Sunday 18th February 2018
February 16th 2018: Mike van Dulken & Henry Croft at Accendo Markets, commented to clients this morning: “FTSE 100 Index called to open +30pts at 7265, maintaining a shallow uptrend towards 7300 since Monday, but in a bearish rising wedge that could yet see the uptrend scuppered. Bulls need a break above 7275 overnight highs to extend the uptrend; bears want to see a troubling of rising lows around 7245 to put the uptrend in jeopardy. Watch levels: Bullish 7275, Bearish 7245. Calls for gains at the open come after solid gains on Wall St and a largely positive session for Asian markets (ex-China and HK for Lunar New Year) as global volatility continues to ease, back below its long-term average of 20, and equities maintain their recovery course. Japanese stocks are higher despite a stronger Yen, after BoJ Governor Kuroda was nominated for a second term, while further USD weakness (meaning stronger GBP and EUR) helps commodities like Oil and Gold. However, Australia’s ASX is the odd one out, in the red with Miners and Financials under water, the former having a potential negative knock-on for the FTSE … Gold has broken above $1357 resistance as the US dollar extends its decline. The precious metal is trading a fresh 3-week high as the global reserve currency falls to a fresh 3-year low. Despite retreating from overnight highs of $1360, former resistance at $1357 is proving supportive. This afternoon, US Import Price Index will be the final US inflationary print that could influence USD … Crude Oil benchmarks have climbed higher overnight, bouncing from intersecting support yesterday afternoon, however remain hindered by January falling highs resistance. Global benchmark Brent touched $65 before retreating marginally from its highs, off yesterday’s $63.4 lows, while US crude has dipped from $61.8 from yesterday’s lows of $59.7 -- EFG Eurobank in Athens reports that the February 19th Eurogroup will discuss, among other things, the implementation of the remaining prior actions under Greece’s third programme review, which constitutes a precondition for the disbursement of the next loan sub-tranche of €5.7bn. The deadline for the submission of binding offers for the acquisition of 66% of the Hellenic Gas Transmission System Operator (DESFA) expires today. According to the Hellenic Statistical Authority (ELSTAT), inflation returned into negative territory in January this year after 13 months of expansion with the Consumer Price Index dropping by 0.2% on a year on year basis. Fitch is scheduled to release its updated review on the Greek sovereign today --- US Treasury yields retreated from yesterday’s fresh multi-year highs as investors are becoming cautious, indicating no rush to price in a steeper path of Fed rate tightening in the coming months, in spite of higher than expected US inflation data for January. With respect to global equity markets, risk appetite looks to continue to recover with the VIX volatility index moving below 20. In FX markets, the USD extended recent losses with the DXY index dropping to three-year lows earlier today weighed down by lingering US structural woes and the perceived erosion of its yield advantage - The European Parliament’s Economic and Monetary Affairs Committee will give its opinion next Wednesday on a proposal to create a single, clear and fair European corporate tax regime, dubbed the “Common Consolidated Corporate Tax Base” (CCCTB), which would also embrace digital firms. One major feature is to ensure that companies are taxed where their profits are generated, in a bid to crack down on profit shifting - Chris Iggo, CIO, fixed income, at AXA Investment Managers in a client note today says investors are moving money out of fixed income funds in response to higher yields and negative returns. “Now that volatility is rising; and yields have moved higher, there are outflows. It is not clear where the money is immediately going but the flows do suggest that, at least based on behavior, investors think things will get worse before they get better in bond-land. As I write, the 10-year benchmark US Treasury yield is closing in on 3%. This is the highest level since the beginning of 2014 and represents a 160 basis points (bps) increase in yields since the low reached in mid-2016. The pattern, if not the actual size of the move or the level of yield, has been the same in the German bund and UK gilt markets. It might be that investors are getting out of bonds a bit late,” he says. Iggo also notes that investment grade corporate bond credit spreads are more or less unchanged, year-to-date, but have widened in the last two weeks in response to higher equity market volatility, explaining that: “For long-term followers of US high yield, that benchmark yield is now back above 6% for the first time since the end of 2016. European high yield bonds have not seen such a large move, but the benchmark yield is back above 3%. I doubt that these yields are enough to entice investors back into fixed income just yet, especially when sentiment is bearish and expecting higher yields as we move further into the regime of monetary normalisation. Indeed, the risk scenario is now not about being short but about being long” - Miles Eakers, chief market analyst at Centtrip reports this morning that: “Global stock markets continued to make gains overnight following another positive day on Wall Street. The US S&P 500 is now up close to 8% from last week’s nadir. Equity prices increased after the US Bureau of Labor Statistics released its Producer Price Index (PPI). The PPI, which measures the average change in the selling prices received by domestic producers for their output, showed prices rose by 2.7% on an annualised basis, further supporting robust US economic growth. Market participants have for now brushed aside last week’s ‘healthy’ correction, with global stocks all on the way up. The euro and the pound strengthened against the US dollar, as the latter continues to weaken across the board.” - Are emerging market (EM) equities set to resume their outperformance versus those in developed markets (DMs) after proving their resilience during the global correction? NN Investment Partners (NN IP) thinks they will. NN IP’s analysis suggests that EM equities underperformed those of DMs by just two percentage points during the global correction of the past weeks. The asset manager also notes that the traditional weak links, such as Turkey, Brazil and Colombia, were not responsible for the underperformance, having held up well and even outperforming the EM average, the analysis shows. The only market that clearly underperformed is China. Maarten-Jan Bakkum, senior emerging markets strategist, NN IP, says in a client note today: “The Chinese market and particularly the Chinese Internet names were the segments that had inflated the most within global emerging markets during the previous months. While the Chinese underperformance should not have been a big surprise, it remains remarkable that other EMs that should be more sensitive to big movements in DM interest rates have held up so well. We are therefore inclined to buy into weakness in China and increase our underweights in markets such as Turkey, where macro imbalances are large, economic policies are becoming more unorthodox and higher DM bond yields should eventually push local rates higher.” Even so, there is a caveat. NN IP anticipates that the EM-DM outperformance trend in equities that started two years ago will be sustained only as long as the rising bond yields in the US and Europe do not force EM central banks to tighten policy; thereby keeping EM financial conditions easy and supporting the EM domestic demand growth recovery -

