Tickmill UK Daily Market Notes

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High expectations on NFP as a platform for greenback rally

As I have previously suggested, the dollar seemed fundamentally undervalued and at the end of last week there was a correction after what could be called a ridiculous sell-off. Powell’s soft position and the lull on the tariff front only temporarily helped keep the focus on domestic factors of other major currencies, but on Friday the attention was drawn to the dollar again. The most likely reason for this is the looming deadline of the new Trump tariffs, a powerful source of inflationary pressure, which the Fed will likely need to curb by raising rates. Other world banks continue to lag behind in terms of tightening policies and consensus grows that best risk/yield ratio among major currencies is currently offered by the dollar.


On Friday, risk aversion spiked and capital poured into the dollar after Trump announced that he was ready for a deal with Mexico, pointing out that it was not possible to get around sharp angles in negotiations with Canada.


On Saturday, the US president said that NAFTA will be quite viable in the form of a bilateral deal, hinting that the “easy” end of negotiations with Canada was unexpectedly difficult. Attempts by Congress to ease Washington’s hard stance failed, because Trump threatened to break the treaty altogether. Nevertheless, the main threat to world trade comes from the tariffs of the US and China, which can reach a new level already on Thursday. Trump said he was ready to impose duties on Chinese goods worth $ 200 billion after the end of the discussion period.


The data on inflation in the Eurozone pointed to the growing gap in the need to raise rates between the ECB and the Fed. The basic indicator excluding goods with volatile prices rose by only 1% in August, almost half the target value of the ECB. Employment in the region for July lacked hints about higher inflation, remaining at 8.2%. Let me remind you that a decrease in unemployment often means a shortage of workers and accompanying inflation of wages, which is then transferred through spending to consumer inflation.


At the same time, data on consumer optimism from the University of Michigan, the Chicago PMI beat the forecasts without giving a reason to quibble to the impeccable growth of the American economy. Inflationary expectations for the year ahead were revised upward, from 2.9% to 3.0%, another signal in favor of consumer spending growth.


The report on activity in the manufacturing sector of Japan as a whole indicated stagnation in the sector, but it is interesting to analyze the reasons for this. The sector is mainly aimed at export, so Japan’s economic data on the manufacturing sector reflects the trend of protectionism in global trade. The data showed that export orders decreased, mainly due to the decrease in orders from China, one of the main partners in Japan. On the other hand, pressure on producers exerts an increase in cost inflation. In addition to energy costs, it is also the US steel tariffs, which through the supply chains also affect manufacturers. In this light, the Bank of Japan will have to support the sector through a weak yen, which reduces the chances of shifts in politics or even a change of rhetoric to meetings before the end of the year.


The pound made a failed attempt to trade optimism on Brexit, after reports from the EU’s chief negotiator about the “unprecedented” proposal for a deal with Britain. However, May continues to promote its “Chequers plan”, which is considered unsatisfactory by the EU. The glimmer of hope turned back into gloom after EU Barnier stated that he was against May’s proposal. Informal deadline for negotiations will be shifted from October to mid-November.


Emerging market currencies are prone to further decline, although losses on Monday were moderate. Their slump against the dollar is likely to continue because of new tariffs. The payrolls report for August represents a benchmark for the dollar this week and data for July allows us to form rather positive expectations about the US currency. The short-term goal for DXY – level 95.50 four days before the report, the strengthening of the dollar on Friday indicates that the main preparation for growth has already been carried out.


Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
 

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AUD is doomed for slump after dovish RBA

Asian markets kept sliding on Tuesday while the dollar remained stable as the markets are threatened by the escalation of conflict between the US and China and the problems of emerging markets. The emergency austerity measures taken by Argentina indicate an imminent crisis of fiscal policy as the state gradually halts the fulfillment of some of its crucial obligations.


Futures on the S&P 500 opened with growth on Tuesday, futures e-mini on the S&P 500 climbed above the level of 2900, indicating the brisk activity of bulls on US stocks at the opening of the New York session. Reallocation of capital continues to work in favor of the US, as the impeccable economic growth, the bullish Fed, record corporate earnings and the risk of flight of inflation make US assets one of the most profitable places for holding investments.


