BTC USD 56,831.7 Gold USD 1,777.12
Time now: Jun 1, 12:00 AM

Daily Trading Insights & Tips

tickmill-analytics

Fun Poster
Joined
Mar 5, 2020
Messages
117
Reaction score
0
Points
10
Why stock markets Thursday fall is a good buying opportunity


Consolidation of 10-year US bond yields around 1.30% turned out to be a short-lived market state. On Thursday, the yield surged to +1.55% area which brought about a massive knee jerk reaction in risk assets. Investors dumped tech shares with Nasdaq erasing 3.52% of its market cap and SPX losing 2.45% of its value. Aggressive selling began right after the NY opening on Thursday:


Bond-yields-correction-ENG.png



On Friday, there are signs of modest downside pressure remaining - European equities trade in the red, futures on US stock trade near the opening exhibiting some correlation with Thursday returns.

What is really important that the outflow from bonds (which led to steep rise in yields) is not limited to the US Treasury market and is a global phenomenon - the yields of German, Japanese, Australian bonds are rising as well, despite yield curve control efforts from the BoJ or the ECB:


Screenshot-2021-02-26-at-13-34-11.png



The chart shows that expectations of quickening inflation pace and, to a lesser extent, rise of real interest rate are also driving factors in other developed economies, which is the cause of outflows from fixed income instruments.

How long will the bond outflow last and weigh on equities? It’s difficult to give precise answer, but CTA futures positions on major government bond futures show that net short increased to 85th percentile:

CTA-aggregate-net-position-0.jpg



In other words, only in 15% of cases since 2009, net short exceeded the current level. Therefore, from a technical point of view, investors should be tempted to buy the dip as the sell-off is quite extreme. In addition, according to JP Morgan on Monday, pension funds will have a rebalancing at the end of this month, about $ 90 billion will be available for investments, and the choice may fall on the government bonds, because they of appealing valuations.

Fed officials Williams and Bostic, commenting on the rally in bond yields, said that it is unlikely that the Fed will somehow react to this move, since it is natural and stems from the reassessment of economic growth expectations due to positive data. They also downplayed the impact of fiscal stimulus on inflation. Judging by Powell's speech last week, the Fed's stance on inflation is that the observed inflationary effects are temporary, so no response is required. Consequently, if the FED is correct, the inflation premium in bonds would also need to adjust downward with inflation weakening later.

Let's hope that 1.5% in 10-year yields will become a psychological borderline and the “pernicious” effect of bond rout worldwide on stock assets will not develop further. A cautious buy on SPX and a short dollar is justified, despite the risk of continued slide in bonds to more extreme levels. All the same, world economy has not yet recovered enough to confidently dump bonds.


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

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

tickmill-analytics

Fun Poster
Joined
Mar 5, 2020
Messages
117
Reaction score
0
Points
10
Powell speech, upcoming stimulus talks in Congress should provide additional support for stocks


Orderly sell-off in sovereign debt markets, which flared into massive dump last week, has slowed down on Monday, but is far from over. The 10-year Treasury yield bounced off from a local high of 1.55%, however resumed advance on Monday. It looks like the bond markets entered into a state of short-term equilibrium, but the balance of forces is fragile. The Fed types gave a dry commentary on the rout last week, leaving a lot of understatement. This week there will be a number of speeches by the Fed officials, it is expected that their detailed comments on the rally of risk-free rates will become the main catalyst for movement in risk assets.

Unlike the Fed, the European Central Bank did not stand aside and came forward with “open mouth operations”, hinting at flexibility of the current main program of asset purchases - PEPP. The RBA supported Australian government debt market with concrete actions, boosting bond purchases to enhance control over long-term rates. Considering that world central banks often act in sync, there is a chance that the Fed will also hint at the opportunity, for example, to change composition of monthly QE purchases (by increasing purchases of longer-maturity bonds), which should bring peace to the Treasuries.

