Sive Morten
Special Consultant to the FPA
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Fundamentals
Almost the whole week market was lazy, showing slow action in direction that was preset earlier. Driving factors were mostly the same - difficulties in US/China negotiations, UK election polls and statistics. Situation has changed drastically only by Friday when unexpectedly market has got positive NFP report.
But, week has started not on positive mood at all. The dollar fell to a one-month low on Wednesday, undermined by weaker-than-expected U.S. private sector job growth data that followed soft manufacturing numbers earlier in the week that fueled worries the world's largest economy could slip into recession. The U.S. currency also slid to a four-week trough versus the euro and earlier dipped to a two-week low against the yen before recovering to trade slightly higher on the day.
"We have seen big U.S. data misses this week and that doesn't help dollar sentiment," said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.
A private survey showed on Wednesday that U.S. private-sector hiring in November unexpectedly slowed to its weakest pace in six months, as goods producers and construction companies cut jobs. U.S. companies' jobs rose by 67,000 last month, the ADP National Employment Report said. The median forecast among economists polled by Reuters called for a gain of 140,000 jobs.
"This data is hard to ignore," Scotiabank's Osborne said. "We have seen some slowing in hiring in the U.S. recently. But it's not too surprising given the headwinds for global growth and the slowdown in the U.S."
Following the soft payrolls report, data showed that the Institute for Supply Management's non-manufacturing index fell to 53.9 in November from 54.7 the previous month. The weaker-than-expected U.S. services report came after poor U.S. manufacturing data earlier this week.
U.S.-China trade negotiations were also in focus on Wednesday. A Bloomberg report that the two sides were close to agreeing on the amount of tariffs that would be
rolled back in a phase-one trade deal boosted the offshore-Chinese yuan by 0.2% to 7.05. The Chinese currency had languished around seven-week lows to the dollar after U.S. President Donald Trump said on Tuesday a trade agreement may be delayed until after the November 2020 U.S. presidential election.
The dollar trades with an 11% premium in times of trade uncertainty, Osborne said, but the greenback seems to have peaked in October as trade tensions have somewhat eased. "It's really gotten to the point where 'people familiar with trade negotiations' are on the ball and there is some progress here and we're going toward some skinny trade deal," Osborne said. "I would expect the dollar to soften."
Speaking on "special" US/Sino relationships, we already mentioned previously two other issues - first is US Congress bill on Hong Kong situation which is supports rebels and oblige China to fill their demands and start negotiations. Second - US also set another bill in relation to Uighur nation trying to force China to provide them more autonomy. Of course both acts make China to chafed at interference from US in national affairs and triggered mirror political response.
But this is not all yet. Yesterday D. Trump calls for World Bank to stop loaning to China. The World Bank on Thursday adopted a plan to aid China with $1 billion to $1.5 billion in low-interest loans annually through June 2025. The plan calls for lending to “gradually decline” from the previous five-year average of $1.8 billion.
“Why is the World Bank loaning money to China? Can this be possible? China has plenty of money, and if they don’t, they create it. STOP!” Trump wrote in a post on Twitter.
Recent steps that are done by US makes me think that they do not need a "deal" right now or at current conditions. They see that China needs it more and US wants to drag out China more to get better results, or lead China to an edge when they need agreement badly.
Talking on nearest future - now all eyes stand on 15th of December, where next tariffs pack should be set on Chinese consumer goods, including cellphones, laptops etc.
In general, despite that US/China negotiations becomes a soap opera - stock market reacts on it sharply. The stock market looks set to end 2019 the way it began the year — highly sensitive to headlines from President Donald Trump’s global trade war.
Stocks pulled back from record highs to start December, undermined by comments from Trump and others in his administration suggesting any deal to resolve the trade dispute between the United States and China would not come soon. But the market rebounded at the end of the week on Friday’s strong U.S. jobs and a change in tone from Trump.
Wall Street could see more volatility ahead of Dec. 15, when the next tranche of U.S. tariffs on Chinese imports is set to take effect. The tariffs on $156 billion in Chinese imports that could take effect Dec. 15 are largely on consumer goods, including cellphones, laptop and desktop computers, toys and clothing.
