Tuesday, August 1, 2017

CAC Moves Higher as Markets Eye Mario & Co.

The CAC index has posted slight gains in the Thursday session. Currently, the index is trading at 5229.75, up 0.26% on the day. In economic news, today’s highlight is the monthly ECB policy meeting. There was positive news from German and eurozone indicators. German PPI improved to 0.0%, above the estimate of -0.1%. The eurozone current surplus jumped to EUR 30.1 billion, well above the estimate of EUR 23.3 billion.
On Tuesday, the CAC suffered its worst day this month, dropping 0.8 percent. French stock markets were down in response to soft investor confidence surveys in Germany and the eurozone. The ZEW Economic Sentiment surveys gauge the optimism of institutional investors and analysts. Both surveys indicated that investor confidence in June had weakened compare to the May readings. With the eurozone economy improving, analysts attributed the dip in investor confidence as due to the stronger euro, which is making European exports more expensive and thus less attractive for foreign buyers.
All eyes are on the ECB, which will release a rate statement, followed by a press conference with Mario Draghi. In December 2016, the bank tapered QE while extending the scheme until December, and this type of scenario could be adopted once again. Will the bank make a similar move at this meeting? OANDA Senior Currency Analyst Craig Erlam explains that we’re unlikely to see any moves today, but traders should circle September as a strong possibility for some moves from the ECB:
While we’re not expecting any changes from the ECB today, it’s €60 billion a month asset program expires at the end of the year and traders are looking for clues regarding what comes next. An announcement on this is unlikely until September when it releases its new macro-economic projections but Mario Draghi may offer some insight into what we can expect during the press conference.
The most likely decision, despite the central bank still falling well short of its inflation target, will be to cut its purchases by another €20 billion as it did in April and extend by another six months. There has been a lot of speculation about a more explicit phasing out but I think the ECB want to be more careful given the fragile nature of the recovery. The result will likely be the same though with the central bank ending its quantitative easing program either at the end of 2018 or early 2019.
President Trump hasn’t done very well at learning how to tango with Congress, and this week’s debacle on Capitol Hill could make the gap between Trump and Republican lawmakers even harder to bridge. Trump had vowed to replace Obamacare, but his health care bill has stalled in the Senate before lawmakers even had a chance to vote on the proposal. With some conservative Republicans coming out against the bill, it’s questionable if the Republicans can pass another version before Congress takes a recess in August. Trump had promised to pass a health care before the summer break, so his credibility will take another hit if he’s unable to do so. Trump has been in office for six months, but has been unable to get Congress to pass any significant bills, even though the Republicans enjoy a majority in both houses of Congress. With this latest setback, there is growing skepticism as to whether Trump will be able to convince Congress to pass other key parts of his agenda – tax reform and fiscal spending.  This paralysis on Capitol Hill has deepened investor pessimism about Trump’s legislative agenda and is weighing on the US dollar.
Traders Eye ECB Move in September
Will Draghi Drop Any Tapering Clues?
Economic Calendar
Thursday (July 20)
  • 4:00 Eurozone Current Account. Estimate 23.3B
  • 7:45 ECB Minimum Bid Rate. Estimate 0.00%
  • 8:30 ECB Press Conference
  • 10:00 Eurozone Consumer Confidence. Estimate -1
  • *All release times are EDT
    *Key events are in bold
    CAC, Thursday, July 20 at 7:10 EDT
    Open: 5237.50 High: 5250.50 Low: 5226.50 Close: 5229.75
    This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.
    Kenny Fisher joined OANDA in 2012 as a Currency Analyst. Kenny writes a daily column about current economic and political developments affecting the major currency pairs, with a focus on fundamental analysis. Kenny began his career in forex at Bendix Foreign Exchange in Toronto, where he worked as a Corporate Account Manager for over seven years.