Nevertheless, since both inflation expectations and real rate rise in the US, with the exception of negative shocks due to high volatility, this combination should have a bullish impact on world stock markets. At least this is what history suggests:

stock-performance-real-yield-copy.png



Macroeconomic news on the US last Friday had in overall a positive tone – consumption expenditures growth (the main inflation gauge of the Fed) accelerated to 1.5% (1.4% forecast), consumer sentiment from Michigan beat forecast. As for the economic calendar this week, the focus is solely on the US labor market data - ADP report, employment component of the ISM service sector activity index. and Non-Farm Payrolls report for February.

Congress is rushing to approve new fiscal stimulus. Biden proposal were approved in the House on Saturday. None of the Republicans voted in favor, but their votes are not needed. Past stimulus measures had bipartisan support, but this time we see a complete split between the parties. It should be borne in mind that the main programs of extended social protection will expire on March 14, i.e., this date is probably an unofficial deadline for the approval of new stimulus. The highlight of the proposal is stimulus checks of $ 1,400 per person (whose income is below $ 75K per year). A good portion of this money, like last time, will likely flow into the stock market. Expectations of an impending positive retail investment shock are also pushing stock indices higher, or at least preventing them from correcting much.


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

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

tickmill-analytics

Fun Poster
Joined
Mar 5, 2020
Messages
117
Reaction score
0
Points
10
US appears to be taking lead in the global recovery, driving capital inflows

Oil quotes struggle to retain elevated mood ahead of OPEC+ meeting. Monday rally in equities, Monday rally in equities, which led to the surge of US stock indices by 2.3% on average, failed to underpin commodity prices. On Tuesday, prices stay in a downtrend thanks to strengthening USD and bearish motives in commodity markets in general. While optimism still prevails in the oil market, there are signs that demand growth has begun to weaken with downside risks growing on the demand side. For example, recovery momentum in the manufacturing sector of China, the largest consumer of oil in Asia, continued to fade in January, indicated the data on Sunday:

Screenshot-2021-03-02-at-13-02-55.png


The latest trade data shows that China is starting to buy less oil, both due to a slowdown in domestic demand growth and as the time of cheap prices has apparently gone. In general, it is reasonable to expect that Chinese demand will move to a plateau, since China stocked up storage facilities in the 3-4th quarter of last year, taking advantage of low prices. The season for refinery maintenance in China begins in the second quarter, which will also hit purchases.
According to Reuters estimates, OPEC oil output, despite signs of strengthening demand, declined in February. Saudi Arabia's voluntary production cuts drove OPEC's average production down by 870K in February to 24.89 million barrels per day. The consensus now is that the Saudis won’t extend the gift to the market after the upcoming OPEC + ministerial meeting. In addition, there are expectations that the output quota will be lifted by 500K barrels. Clearly, negative news background builds up for the oil market.
Greenback rally gains traction as the US economy appears to be taking lead in the pace of recovery among developed economies. If in January-early February we had a mix of a relatively weak US economy + expectations of US fiscal incentives + risk-on, now the first component seems to be replaced by a “strong US economy”, which started to draw foreign capital flows into the US assets. Previous risk-on setup contributed to investment outflows from the US in the search for yield abroad, which pressured USD. Now this trend seems to be changing sign. ISM manufacturing PMI for February released on Monday cemented idea of US economic acceleration as it surprised substantially to the upside. The index rose to 60.8 points (forecast 58.8), positive expectations about the labor market were also set by employment component (54.4 points, forecast 53). Apparently, the data release triggered a move in FX:

Screenshot-2021-03-02-at-13-54-31.png


This week, the dollar is likely to develop corrective momentum upwards. The focus is on the release of PMI in the non-manufacturing sector, the ADP data (due on Wednesday) and the US unemployment report on Friday.


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

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

tickmill-analytics

Fun Poster
Joined
Mar 5, 2020
Messages
117
Reaction score
0
Points
10
Negative correlation of Gold with US real interest rate starts to bite the safe haven

European markets rallied alongside US equity index futures as the recent factor of bearish pressure - correction in sovereign debt markets and related volatility of interest rates - faded into the background. The themes of global expansion, bull market in commodities and fiscal impulse in the United States are apparently returning to the forefront.

