The Bullet Report: Top 5 things to know in the market today, October 23rd

1. The lack of fresh developments on either North Korea and the succeeding FED chairman positions being filled, combined with the significant progress made on tax reform helped the U.S. dollar close out a strong week. The Dollar experienced the strongest gains against the New Zealand dollar and Japanese yen but none of the major currencies escaped its rally.

2. The most important event risk on next week’s calendar will be the highly anticipated European Central Bank monetary policy announcement. EUR/USD has traded in a narrow range ahead of the announcement as investors wonder whether it will be a hawkish or dovish taper. The euro was 0.15 % lower at $1.1769, extending losses from Friday when it lost 0.6 %.

3. The EURUSD has drifted lower from a 2-1/2-year peak of $1.2092 reached on Sept. 8, as hopes for the European Central Bank to take a more hawkish stance have been offset by speculation that it is not be in a hurry to discontinue its easy policy.

4. USD touched a three-month high against the yen on Monday, with an emphatic election victory for Japan’s ruling party keeping yen-weakening stimulus measures at the heart of government policy. The U.S. currency was up 0.25 % at 113.79, losing a bit of momentum after earlier touching 114.10, its highest since July 11.

5. Gold prices fell in Asia on Monday as the dollar showed strong gains after Japan’s Premier Shinzo Abe resoundingly won re-election, signaling continued easy policy. Gold prices continued falling on Friday, pressured lower by the stronger U.S. dollar which was boosted after President Donald Trump’s plans to overhaul the tax code cleared a critical hurdle. Prices are now at $1274

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Crude Oil Climbs as Gold is Perched Precariously

Crude makes a comeback but there is no such luck for gold as U.S. yields and the big dollar march higher.

After a choppy session on Friday where oil spent most of it on the back foot, as the washout of stale long positioning continued in earnest, both Brent and WTI shock of their standing eight counts to rally aggressively and finish the day over one percent higher from their opens. The impressive comeback was sparked by Saudi Arabia compliance comments and the Baker Hughes Rig Count which showed another fall in U.S rig numbers to 736. The decline continues a multi-month trend of falling rig numbers with talk of “peak shale” gathering pace. Prematurely in our opinion.

This morning in Asia Brent and WTI has managed a slightly positive start, trading at 57.95 and 51.80 respectively, a small rise from Friday’s bright close. Geopolitical tensions in the Middle East will continue to support both contracts through the Asian session following Friday’s comeback.

Brent spot will face initial resistance each side of 58.50 ahead of the more formidable 59.10 level. To make serious progress past those lofty heights will likely require fresh news to drive momentum. Support lies distantly at 57.25 and 56.60 demonstrating just how powerful its relief rally was on Friday.

Brent Daily

WTI spot faces resistance at 52.00 and then 52.50 ahead of its long-term resistance region between 53.50 and 54.50. Like Brent, support is distant at 51.10 which is followed by 50.50.

WTI Daily

Gold

Gold closed ominously on Friday at 1280.25, giving up all its previous day’s gains as a  stronger U.S. dollar and rising  U.S. bond yields continue to haunt it. The news wasn’t much better in early Asia this morning with gold falling another five dollars to 1276.25 as the dollar gained more strength again after Shino Abe’s resounding election victory in Japan over the weekend.

With the U.S. 10 year marching towards 2.40%, we can expect golds appeal as an investment asset to continue to dimish in the short term implying more downside pain is possible for the yellow metal.

Gold has now formed a double top at 1291.50 which will be a difficult level to recapture in the short-term.  Gold is trading at 1277.40 and support is now just below at 1275.80, the 100-day moving average and also a double bottom. A daily close below here implies a move towards the 1260.00 October low and also the 200-day moving average. A break of this level could see more stop-loss action and some structural shifts to short positioning.