The euro is glued to the level of 1.16 from yesterday, the pound was fixed at 1.2870 after yesterday’s decline. The yen also slightly changed against the dollar. Industrial polls, published on Monday, indicated that European and Asian companies are accumulating stress due to a slowdown in global trade and lower export orders. Argentine President announced new fiscal restrictions that could help balance the budget next year. Export companies fell into a special disgrace, as the state introduced higher taxes on exports.


The Bank of Australia left the interest rate, which has been unchanged for 25 months in a row. The statement of the regulator contained almost no surprises in it saying that “further progress is expected to reduce unemployment and inflation to the target level, however this progress will be gradual.” Obviously, the regulator is trying to soften the effect of slowing down the activity in the Chinese economy, where Australia mainly exports raw materials. Yesterday’s Japanese production activity report showed that China had cut purchases from Japan, with Australia likely experiencing the same trend of deterioration. The RBA was more optimistic about wages but became less confident about capital investments. Comments on the real estate market and wholesale prices were identical to those in August.


In general, both comments and decisions were widely expected by the market as the market probability of a rate hike at the end of next year is at 30%. The discord in the monetary policy between the Fed and the RBA is likely to continue to put pressure on the Australian currency in the medium term, which lost nearly 10% against the US dollar for this year. After a brief upside move during the regulator’s announcement, the pair went into a rapid decline from the level of 0.7230 and in the light of growing problems in China, the main trading partner, serious support for bears is likely to be located lower, at the level of 0.70.







On Saturday, Donald Trump gave a new impetus to the anxiety associated with trade wars, saying that the presence of Canada in the NAFTA is optional and delivered an ultimatum to Congress if the latter interferes in the negotiations. On Thursday, we will find out about the fate of another threat to world trade – tariffs for Chinese goods. This is likely to happen, since the only thing that can stop Trump are problems in his own economy, which so far does not give cause for concern.


As a new risk factor for the euro and the pound is the growing likelihood of a hard exit of Britain from the European Union. Chances for such an outcome are now 25%. The negotiators on both sides are far from resolving contradictions according to the comments of both sides. However, it is worth paying attention to the sensitivity of the pound to hints of “soft Brexit”, so it’s worthwhile to short the Pound pairs cautiously. The bullish leap last week already proved this. As for the British statistics, it turned out to be a disappointment for traders. Retail sales grew weakly last month, but transaction data showed increased sales in pubs. The data did not have a noticeable impact on GBPUSD, which now depends more on the dynamics of the dollar.


Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
 

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US stocks market and Nash Equilibrium


Dollar pressure on major currencies mildly increased on Wednesday ahead of the Friday Payrolls release, while the data from US factories for August are rather optimistic. The warnings about the imminent crash of the US stock market are gradually being replaced with reports about the robust state of the economy and the solid footing of US firms. It is in such an atmosphere, when the stock market attempts to leave behind historical highs, “marginal buyers” should begin to appear in the US market. No, this is not a warning, because it is impossible to prepare for the “black swan”. But before it happens there is often a heavy imbalance in market expectations, which forms a critical gap between price and fundamental value.


In our case, for the American market, this disequilibrium is formed by the non-alternative position of the American assets relatively to the assets of other countries. The question, “where could I look for yields other than American assets?” has no clear answer. It seems to me that the situation resembles Nash equilibrium, where it is not advantageous for each participant to deviate from the choice when others do not, although the choice itself may not be the best one. Non-optimal choice, in the context of US assets, simply means the stock which significantly deviated from the fundamental value.


This can be represented as follows:




Two alternatives are presented, US assets and, let’s say, gold. Yield of the first is Rrisk, The second one is Rdef.

· Rrisk. – The yield is higher than the yield of the safe heaven asset, but risk of its holding increases.

· Rdef. – Yield of the haven asset, lower risk.

· Stick – means a strategy to stick to investing in US assets,

· Deviate – to deviate in favor of a defensive asset, which is now declining and therefore has a negative return on capital. For simplicity, the negative yield is taken as 0.

In the absence of coordinated actions, participants will remain in equilibrium Rrisk., Rrisk., Although the optimal risk/reward ratio could be provided in Rdef., Rdef. if both parties choose it. The transition from the first equilibrium is possible in case of collusion. By translating this into the market language, “collusion” is possible in the event of a shock, that is, the appearance of publicly available information that reveals the possibility of coordinating actions for transition to a new state. But the shock, as you know, is always unexpected.