After a short period of stabilization, the yields on long-term US and German bonds are on the rise again as local Central Banks stand their ground and refuse to contain the rise. And no wonder, in fact, in the past few weeks, the dynamics very desirable for central banks has been taking place in bonds - real interest rate started to rise as well. This is usually associated with "qualitative" economic growth and increasing productivity. Until mid-February, the biggest contribution to the growth of nominal rates was made by inflation expectations, which could have worried the Central Bank, but then the real rate joined the party and immediately soothed concerns. By the way, this is why gold also collapsed, since an increase in the real rate means an increase in gold’s opportunity costs:

Gold-US-Real-Yield.png


Gold has negative correlation with US real interest rate and therefore tend to decline when the interest rate starts to rise.

Although the real rate has risen, it is still deep in the negative zone. It is at a historic low. It has a room to rise more. There are expectations that the rate will continue to rise, since it is believed that global economy is in the initial phase of upturn and related trends in the government bond markets can only start to emerge as well. This should have a negative impact on the Gold’s investment appeal for at least the next quarter or two.
The European STOXX 600 Index rallied for the third trading session in a row, and British assets reacted optimistically to the government's decision to extend payments to those who lost their jobs as a result of lockdowns.

The data on retail sales and unemployment in Germany made sad adjustments to the expansion story. The forecast for growth of the key item of consumer spending did not materialize - sales fell by 4.5% in monthly terms, against the forecast of +0.3%. It was also expected that the number of unemployed will decrease by 13K, but the number of unemployed, on the contrary, has increased. There has been another mini-shock in expectations for the largest EU economy, which paints an unclear outlook for European assets. European stocks are ignoring the worsening data so far, but for how long? The Bundesbank in its report on Wednesday said it expects a marked decrease in economic activity in the first quarter.

The European currency has experienced difficulties in growing amid negative data and the strong economic outlook for the United States undermines the idea that the dollar will weaken on the upcoming growth in the money supply in the United States due to fiscal stimulus, as an inflow of investors in US assets due to expectations of higher expected returns could start to counterbalance the supply factor. The US labor statistics on Friday will provide more information on the speed and direction of the US economic recovery, but one should closely monitor the emerging trend in the US, as it has every chance of developing into a medium-term strengthening.

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

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

tickmill-analytics

Fun Poster
Joined
Mar 5, 2020
Messages
117
Reaction score
0
Points
10
OPEC’s extension of current output curbs is still in cards despite robust demand growth


Greenback advance eased on Thursday as bullish momentum developed earlier in the first half of the week failed to find support in key data releases. ADP report and ISM non-manufacturing PMI published on Wednesday fell short of expectations, although bull run in USD indicated expectations of a positive surprise. The number of jobs in the US in February rose by 117K according to ADP, which is less than 177K estimate. ISM index missed estimates as well with employment sub-index indicating a slight cooling in the pace of hiring. Recall that services sector employs more than 70% of the US labor force that’s why ISM employment survey data is a key for understanding pace and direction of US recovery. If Friday payrolls report misses estimate as well, the contribution of eco data in USD strength will greatly diminish, leaving USD vulnerable to concerns of money supply expansion due to upcoming fiscal stimulus.

There are signs of USD strength on Thursday thanks to bearish mood in US equity futures and European shares. Given the S&P 500's plans to test 3800 today, USD is likely to extend intraday advance today.

Oil market with little effort digested EIA weekly release on commercial oil stockpiles in the United States. In the week ending February 26, crude oil inventories surged 21.5 million barrels - the highest growth in several years. When the market is in a state of contango (oil futures curve is upward sloping), oil prices often drop on the rise in inventories since inventories are hedged by selling more futures what means less demand pressures in the future. However, current situation is somewhat different: inventories rose mainly because refinery utilization dropped to the lowest level in several decades. During the reporting week, refineries were working almost at half-full capacity - utilization fell to 56%, the lowest level since the 1980s:


Screenshot-2021-03-04-at-13-37-39.png




At the same time, oil production in the United States extends recovery - in the reporting week, it increased by 500 thousand bbl/d.

