BoE Preview: Will Carney Live to the Expectations?

BoE Preview: Will Carney Live to the Expectations? Today, the Bank of England’s (BOE) starts its two-day meeting, which will culminate in tomorrow’s decision on interest rates.

The meeting comes at an interesting period for the global financial markets. As you already know, global markets have seen significant swings in the past two days. These swings have wiped out most gains they had established in the first month.

The market turbulence started on Friday when the Bureau of Labor Statistics (BLS) announced the January’s jobs numbers, which beat expectations. After this release, global investors started thinking again about the chances of high inflation which would trigger an increased pace of rate increases.

Therefore, today’s meeting comes at a very different time compared to the previous meeting when everything seemed normal.

For this meeting, investors expect the bank to leave interest rates unchanged at 0.50%. Therefore, tomorrow, traders will not focus on the headline numbers.

Instead, they will focus on two things. First, they will focus on the letter from Governor Carney to Philip Hammond explaining the current rate of inflation. As you recall, the rate of inflation in December soared to 3.1%, triggering the letter-writing scenario. In January, the inflation rate dropped marginally to 3.0%.

Second, they will focus on the statement from the MPC. This statement will help them decide on the expected pace of rate increases.

In the recent past, despite the increasing market volatility, traders have placed a 50% chance that the BoE will hike interest rates in May. They have also priced in two more rate hikes, possibly in September and in December.

The problem for this is that sky-high expectations often lead to disappointments.  As you recall, in the November meeting, the BoE raised interest rates for the first time. While traders were pleased with the headline number, they were disappointed that the officials omitted language they had used previously saying the markets were underpricing the rate trajectory. At the end, the pound fell by more than 14 bps while the 10-year gilt yields fell by 8 bps. This was the biggest drop since the rate cut in 2016.

In other words, traders have become more hawkish which could complicate things for the BoE. Disappointing language could lead to another sell off in the pound amidst another one in the stocks market.

In addition, the decision comes at a time when the pound is doing well. In January, it climbed more than 50 bps against the dollar, which is its best start of the year on record. In addition, large money managers have increased their bullish bets on the currency to the highest level since 2014.

The meeting comes at a time when Brexit is a hanging cloud. Yesterday, a note released by the EU increased the complexity of the situation. According to the note, the EU will be at will to punish the United Kingdom, even by increasing tariffs and shutting down their market unless the UK made concessions. All these issues have made the political environment in the country very difficult for Theresa May who is struggling.

Sources:

https://www.bloomberg.com/news/articles/2017-09-13/boe-preview-pound-may-benefit-as-hawkish-tone-seen-in-rate-vote

http://gulftoday.ae/portal/e17668bb-aa5a-4fc3-8bd4-3e7696b720b1.aspx

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EURUSD and GBPUSD Looking For Possible Turning Points

EURUSD is coming significantly lower from earlier 1.2430, a swing high which might have been wave four so current leg down can be the final leg of wave c) that belongs to an Elliott wave flat correction. We realize that dollar is very strong, so we must be careful with calling a turn, but there are […]

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NZD/USD Technical Analysis: Waiting for Reserve Bank of New Zealand’s Decision

NZD/USD Technical Analysis: Waiting for Reserve Bank of New Zealand’s Decision. In the past three months, the NZD/USD pair has been on a strong upward trend. As shown below, the pair has had a strong 30 degrees trend, making slight higher highs and higher lows. The pair has moved from a low of 0.6781 to a high of 0.7439.

The upward trend has been because of the dollar weakness and the strong performance of commodities. As you know, New Zealand is the world’s leader in milk and cattle exports. It is also a richly endowed country with major natural resources. As shown below, in the past one month, the dollar index has fallen from a high of $92.62 to a low of $88.43.

The upward trajectory changed last Friday when the dollar started to rise following the release of the monthly jobs numbers. After the news, the treasury yields rose to the highest level in three years, forcing investors to exit stocks. At the end of the day, the dollar was up by almost a percent.

This week, the movements on the pair will depend on the RBNZ, which will release its monetary policy decision on Wednesday. On this day, traders will want to hear their opinion about the economy and interest rates.

This week, in case of a reversal, traders should watch out for the 0.7250 level and in case the pair continues to move down, they should watch out for the 0.7251 level as shown below.

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Weekend Review: Friday’s Crash and Hopes from Germany

Weekend Review: Friday’s Crash and Hopes from Germany. Over the weekend, traders and investors from around the world were processing the market crash in the United States.

As you remember, Friday seemed like a good day. In the morning (U.S time), the Bureau of Labor Statistics (BLS) released its highly anticipated jobs numbers. To many investors, a positive reading on this number is usually a positive note; an indication that the economy is doing well.