UBS economists estimate those tariffs would drag on U.S. gross domestic product by either 0.1% or 0.2% in each of the four quarters next year. UBS projects overall GDP growth to average 1.1% in 2020, with tariffs generally weighing heavily in the first half of the year.
“The problem is the uncertainty that the trade war process has on business decisions,” said Art Hogan, chief market strategist at National Securities in New York. “Without some sort of short-term truce, company spending gets frozen and that’s where it affects the economy and the market.”
“Without a phase one plan on getting something signed early in the new year, I think the market is susceptible for a pullback,” said Robert Pavlik, chief investment strategist at SlateStone Wealth LLC.
The focus will remain on trade into next week, even as the Federal Reserve holds its last meeting of 2019, with the U.S. central bank expected to keep interest rates steady after three cuts earlier in the year.
“The Fed chairman pretty much outlined that the bar is very high to raise rates,” SunTrust’s Lerner said.However, he added, if some of the tariffs result in a sharp slowdown, “the Fed would have to act eventually” by cutting rates.
Investors will also be looking for signs of strength in the holiday shopping season, given that consumer spending is seen as a key pillar holding up overall economic growth.
There is a strong incentive to push off the tariffs “as long as people are at the negotiating table,” said Carol Schleif, deputy chief investment officer at Abbot Downing in Minneapolis. “President Trump definitely doesn’t want a downbeat consumer going into the election cycle,” she said.
And after these comments we see interesting situation on net speculators positions on Gold market and Stock market. Thus, despite Friday's drop, net gold position stands long and jumps to 290K contracts - almost right back to absolute high, while S&P 500 drops to 40K bearish contracts and is dropping since 11th of October. Taking in consideration this dynamic - it is difficult to combine it with positive solution of tariffs problem, at least till the end of the year. This is the riddle that has to be resolved. But now it seems that markets do not believe too much that "deal" will be achieved any time soon.
The dollar gained on Friday after five straight days of losses, lifted by data showing the U.S. economy created many more jobs than expected in November, backing the Federal Reserve’s stance of keeping interest rates on hold after cutting them three times this year.
Gains in the dollar were fairly modest despite the robust jobs number, however. The greenback has been pummeled all week due to a slew of weaker-than-expected data in the U.S. manufacturing and services sectors, with investors coming to grips with the reality that the economy is slowing down.
Friday’s jobs report provided a respite from all the pessimism and from the continuing uncertainty over the status of U.S.-China trade negotiations.
Data showed nonfarm payrolls increased by 266,000 jobs last month, with manufacturing recouping all 43,000 positions lost in October. Economists polled by Reuters had forecast payrolls rising by 180,000 jobs.
The dollar still posted its worst weekly percentage loss in more than a month despite Friday’s gains.
“No question today’s jobs report is strong, but is it strong enough for people to change their views about the economy?” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “I still think the U.S. economy is weakening and I don’t think today’s number is going to change people’s expectations for Q4 GDP (gross domestic product),” he added.
The New York Fed Staff Nowcast estimate for GDP in the fourth quarter stands at 0.6% and 0.7% in the first quarter next year, according to the NY Fed website. Poor U.S. data releases earlier reduced the GDP estimate by 0.2 percentage point for Q4 and lowered the expectation for Q1 next year by 0.3 percentage point.
Earlier in the week, U.S. data showed dismal figures on private payrolls, services, manufacturing, and construction spending.
The jobs report reinforces expectations that the Fed will remain on hold at next week’s policy meeting, with its outlook on monetary policy seen little changed from the last statement.
“We suspect the large majority of the (Federal Open Market) Committee will be comfortable projecting no change for policy rates in the year ahead,” Michael Feroli, chief U.S. economist at JP Morgan, wrote in a research note.