An additional point on the report, which neutralized the increase in inventories - a significant decrease in refined petroleum products. Gasoline stocks fell by 13.6 million barrels (forecast -2.3 million), distillates - by 9.7 million barrels. This is partly the result of reduced refinery utilization rates, but the dynamics also speaks of strong fuel demand, which is positive leading indicator for the market.


Oil prices were offered additional support after Reuters reported that OPEC will extend current output curbs until April. In case this outcome becomes reality, prices will likely suffer a strong upside shock, as probability of this event is low based on recent rumors and demand data. In my opinion, if OPEC extends current output settings, this should fuel prolonged price recovery, justifying short-term bets on oil growth.


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

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

tickmill-analytics

Fun Poster
Joined
Mar 5, 2020
Messages
117
Reaction score
0
Points
10
Major global funds could start portfolio rebalancing soon. What does it mean for stocks?


China strengthened investors’ conviction in the global recovery with the latest trade data released on Sunday. The volume of exports gained impressive 60% YoY in January-February period. The reading was way ahead of market projections (40%). The February figure is a huge gain - 150% YoY. Undoubtedly, growth of China exports is also a merit of its trading partners, especially the United States, where economic growth in February could be the highest on record. This can be seen, for example, in the surge of GS Analytic Index to the highest level in many years:



GSAI-February.jpg



A similar jump is in the NY Fed Nowcast GDP forecast for the 1Q of 2021:



Screenshot-2021-03-08-at-14-32-38.png



The forecast was revised sharply higher thanks to strong incoming data and now stands at 8.5%. And that's without taking into account forthcoming government spending stimulus!

Congress approved support measures of $1.9 trillion, but Monday moves in the US futures indicate that approval of the bill apparently has been priced in valuations.

Equities remain under pressure as the stressful situation in US long-term rates has not gone anywhere. Moreover, last week's events (Powell speech, NFP release) only fueled the trend. I agree that the topic of erratic moves in the Treasury rates has set the tongue on edge, but the markets, in a sense, are now in unchartered waters – the good old Fed which expressed concerns about every ebb and flow in the market, has apparently gone. Therefore, repeated shocks in rates, such as the recent ones, should not be ruled out. We’ve seen their impact on equities and the risk of repeated volatility keeps buying pressure effectively in check.

JP Morgan has discovered another channel of the impact of the recent Treasury selloff on the stock market – coming portfolio rebalancing of large pension and mutual funds. They will most likely significantly adjust the proportions of assets in the portfolio, due to accumulated overweight in equities as well as favorable conditions - stocks became quite expensive while bonds have fallen a lot.

There are 4 big players to watch out for - balanced Mutual Funds (60:40), US Pension Funds, Norwegian Oil Fund and Japan Pension Fund. They make portfolio rebalancing at different intervals, but since some of them have called off the move, there is a risk of combined sell-off. For example, US mutual funds have a noticeable overweight in equity, which sooner or later will have to be adjusted:


equity-beta-2.jpg



JP Morgan estimates cumulative potential outflow from stocks caused by the sale of these funds at $316 billion. Since the event (rebalancing) is more or less likely (the fund's strategy periodically requires this procedure), other market participants may be inclined to try to get ahead of the whales, which may increase near-term pressure on equities.

Key events to watch this week:

EURUSD – the weekly report of the ECB’s purchases within PEPP (pandemic QE” program) which is due today - will the ECB respond to the rise of EU bond yields? Increased bond purchases by the ECB should have negative impact on the Euro as it will signal that the ECB is concerned. On Thursday - the ECB meeting and again the question, what does the regulator think about the recent moves in bond yields?

