we could see the US dollar lose more field against most majors, if we are lucky enough. The EURUSD for example gained more than 10% since the end of September, as Cable gained nearly 20% since the Liz Truss dip.   As such, the US dollar rebound seems a bit aggressive, especially knowing that the market has been refusing to price in a terminal rate for the Fed above 5%.  So, there is a risk that we don't see a one-sided dollar selloff when the Fed remains sufficiently hawkish – and when the market pricing will have to match the Fed talk at some point.   But the latest dollar selloff is a hint that the US dollar has certainly peaked this year, and next year will be, despite some Fed hawkishness, and some rebounds, a year of softening for the greenback and recovery for other currencies.   OPEC doesn't cut output  The weekend was rather eventless, as OPEC decided to maintain its daily output restriction unchanged at 2mio barrels per day at Sunday's meeting, which could be seen as a negative development for the bulls.   But there are two price-supportive developments that could limit losses below the $80pb.   First, Europeans finally agreed on the Russian oil price cap at $60pb, that Russia refused – hinting that the Russians could reduce their oil output in the coming months, which would than reduce the global supply and push prices higher.   Second, China is easing Covid measures. The Chinese reopening could counter the global recession odds and support oil prices.  In US crude, strong resistance is seen at $85pb, 50-DMA. 
Euro to US dollar - Ichimoku cloud analysis - 21/11/22

If ECB policymakers should make a decision between fighting inflation and avoiding recession, they will likely choose fighting inflation says Ipek Ozkardeskaya

Ipek Ozkardeskaya Ipek Ozkardeskaya 29.11.2022 20:58
Our editors asked Swissquote's Ipek Ozkardeskaya about her thoughts about this week's data, which seems to be crucial ahead of decisions of Federal Reserve and European Central Bank. What's more, we're astonished by Black Friday results which are said to near $10bn, so we asked Ipek for a comment on this case as well.   The ECB, nor any other central bank, can't choose to escape recession over fighting inflation   The ECB, nor any other central bank, can't choose to escape recession over fighting inflation, because inflation is toxic for an economy in the long run, and should be dealt with rapidly to avoid it from becoming structural. Therefore, if ECB policymakers should make a decision between fighting inflation and avoiding recession, they will likely choose fighting inflation. They could however adjust the speed and the force of their action according to the economic conditions. in this respect, recession could slow down the pace of tightening but won't stop it.   Read next: Investors also seem to have become less sensitive to the Ukraine War, which was a significant driver of crude in the first half of 2022 says Finimize's Luke Suddards | FXMAG.COM    This week's prints stand for the last data pack ahead of December Fed decision, supposing they came as a surprise would Fed go for a 75bp rate?   Probably not. The Fed has been clear enough in its communication that they are not done fighting inflation. However, because there is a delay between the monetary policy action and the economy's reaction, the Fed officials prefer taking smaller steps while keeping the topside open for higher rates. Therefore, I wouldn't expect the Fed to surprise with another 75bp hike in December. Unfavourable economic data - stronger-than-expected jobs, high-than-expected inflation - would rather be felt for the Fed's end-rate expectations. For now, it is around 5-5.25%.       When it comes to the Black Friday sales, there are two positive forces that explain the record figures   Despite the record Black Friday sales, retailers broadly reported a rise in inventories and slowing discretionary spending ahead of the peak US shopping season. When it comes to the Black Friday sales, there are two positive forces that explain the record figures. 1. Higher inflation pumps up the final numbers. 2. It is possible that people chose to take advantage of promotions as their purchasing power weakened by inflation. This may explain why we had record Black Friday sales this year.    But even if we factor in inflation there is still be growth in this year's holiday consumption.   This is not necessarily great news for the Fed, which targets a consumer-led recession to slow down inflation. Therefore, the US record pre-holiday sales, combined with the strong monthly retail sales data hint that the US consumer demand has not weakened enough to tame inflation. This means that the Fed would only feel more comfortable pushing its rates higher and get the slow down it is looking for.

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