Indeed by CME Fed watch tool, odds now suggest that Federal reserve will be "on hold" until late summer 2020 on new rate decision and should hold it intact in nearest few months. The first hint on possible rate change appears in July only:
US economy now stands in fragile equilibrium. This is the reason why data differs strongly month by month. The major question here still stands about the tendency and trend. How to treat this positive NFP - either as pullback in slowdown of US economy, or as reversal/continuation of upside tendency. Since Fed has started to act in advance, it seems that first statement is more probable. As you remember, Fed was cutting rate when it was not necessary, in advance of few months before first signs of economy slowdown have appeared. Taking in consideration this issue, as well as UBS forecasts, we should be careful in our judgement as NFP effect could be short-term. To set stable tendency on USD, market needs stable chain of positive data for few months.
Still, EUR also doesn't shine right now. Germany factory orders drops 0.4% this week and investors keep net short position on EUR that is growing few weeks in a row coming back to October lows:
Source: cftc.gov
Charting by Investing.com
Taking in consideration recent events in Europe, I'm more and more tending to idea that GBP could become more attractive for trading than EUR. Fast political life, necessary big adjustments by BoE in near term, a lot of border agreements with EU as UK is stepping in new life, despite accommodation period - all these things should bring big volatility and a lot of trading setups on GBP. That's the thing that we should carefully think about. The two major factors that are widely expected right now - BJ victory and Brexit agreement could trigger strong emotional rally on GBP. And I will not be surprised if we will see it around 1.40 soon.
Technicals
Monthly
EUR keeps big scale intrigue by showing reversal candle right at YPS1 level. Although it is too far to break the tendency here as market has to climb above 1.25 top, but short-term context could change if reversal candle will get continuation and monthly chart will turn bullish. Meantime price action second month in a row stands inside reversal bar.
In general recent changes here were in favor of EUR due US statistics and more dovish Fed policy, at least in short-term. But this week data has improved and new achievement of US/China negotiations stands in mind of investors. As it is widely suggested D. Trump should not want to hurt stock market during 2020 election rally. Now we need to keep close eye on key technical levels that are vital for longer-term tendency. Market should not erase October rally as it was in June. Otherwise EUR continues to drift lower to 1.03 area.
As we come closer to the end of the year and second issue that might be interesting on EUR is YPS1. If EUR, by the end of the year will be able to hold above YPS1 - 2019 action could be treated as retracement of 2016 - 2017 rally. And EUR will keep chances on extension in 2020.
That's being said the major intrigue stands around fundamental background now - it is changing. It is interesting whether its change will be strong enough to make impact on monthly chart and long lasting tendency here. As economy in EU hardly will improve soon - the major driving factor depends on US - how better/worse situation will be there.
Weekly
Mostly we're in the same situation as week before. Now new patterns have been formed, price action barely impacts on weekly picture as trading range stands too narrow and doesn't involve in trading process even nearest Fib levels. This week we also haven't got grabber pattern.
Despite positive dynamic in recent two weeks bearish reversal candle still stands valid here. Downside reversal happens in the middle of the range and not at some resistance area, which looks a bit worrying. Despite trend stands up, we still could recognize signs of bearish dynamic pressure - price is falling while MACD shows uptrend. And this fact increases importance of price action around daily support as it will be vital for short-term perspective.
Daily
So, on daily chart EUR still has taken classic action and has not challenged resistance for the second time. As a result, our trading setup of long entry by Stop "Buy" order above recent top was not realized, despite that EUR was preparing to this scenario two day in a row. But NFP report sets status quo.
Despite that drop was nice out from resistance, it is too early to suggest that new direction is down. Trend stands bullish and NFP drop could become just a retracement of recent rally. At the same time, we've got reversal day again, which suggests at least minor but downside continuation. The longer term direction will be determined on shorter-term chart.
Intraday
Take a look 4H chart. Here we have Agreement support of XOP and major 5/8 Fib level of 1.1030 area. This will be vital for daily time direction. Market response in this level will show us could we fade NFP drop against daily upside trend or tendency will be broken.
Theoretically we could try to buy around 1.1030 if no collapse will happen and move stops to breakeven at first bounce up. Then just watch what will happen. If EUR will drop this level - market will return back to 1.0980-1.10 daily support.