USD index - on Wednesday and Thursday - major auctions of 10- and 30-year Treasuries bonds. Week demand on these auctions (low bid-to-cover ratio) will likely add upward pressure on the yields, and vice versa, strong demand will bring welcomed relief to risk assets. Another report to watch is US CPI in February, which is due on Wednesday. Given the latest data on the NFP, a positive surprise is likely and should support upside movement in the USD.



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

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

tickmill-analytics

Fun Poster
Joined
Mar 5, 2020
Messages
117
Reaction score
0
Points
10
US 10Yr bond auction could weaken USD support


Brisk recovery of risk assets on Tuesday, during which the Nasdaq recaptured almost half of the correction since February, gave way to more measured moves on Wednesday. Modest inflow into longer-maturity Treasury bonds caused the yield to retreat from local high of 1.6% to 1.54%. Yesterday's auction of 3-year Treasury notes was a moderate success allowing bond investors to collectively breathe out:



Screenshot-2021-03-10-at-17-43-33.png




However, bond yields resumed modest upside on Wednesday which apparently curbs optimism in risk assets and offers solid support to US currency. SPX and Nasdaq futures sway near opening, European equities also lack buying pressure. The Dollar sell-off on Tuesday drove the currency’s index to the lower bound of the current ascending channel. Potential break in the trend channel today or tomorrow could put an end to the short-term bullish USD move:


Screenshot-2021-03-10-at-17-14-09.png



Three key events that will determine the way forward in the near term are US inflation report, the $38 billion 10-year bond auction due today and the 30-year bond auction due tomorrow. Weak demand for long-term Treasury debt may cause new volatility in rates, which in turn could limit advance in equities, however, strong rebound of risk assets on Tuesday indicates that investors discount that risk. Tomorrow will be followed by an auction for 30-year bonds, which will be of interest for the same reasons. Key indicators that need to be monitored are bid-to-cover ratio (an indicator of strength of the demand), foreign sector demand and the actual yield at which the securities were sold.

US consumer inflation is expected to accelerate to 1.7%, core inflation to 1.4%. The focus is on core inflation as the broad inflation could easily beat forecast due to higher fuel prices and cold winters in several US states which implies more spending on heating. An upward deviation from the forecast in core inflation will likely support upward trend in the USD and will probably initiate additional sales in gold, since in such a case, instability may reemerge in the Treasury market, where recent sell-off were caused by rise in inflation expectations and real rate. Recall that the markets are now worried about a possible spike in inflation due to a combination of pro-inflationary effects from a real economic recovery + fiscal stimulus from the government. Therefore, investors are now especially sensitive to inflation data.





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

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

tickmill-analytics

Fun Poster
Joined
Mar 5, 2020
Messages
117
Reaction score
0
Points
10
OPEC turns dovish on 1Q, 2Q oil demand, bond yields are on the rise again. Will stocks’ sell-off continue?



Oil prices were under pressure on Friday thanks to stronger USD, rising US oil inventories and negative short-term outlook in the OPEC monthly report. The organization expects oil demand to grow stronger in 2021 than previously thought, however, pessimism about the first two quarters increased.

Rising worries about short-term demand outlook appears to be the key reason behind extension of current output curbs in early March. According to the OPEC estimates, the demand for hydrocarbons will be noticeably weaker in the first half of the year than previously expected, but it will rebound strongly in the third and fourth quarters. The OPEC, apparently, counts on massive easing of lockdowns by that time:


Screenshot-2021-03-12-at-13-32-42.png




An additional constraint is created by prospects for increasing production outside OPEC - by 370K b/d in the second quarter. It seems clear that the OPEC is likely to take a pause in increasing production for another couple of months, probably till the end of this quarter. Oil prices have already taken into account extension of curbs, so further near-term growth prospects will depend on how much the mass vaccination outpace expectations in key economies-consumers of oil and resumption of activity in China after the Lunar New Year (after relatively weak PMI for January and February).