After the data was released, many traders expected the US market to perform well. Furthermore, the data showed the fastest acceleration of wages in 9 years.

The opposite happened. The markets crashed with the Dow falling by as much as 700 points. The crash was because of the rise in U.S treasury bonds. As shown below, the yields on a 10 year bond rose to the highest level in three years leading investors to dump stocks for the safe bonds.

The chart below shows the 5-day performance of the three biggest indices in the United States.

The question among investors was on whether the stocks crash was a one-off event or the beginning of the end. In an interview on Friday evening, the outgoing Fed chair Yellen said that to her, stocks were currently overvalued.

Another major development during the weekend was from Germany. As you know, since last year’s election, Chancellor Merkel has been unable to form a government. To do so, she needs to either call for another election or form a coalition with the opposition.

A few weeks ago, the two parties agreed to start coalition talks. In these talks, both parties present their agenda and form a compromise. Sunday was the self-imposed deadline for the talks but the parties agreed to extend. According to the Financial Times, both parties were upbeat about the talks and were optimistic of a comprehensive deal.

During the weekend, traders were still watching cryptocurrencies. As you remember, last week, the price of all cryptocurrencies fell with bitcoin trading below $9,000. Bitcoin, ethereum, ripple, and litecoin ended the week down 28%, 23%, 39%, and 35% respectively.

The pain continued during the weekend when bitcoin traded below $7,000 and ethereum below $900. The major news that broke during the weekend is when large United States banks announced that they would stop processing bitcoin payments. They explained that the volatility in the cryptocurrencies market made their services in the space unsustainable.

Traders are now worried that the much-talked about cryptocurrencies crash is just beginning. As you remember, last week, the CFTC launched an investigation to one of the largest exchanges in the world called Bitfinex.

Another major news that happened during the weekend was the announcement by the Fed about Wells Fargo. As you remember, Wells Fargo has been under investigation for defrauding millions of customers. In Yellen’s final act as chair, she asked the bank to sack four directors and halt any future growth plans. By this, the Fed means that the bank could not exceed its assets past the 2017 levels without permission. Traders are waiting for the market to open to see how the banks will trade.

Sources:

https://finance.yahoo.com/news/stock-market-crash-3-stocks-131700057.html

https://www.express.co.uk/finance/city/914478/financial-crash-us-stock-market-trading-dow-jones-Nasdaq-global-money

https://qz.com/1197461/jobs-report-is-a-global-recession-led-by-a-us-stock-market-crash-in-the-offing/

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USD: If The Greenback Is Back; How To Play It? – ANZ

The upbeat US Non-Farm Payrolls sent the dollar high. But is it a full comeback? If so, what’s next? Here is the view from ANZ: Here is their view, courtesy of eFXnews: ANZ Research discusses the USD outlook and thinks that the greenback is setting the stage for a more sustained rebound over the coming weeks. […]

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NFP 200K, wages up 2.9% y/y – USD jumps – Live Coverage

The US was expected to report a gain of around 184K job gains in January. Wages were predicted to rise by 0.3% m/m and 2.6% y/y. The unemployment rate was projected to remain unchanged at 4.1%. The dollar was making some gains ahead of the publication. Join the live coverage with Valeria Bednarik and I. […]

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With Global Indices Overbought, Is the Bubble About to Pop?

After the financial crisis of 2008/9, the financial markets around the world have seen tremendous growth. Consider the 5-year chart below of the major global indices.

As seen, the NASDAQ has led the way, gaining by more than 150% while the FTSI 100 has been the laggard, gaining by just 18%. This is attributed to the risks posed by Brexit on the UK economy.

At the same time, the CBOE Volatility index, which measures the volatility in the financial markets, has stayed at significant lows as shown below.

The surge in the global stocks markets is associated with the central banks decisions. After the crisis, the global central bankers moved to rescue the economy by introducing low interest rates. They also started a large scale asset purchase in what is known as the quantitative easing. In other words, they printed billions of dollars to buy treasuries and mortgage backed securities.

So far, only the Fed has moved to end the stimulus package. Other banks have issued forward guidance on when they will end the packages.

Another reason why stocks have done well is because of corporate earnings. In the past five years, corporate earnings in the United States and in around the world have risen significantly. For example, in 2010, a company like Facebook was making a few billion dollars in annual revenues. Last year, the company brought almost $30 billion in revenues. At that time, a company like Snapchat never existed. Last year, the company made billions of dollars.

Therefore, corporate earnings and easy money have led the stocks market to grow. Another reason which is less talked about is crude oil. As shown below, the price of crude oil has lost about 32% in the past 5 years. This year, the major indices have continued to break records every day.

For traders, the daily movements of stocks, currencies don’t matter. This is because, they can always buy and sell financial instruments and exit within a short period.