Almost the whole week market was lazy, showing slow action in direction that was preset earlier. Driving factors were mostly the same - difficulties in US/China negotiations, UK election polls and statistics. Situation has changed drastically only by Friday when unexpectedly market has got positive NFP report.
But, week has started not on positive mood at all. The dollar fell to a one-month low on Wednesday, undermined by weaker-than-expected U.S. private sector job growth data that followed soft manufacturing numbers earlier in the week that fueled worries the world's largest economy could slip into recession. The U.S. currency also slid to a four-week trough versus the euro and earlier dipped to a two-week low against the yen before recovering to trade slightly higher on the day.
"We have seen big U.S. data misses this week and that doesn't help dollar sentiment," said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.
A private survey showed on Wednesday that U.S. private-sector hiring in November unexpectedly slowed to its weakest pace in six months, as goods producers and construction companies cut jobs. U.S. companies' jobs rose by 67,000 last month, the ADP National Employment Report said. The median forecast among economists polled by Reuters called for a gain of 140,000 jobs.
"This data is hard to ignore," Scotiabank's Osborne said. "We have seen some slowing in hiring in the U.S. recently. But it's not too surprising given the headwinds for global growth and the slowdown in the U.S."
Following the soft payrolls report, data showed that the Institute for Supply Management's non-manufacturing index fell to 53.9 in November from 54.7 the previous month. The weaker-than-expected U.S. services report came after poor U.S. manufacturing data earlier this week.
U.S.-China trade negotiations were also in focus on Wednesday. A Bloomberg report that the two sides were close to agreeing on the amount of tariffs that would be
rolled back in a phase-one trade deal boosted the offshore-Chinese yuan by 0.2% to 7.05. The Chinese currency had languished around seven-week lows to the dollar after U.S. President Donald Trump said on Tuesday a trade agreement may be delayed until after the November 2020 U.S. presidential election.
The dollar trades with an 11% premium in times of trade uncertainty, Osborne said, but the greenback seems to have peaked in October as trade tensions have somewhat eased. "It's really gotten to the point where 'people familiar with trade negotiations' are on the ball and there is some progress here and we're going toward some skinny trade deal," Osborne said. "I would expect the dollar to soften."
Speaking on "special" US/Sino relationships, we already mentioned previously two other issues - first is US Congress bill on Hong Kong situation which is supports rebels and oblige China to fill their demands and start negotiations. Second - US also set another bill in relation to Uighur nation trying to force China to provide them more autonomy. Of course both acts make China to chafed at interference from US in national affairs and triggered mirror political response.
But this is not all yet. Yesterday D. Trump calls for World Bank to stop loaning to China. The World Bank on Thursday adopted a plan to aid China with $1 billion to $1.5 billion in low-interest loans annually through June 2025. The plan calls for lending to “gradually decline” from the previous five-year average of $1.8 billion.
“Why is the World Bank loaning money to China? Can this be possible? China has plenty of money, and if they don’t, they create it. STOP!” Trump wrote in a post on Twitter.
Recent steps that are done by US makes me think that they do not need a "deal" right now or at current conditions. They see that China needs it more and US wants to drag out China more to get better results, or lead China to an edge when they need agreement badly.
Talking on nearest future - now all eyes stand on 15th of December, where next tariffs pack should be set on Chinese consumer goods, including cellphones, laptops etc.
In general, despite that US/China negotiations becomes a soap opera - stock market reacts on it sharply. The stock market looks set to end 2019 the way it began the year — highly sensitive to headlines from President Donald Trump’s global trade war.
Stocks pulled back from record highs to start December, undermined by comments from Trump and others in his administration suggesting any deal to resolve the trade dispute between the United States and China would not come soon. But the market rebounded at the end of the week on Friday’s strong U.S. jobs and a change in tone from Trump.
Wall Street could see more volatility ahead of Dec. 15, when the next tranche of U.S. tariffs on Chinese imports is set to take effect. The tariffs on $156 billion in Chinese imports that could take effect Dec. 15 are largely on consumer goods, including cellphones, laptop and desktop computers, toys and clothing.