Of course, the scheme is rather simplistic, but it seems to me that it can become another explanation of the nature of the shocks. For the United States such a surprise should obviously become a shock of domestic demand.

Let’s move on to the traditional part of market analysis.

In emerging markets, the plague continues to rage, but if the lira felt relieved, then the Argentine peso and rand would go into almost a free fall. Yesterday, Rand lost 3.2% against the dollar for the day, the maximum decline since November 2016, after the government announced that the country is in recession. Rand-nominated government bonds have fallen sharply, fiscal policy is under a threat, as is the case with Argentina.

The new tariffs for exports in Argentina as a measure for balancing the budget were perceived by the market as ineffective, since the end of last week, the currency has lost almost 24%. The Russian ruble against their background looks quite stable. The troubled countries will probably solve problems through IMF emergency loans. They are always unpleasant for governments, as they require structural reforms, fiscal discipline (often reducing social spending), which is always politically inconvenient for the authorities.

At the same time, manufacturing activity in the US rose to a maximum in 14 years in August due to the growth of new orders, but so far the driver remains exclusively domestic demand. The survey from ISM among managers in production warned that the peak had been reached, and in the coming months the export orders may fall due to a strong dollar. The factories also reported an increase in hiring, which is a good signal for Payrolls in August. The slowdown in production was also written off to labor shortage, this trend will soon prove itself in the report on Friday.

EURUSD is expected to stabilize around the level of 1.15, the pair may fall to this level thanks to the news of new tariffs tomorrow. The further trend will be set, in fact, by the unemployment report.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
 

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NFP review and some notes about the ECB meeting due this week



Surprisingly, the greenback was offered support from the economic front on Friday, after the unemployment report confirmed the firm tread of the US economy. However, the systematic reassessment of job creation in August, according to data for the past seven years, convinces us to look at the revised data in September to get a more accurate picture of the labor market.

Some investors expected to see how the economy felt the icy breath of tariff wars, but strong domestic demand has so far successfully leveled these fears in market sentiment. Below are the key points of the report:

– The unemployment rate remained at 3.9%, the number of new jobs was 201K, slightly exceeding the forecast of 195K;





– A much more important point of the report was wage growth, which grew by 0.4% almost double from the forecast. In annual terms, wages have changed by 2.9%. This speaks in favor of a more aggressive Fed monetary stance, since accelerating consumer inflation is usually preceded by a strengthening of wages. Usually, there are two channels of wages inflation from the labor market feeding to the consumer inflation: income growth allows consumers to increase spending, while firms are increasing labor costs, which urges them to raise end prices;

– In the manufacturing industry, there has been some slowdown in the pace of hiring. In August, the number of jobs decreased by 3K, mainly due to the reaction of firms to reduced export orders due to tariffs. Market expectations in this area are focused on fears related to protectionist policies, so in the short-term production is the first candidate for alarming signals in the trends of employment.

– The June and July gains in jobs were revised downward. During these two months, the increase in employment was 50K less than was indicated in previous reports.

The optimistic dollar reaction to the report was limited. The dollar index jumped Friday to 95.50, but on Monday it got down to decline. An important factor that affected the move of EURUSD on Friday was the sell-off of the European currency before the ECB meeting this week, which makes small steps in the direction policy tightening, while looking round at the weakness on the firms’ side due to tariffs’ uncertainty and lukewarm inflation.

In such a situation, it is necessary to preserve the escape routes and the ECB will probably confirm the intention to reduce the program of buying up bonds to 15 billion euros in October with “expectations” to finally come to an end by the end of this year. With each new meeting, the ECB will have to make more and more clarity in the interest rate trajectory, because there has been already a clear signal regarding the QE end. Should ECB stick to the vague wording of “leaving the rate unchanged at least until the summer of 2019,” then confusion will grow in the markets, and the uncertain response of markets to ECB statements is not exactly in the interest of the ECB. The likelihood that the ECB will raise the rate in October 2019 is currently 90%, while the market is fully confident that the increase will occur next year.

