Tickmill UK Daily Market Notes

[tickmill-news]

Oil and EURUSD set to rebound next week but it may hide a selling opportunity


The news continues to be full of headlines that discourage risk appetite. Among them – a new all-time high in daily Covid-19 cases in Poland and gloomy forecast for the course of the third wave from the German Ministry of Health without additional restrictions. Nevertheless, risk assets are successfully developing a technical rebound on Friday. Why technical? First, the intraday growth is moderate, not exceeding 1% in the main indices. Secondly, a fairly spoiled news background can be fixed only by a decline in infection rates, which obviously will not happen overnight. The peak of pessimism in this regard has not been reached. Thirdly, the quarterly rebalancing of large funds, during which they will have to reduce the weight of shares in portfolio and increase the share of cheap bonds, has not yet been completed.

The blockage of the Suez Canal counterbalanced the virus story, causing prices to rise. Risk-on in the commodity market then spread to risk assets. But let’s keep in mind that supply chain disruptions are temporary. As soon as the movement in the channel recovers (1-2 weeks), the market will again be absorbed by fears of fragile demand due to the third wave, which will certainly not go anywhere by that time.

As for the technical picture for oil, a series of recent dips have invalidated the bullish trendline that has been running since November 2020. The breakout has led to a shift in sentiment in the short term, resulting in a short-term bearish channel:

The story with the blocking of the channel increases chances of a short-term rise in oil, however, the main resistance in this rise may be located at around 60.50 (the upper border of the channel). It should be borne in mind that on April 1, OPEC will again decide how to adjust production in response to the deteriorating market conditions. In my opinion, OPEC has already surprised by leaving the restrictions at the same level at the last meeting, so on April 1 there will be disappointment.

EURUSD has reached the target proposed in yesterday post - the lower border of the current trend corridor. I expect the pair to rise next week to the level of 1.183-1.185 (a repetition of the previous scenario with testing 1.1955), followed by a drop back below 1.18:

The catalysts for the weakening could be data on inflation and the German economy or worsening epi curves or new measures in the EU to contain the virus.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Strong March NFP suggests more US data surprises to come





The US jobs market data in March were really impressive. Given momentum effect in the labor market and still incomplete recovery in consumer mobility, payrolls growth April may top 1 million. It means the odds of more economic surprises in the US from the key macroeconomic areas are quite high, which justifies elevated market expectations about US assets and USD performance. We cannot rule out that US labor market can achieve pre-pandemic levels by the end of the year which will certainly trigger premature Fed tightening. For now, it remains a tail risk.



The solid report on the US labor market for March indicated the growth of jobs by 916K against the 660K forecast. The payroll readings for the previous two months were revised upwards by 156K. Employment in the private sector rose by 780K, while the currently not very indicative unemployment rate fell to 6%.



Employment growth overtook the forecast thanks to warm weather which additionally boosted mobility and some economic sectors like construction, strong vaccination program in the US and economy reopening efforts from individual states, which boosted consumer sentiment, business climate, activity and labor demand.



Improved weather helped construction sector to boost hiring by 110K, continuing easing of restrictions led to an increase in jobs by 280K in the leisure and hospitality industry. Public sector employment increased by 136K. However, in no industry has demand for labor recovered to pre-crisis levels.



Expectations for the jobs market performance in April are high due to two reasons. Firstly, consumers mobility still has room to recover. Secondly, it’s reasonable to expect that recovery will continue given positive trend in reopening and non-stop supportive government measures. The following shows the dynamics of restaurant reservations for some key states, as well as the number of security checks at airports:

Source: ING



It can be seen from both charts that all the curves (with the exception of Miami table reservations) are still below the pre-pandemic level, so recovery still has a room to go. Consequently, the demand for labor should continue to grow.



Despite the positive NFP update, there are 8.4 million fewer jobs in the US economy than it was before the pandemic. The Fed has signaled that it will not raise rates until 2024 until there is substantial economic progress. Given their lukewarm attitude towards rising inflation, it is clear that they want to see jobs return to pre-crisis levels.



