M&A activities drove equities, focus shifts to earnings
Equity markets began the week on a positive note with M&A activities, positive earnings, and better than expected manufacturing data from the Eurozone and U.S. all boosting appetite to risk.
The merger between AT&T and Time Warner was the biggest announced deal, but both companies’ stocks trader lower on Monday as Democratic and Republican presidential candidates expressed concerns. The aim of transforming the second largest U.S. telecom company to a media and entertainment conglomerate hinges on the Federal Communications Commission’s approval which seems to be a very complicated process.
U.S. regulators are not the only ones seeming tough on M&A activities, but also in Europe where Syngenta shares fell more than 9% yesterday after the EU commission said that Chinese ChemChina has not offered concessions over its $43 billion bid, which will likely delay the process up to five months according to the Commission’s spokesman.
Equity bulls would need positive earnings to resume this week and for the tech sector to take the lead from the financials with the two largest publicly traded companies, Apple and Alphabet to announce results.
Currency markets resumed their range bound trading on Tuesday, with the dollar remaining at 9-month high, and 1.7% far from its 13-year peak. The Euro traded slightly lower as traders ignored positive PMI reports yesterday which showed that the Eurozone economy had expanded at the strongest pace this year, as it seems monetary policy divergence remains the number one factor impacting currency moves. Markets are increasing their bets on a December Fed rate hike, and the closer we get to the FOMC’s December meeting, the higher the probability will go, and this is likely to continue supporting the dollar. Markets are currently pricing a 74% chance for a December hike.
Of course a stronger dollar is not good news for oil prices, however this wasn’t the main driver of crude. Comments from Iraq’s oil minister that his country should be exempted from the output curbs, brings the question who else would request the same? We think oil prices will remain volatile in the next couple of weeks but within limited ranges until we get more clarity on November 30 when OPEC delivers its plan.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
WTI Crude received a pummelling on Tuesday with prices sinking below $49.50 after reports displayed an inflated rise in U.S inventories which revived concerns over the excessive oversupply in the markets. Oil’s selloff was complimented with anxiety towards Russia not joining the OPEC supply curb which raised questions over the success of the pending meeting in November. With Iraq requesting an exemption from the output curbs after Iran, Nigeria and Libya this just throws a spanner into works consequently pressuring oil even further. It is becoming quite clear that OPEC members have exploited the market sensitivity to generate speculative boosts in prices and such may come at a painful cost if investors are left disappointed on November the 30th.
Sentiment remains bearish towards oil with this horrible combination of uncertainty and oversupply fears creating a firm foundation for sellers to drag oil prices lower in the short-term. From a technical standpoint, a breakdown below $49 could open a path lower towards $47.50.
Sterling struggles to keep afloat
Sterling displayed its sensitive status in the foreign exchange markets during trading on Tuesday by stumbling over 1% ahead of Carney's testimony, only to shock investors by staging a remarkable rebound mid-way through Carney's speech. Traders were swift to attributing Sterling’s decline to comments from U.K Chancellor of the Exchequer Phillip Hammond, but the sheer lack of liquidity and gloomy mood amid the persistent hard Brexit fears could have played a key role in the selloff. In October the pound has depreciated roughly 6% against the Dollar with further declines expected as mounting hard Brexit fears spark renewed rounds of selling. It’s the terrible amalgamation of political uncertainty, fears over the UK losing its access to the European single market and anxiety over the future of the UK economy after the article 50 is invoked which have made Sterling a sellers dream.
From a technical standpoint, the GBPUSD is struggling to keep afloat on the daily timeframe. Prices are trading below the daily 20 SMA while the MACD has also crossed to the downside. The break below 1.2200 could encourage a further decline towards 1.2000.
Dollar bulls on tea break
Dollar edged lower during early trading on Wednesday as investors exploited Tuesday’s soft U.S economic data to take profit on the currency’s recent rally. The consumer confidence in the States declined to 98.6 in October from 103.5 in September which sparked concerns over households maintaining a cautious stance as the presidential election loomed. Despite the soft economic release, the bullish sentiment towards the Dollar remains unchanged with the Fed-fund futures showing a 78.5% probability of a rate increase in December. Investors may direct their attention towards Friday’s GDP report for the States which if exceeds expectations could act as another key chest piece for a rate hike in December.