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst, OANDA
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. He covers central banks and global economic and political trends for OANDA. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and financial services marketing from the University of Toronto.

A weaker JPY can be a bane and a blessing to Japan. It does have benefits for exporters, which can increase their earnings. The stock market has captured that sentiment as the stock market keeps rising. A weak currency in the long term can also bring about a higher cost of imports. For an island nation that is dependent on energy and food imports to lead to higher prices not driven by consumerism, this is not a positive development.

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Thursday, 18 September 2014 14:54

US Fed Chair Yellen Focuses on Normalization

 

What seems to be a trend after Bank of Canada Governor Stephen Poloz gave a speech yesterday that read like central banking 101, the chair of the U.S. Federal Reserve, Janet Yellen, stressed that the twin mandates of the central bank are full employment and inflation. Market watchers are well aware of how monetary policy works under normal conditions. Yellen and her team communicated that the Fed is ready to get back to “normal” after the 2008 financial crisis and the resulting Great Recession.

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The combination of low volatility and the low-rate environment created by central banks has given risky assets carte blanche as investors continue to disregard geopolitical risk in the search for higher yields. Economic recovery in the United States -- and to the International Monetary Fund’s (IMF) surprise -- England contrast with the struggle with deflation in Europe and falling exports in Japan.

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Two of the most recognizable barometers of investors’ confidence – oil and gold – have proven to be less effective gauges in 2014. Central bank actions have dictated the pace of global economics and their interventions have also disrupted the supply and demand of commodities. 

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Wednesday, 23 July 2014 16:01

Mexican Economy on the Mend

Despite a disappointing first half of the year, for the government of President Enrique Peña Nieto, everything appears to be going according to plan

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With a national election on the horizon, the pressure is rising on incumbent President Dilma Rousseff to tame inflation and grow Brazil’s stagnating economy

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Easy money policies could wreak havoc in emerging economies like India’s. Newly appointed Prime Minister Narendra Modi’s challenge is two-fold: reshape Indian politics and create lasting economic reform

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Caution is the order of the day ahead of a Federal Reserve policymakers meeting on Wednesday. The U.S. dollar edged up against a basket of currencies on Tuesday but investor concerns over the Fed’s upcoming pow-wow and the spectre of rising military conflict in Iraq is keeping forex trading contained to tight ranges.

Meanwhile, the European Central Bank (ECB) decision to turn to negative deposit rates had limited effect. Initially, the policy had the intended result and it started weakening the currency below €1.36, but geopolitical events quickly changed the economic landscape. The EUR had proven resilient to Ukrainian turmoil but the Iraqi insurgency proved too much. The USD has lost some of its appeal as a safe haven so the EUR recovered and even the inflation data confirming the deflation fears could not bring it below €1.3550. Eurostat, the statistical office of the European Union (EU), released inflation figures revealing the annual rate of inflation across the 28-member EU fell to 0.6% in May from 0.8%. Eurostat also said the core rate of inflation slid to 0.7% from 1% in April.

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