Officials' comments make it clear that unemployment is now giving false signals due to the large number of demotivated workers. Now only 57.8% of the working population is employed:

This is very low and, in some respects, comparable to the employment rate of the 1980s. To reach pre-crisis levels (labor force participation rates above 60%), the labor market should add at least 6 million jobs.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.



High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Upbeat soft data in the EU fuels tactical retreat of USD



Indices of activity in manufacturing and services sector in the EU indicated a welcomed expansion in March. However, it came with a decent delay due to lockdown extensions. Compared to the pace of recovery in the US, it’s still just a minor uptick. Nevertheless, it was enough for Euro to break a series of falls as there was a bunch of risks associated with extended lockdown which were priced in the European currency. The March data eased concerns about worst-case scenario for the EU and helped to downplay impact of slow vaccinations and lockdown pressure on business sentiment. EURUSD is developing a rather rapid upward movement, while USD index broke the main uptrend channel which casts doubts on immediate continuation of the advance:

Improving demand for Treasuries also played against the US currency. The yield on 10-year notes continues to decline after reaching a local peak of 1.774% on March 30. In my view it’s just another break in the broad downtrend. Labor market data, ISM indices, in particular the components of new orders and expectations, consumer mobility indices call to prepare for new surprises in April, so the positive impact of the flight from long-date Treasuries on the dollar should still remind of itself in the near future.

The recovery in the Eurozone was quite synchronous: Markit pointed to the growth of business activity in Germany, Italy, Spain and Ireland, both in services and in manufacturing. Together, these four countries account for three quarters of the Eurozone's economy. Firms see a surge in orders in the United States against the backdrop of the lifting of restrictions, so they are too very optimistic about the near future.

Today, clues about the further behavior of the dollar should be looked for in the minutes of the Fed meeting for March. Expectations are modest – reiteration of the mantra of ultra-easy monetary policy despite all the optimism taking place in the data. Still, there are fears that the dynamics of inflation will cause discomfort among officials. Therefore, if there is even a slight bias towards hawkish policy, even a hint of an earlier curtailment of QE, it will certainly resume the growth of Treasury yields and support the dollar. In general, it is too early to write off strong dollar.

On the other hand, the risks of weak vaccination rate in the European currency may be eliminated by news refuting the connection of the Astra Zeneca vaccine with blood clots. This will signal a recovery in vaccination rates - a key component of expectations that immunization targets will be met earlier and mobility will recover faster.

From a technical point of view, the upward correction in EURUSD may hit the 1.1930 - 1.1960 zone before we could start discuss resumption of USD rally:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Strong US CPI May Trigger Treasury Sell-off, Dollar Rise

Summary

- Long-dated bond yields picked up ahead of US CPI release, increasing odds of USD rebound;

- Solid China trade data, in particular growth of imports, underpinned oil prices.

Calm in the equity markets extended into Tuesday with US equity index futures swaying near the opening. However, debt markets appear to be strained. Bond yields advanced as the risk of higher inflation rates re-emerged in the past and this week’s data.

Today US consumer inflation report is due and there are good reasons to expect a surprise on the upside. The fact is that inflation on intermediate goods (PPI) in China and the United States came materially higher than forecasts in March, which is likely to affect the final prices due to cost-push inflation pressures. A strong CPI reading will most likely wake up the bears in the Treasury market, and again we will see a renewed uptrend in yields and USD. EURUSD will probably not hold at the current levels and likely go down to 1.1850-1.1860, given tepid behavior of the buyers after reaching 1.19 mark:

Accordingly, a breakout of 1.70% level in 10-year Treasury Note yield may become a technical signal for resumption of the rally to new local highs. The factor of Treasury sell-off, as shown by the dynamics of USD in March and February, is probably the most import in the currency’s strength.

ZEW report on corporate sentiment in Germany, which is usually of high importance, can be ignored, as investors focus on data on vaccination pace, as well as news on the European Recovery Fund, which still has a long way before approval and which could be the factor of Euro strength, similar to fiscal stimulus in the US.