The Dollar Index is heavily bullish on the daily timeframe as there have been persistently higher highs and higher lows. Previous resistance around 98.00 could transform into a dynamic support which invites a further incline towards 99.50.
Draghi on the defence
Mario Draghi was defensive on Tuesday in Germany's capital when he insisted that the ECB’s aggressive bond buying and ultra-low interest rates had not harmed German households. Although the concerns from German banks on how low rates have eroded their portfolios were acknowledged, it seems likely that Draghi’s defensive comments may fortify expectations over the ECB bolstering its 1.7 trillion euro bond-purchase program at its December policy meeting. The EURUSD remains under noticeable pressure on the daily timeframe and is currently fundamentally bearish as the expected monetary policy divergence between the ECB and Fed encourage bears to install repeated rounds of selling.
Commodity spotlight – Gold
Gold bulls exploited the instance of risk aversion on Tuesday to propel prices towards $1275. Regardless of the short term gains, the metal remains pressured by renewed US rate hike expectations while a strengthening Dollar’s ensures upside gains are capped. The current technical correction on the daily timeframe could offer an opportunity for bears to attack. From a technical standpoint, bears should be able to maintain control below $1285 with a breakdown below $1260 sparking further declines.
Uninspiring earnings projections from giant U.S. companies are weighing on Asian equities this morning after Wall Street stocks fell for a second day. When looking at the bigger picture, earning season wasn’t really disappointing so far with more than 75% of companies beating bottom line forecasts that would likely lead to profit growth for the first time in five quarters. However, investors need to see more solid growth in order to justify the overstretched valuations of their equity holdings.
Another factor weighing on Asian equities today was the drop in Chinese industrial profits growth which grew 7.7% YoY in September from 19.5% in August, suggesting that policy makers will face more challenges to keep growing the economy at the desired pace.
The investment environment is becoming more challenging nowadays especially with the drop in equities coinciding with higher yields on bonds leaving traditional investors with little options to diversify their portfolios. With more uncertainty ahead whether its U.S. elections, Fed raising rates, hard Brexit negotiations, and limited tools from major central banks, I continue to see alternatives such as gold are a must have as an insurance policy.
U.S. crude inventories vs OPEC
Oil bulls received a pleasant surprise yesterday after inventories unexpectedly fell 553,000 barrel in the week to October 21. The EIA data which has become somehow the nonfarm payrolls of energy markets sent U.S. oil from a 2% loss to green territory for a short timeframe before falling back 1.6%. Oil traders have been clearly ignoring fundamental factors most recently and driven mainly by comments from OPEC members and this will remain the case until November 30. We expect prices to remain volatile but within tight ranges for the next couple of weeks, so a sideways trading strategy could work in this situation.
UK not in a recession
UK’s third quarter GDP later today will show how the economy fared in the immediate aftermath of the Brexit vote. Although the data will likely show that growth slowed from the previous quarter it’s still not as gloomy as many had predicted earlier. If the figure managed to beat the 0.3% expected growth, this will end speculations on further easing in monetary policy and provide some short term relief for the pound.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
NZ trade balance data rattled the NZ economy yesterday as it came in below expectations at -1.436B NZD. This was much larger than the market anticipated and reflected on worse than expected export data to 3.47B (3.52B exp), imports were also up to 4.90B helping to make the trade balance figures worse than expected. The market's reaction was bearish in nature, and came in the face of some USD weakness as well which meant a dip for the NZDUSD. Despite all of these movements it seems unlikely that the Reserve Bank of New Zealand will step in just yet - in fact with commodity prices looking all the more stable I would not be surprised to see them wait and see how things turn out just yet. What is apparent is that the NZDUSD continues to be overvalued and jaw boning no longer does the trick for market anymore, with very little action from the RBNZ in the past to back up the talk it's hard to even pay attention to it anymore.
The NZDUSD from a technical perspective is held up firmly on support levels at present, after shooting down the chart 0.7113 continues to be a major level, on the H1 chart we can see that the market is very aggressive at defending this level and this does reflect the current trend we are also seeing on the AUDUSD. A push through this level seems unlikely and I would need to see another daily candle break through and hold its ground against any movements lower for further bearish trend to be confirmed. Looking at the daily chart the 200 day moving average would be for me a very strong dynamic support level as well and something that should not be ignored. Trending upwards resistance is likely to be found at 0.7180, with this major level likely to be tested extensively if the trend plays out as expected.