Technically, the uptrend in oil has been extremely steep. Quotes drifted away significantly from key moving averages with the divergence from 200-day moving average increasing to the highest level since 2008:


Screenshot-2021-03-12-at-16-12-54.png



Price last met MAs in November 2020 - when the markets hit a turning point - the vaccine was announced. Prices are now near their 2-year highs. In addition, the market entered a phase where key positive catalysts on demand and supply side have been priced in, which leaves little room to extend rise. In my opinion, the market is at best poised to enter on a sideways trend for 1 – 1.5 month.


EURUSD


Downtrend risks in EURUSD have risen markedly since the ECB meeting on Thursday. The recent rise in EU bond yields did worry the regulator, since Lagarde said the ECB will significantly increase PEPP asset purchases in the next quarter. In contrast, the Fed said that nominal interest rates rose in response to growth in the economy, so no intervention was needed. The resulting divergence in policy of the Fed and the ECB is a signal for further selling of EURUSD. In addition, epidemic curves and pace of vaccinations in the EU cause worries about the outlook for economy reopening. Take, for example, the reports about slow pace of vaccinations and expectations of a third wave of the epidemic in the EU. In my opinion, the pair has every chance to drift lower to 1.18 by the end of March:



Screenshot-2021-03-12-at-16-27-23.png




Weaker-than-expected February US inflation and strong demand at the Treasury auctions failed to contain the rise of bond yields. On Friday, the sell-off on the sovereign debt markets resumed - 10-year bond yields in the US, Germany, Great Britain and Australia renewed uptrend. There is a risk of a new bearish retracement in equities and a wave of strengthening in the Dollar. Today and the beginning of next week, risk assets and gold are likely to stay in corrective mode, pushing USD back above 92.00, as it is not yet clear what could stop the renewed sell-off in bonds.


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

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

tickmill-analytics

Fun Poster
Joined
Mar 5, 2020
Messages
117
Reaction score
0
Points
10
EURUSD: tactical retreat continues on growing EU risks


In the past few weeks, risk assets were shaken up by wild moves in interest rate markets. The surge in volatility was caused by the dump of fixed income assets, primarily by the outflow from sovereign debt markets of developed countries. Although intensity of the sell-off eased on Monday, further upside in yields is likely if incoming data continue to point to quickening economic rebound. Consequently, risk assets remain vulnerable to potential downside caused by yield spikes, as increasing base interest rates feed into other credit markets as well, pushing up borrowing costs for firms. More expensive liquidity means higher risks:


US-yield.png



In this regard, the main event of the week will be the Fed meeting on Wednesday. It seems that the Central Bank made it clear that the rise in yields is normal, however investors still expect the Fed at least to signal that it is ready to support the market (as the ECB did last week). The upcoming meeting in this sense will not be an exception.

Particular attention should be paid to the Central Bank decision on extension of temporary exemption from the so-called supplementary leverage ratio (SLR). If the Fed does not extend the exemption, US banks will have to look for extra liquidity to bring capital adequacy ratios to the required levels. It is believed that they will do this by selling Treasuries from balance sheets. We all know what happens when Treasuries are sold a lot and quickly. Yes, equity markets collapse.

To the day ahead the data highlights include US retail sales report. It is one of the biggest catalysts for short-term market volatility. Better-than-expected monthly growth of sales should add fuel to the US reflation story, adding bearish pressure on Treasury market, which may in turn affirm USD positions against other majors. Markets expect retail sales to nudge down by 0.6% and it is reasonable to expect that due to high-base effects. Recall that January growth was 5.3% and it should be difficult for retail sales to make additional gain.