China foreign trade showed mixed dynamics - export growth did not meet expectations, but imports accelerated significantly (38.1% versus 23.3%). Details also showed that China ramped up oil purchases, which came as a surprise. Oil prices rose moderately, but the focus is on successes or failures in suppressing the virus. The situation in this regard is very ambiguous - the deserted streets of India due to record daily growth on the one hand and the rapid recovery of mobility in the United States or Great Britain due to the weakening of the restriction on the other.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Markets are not afraid of US inflation risks

Summary:

- Markets reaction to US inflation report was rather restrained, which came as a big surprise and has medium-term implications for USD;

- The basis of bearish pressure in GBPUSD is largely lockdown-related risks, the chances of which are falling.

Despite highly upbeat reading of US March CPI, markets’ reaction to the event was quite unusual – long-dated Treasury yields skid, pulling lower disappointed dollar. This suggests that the prospects for inflation and growth are largely factored into valuations - the market has gone far ahead in its inflation outlook and will be difficult to surprise. At the same time, the number of arguments against buying the dollar is growing - the net position of speculators in futures has approached neutral (net short is only 2% of open interest), which reduces the opportunity for short-squeeze, the Fed is resolutely rejecting speculations about tapering of asset purchases, and on the other side of the Atlantic, economic activity is reviving, making growth more synchronous, which takes the advantage off the USD.

EURUSD continued to rise, thereby completing the "flag" pattern (one of the trend continuation patterns). However, now the pair is in the area of overlap of the upper bound of the downward trend channel and key horizontal level. The previous attempt to break out and go beyond the upper border of the corridor in a similar situation ended unsuccessfully, and sellers retained control. Successful consolidation above the level of 1.1950 may be considered as a signal that the pair is returning to a medium-term uptrend:

The pound sterling came under pressure yesterday after news that the chief economist of the Central Bank is leaving his post. Andrew Haldane was one of the main hawks in the Central Bank of England, so the path to raising rates may be longer, due to decline in the general policy bias of the Central Bank to quickly normalize credit conditions. However, the main focus remains on the pace of vaccination and the UK is doing well in this. Among the latest news, England's superiority in this regard is notable - take, for example, the fact that more than half of the adults in the country received the vaccine. In the GBPUSD pair, after the correction from 1.40, many risks related to the last lockdown remain priced in, which, as time shows, are unlikely to materialize. This justifies gradual strengthening of the pound against the main peers - EUR and USD.

On the technical front, the pound is likely to test the upper boundary of the correctional channel (1.3850) against the backdrop of retreating USD:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Shale oil is slow to recover removing on the key caps for oil price growth



The data on US crude oil inventories has brought noticeable relief to the market, once again hinting on lack of shale oil output rebound, despite warming weather and strengthening demand. Inventories dropped by ~5.9 million barrels last week, more than double than the forecast. Gasoline inventories declined more than expected as well, indicating that consumer demand remains strong.

The report apparently came as a surprise to the market. Oil prices jumped upwards on the release, breaking through the trading range that formed after the last oil mini-collapse:

Production in the US is indeed recovering slowly despite increasing rig count. It means that on the supply side, the picture is still quite favorable for price growth:

The IEA's monthly report released on Wednesday also pushed prices higher. The agency has significantly raised its forecast for oil consumption in the second quarter of 2021, which makes it possible to expect the market to better cope with the forthcoming increase in OPEC production.

The geopolitical factor also accompanies the rise in oil prices. The chances of a quick conclusion of a nuclear deal between Iran and the United States have decreased due to the escalation of the conflict between Israel and Iran, which means that a quick return of Iranian barrels to the market (with a potential of 2 million bbl/d) is not to be expected.

Another piece of data on inflation in the US again exceeded expectations, but assets’ market lacked response. Import and export prices for March were significantly higher than the forecast, indicating that supply is not keeping up with demand. This is a perfectly reasonable assumption, given the series of fiscal stimulus in the US that has sparked a surge in consumer demand. By looking at prices in terms of their signaling function to producers, firms will start adjusting their output in response to price increases, so we first need to see inflation.