For long-term investors however, these are difficult times because of the difficulty in finding reasonably-valued companies. Some of the most loved companies like Amazon, Tesla, and NVIDIA are overvalued based on multiple valuation measures like ratio analysis. For example, Tesla, which makes electric cars, is currently valued at more than $50 billion, which is close to that of General Motors, which is selling more electric vehicles than Tesla.

From a technical perspective, all the major indices are in the extreme areas of being overbought. Consider the chart of the Dow and NASDAQ below.

Dow Jones Industrial Average

NASDAQ Composite

Hang Seng

The overbought situation is seen among all the major indices.

The challenge at this time is that Central Banks are moving to Quantitative Tightening, which is the opposite of easing. By tightening, they will normalize interest rates and end purchases. Still, the interest rates are at historical lows. In the United States, the administration has brought corporate taxes to significant lows.

For investors, the fear is that markets are in a bubble, which could pop at any time. If it pops, as it happens during periods of tightening, the central banks might not have any options to save the financial market. Historically, when there is a financial crisis, central banks move to lower interest rates while policy makers move to lower corporate taxes. They do all this to stimulate the economy. Now, with interest so low, and with the tax plan passed, it would be difficult for the policy makers to contain a recession if the bubble pops.

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USD/CAD awaits verdict on NAFTA – one scenario is more priced in than the other

The Canadian dollar enjoyed a wide range of upbeat economic figures, a rate hike, and also rising oil prices, but its gains were limited. Worries that the North American Free Trade Agreement would be abandoned by the US, kept the loonie back. Last week, the US dollar took another plunge, mostly ignited by Mnuchin’s endorsement […]

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Week in Review: Central Banks and Davos Dominate

Week in Review: Central Banks and Davos Dominate . This week, the focus among the financial community was on the United States corporate earnings, Monetary Policy decisions from Japan and ECB, and the ongoing meeting in Davos, Switzerland.

Corporate Earnings

This week, we received major earnings from top companies like Caterpillar, 3M, Starbucks, AbbVie, Haliburton, and Netflix. Among the top movers were Netflix, which reported a surge in new subscribers and Caterpillar, which reported exciting results, helped by the growth in global economy. The companies that disappointed were Starbucks, which beat analysts forecast but missed on margins, and General Electric, which reported weak earnings. The SEC also reported that it is investigating the company.

Monetary Policy Decisions

This week, Bank of Japan (BoJ) was the first to leave interest rates unchanged at negative 0.1 percent. They also left the ten year yield target at 0%. All this was in line with the expectations from analysts and financial watchers. This decision had a unanimous vote of 8-1.

The most important decision of the day was on the bank’s future guidance. In this, the bank said that it would continue with its quantitative easing program as long as possible to achieve the inflation target of 2 percent. On inflation, the bank expected the cote consumer prices to go up by 1.4 percent this year and 1.8% in 2019.

This week, the yen rose against the dollar by almost 1.50%.

On Thursday, the ECB completed its two-day meeting and left interest rates and deposit facility rate steady at 0 percent and negative 1.4 percent respectively. In the meeting and subsequent press conference, Draghi reaffirmed his commitment to continue with the quantitative easing program until or beyond September this year. This news pushed the euro to a three year high against the dollar.

Today, the Census Bureau released the core durable goods data which rose against 0.6% against the expected 0.5% while the Bureau of Economic Analysis released the QoQ GDP growth of 2.6% against the expected 3.0%.

In addition, today, we received inflation data from Canada which showed inflation slowed to -0.5%.

Crude Oil

This week, crude oil continued the upward momentum with the main benchmarks reaching a three year high. As of this writing, the WTI is trading at $65.61 while Brent is trading at $70.51. Because these are significant psychological levels, I expect the commodity may try to establish a ceiling. If the data released next week shows increased demand, The momentum may increase. An alternative scenario is where the commodity retraces significantly before starting upward movements.

Davos

The annual meeting of who is who in the society happened this week with the key topics being about technology, globalization, and inclusiveness. Several headlines came out of the meeting including the statement by George Soros that Facebook and Twitter were damaging creativity, the statement by Steve Mnuchin who argued for a weaker dollar, and Trump’s statement in favor of a strong dollar.

Week Ahead

In the coming week, investors and traders will focus on corporate earnings and the Fed. On earnings, we will get results from companies like Lockheed Martin, PZ Cussons, McDonalds, Pfizer, Electronic Arts, SAP, and Banco Santander among others.

On Tuesday, we will get the Consumer Confidence data. On Wednesday, we will get Australia’s inflation data, Germany’s PMI, the Fed statement, and the Chinese manufacturing PMI. On Thursday, we will get manufacturing data from China, Germany and the UK. On Friday, we will get the jobs data from the United States.

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