European bond markets will be particularly interested in the aspect of reinvesting bond revenues in the ECB policy. After the completion of QE, ECB demand for bonds should be formed on the basis of proceeds from bonds that have reached maturity. How and to whom ECB will “give” this money? To be more precise, the time goes by and the bonds in the ECB portfolio are getting closer to maturity. By reinvesting proceeds in long-term bonds, portfolio maturity can be prolonged while buying short-term bonds ECB can make the curve even steeper. The spread of bond yields across EU member states may also force the ECB to curb the cost of borrowing in some countries, for example, Italy. However, at the last meeting in July Draghi announced a neutral rule, where each country can get support from the ECB, according to its deductions to the EU. All this will also make the corresponding changes in the structure of interest rates.




Stabilization of yields in Italy by additional injections of the ECB could have calmed the market, but it is clear that the regulator does not want to exacerbate the problem of moral hazard. However, if Italy emerges at the conference, it will be a big upside surprise for the euro.

Global risk appetite was supported by data on industrial and consumer inflation in China. Both indicators exceeded expectations, despite trade tensions, but positive data could be the result of stimulus measures in China. Later data on the money supply and credits in the Chinese economy should be released, while if the monetary aggregates do not show significant growth (weak incentive measures), the inflation data will have an even more positive effect.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
 

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10YR US auction may push the yields above 3%


Yet another deluge of Treasury bonds thanks to the US Treasury happened on Wednesday, but with each new auction investors seem less and less happy with the rapidly rising bond supply. Trying to shift future consumption towards current one through tax cuts, the government was forced to increase the speed of borrowing, but expectations of a hawkish Fed increased the borrowing costs as well, making it pricier for government to raise money through debt.


The appetite for fresh batch of debt was tepid as shown by the yield to maturity which rose to 2.821%, the highest level since May 2008. Higher YTM says that the market is willing to pay less to receive fixed payments in the future. The lower the YTM, the more attractive is fixed payment security.


Among the other auction details, it is also worth taking note of the ratio between direct, indirect bids and dealers. Foreign buyers can not directly interact with the Treasury, so they do this through intermediary banks, thus creating indirect demand. At yesterday’s auction, the percentage of indirect buyers was 46.3%, with an average value of 42.7% in August while lower than the average for 6 months value of 48.1%. Declining share of indirect investors can be explained by the fact that dollars are now needed everywhere, including emerging markets, which have been throwing US Treasury bonds to get some money. They are not yet ready to return dollars to their homeland in exchange for debt offer from the White House. Dealers purchased 43.0%, while direct buyers took only 10.7%, in accordance with historical values.





The auction took place during the phase of intraday bond market decline: yesterday, the yield of 10-year bonds gradually advanced to 2.97%, almost simultaneously with the yield on 2-year securities, which rose as well. The spread between the two practically did not change, being at 0.23%.


Today, it’s worth paying attention to 10-YR bill auction among willing masses, with a total volume of $23 billion. As the placements through the past two months show, the market does demonstrate a tendency for risk-aversion.

Oil

Against the backdrop of news about the interruption of production and refinery works on the east coast and sanctions against Iranian oil, WTI jumped above 69 per barrel, drawing optimism from the API data.

API

The change in crude oil reserves -8.636M against the forecast of -1.75M.

Cushing + 2.122M against expectations of 900K.

The reserves of gasoline increased by 5.8M barrels.

Distillates decreased by 1.165M barrels.

It is obvious that the reduction in supply due to interruptions in the Mexican Gulf and the high demand for fuel due to the economic recovery, cause such a high pace of decline in oil from storage facilities. In turn, less stocks – less opportunity for American producers to influence the market – more control options for OPEC – rising prices. Market is currently trading in backwardation meaning that current supply is lower than it will be in the future.





France and South Korea, in turn, cave in under US pressure and abandon Iranian oil, forcing the latter to reduce supplies. Also, the news slipped on the market that Russia and OPEC are ready to sign a new oil agreement. It seems for prices that the upside path is opening.


In an interview with BBC the head of BoE Mark Carney, said that China’s financial system now represents one of the main risks to financial stability. The reason is the risk of repeating same mistakes that led to the 2008 crisis in the US, that is, the accumulation of high household debt, a high percentage of bad debts in Chinese banks due to inefficient lending, including costly and uneconomic infrastructure projects.