Gold Daily

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UK and EU Not Even Half Way There on Brexit Bill

French President Emmanuel Macron said on Friday that work on settling Britain’s financial obligations to the EU when it leaves was not even halfway done.He said more than half the work remained to be completed on the crucial issue of Britain’s exit bill and that discussions could not move to the next phase on the future relationship until the three divorce issues of citizens’ rights, the Irish border and financial settlement have been settled.“A lot is in the hands of Theresa May,” Macron said in a news conference at the end of an EU summit.

Source: France’s Macron says work on Brexit bill not even halfway done – Reuters

USD/CAD – Canadian Dollar Plummets on Poor Retail Sales

US Futures Higher as Tax Reform Hurdle is Passed

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UK Logs Decade Low Budget Deficit For September

The UK budget posted the smallest budget deficit in a decade for the month of September, suggesting that the borrowing is on the course to undershoot the full-year target. Public sector net borrowing, excluding banks, decreased by GBP 0.7 billion from the previous year to GBP 5.9 billion in September, the Office for National Statistics said Friday.

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Diving into Traders Psychology, What is It and How to Use It

Trader’s psychology is a frequently used term, for good reason too – it is a collection of multiple characteristics that are important to be able to follow your trading strategy and achieve your investment goals. Let’s take a look at those characteristics:

 

Trader’s Psychology

  • Trading Discipline
  • Perspective
  • Mental Fortitude
  • Stress management
  • Risk Management

 

Trading Discipline

  • Adhere to your plan
  • Keep your investment goals in mind
  • Don’t react impulsively or greedily – emotions are the enemy!
  • Channel the robot

 

Most experts agree that the first facet of traders’ psychology is discipline. One of the best scenarios as a case demostrating discipline is retracement/reversal. Frequently instruments will experience a temporary reversal of their price movement, but see a correction shortly after or before the end of the trading day. This retracement could cause a trader to exit a position/trade which hasn’t gone into full reversal ultimately causing losses or breaking away from a strategy that hedged an instrument against another. If you’re perplexed about the ‘channel the robot’ phrase above – robots are emotionless and only react to input of data. Get it now?

 

Perspective

  • What are your long-term investment goals?
  • How high and how low is your risk aversion in the context of your strategy?
  • Reality check – reward always comes with risk

 

Having a realistic point of view about trading is crucial. No matter what the type of investment, there is always a risk/reward ratio. How much will you be rewarded for a defined level risk. The higher the risk the higher the potential reward (but remember the lower the chance you will receive it). The lower the risk, the lower (or slower) the reward inversely.

 

Mental Fortitude

Being able to see the red arrows on your terminal and thumbing your nose at it is not as easy as you think, the biggest reason is that most traders realize those are assets. Their assets. The problem is that exiting a position too soon, can have similar psychological results to losing a trade. Psychologically speaking it might even be more damaging, as exiting too soon and then seeing your previous position  go into correction and then grow make you hold on to trades beyond your predetermined stop-loss, causing you to be on the losing side of that trade. Resilience and being able to bounce back is another characteristic that is important. Take this as an example: a flexible sapling can touch the ground and return to its original state allowing it to grow large enough to resist being bent.  If that sapling was rigid it would snap and never grow to the size necessary to not be bent.

 

Stress Management

  • Every trading day is a new trading day
  • Leave the baggage at the gate
  • Knowledge is a stress reliever
  • A cliché but worth mentioning – Keep your cool

 

This point segues beautify from mental fortitude, in actuality there might even be a little bit of overlap. Managing stress especially after a losing trade can be extremely challenging, but if you want to reach your investment goals its crucial. Instead of seeing a loss like Stress is frequently the result of a lack of knowledge, knowing the instrument you are trading, the market you are trading it on and the historical data behind it – can help alleviate stress.

 

Risk Management

Although risk management is usually referenced when talking about trading strategies, it can also offer a certain comfort knowing for example that your stop-loss level is in line with your risk appetite. Other risk management tools that can help are alerts to inform you when your instrument goes over or under a certain price level, which is a feature most platforms support.

 

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U.K. Inflation Is at 5-Year Highs, but Why is the Pound Dropping?