    U.S. Holiday Means Economic News Today, Then Focus Shifts Overseas

    The capital markets are mostly quiet, amid a light news stream, and ahead of three key events in the coming days, with U.S. markets closed tomorrow and light participation expected on Friday.  These events are tomorrow's OPEC meeting, the flash euro area inflation reading on Friday, and month-end portfolio and hedge adjustments.  
    The odds of a substantial output cut from OPEC appear to have slipped. The Saudi oil minister continues to play down the need for output cuts; apparently on grounds that to stabilize the market, more than OPEC cuts are necessary.  Although there were some suggestions that Russia could cut output to help facilitate an OPEC cut, they lacked credibility.  A Rosneft official, on the newswires, indicated Russia does not plan to reduce its output.  
    Simply put, as a cartel, OPEC ostensibly is interested in keeping prices higher than they would otherwise be.  However, for numerous reasons, OPEC is not the price setter it once was.  Especially with the rise of U.S. output, there has been a significant shift in the underlying fundamentals, and this requires a new strategy.  Essentially, prices may have to fall to levels that begin curtailing production in a significant way.  This is closer to $70 for Brent and $60-$65 for WTI.  
    Part of the challenge is that in industries that have high fixed costs, which in this case may be more a function of fiscal need than the cost of production, there are incentives to produce even at a loss. Worse, increase production in the face of falling prices to try to preserve revenue levels.  Of course, this serves to exacerbate the problem.   
    The failure of OPEC to indicate a serious cut in output will likely encourage fresh selling of oil.  This would likely support sovereign bond markets and could support equity markets, outside of energy.  It may mean little relief for high-yield bond market indices for which energy sector bonds account for a significant part.  
    The continued fall in oil prices will not do the ECB any favors in its battle to arrest disinflationary forces.  It will report the flash November CPI on Friday, ahead of next week's ECB meeting. Although some economists/analysts are predicting a sovereign bond purchase plan will be unveiled, we are less sanguine.  We understand recent comments as indicating that a consensus favors waiting until next year to see the second takedown of the TLTRO, expected to be substantially more than the first, and the covered bond and ABS purchases.   
    We continue to be impressed with the legal, political and operation challenges of a sovereign bond purchase program in the EMU.  Moreover, we cannot help but wonder if all this speculation of sovereign purchases distracts from 1) the existing extremely accommodative stance--negative deposit rate, full allotment of refi operations at a fixed rate just above zero, and 2) the need for structural reforms to boost growth potential and support aggregate demand.  
    The main economic news today has been the second look at UK Q3 GDP.  Although the 0.7% quarter-over-quarter growth was left unchanged, the details were disappointing.  Although private consumption edged up (0.8% from 0.6%), it was government spending that really was the standout.  Despite the talk about Tory austerity, government spending rose 1.1%.  The market expected a 0.2% increase.  Business investment fell 0.7% (expected to be a 2.3% increase after a 3.3% rise in Q2).  Exports fell 0.4%, while the market had expected a 0.1% decline.  Imports jumped 1.4% after having fallen 0.3% in Q2. 
    Sterling looks to be tracking short-sterling futures.  The Dec 2015 contract initially ticked up to new highs, but then reversed.  This coincided with sterling falling on the news, but then recovering to back to session highs.  The key is $1.5740 on the upside.  A move through there could see a quick move toward $1.58, were sellers likely lurking. 
    The dollar has lost some momentum against the yen.  Initial support is near JPY117.70-80.  A break could force a bigger short squeeze in the yen and push the dollar toward JPY117.00.  Former MOF official, Sakakibara has opined that the 14% fall in the yen since mid-year has largely run its course.  This echoes comments by some current officials, like Finance Minister Aso.   Separately, we note that Sakakibara warned that the LDP will likely lose more seats in the December 14 snap-election than many anticipate.  According to newswires, he has intimated that a loss of 100 or more seats could force Abe to step down.  This would indeed be a shock to investors.   
    Due to the holiday tomorrow, the U.S. economic diary is chock-full today.  The initial focus will be on the volatile durable goods orders for insight into business investment.  Personal consumption and expenditure data will be helpful for economists to firm up Q4 GDP forecasts.  Note that the expected core PCE deflator is unchanged at 1.5%.  
    Later in the U.S. morning, reports include the Chicago PMI, University of Michigan consumer sentiment, pending and new home sales.  The Chicago PMI often correlates with the national figures while the University of Michigan’s measure of consumer confidence is highly correlated with the equity market.  The drop in gasoline prices and improvement in the labor market may help as well to lift the measure toward 90 in its final read.  Expectations are for small improvement in the housing data.  The bottom line is that the slew of data is unlikely to distract from the U.S.-friendly divergence theme.
    Dollar is Firm but Loses Momentum against the Yen is republished with permission from Marc to Market

    Goldman Sachs, McDonald’s Hold DJIA Down on Tuesday

    July 18, 2017: Markets opened lower Tuesday and never strayed far from the break-even line. There was no significant economic news today other than a weakening dollar brought on by a failure of the Republican healthcare bill. The ripple effect hit crude oil prices and kept the price hike for crude from rising further. WTI crude oil for August delivery settled at $46.40 a barrel, up 0.8% on the day. August gold added 0.7% on the day to settle at $1,241.90. Equities were headed for a mixed close shortly before the bell as the DJIA traded down 0.28% for the day, the S&P 500 traded up 0.02%, and the Nasdaq Composite traded up 0.38%.
    The DJIA stock posting the largest daily percentage loss ahead of the close Tuesday was The Goldman Sachs Group Inc. (NYSE: GS) which traded down 2.55% at $223.46. The stock’s 52-week range is $155.37 to $255.15. Volume was about 60% higher than the daily average of about 3.5 million shares. The company reported results this morning that included a 40% drop in bond trading revenues.
    McDonald’s Corp. (NYSE: MCD) traded down 1.07% at $153.60. The stock’s 52-week range is $110.33 to $156.75. Volume was about 30% below the daily average of around 3.4 million. The company had no specific news Monday.
    The Home Depot Inc. (NYSE: HD) also traded down 1.07% at $152.22. The stock’s 52-week range is $119.20 to $160.86. Volume was 30% below the daily average of around 4.4 million shares. The company had no specific news.
    Caterpillar Inc. (NYSE: CAT) traded down 0.98% at $107.00. The stock’s 52-week range is $78.34 to $110.00. Volume was around 40% below the daily average of around 4.8 million shares. The company had no specific news Tuesday.
    Of the Dow stocks, 11 are on track to close higher Tuesday and 19 are set to close lower.

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