The Chinese yuan continues to cede territory to the dollar, this morning the pair almost reached the level of 6.88, but the dollar could not fix the growth. The Chinese authorities still prefer to take a passive position, responding to threats of imposing tariffs by retaliatory measures, thus trying to minimize the damage from the confrontation. Interim US elections in November are now one of the main hopes of the Chinese government, in particular, the seizure of the House of Representatives by democrats and obstruction of measures aimed at exacerbating a trade dispute with China.


Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
 

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ECB: Keeping low profile


Yesterday, the US Treasury held an auction of 10-year bonds offering $23B of them. Let me remind you that the US bond auction events should be closely monitored, since the bond supply is rising (to raise money for tax reform), while rate hikes and economic growth negatively affect demand in terms of yield and in terms of appetite to risk.

Yield to maturity came at 2.957%, slightly below the 3% which I mentioned in the past review. Investors asked for a yield which was slightly lower than it was at the auction last month (2.96%). Inside the auction, the bid-to-cover ratio was at 2.58 (2.55 in August), indicating a consistently high appetite, the percentage of indirect buyers was 64% against 61.3% in August and higher than the average of six months (60.8%), dealers took 22.6% of securities and the remaining 13.4% fell on direct buyers.




Overall, the placement was quite successful compared to auction of 3-year bonds, held on Tuesday, most likely due to the fact that 10-year securities were absorbed well in August (when the yield dropped from 3% to 2.8%). The following placements, which are likely to take place with yields above 3%, will most likely start showing signs of weakness in demand.





ECB meeting

What is known from the last meeting:

⁃ The rates are expected to remain at current levels at least until the summer of 2019, the rational duration of such a policy depends on the time that inflation needs to reach 2% in the medium term;

⁃ If trends in economic data develop in the right direction, the volume of asset purchases will be reduced to 15 billion euros in September, and the asset-purchase program will stop at the end of the year.

⁃ The risks for the euro area remain broadly balanced. The move to protectionism, as the main challenge to world trade, remains a matter of concern. Volatility in financial markets requires close monitoring.

⁃ Inflation remains on the necessary trajectory and will remain after the completion of the QE, but for this it is required to adhere to other monetary measures to support the economy (low rates).

The data received after the July meeting:

GDP for the second quarter increased by 0.4% with a forecast of 0.5%, annual economic growth slowed to 2.1%, although 2.5% was expected. On the inflation front, core inflation rose by 1.1% in July, the highest level since September 2017, but already in August, it slowed to 1%, not living up to the forecasts. In general, the development of inflation does not allow us to take the ECB as a hawkish position, since attempting to not rely on stimulus, and therefore suggesting the presence of another source of pressure in prices, is not yet possible. Among other data, shifting the growth toward slowdown, we can note PMI for July and August without positive shifts, the strengthening of the euro against the dollar. The reason for the enthusiasm, however, may be the changes in wage growth, which rose to 2.2% in second quarter.

Possible changes in the forward guidance at the meeting today:

⁃ It is unlikely that the ECB will be generous enough to give more clues on the rate hike timeframe, as it is not easy for ECB to remain bold in policy steps without understanding how the next stage of cutting down asset-purchase will affect the economy. The situation of the Fed with the US economy is very different from what the ECB has to work with, and the tariffs did not particularly affect European prices. It also makes no sense to drop a bullish hint for the euro buyers, which the ECB also relies on as a supporting factor.

⁃ It makes even less sense to make any changes in the pace of cuts of the asset purchase program, so in this part of the statement, we are not expecting anything new. An unlikely comment about a rollback in purchases can be imagined but only if there is a severe downturn on the horizon which off course can throw off the ECB’s plans, but it’s highly unlikely.

⁃ The ECB is likely to lower the GDP forecast, and may again refer to the risks of trade tensions, but in the context of the influence of these factors on future policy, their significance may be downgraded by the market to “on-duty” wordings.

Just in case, I would like to mention bearish and bullish surprises, and what they may lead to.

Lower inflation forecasts, or hints aboutextension of the purchase of assets for 2019, will provoke a significant decline in the euro, to the level of 1.14 – 1.13.