It will also be interesting to see what happens to consumer inflation in the EU. The CPI report is due on Wednesday. Risks are skewed towards a weaker reading than the forecast (1.1%) as we saw some reports last week indicating that the EU made tactical retreat extending lockdowns due to the threat of a "third wave" and slow pace of vaccination. In general, coronavirus situation in the EU remains tough, which is reflected in the weakness of European currency. Therefore, it may be worth to expect a negative inflation surprise and downside in Euro after the release. By the way, the latest COT data showed that speculators trimmed long positions in the euro, so fast rebound in EURUSD looks unlikely. Risks are on the side of weaker euro against USD for the next couple of weeks due to Central bank’s policy discrepancy, slowdown caused by extension of lockdowns and risk of fading inflation impulse:


Screenshot-2021-03-12-at-16-12-54.png




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

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

tickmill-analytics

Fun Poster
Joined
Mar 5, 2020
Messages
117
Reaction score
0
Points
10
B] Key takeaways from the Fed meeting for equity markets[/B]


The Fed meeting was not convincing enough to stop the rise in market rates. The yield on 10-year US Treasuries again renewed its local peak, exceeding 1.7% on Thursday. Acknowledging that GDP and inflation will grow at faster pace than previously forecasted, the Fed generally left its forecasts for a first rate hike unchanged - no earlier than 2024. QE at the current volume of $120 billion / month (80 billion Treasuries + 40 billion MBS) will continue until there is "significant progress in achieving unemployment and inflation targets."

The Fed significantly raised its forecast for GDP growth - from 4.2% to 6.5% (Q4 2021 compared to Q4 2020), and inflation - from 1.8% to 2.2%. Nevertheless, the dot plot showed that the majority of FOMC members would not have voted for a rate hike before 2024. That is, the opinion of the majority, compared to the last meeting, has not changed. The number of FOMC participants awaiting an increase by the end of 2023 increased from 5 to 7, and those who would vote for an increase by the end of 2022 - from 1 to 4 participants.

The situation is not easy for the Fed. On the one hand, recent economic data trumpet expansion and market participants demand that the Fed admit it by hinting at an earlier rate hike. We see this through the rise in market interest rates, growing inflation premium in bonds, various inflation swaps, etc.:

Screenshot-2021-03-18-at-14-30-09.png



If the Fed pretends that early rate hikes are out of the question, inflation expectations will accelerate growth (low Fed rate + strong economy = high inflation). On the other hand, if the Fed hints at earlier QE tapering or a rate hike - the expectation that the Fed will start selling bonds from the balance sheet earlier => another jump in yields upward (“the Fed will soon join the bond sale”). In both cases, rising market interest rates (borrowing costs) will slow recovery. It would seem, why not then declare that it is still not so rosy and low rates are justified? This would contain the rise in bond yields, but it could sow anxiety among market participants and derail the recovery as well due to wrong guidance. In general, Powell has to carry out a difficult balancing work at press conferences - to combine recognition of expansion, uncertainty about the future and, as it were, leave the possibility of an early increase in rates.

The US economy is currently experiencing an increase in consumer spending and the number of jobs in the US, but on the other hand, the economy is still 9.5 million fewer jobs than it was a year ago. The unemployment rate shows an incomplete picture, as it does not take into account the unemployed who are not looking for work. So, for example, if unemployment in the United States fell from 10% to 6%, the labor force participation rate recovered from a minimum of 60.2% (May 2020) to only 61.4%, which is below the pre-crisis level of 63.4%. And if we look at the share of the employed in the working-age population (an even broader indicator), then it recovered even worse after the crisis:


Screenshot-2021-03-18-at-14-01-31.png



In my opinion, the Fed would like to see this figure at 60% before starting to normalize policy. The catch is, it's hard to predict when this will happen. With fiscal incentives - maybe this year. Then the markets will have to prepare for a rate hike. This is why markets tend to get ahead of the curve now.

As a result of the meeting, one thing became clear - long-term rates will continue to grow, which will neutralize the positive effect of fiscal stimulus on stock markets. Waves of sales in bonds, which, apparently, will still occur, since the path of yields upward is open, will cause, according to the well-known scenario, corrections in the stock markets as well. Growth is likely to be, but not as smooth as we would like.


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

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

Live Forex Chart

Currency
Rates
EUR / USD
1.19675
USD / JPY
108.541
GBP / USD
1.38588
USD / CHF
0.92037
USD / CAD
1.25024
EUR / JPY
129.896
AUD / USD
0.77417

CG Sponsors




Top
Log in Register