Oil markets have also been key trenders after OPEC meetings continue to be back and forth, with very little in the way of concrete agreements and the entire OPEC board looking all the more fragmented after every meeting. If anything is to come from it, it may require further burning of cash reserves and an actual agreement, regardless Americas own oil producers are very much continuing to pump oil and are looking all the more likely to deliver production rather than vanish as was expected.
On the charts Oil hit resistance at 52.22 and has so far looked to trend further back down, as the market continues to look all the more likely to hold its ground at this level unless OPEC comes through with something. So far it has found support at 48.96 and is likely to trend lower and find further support levels which are likely at 46.46 and 43.47. So far movements/waves have been large, so I don't expect to see much in the way of ranging from oil markets which have very little history of doing so in recent times.
The mounting expectations over the Federal Reserve raising US interest rates in December have inspired bullish investors to send the Dollar Index to fresh eight-month highs at 99.00. This Index remains heavily bullish on the daily timeframe as there have been consistently higher highs and higher lows. Prices are trading above the daily 20 and 200 SMA while the MACD points firmly to the upside. Previous resistance around 98.00 could transform into a dynamic support which encourages a further incline towards the psychological 100.00 level.
GBPUSD breakdown pending
The persistent hard Brexit fears have left the GBPUSD vulnerable to heavy losses. This pair is heavily bearish on the daily timeframe as the candlesticks are trading below the daily 20 SMA while the MACD has crossed to the downside. For three straight trading weeks, prices have oscillated between 200 pip range with pressure building up. A breakdown below 1.2100 could catalyse a further decline towards 1.1800 in the medium term.
EURUSD fundamentally bearish
The expected divergence in monetary policy between the European Central Bank and Federal Reserve has made the EURUSD fundamentally bearish. With consistently lower lows and lower highs on the daily timeframe the pair also fulfils the prerequisites of a technical bear trend. What most bearish traders are observing on the EURUSD is when the technical bounce comes to an end. Prices may trade towards the 1.1000 resistances or breakdown below 1.0850 with targets stretching towards 1.0500.
USDJPY bulls make an appearance
The USDJPY is turning increasingly bullish on the daily timeframe with the breakout above 105.00 potentially opening a path higher towards 106.00. Dollars resurgence amid renewed rate hike hopes remains a key driver behind the USDJPY upsurge with further inclines expected. From a technical standpoint, prices are trading above the daily 20 SMA while the MACD has crossed to the upside. Previous resistance around 105.00 could transform into a dynamic support for a further upsurge towards 106.00.
EURGBP parity dream…
Sterling weakness from the persistent hard Brexit concerns may be the engine which ensures the parity dream on the EURGBP is achieved. From a technical standpoint, the pair still remains bullish on the daily timeframe with the 0.8900 support providing protection for the bulls. A breakout above 0.9000 could provide buyers enough momentum to send the EURGBP towards 0.9150.
Week Ahead: Central Banks meetings, U.S. NFP, more earnings
After the U.S. and U.K. economies showed better than expected growth in the third quarter, investors turn their attention to monetary policy actions. Four major central banks will meet the coming week (Fed, BoE, BoJ, and RBA), and while most of them remaining accommodative or planning to ease further, only the Federal Reserve is set to swim against the tide. Here’s what to watch the week ahead:
The Fed to send a clear message
With 9 days remaining to the U.S. presidential election, the Fed is expected to keep markets calm and stand pat on rates when they announce policy on Wednesday. The two-day meeting will most likely set the tone for December where markets are pricing more than 70% chance for a hike.
Latest round of economic releases supports the idea of tightening policy with growth bouncing back from a weak first half in 2016, jobs added to the economy averaging at 191,000 in the last three months, and more Americans buying new homes. The improvement in data will likely keep the dissenters from October’s decision in favor of hiking, but I think it’s very unlikely for other members to join.
I believe the statement that follows the meeting will indicate a clear signal that a rate hike in December is coming, similarly to what we saw in October 2015 when the Fed stated “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress both realized and expected toward its objectives of maximum employment and 2 percent inflation.”
Another strong jobs report to support Fed’s view
Several U.S. economic reports are due next week including personal consumption expenditure, ISM manufacturing and non-manufacturing, factory orders and trade balance, but Friday’s jobs report will have the most significant impact on markets. The economy is expected to add 175,000 jobs in October versus 156,000 in September, and unemployment to tick down to 4.9% from 5%. Wages are no less important with average hourly earnings expected to climb to 2.6% from a year ago suggesting that inflation will return sooner than later.