British inflation is surging, and the Bank of England (BOE) is seriously considering raising interest rates sooner rather than later. So then why is the British pound failing to pick up speed? The answer lies in Mark Carney’s latest warning on Brexit.

 

The U.K.’s consumer price index (CPI) reached 3% in the 12 months through September, the Office for National Statistics reported this week. That was the highest level since April 2012. What’s more, it can still go higher, according to BOE Governor Carney. That was the risk the Bank took when it slashed interest rates in 2016 following the Brexit referendum.

 

The latest pickup in consumer prices all but guarantees a rate hike in the coming months, as policymakers seek to begin normalizing monetary policy. In fact, rates could rise as early as next month if all the stars align.

 

Although rates may rise very soon, a warning by Carney has prompted a mass exodus from Faced with the possibility of failed Brexit talks, the central bank chief warned of grave risks to the nation’s outlook.

 

In testimony to lawmakers in British parliament, Carney said the European Union (EU) risks destabilizing the region’s financial sector should it call off Brexit talks.

 

“The entire economic impacts are greater for the U.K. but…from a financial stability perspective they are greater for the EU than for the U.K.,” Carney said on 17 October, as reported by The Wall Street Journal.

 

“It is absolutely in the interests of the EU27 to have a transition agreement,” he added.

 

Last week, EU leaders said that Brexit progress has been insufficient for talks to move to the next phase. That’s because EU lawmakers are looking to settle the divorce before moving on to free trade talks. Thorny issues tied to mobility rights are still unresolved despite five rounds of negotiations.

The British pound has declined roughly 200 pips against the dollar this week. Markets were under pressure on Friday, as cable briefly fell below the 1.3100 handle.

Sterling is extremely sensitive to Brexit speculation. The vote to leave the EU in June 2016 triggered the pound’s biggest drop in over three decades.

[1] BBC News (17 October 2012). “UK inflation at highest since April 2012.”

[2] Graeme Wearden and Nick Fletcher (17 October 2017). “Bank of England’s Mark Carney says inflation hasn’t peaked yet after hitting 3% today – as it happened.” The Guardian.

[3] Jason Douglas (17 October 2017). “BOE’s Carney Issues Stark Warning on Brexit Risks.” The Wall Street Journal

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Global Markets Rise

Treasury chief Steven Mnuchin said this week that markets could see a correction if US lawmakers fail to pass the president’s tax-cut measures, while People’s Bank of China governor Zhou Xiaochuan warned of “excessive optimism” and a possible plunge in prices.

But Trump’s promise to pass the legislation moved a step closer late Thursday when senators agreed a budget resolution that unlocks a procedure allowing Republicans to push through such measures without the need for Democrat help.

Trump hailed the vote as “an important step in advancing the administration’s pro-growth and pro-jobs legislative agenda”.

Expectations the tycoon’s tax cuts and big spending plans would boost the economy were one of the drivers of a months-long global markets rally that kicked off after his November election, though a series of White House crises and legislative setbacks pared those gains.

While the controversial proposals still have a long way to go before being passed, the news spurred Asian markets to life after a plodding start to the day, while the dollar strengthened against the yen, euro and pound.

“The budget still has to also pass the House, but near term, it should be supportive for the dollar,” Shinichiro Kadota, a senior foreign-exchange strategist at Barclays Securities Japan in Tokyo, told Bloomberg News.

“Senate passage of budget was a step required for budget reconciliation to advance tax reform.”

And Stephen Innes, head of Asia-Pacific trading at OANDA, said: “It’s likely not too late to jump on this party bandwagon as global equity markets continue ratcheting higher… or the Trump trade bandwagon for that matter.”

Tokyo ended marginally higher as a weaker yen helped reverse early losses to see the Nikkei to its 14th straight gain, matching its best run since 1961.

Via AFP

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U.S. Dollar Rises from the Ashes

After a disastrous year, the U.S. dollar has finally shown signs of real progress. Earlier this month, the U.S. dollar index (DXY) jumped to its highest level since August on political support and weakness from other major currencies.