On the other hand, if the ECB reports“even greater confidence” in inflation, a firm belief in the need to complete QE in 2018, it will lead to the EURUSD rally at least to 1.18

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
 

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Time to start worrying about your dollar longs?

The ECB held a meeting yesterday and, although the forecasts for the GDP were indeed lowered, the market turned a deaf ear to the bearish part of the report as it was information that was rather anticipated. The market focused instead on Draghi’s verbal assessment of economic recovery and comments on inflation.

After the July and August CPI miss, the case for core inflation was not very good: in July the indicator fell to 1.1% and then to 1.0% in August which failed to meet projections. There was an uncertainty about how the ECB will react to these changes.

However, commenting on inflation, Draghi initially maintained neutrality, saying that “measures of underlying have generally remained muted”. But moderate optimism crept into the market after the words “the price pressure on the domestic market is increasing and strengthening,” “the uncertainty about future inflation is receding.” According to the head of the ECB, “by the end of the year favorable conditions for inflation will continue to develop, and in the medium term, it will continue to grow”.

More importantly, Draghi put an end to the pessimism about the data in July and August, saying that the ECB expects “a significant improvement in core inflation.”

Regarding the asset-purchase program there is nothing new or important, ECB anticipates a decrease to 15 billion euros in October and stopping the program by the end of 2018.

The emphasis on the Italian crisis squeezed bears shorting the euro on political instability in Europe. Draghi lifted the mood reminding that the Italian authorities have agreed to adhere to the budget rules of the EU and there is no imminent threat of crisis contagion.

Meanwhile the dollar which had lost all sensitivity to positive surprises on the economic front, was faced with the first serious reminder of the limits of the expansion of the American economy. Consumer inflation in the US slowed in August, following a slowdown in industrial inflation. The source of moderate data was a 1.6% drop in textile prices, deflation (-0.3%) was also observed in major commodity items and prices for medical services also failed to increase (-0.2%).

[URL]https://blog.tickmill.com/wp-content/uploads/2018/09/table1-1024x692.png[/URL][img/]


Interestingly, the demand for new cars was moderate, as prices in August did not change compared to July, while inflation of used car prices suggests that consumers prefer cheaper durable goods.

The main part of inflation is formed by services, while inflation for basic goods keeps around zero:

[IMG]https://blog.tickmill.com/wp-content/uploads/2018/09/graph1-1024x620.png


Under the conditions of tariffs, which are a powerful source of inflationary pressure, a slowdown in inflation may indicate a depletion of the potential of consumer demand. In other words, the burden of tariffs imposed on the consumer can turn out to be unbearable at one time, and now when there are signs that the main support of the American economy starts to bend, US authorities will have to be much more cautious both in terms of foreign policy (trade wars) and with respect to monetary measures.

Of course, this warning can be countered by the fact that payroll data for August (an increase of 0.4% with a forecast of 0.2%) denies imminent danger, but if we consider that firms react to changes in aggregate demand after the changes occurred (and already adjusted salaries), then it can be assumed that wage growth will slightly lag behind the development of inflation.

The Fed probably received signals about a possible slowing of inflation in August, which is why when Powell was in Jackson Hole, he discussed his intention not to rush with the rate hike and to allow some overheating in the economy. At the end of September, the Fed will hold a meeting and the rate hike is warranted at the meeting, but rumors about the impact of a new portion of inflation data on Fed forecasts paves the way for the development of a negative scenario for the dollar.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
 

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BoJ decision and export data curb Yen depreciation

The Bank of Japan left the parameters of the monetary policy unchanged today, which is not surprising, given the lack of any decent inflation prospects. A little surprise was buried in the regulator’s statement, as the bank kept the wording about moderate GDP growth, which, coupled with the growth in export activity (data from Tuesday), revived trade in the yen and Japanese bonds.

The short-term target rate remained at -0.1%, the long-term target rate also remained unchanged at 0 percent. The decision was made with 7 vs 2 votes.

The yield on 10-year bonds of the government increased to 0.12%, indicating a bullish effect from the comments of the bank.


Interestingly, the bank’s concern about the negative effects of easing has disappeared from the statement. However, the degree of fears about the influence of the world economy on Japan has grown. This, of course, is about tariffs and trade tensions.