It is becoming increasingly difficult for the Fed to maintain the status quo against the backdrop of hints of inflation coming from “all the cracks in the economy”. Therefore, commenting on what is happening, officials are increasingly saying that inflation is not a problem and monetary stimulus are not endless. Yesterday the head of the Central Bank Powell said that the curtailment of QE will begin "much earlier" than the rate hike, and the Fed is going to keep rates at the current level at least until the end of 2022 (previously the deadline was until the end of 2023).

The early withdrawal of monetary incentives is one of the main threats to the growth of risk assets. An important component of their fundamental assessment is the cost of credit, which justifies their high sensitivity to any hints about an early tightening of the Central Bank's policy.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Falling yields open opportunity to short Gold



The most notable move in asset markets this week was collapse of US yields. The 10-year Treasury yield, which has exploded since the start of the year on accelerating inflation expectations, tumbled to the lowest level since early March:

Most interestingly, this happened against the backdrop of the release of quite pro-inflationary reports - strong US CPI, stellar retail sales, US labor data. Recall that in March, consumer inflation in the US accelerated to 2.1% YoY, retail sales by 9.8% in monthly terms while unemployment claims rose by 576K (the lowest since the beginning of the pandemic). All three indicators beat forecasts, however expected sell-off in bonds never happened. Moreover, investors began to flow back en masse to long-term bonds. As a result, gold skyrocketed due to lower opportunity costs and the dollar came under pressure.

The strange bond move could be explained by heightened geopolitical tensions, in particular, between Russia and the United States over the Ukrainian issue. There were also reports that the downward movement of yields triggered coverage of short positions in the Treasuries, one of the backers of which was "Bond King" Bill Gross. At the beginning of the year, he advocated shorting Treasuries on a potential surge of inflation. Inflation did accelerate, but there was no surge, so his bond position and his followers could be under pressure.

In my opinion, yields will not be able to hold out for a long time at the levels where they are now after a fairly rapid pullback. The reason for this is unchanged inflation trend in the United States. Recent economic data marked beginning of the accelerating trend in price growth. There are no potential catalysts on the horizon for a sharp slowdown in inflation or that could lead to inflection points in the trend. Considering the instruments most available to trade this idea, gold is striking. It is currently approaching the upper border of medium-term downward trading corridor ($1800) …

…which could be a good selling opportunity if we bet on integrity of the channel. Surely this will require a resumption of growth in yields, but there are all the prerequisites for this. The most important of these is continuing trend in lifting of social restrictions and subsequent emerging consumer impulse that generates price increases. In Europe and in a number of other countries, it is still waiting for its moment.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

EUR, GBP and JPY: near-term technical setup against USD


The most notable event in FX market on Monday was steep fall of the greenback. The currency index erased half a percent through rather sharp downward moves, which could indicate a large dump. The US currency has been taken away one of the key footholds – ssell-off in long-dated US Treasuries. Massive sales observed in February and March has been fueling demand for cash, however, this driver has suddenly lost steam last week - strong pro-inflationary data in the US (CPI, retail sales) for March met relatively tepid reaction of the bond market. Apparently, this forced dollar holders to ditch the currency.

Analyzing the possibility that the dollar will continue to fall, it is worth paying attention to the technical situation in the pair with the main rival - the euro. Earlier, we discussed a scenario where price after breakout of the horizontal + sloping resistance level (1.1950-60) may set the stage for protracted euro rebound if it stays above the level for several days. Price action on Monday indicates realization of this setup:

The ECB decision this week may open up additional growth prospects for the European currency. If the Central Bank sees optimism in the data and speaks less about the need to maintain huge asset purchase stimulus, the euro will get a support factor in the form of the European Central Bank’s slightly less dovish stance. Chances abound due to unexpectedly strong European data for March.

The dollar's downward jerk also affected GBPUSD - the pair broke through from the bottom up the correctional channel, which has been going on since March, which opens the way to 1.40 after a technical pullback:

The movement could be catalyzed by employment and inflation data on Tuesday and Wednesday. Particular attention should be paid to the inflation report, as due to the rapid pace of vaccinations, the chances of seeing a consumer boost in March are high.