Earning season remains in full swing
Earnings season will continue with heavyweight companies to announce results including Facebook, Alibaba, Starbucks, Pfizer, Time Warner, Qualcomm, and Warren Buffett’s Berkshire Hathaway. So far 74% of S&P 500 companies managed to beat profit estimates while 58% beat on revenues, and it became clear that U.S. companies are out of profit recession which lasted 5 quarters with earning growth for S&P now standing at 1.6% according to Factset.
By Hussein Sayed, Chief Market Strategist (Gulf & MENA)
It's a big day for the Australian economy as it continues to find movements from fundamentals rather than technical's. In this case, the cash rate statement and the rate statement are likely to take centre stage for the AUDUSD. Many had expect the Reserve Bank of Australia to hold back in the short term, as it has been unclear if the Australian economy will recover on the back of the boost in commodity prices in the metals sector. For myself it seems like it will, but it seems all the more long term rather than short term, and this will lead to issues in the short term as many Australians expect positives rather than negatives from the uptick in commodity prices. With Capex decreasing and employment looking more repressed than ever the Australian economy continues to struggle and it's likely to remain that way.
The AUDUSD on the charts has tried to remained bullish in the short term, but the bears are starting to take control. Every wave has so far been much weaker, and I expect that to continue in the long run. The 100 day moving average has acted as dynamic support in the past, and is likely to remain that way as well. Many are expecting any further resistance higher to occur at 0.7616 and 0.7643 which have held out against further movements higher. But it's also worth acknowledging the bullish trend line that has been in play for some time, and is likely to hold up any further movements lower, so AUDUSD traders will be taking stock of this trend line and the potential it has to ruin the bears day.
It has been a topsy turvey day for gold markets as they continue to buck the trend and look to climb higher on the back of political risk which continues to be a major force for US traders. Many are expecting a democratic victory, but with the uncertainty at hand some are wondering what the next step may be. So for gold markets this has been somewhat of a bullish market as of late, and in the fact of positive economic data and interest rates likely to be pushed higher.
Gold has previously failed to break below support at 1249 after repeat attempts, and this looks to be a strong level despite what many are saying. I would expect gold to trend higher in the short term above resistance at 1295 as US political risk increases and the election continues to find itself under further pressure from outside sources. Further levels higher for resistance can be found at 1323 on the charts.
The stock markets appear on track to continue their lower levels of volatility and possible losses as we head into the second day of the new trading week at the time of writing. We are now exactly one week away from the US election taking place and while this event shouldn’t usually dominate market attention, the fact that the race for US President is between the two most unpopular candidates in election history could provoke a different type of market reaction from investors.
The headlines at the moment are still circling around the breaking news late last week that the FBI are once again reviewing the emails of US Presidential Candidate Hilary Clinton. It is not yet known whether this will impact her current probability of winning the election, although it is safer to say that even if Clinton is declared the eventual winner that this will at the very least dominate the early weeks of her Presidential reign.
The risks to the US election result at this point in time still rests with Donald Trump being declared the unlikely victor, which is something that has still not been priced into the financial markets. Hilary Clinton being declared as the winner is what the markets currently expect and have priced in could still result in a subdued, or even negative reaction from investors. The reason for this is because this should provide further clarity that the Federal Reserve are on track to raise US interest rates for the second December in succession.
It is worth pointing out that while the Dollar is close to milestone high levels at the time of writing and a US interest rate rise has mostly been priced into the Dollar, confirmation of a US interest rate rise would still be seen as a negative for emerging market assets, precious metals and the stock markets.
WTI Oil below $47
WTI Oil concluded the month of October close to where the commodity commenced trading and looks at further risk to extending losses as we begin November with the price of WTI falling below $47 overnight.
The reason for the resumption of violent losses over the past week have followed concerns that OPEC will be unable to agree on the previously expected production cut during their meeting this month. Investors had previously priced in the shocking news that OPEC had unexpectedly agreed to a preliminary cut to be confirmed in November, however they have now took profits off the table as a result of this situation now leading to confusion.
The name of the game with oil at present now appears to be sell the fact that OPEC have not yet confirmed any changes in production output, while investors were previously buying the rumor but have now changed their tune.