UBS economists estimate those tariffs would drag on U.S. gross domestic product by either 0.1% or 0.2% in each of the four quarters next year. UBS projects overall GDP growth to average 1.1% in 2020, with tariffs generally weighing heavily in the first half of the year.
“The problem is the uncertainty that the trade war process has on business decisions,” said Art Hogan, chief market strategist at National Securities in New York. “Without some sort of short-term truce, company spending gets frozen and that’s where it affects the economy and the market.”
“Without a phase one plan on getting something signed early in the new year, I think the market is susceptible for a pullback,” said Robert Pavlik, chief investment strategist at SlateStone Wealth LLC.
The focus will remain on trade into next week, even as the Federal Reserve holds its last meeting of 2019, with the U.S. central bank expected to keep interest rates steady after three cuts earlier in the year.
“The Fed chairman pretty much outlined that the bar is very high to raise rates,” SunTrust’s Lerner said.However, he added, if some of the tariffs result in a sharp slowdown, “the Fed would have to act eventually” by cutting rates.
Investors will also be looking for signs of strength in the holiday shopping season, given that consumer spending is seen as a key pillar holding up overall economic growth.
There is a strong incentive to push off the tariffs “as long as people are at the negotiating table,” said Carol Schleif, deputy chief investment officer at Abbot Downing in Minneapolis. “President Trump definitely doesn’t want a downbeat consumer going into the election cycle,” she said.
And after these comments we see interesting situation on net speculators positions on Gold market and Stock market. Thus, despite Friday's drop, net gold position stands long and jumps to 290K contracts - almost right back to absolute high, while S&P 500 drops to 40K bearish contracts and is dropping since 11th of October. Taking in consideration this dynamic - it is difficult to combine it with positive solution of tariffs problem, at least till the end of the year. This is the riddle that has to be resolved. But now it seems that markets do not believe too much that "deal" will be achieved any time soon.
The dollar gained on Friday after five straight days of losses, lifted by data showing the U.S. economy created many more jobs than expected in November, backing the Federal Reserve’s stance of keeping interest rates on hold after cutting them three times this year.
Gains in the dollar were fairly modest despite the robust jobs number, however. The greenback has been pummeled all week due to a slew of weaker-than-expected data in the U.S. manufacturing and services sectors, with investors coming to grips with the reality that the economy is slowing down.
Friday’s jobs report provided a respite from all the pessimism and from the continuing uncertainty over the status of U.S.-China trade negotiations.
Data showed nonfarm payrolls increased by 266,000 jobs last month, with manufacturing recouping all 43,000 positions lost in October. Economists polled by Reuters had forecast payrolls rising by 180,000 jobs.
The dollar still posted its worst weekly percentage loss in more than a month despite Friday’s gains.
“No question today’s jobs report is strong, but is it strong enough for people to change their views about the economy?” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “I still think the U.S. economy is weakening and I don’t think today’s number is going to change people’s expectations for Q4 GDP (gross domestic product),” he added.
The New York Fed Staff Nowcast estimate for GDP in the fourth quarter stands at 0.6% and 0.7% in the first quarter next year, according to the NY Fed website. Poor U.S. data releases earlier reduced the GDP estimate by 0.2 percentage point for Q4 and lowered the expectation for Q1 next year by 0.3 percentage point.
Earlier in the week, U.S. data showed dismal figures on private payrolls, services, manufacturing, and construction spending.
The jobs report reinforces expectations that the Fed will remain on hold at next week’s policy meeting, with its outlook on monetary policy seen little changed from the last statement.
“We suspect the large majority of the (Federal Open Market) Committee will be comfortable projecting no change for policy rates in the year ahead,” Michael Feroli, chief U.S. economist at JP Morgan, wrote in a research note.