USDJPY did not stand aside either. However, it should be borne in mind that technically the yen was strengthening extremely quickly against the dollar (hourly RSI is below 20 ppoints), which increases the chances of a rebound. Potential entry area - intersection with the medium-term trend line (107.60-70):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Pressure on USD rises ahead of possible dovish Fed move

The CFTC data showed that net long speculative position on EURUSD rose last week, which suggests the shift in sentiment on the pair is under way after protracted squeeze of long positions. Historically, the euro net long position is within one sigma, i.e., far from extreme levels and there is still room for bulls to ramp up pressure. Speaking of the short term, there was no particular rush of buyers after the test of 1.21 on Monday - the major move is most likely set for Wednesday, when the Fed will clarify the course of US monetary policy. And again, the main question is when to expect unwinding of current pace of QE purchases. Long-dated Treasury yields advanced on Monday, signaling return of inflation concerns as well as worries about possible Fed meeting outcome where the regulator hints that reduction in credit stimulus could begin in the less distant future.

The European currency is also drawing strength from progress on the fiscal front. Positive news on the European recovery fund (large-scale fiscal stimulus) triggered some sell-off in European bonds, due to reassessment of inflation expectations. The yield on 10-year German bonds is again moving towards the local high of this year (-0.217%), while the sell-off appears to be stronger than in long-dated Treasuries:

The dollar index is moderately correcting downwards, having touched the lowest level since the beginning of March (90.65). Despite the coronavirus crisis in one of the largest emerging economies (India), expectations for a global recovery persist, as evidenced by the positive dynamics of industrial metals prices. Iron ore and copper have resumed their uptrend since early April, reflecting expectations that demand will continue to rise:

The theme of recovery this week may be supported by the data on the US economy, in particular GDP, orders for durable goods and claims for unemployment benefits. Output growth in the US economy for the first quarter is expected to be an impressive 6.1%. Given benign environment, better-than-expected data updates should fuel risk appetite. If the Fed gives a signal that it will tolerate overheating of the economy, there will be even less sense to stick to USD positions till the next meeting.

Joe Biden's first speech to Congress will also take place this week, in which he can provide more details on tax reform. For risk assets, the details are likely to be negative, so US indices are likely to decline ahead of the speech.




Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

“Frozen” USDCAD and the upcoming Fed meeting: markets overview

FX and sovereign debt markets are bracing for the bout of turbulence ahead of the Fed event today. Despite success in spurring inflation growth, the Fed’s message will likely remain unchanged – substantial observed progress in employment is an essential condition to depart from accommodative policy. Yield differential between the 10 and 2-year Treasuries will likely extend gains on a dovish message - which should support EM currencies as well as Norwegian krone and CAD.
US long-dated yields have rebounded ahead of the Fed, halting decline which lasted about a month:

The US dollar were also offered support thanks to signs of renewed bond market rout and set to test the upper bound of downward channel in which it currently resides:

Inflation premium in long-dated Treasuries could be fueled by the US consumer sentiment report released on Tuesday. Consumer sentiment index jumped to 121.7, the highest since February 2020. The report reinforced fears that supply in the economy is not keeping pace with rebounding consumer demand, which should result in faster inflation. There are signs on the supply side that justify those fears: for example, quickly rising maritime shipping rates or, for example, updated profit forecast of the largest container operator Maersk. The company has doubled its profit forecast for 2021 due to "exceptionally strong" demand for its logistic services.
Given these findings, if the Fed continues to cling to the transient inflation argument today and leaves QE timeframe unchanged, the US real rate will be under pressure again. This time, however, we have less patchy global growth, so there are plenty of alternatives to US fixed income assets. This should stimulate the search for yield abroad. The effect on the dollar appears to be negative.
However, pressure on USD will likely be uneven. Given positive correlation of yielding currencies with the spread between 10-year and two-year US government bonds, in particular the Canadian dollar, today's message from the Fed may open way for their further rally. By the way, the CAD has been behaving strangely in the couple of last days, fluctuating in a very narrow range after strong sweeping moves earlier:

Continuation pattern?

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.