It is worth pointing out at the very least that if OPEC members are not even able to agree within the same committee group on production levels, then there are even slimmer chances of Non-OPEC members agreeing to join this unexpected treaty. This is what is required and a change in global production output would be seen as a significant milestone on the road to leading the price of oil away from ongoing depression.
In the meantime, any further concerns floating around over OPEC being unable to follow through with their previous pledge to confirm a change in production output this month should in theory install further selling momentum.
Confirmation or renewed optimism of what investors were previously pricing into the markets with this being a change in production output would be required to enhance the potential of a price recovery for oil.
Today's market revelations from the Reserve Bank of Australia regarding interest rates were an interesting turn to say the least. Many traders have been expecting the easing bias to continue for the RBA in the long term, given the state of the economy. But instead, they found themselves listening to a much more hawkish RBA than anyone expected and it would seem that interest rate cuts may be completely off the table for now. In line with the statement the RBA also believes that inflation is likely to pick up as well, and commodity prices are recovering albeit a struggle at times. For some time now we have seen a reserved approach from the RBA so for traders this was very much a bullish signal and the AUDUSD responded in turn jumping higher. However, the RBA still considers the AUDUSD to be too high and complicating the current recovery of the economy. Sadly if you're going to suddenly turn hawkish then markets are likely to look for further yield out of the Australian economy when all others are lagging.
On the charts the AUDUSD has been showing weaker waves than ever before with a pattern of lower highs every time we see a jump. It will be interesting to see if this can be maintained in the long run given the hawkish tone that has occurred. Any retreat downwards is likely to find dynamic resistance around the 100 day moving average mark, but also at 0.7616. I previously was slightly bearish, but less likely to be so these days unless we see the Chinese economy struggle and inflation continue to be sluggish for the Aussie economy. Any jumps higher looking for resistance are also likely to find it solidly at 0.7730, which will be a touch and go point to see if the AUDUSD can sustain new heights on the charts.
Across the water in the US market and oil continues to show surplus build ups with social media reporting a build up of 9m barrels before the official release, which is naturally in turn causing selling in oil all together. With OPEC failing to come to any sort of agreement, it feels very much the case that we will see oil prices continue to dip and slide lower on all this news. Only a sustained agreement could genuinely stop the bears from coming back into the market and taking a swipe every time the oil inventory data shows a build-up.
Oil has slid aggressively down the charts and has held up on support at present at 46.19 with the market now looking to position itself for the official data due out on Thursday, which will likely cause some strong swings in the market. So far we've also seen very little profit taking, which means we could see a bullish candle at a major support level in the near future. I would take this as caution around a reversal and focus on the trend which continues to be one of the stronger points of trading oil in the present climate.
Investors are dumping risk assets this morning as latest ABC News/Washington post tracking poll showed Trump ahead of Clinton for the first time. Trump odds for winning the U.S. elections increased after FBI reopened its investigation into Hillary Clinton's use of a private email and he will maximize his leverage on the case with less than a week remaining to the election date.
Most major Asian equity indices fell by more than 1%, as Wall Street’s fear index “VIX” soared above 20 levels for the first time since September 12. The Mexican peso which has become the popular election proxy also fell this morning, declining by more than 4.3% for the past six trading days.
The dollar was also hit, plunging to three weeks low versus the euro and one month low against the swiss frank as U.S. 10-year treasury yields fell 7 basis points from yesterday’s highs.
Neither earnings nor economic data will provide market direction and it’s going to be a roller coaster ride for the next couple of days as a Trump win appears similar to a Brexit style reaction and probably more severe.
The post Brexit vote market reaction is still fresh in investors’ memory and no one wants to be caught on the wrong side of the trade, it will only take another one or two polls showing a Trump lead to boost markets anxiety and thus a steep sell off in equity markets and high beta currencies.
Gold is likely be the most wanted asset to hedge against political risks, and although it jumped 4% from October’s low, there still much potential to go higher from current levels.
The Fed is expected to stand pat on rates when they announce policy later today, and while recent round of economic data justifies a rate hike, the Fed doesn’t want to influence the presidential election outcome either way. In a recent report, I expected the Fed to deliver a strong signal on raising rates in December by reiterating a similar sentence from October’s 2015 statement:
“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress both realized and expected toward its objectives of maximum employment and 2 percent inflation.”
Although I still believe it’s possible, chances now stand at 50%.