Indeed by CME Fed watch tool, odds now suggest that Federal reserve will be "on hold" until late summer 2020 on new rate decision and should hold it intact in nearest few months. The first hint on possible rate change appears in July only:
US economy now stands in fragile equilibrium. This is the reason why data differs strongly month by month. The major question here still stands about the tendency and trend. How to treat this positive NFP - either as pullback in slowdown of US economy, or as reversal/continuation of upside tendency. Since Fed has started to act in advance, it seems that first statement is more probable. As you remember, Fed was cutting rate when it was not necessary, in advance of few months before first signs of economy slowdown have appeared. Taking in consideration this issue, as well as UBS forecasts, we should be careful in our judgement as NFP effect could be short-term. To set stable tendency on USD, market needs stable chain of positive data for few months.
Still, EUR also doesn't shine right now. Germany factory orders drops 0.4% this week and investors keep net short position on EUR that is growing few weeks in a row coming back to October lows:
Source: cftc.gov
Charting by Investing.com
Taking in consideration recent events in Europe, I'm more and more tending to idea that GBP could become more attractive for trading than EUR. Fast political life, necessary big adjustments by BoE in near term, a lot of border agreements with EU as UK is stepping in new life, despite accommodation period - all these things should bring big volatility and a lot of trading setups on GBP. That's the thing that we should carefully think about. The two major factors that are widely expected right now - BJ victory and Brexit agreement could trigger strong emotional rally on GBP. And I will not be surprised if we will see it around 1.40 soon.
Technicals
Monthly
EUR keeps big scale intrigue by showing reversal candle right at YPS1 level. Although it is too far to break the tendency here as market has to climb above 1.25 top, but short-term context could change if reversal candle will get continuation and monthly chart will turn bullish. Meantime price action second month in a row stands inside reversal bar.
In general recent changes here were in favor of EUR due US statistics and more dovish Fed policy, at least in short-term. But this week data has improved and new achievement of US/China negotiations stands in mind of investors. As it is widely suggested D. Trump should not want to hurt stock market during 2020 election rally. Now we need to keep close eye on key technical levels that are vital for longer-term tendency. Market should not erase October rally as it was in June. Otherwise EUR continues to drift lower to 1.03 area.
As we come closer to the end of the year and second issue that might be interesting on EUR is YPS1. If EUR, by the end of the year will be able to hold above YPS1 - 2019 action could be treated as retracement of 2016 - 2017 rally. And EUR will keep chances on extension in 2020.
That's being said the major intrigue stands around fundamental background now - it is changing. It is interesting whether its change will be strong enough to make impact on monthly chart and long lasting tendency here. As economy in EU hardly will improve soon - the major driving factor depends on US - how better/worse situation will be there.
Weekly
Mostly we're in the same situation as week before. Now new patterns have been formed, price action barely impacts on weekly picture as trading range stands too narrow and doesn't involve in trading process even nearest Fib levels. This week we also haven't got grabber pattern.
Despite positive dynamic in recent two weeks bearish reversal candle still stands valid here. Downside reversal happens in the middle of the range and not at some resistance area, which looks a bit worrying. Despite trend stands up, we still could recognize signs of bearish dynamic pressure - price is falling while MACD shows uptrend. And this fact increases importance of price action around daily support as it will be vital for short-term perspective.
Daily
So, on daily chart EUR still has taken classic action and has not challenged resistance for the second time. As a result, our trading setup of long entry by Stop "Buy" order above recent top was not realized, despite that EUR was preparing to this scenario two day in a row. But NFP report sets status quo.
Despite that drop was nice out from resistance, it is too early to suggest that new direction is down. Trend stands bullish and NFP drop could become just a retracement of recent rally. At the same time, we've got reversal day again, which suggests at least minor but downside continuation. The longer term direction will be determined on shorter-term chart.
Intraday
Take a look 4H chart. Here we have Agreement support of XOP and major 5/8 Fib level of 1.1030 area. This will be vital for daily time direction. Market response in this level will show us could we fade NFP drop against daily upside trend or tendency will be broken.
Theoretically we could try to buy around 1.1030 if no collapse will happen and move stops to breakeven at first bounce up. Then just watch what will happen. If EUR will drop this level - market will return back to 1.0980-1.10 daily support.
?