The dollar index, a measure of the greenback against a basket of six peers, reached a settlement high of 93.96 on 5 October. That followed a 2.8% gain over the previous month. Meanwhile, the euro, yen and Canadian dollar slipped. The British pound also showed weakness as Brexit uncertainty continued to hamper the weakened government of Prime Minister Theresa May.

Although U.S. jobs data have largely disappointed as of late, weak readings largely reflected a volatile hurricane season. In other words, investors are confident that the domestic jobs engine may hum once again in October and beyond.

The greenback caught a tailwind as details of the Republican tax plan emerged, raising confidence that stronger economic growth may follow. President Donald Trump’s tax cuts have been described as the most ambitious in 30 years. They include lowering the top income rate to 35%, slashing the corporate tax rate to 20% from 35% and a one-time repatriation of corporate profits held overseas.

The dollar bulls also rallied behind hawkish testimony from the Federal Reserve, whose policy-setting board has given strong signals that it will raise interest rates in December. Last month, Federal Reserve Chairwoman Janet Yellen reaffirmed expectations for a rate hike in December, saying it would be “imprudent” to keep monetary policy on hold until inflation reaches its 2% target.

 

“For these reasons, and given that monetary policy affects economic activity and inflation with a substantial lag, it would be imprudent to keep monetary policy on hold until inflation is back to 2%,“ Yellen told the National Association for Business Economics on 26 September.

 

The dollar has weakened a bit over the past two weeks, but continues to show resilience. This suggests that the worst of the dollar drought may be behind us. However, upward mobility will depend on several factors tied to global central banks and domestic inflation.

 

[1] Kimberly Amadeo (16 October 2017). “Trump’s Tax Plan and How It Would Affect You.” The Balance.

[2] Greg Robb (26 September 2017). “Yellen says Fed should be ‘wary’ of raising rates ‘too gradually’.” Market Watch.

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Gold Tumbles in Asia as U.S. Senate Rallies the Dollar

Gold tumbles as the U.S. Senate causes yields and the dollar to rise across the board.

Gold has fallen 0.50% or some six dollars from its close in New York as Asia erases almost all of the gains it made yesterday. Gold is wilting as the U.S. dollar surges in Asia after the U.S. Senate adopted an FY18 budget resolution. It has seen Treasury yields edge higher pushing the dollar up across most currencies with the US Dollar Index higher by 0.40% in Asia. Along with the odds of the new Federal Reserve Chairmen shortening to make a more hawkish Jerome Powell the frontrunner, none of this is good news for gold.

Having closed at 1289.00 gold is now trading at 1283.50 with double top resistance at 1291.30 followed by the 1296.00 area. Significant support, however, is just below at 1276.00, a double bottom from Wednesday and Thursday and also the 100-day moving average. A break would open up further falls to the 1260.00 regions and the nearby 200-day moving average at 1258.00. It would most likely a significant rush for the exit door by traders if it were to give way.

Gold Daily

The key to the remainder of the session is whether the U.S. dollar gains and higher Treasury yields are sustained into Europe and New York. If the moves correct then gold may get a reprieve, if Europe continues to run with this baton, it could be a long day for bullish gold traders.

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Breaking News: Spain moves to suspend Catalonia’s autonomy

Having missed the 8pm GMT deadline to renounce its claims to Independence, the Catalonia Government now faces losing all its powers as Spain moves forward in suspending Catalonia’s autonomy.

 

Prime Ministers Rajoy’s government has confirmed that they will implement Article 155 of the constitution restoring full control of Catalonia to Madrid.

 

The Catalan Parliament has also warned that if there is no dialogue between the two Governments on the matter they will push ahead with a formal declaration of independence.

 

Fear that these latest developments will likely cause more unrest in the region sent Spanish stocks lower with the EUR/USD initially coming under pressure when the 8pm GMT deadline was missed dropping to 1.17686 levels before bouncing back about 1.1800.  At the time of writing the EUR/USD is currently trading at 1.18047.

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