Nevertheless, data on Japanese trade still deny tariffs as a serious problem. According to the bank, the damage from trade duties has so far been successfully offset by strong external demand for Japanese goods.

Japanese exports increased by 6.6% in August compared to last year. The median forecast for the indicator was 5.6%, the value in July was 3.9%. This was the first rise above the forecast for three months, most of all Japan sold medical, construction products, as well as industrial machinery. Exports to the US increased by 5.3% in August compared with last year.

Shipments to China, the main trading partner in Japan, increased by 12.1%, while exports to the rest of Asia rose by 6.8%, becoming a clear signal that Japanese trade has not yet suffered major losses from the tariff battle between the US and China.

An alarming moment in the data was the dynamics of car sales in the US, which has been declining for the third month in a row. Last year, this indicator did not cause any concerns. It is possible that the threat of tariffs on cars, which threatened Trump, implicitly had an impact on the demand of US salons on Japanese cars. Considering that 1/3 of exports from Japan to the United States is made up of cars, the export situation could deteriorate sharply if there is a cooling of relations between the two countries. In the meantime, everything is ok.

And although the Bank of Japan took a defensive position and repeated the “easing mantra” the political establishment of Japan started to support a gradual reduction in the bond program. Last week, Shinzo Abe, said that such a policy of the Central Bank cannot continue indefinitely, giving a signal about a possible radical turn in the program.

USDJPY accelerated gains from the start of this week, but today bullish pressure on the Yen saved the currency from further depreciation.





Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
 

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The comeback of bonds after years of heavy QE seems to have put pressure on the US stock market
Asian markets appear to have traded in a somewhat depressed mode on Monday, due to decision of the Chinese delegation to cancel trade talks which has reinforced fears that none of the opponents want to concede in the trade war.

At the same time, oil prices jumped as major producers said they were not going to increase production in response to Trump’s calls.

Shares from the MSCI index excluding Japan decreased by 0.8%. The Hong Kong stock market showed the worst results in Asia, losing 1.3% of value today. Trading in China and South Korea is suspended in case of national holidays.

US tariffs for 200 billion Chinese goods were to come into effect this morning, while the formal response from the Chinese side will follow today at noon. However, in the bilateral trade of the two countries, China imports less than it exports, so at relatively safe tariff rates (5-25%), it can tax less goods than the US. It turns out that due to the deficit in the trade balance, Trump wins time in tariffs battle and can probably inflict more damage to Chinese exporters than China can to the US ones. In turn, the Chinese authorities are considering non-tariff ways to punish the US; it is rumored that these could be implicit administrative barriers for US companies in the US, as well as monetary easing to depreciate the yuan and protect the profits of exporters.

Markets were baffled by the news that China decided to keep negotiators at home which could mean that the countries have little room for compromises. In addition, Deputy Prime Minister Lew He, who was supposed to restore trade relations with the US this week, will be staying at home as well.

The US administration, in turn, appears to be open to future negotiations.

With the approaching deadline on Brexit negotiations, volatility in Pound trading is growing. At the end of last week, the British currency lost almost 1.4%, which the market has not seen since June 2017. Intraday changes of more than 1% seem to have become the norm in the movements of GBPUSD, as the “roller coaster” seems to have attracted more speculators and drove out investors. GBPUSD found a balance at 1.3076, slightly above the minimum level of 1.3053 since mid-September.

On Friday, Prime Minister Teresa May said that talks with the EU have once again reached a deadlock after the leaders of the bloc rejected her “Chequers” plan without sensible comments.

The dollar appears to have made a turn on Friday and seems to be developing momentum for the beginning of this this week as the approaching date of the Fed meeting, despite the known changes in the parameters of the monetary stance, continues to prepare some surprises for the money market. As I said last week, braking inflation in August may not allow the Fed to make hawkish updates in the rate forecast, as this time a tired consumer may not be able to cope with the inflationary momentum from tariffs. The main uncertainty in the Fed’s policy is now focused on whether officials will raise the rate above the neutral level, and if so, what the timeframe for it may be. It depends on how the Fed has received recent data which are likely to have indicated a slowdown in the economy.

After the September meeting, cash, for the first time in a decade, can begin to bring real positive returns. These are short-term one-month TIPS, the yield on which after deduction of inflation may again become positive along with bonds of other maturities. Overcoming this psychological mark will allow the demand for yield to turn attention to the money market. The stock market thus gradually loses the advantage in the form of dividend yield exceeding the fixed yield of bonds, and with the decision of the Fed, the bonds could fall even further in price, and their yields grow.


It makes sense that if safe assets become more profitable (their gap in yields with risky ones is eliminated), then this will put pressure on the market of risky assets, i.е. stock market. As soon as there are signals that the growth rates of corporate incomes begin to lag behind rates of rate hikes (this moment is nearing), investors will start massively getting rid of stocks.

Oil prices stand out in the commodity market with sharp rise on Monday, as Saudi Arabia and Russia denied the need to increase production in response to Trump’s calls to do so in order to reduce prices. Both grades added almost 2% on Monday, while Brent will struggle for a psychologically important mark of $ 80 per barrel, which in case of successful breakthrough will open new prospects for further growth.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
 

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BoJ Minutes show strong commitment to the QEE


This was stated towards the end of the last meeting, published on Tuesday. Some members of the Bank of Japan said that the Central Bank should study in greater detail the negative consequences of prolonged QE, for example, the squeezing of profits of commercial banks. This was stated in the minutes of the last meeting, published on Tuesday.

The committee consisting of nine members raised concerns about how the recent decision by the Central Bank to allow yields to fluctuate with greater amplitude around the target level, affects the manageability of long-term interest rates.

Such a discussion once again brought the problem of weak inflation to the fore which the regulator is trying to “cure” by a large-scale easing program, despite the growth of costs in the form of weakening the banking system and the outflow of capital. “And although the current monetary easing does not cause problems in the financial intermediation system” … “It is important to take into account two perspectives – short-term and long-term, in which QE has its advantages and disadvantages,” the protocol said. When talking about long-term problems, QE usually implies a decrease in profits in the banking system. Low rates suppress the credit activity of banks, which in turn tries to stimulate QE. In fact, this situation is called a liquidity trap.

Another member of the committee said that the Central Bank should focus on what generates monetary policy in financial markets. “When assessing the performance of the financial system and the functioning of the market, it is necessary to delve into the discussion of their dynamics as a response to the efforts of the Central Bank, rather than to examine the economic indicators separately.” Recall that the BoJ made some tweaks to the monetary policy in July, which for the first time in a long time were characterized by the movement not towards QE, but by a slight departure from it. For example, the intervention of the Bank of Japan in the form of “unlimited” demand for bonds in the event of deviation of the yield from the target, began to occur less frequently, as the corridor of yield fluctuations widened. This returned other market participants to trade (i.e. liquidity).

Two members of the committee did not agree with this decision, since they considered that the potential harm exceeds the benefitd. In their opinion, the market could find the solution ambiguous or even doubt the relevance of inflation targets. In addition, market knowledge of more freedom for the yield movement can become the basis for its irrational deviations, which BoJ should curb with increased amounts of bond purchases that before. That is, yield targeting could become even more “costly”.

The fact that only two participants out of the nine insist on studying the negative effects of QE, suggests that the Central Bank has not yet matured to any significant deviation from the course of easing. The Japanese yen changed insignificantly on Tuesday, but getting to the resistance of 113, the highest since the end of 2017.



Of the significant results of QE, one can note the strengthening of Japanese exports and the growth of corporate optimism. The price and costs of these improvements remain the subject of debate. Asian markets could not grow on Tuesday, expanding the sluggish dynamics of Monday, so a new round of trade tariffs in the Sino-American duel and rising oil prices to a 4-year high added concerns about the prospects for a global recovery. The dollar slightly changed before the meeting of the Fed, both camps are pulling forces to the level of 94.00 on the US dollar index. The Chinese yuan is cautiously losing ground, the news of the disruption of the talks between the US and China has allowed the yuan to again be sold on the potential growth of trade tension. It was followed by gold, which shows consolidation near the level of $1200.





Buyers and sellers of gold probably count on the dovish and hawkish scenarios of the Fed meeting, respectively.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
 
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