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Daily Market Notes by Tickmill.co.uk

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  • Representatives

USD: Extreme Shorts are not the Reason for U-turn

The main trading theme in the FX market on Tuesday became the wake-up of dormant USD sell-off, which was a foreseeable development due to the presence of medium to long-term bearish USD macro factors. The only question was when the downward trend would resume. As it turned out, the pause in talks on new fiscal package failed to support greenback.

Basically, when we talk about fresh round of fiscal support, less uncertainty in negotiations on the new fiscal deal also means less uncertainty in the plans of government borrowing, i.e. growth of supply on the Treasuries market and possibly money supply (if the Fed resumes purchases to absorb the supply). For now, it seems that the risk of negotiations put on hold would increase uncertainty about bond supply and cause steeper pullback in T-bonds seems premature.

Accordingly, contrary to my expectations, short positions in Gold were routed earlier and the precious metal went into offensive. Demand returned to the Treasuries market as well. The 10-year Treasury yield appears to have completed its pullback from the last week (after hitting key support at 0.5%) and the trend resumption seems to be finding support and appeal among investors. This allows us to assume that the momentum in assets-safe heavens may be extended to the rest of this week. The rise in risk-free assets, coupled with lull in the stock market (i.e. risky assets), means that roots of the current trend are in the expectations for a new round of borrowing of the US government and corresponding expansionary policy of the Fed.

The CFTC data on USD from August 11 (the latest report) showed that bearish sentiment on USD is one the rise despite extreme positioning. On the contrary, the main opponent, the euro, saw increasing long positions. The net speculative positioning in euro reached 28% of open interest, which is slightly below the previous peak of 30%, which was observed in April 2018. EURUSD was 1.24-1.25 back then, but then turned into a nosedive, which lasted until March of this year.

Weighted by G-10 currencies, the net position on USD declined to -15% of open interest, below October 2017 and is moving to the lows of 2012-2013:

1-24-1024x619.png

So, from historical perspective USD is significantly oversold, but now, as we understand, there are completely different expectations for the path of expansion of the money supply in the US, therefore, it will hardly be possible to break the trend due to the presence of some extreme positioning.

USD positions were also shaken by mortgage and manufacturing data from the US, released earlier. Negative surprises prepare for a weak August and possible Fed interventions in the fall.

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. 73% and 76% 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.

 

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  • Representatives

US Fiscal Talks Steer Towards Frugality Risking to cap T-bond Gains

So, here we go. Some Democrats and GOP members are no longer convinced that the economy needs a large fiscal aid package, a senior White House official told Reuters on Tuesday.

According to the official, there are signs of growing bipartisan bias towards frugality, both in the House of Representatives and in Congress, when it comes to discussing the size of the aid. It can be now reduced to $500 billion which is at least twice less than discussed before. The way how the government will spend may be less stimulating in terms of consumer spending boost since the funds are expected to be directed to financing US Postal Service and payroll loans for small and medium-sized businesses. It means that stimulus checks and extended unemployment benefits, which significantly spurred consumer spending in May-July, may not be included in the new package.

As we discussed earlier, stalling progress in fiscal talks increase the risk of markets being wrong in pricing in the final size and timing of the deal. With new details from the US administration official, the likelihood of this outcome increased.

Why should investors be bothered about that? Let’s explore the chain of the effects.

Firstly, size of the fiscal package has a direct bearing on how much the government would need to borrow. It is clear that more spending means more borrowing and vice versa. The level and intensity of borrowing will determine the flow of a large portion of bond supply to the Treasury market and it is not known whether the market will be able to absorb it without the help of the Fed.

Therefore, bond-buying plans of the Fed may depend on how actively the government would need to tap the Treasury market. Open market operations of the Fed have direct impact on the flow of liquidity in the banking system (bank reserves) and increase of money stock. Expectations of aggressive bond-buying (in case of large fiscal package) may ignite concerns about expansionary monetary policy what means rising pressure on real yield as well as supply of USD which have direct implications for risk assets (bonds vs. stocks story) and USD exchange rate (greenback supply/demand story).

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. 73% and 76% 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.

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  • Representatives

Fed’s “Revision of monetary policy strategy” – what is this?

The biggest piece of market moving data released on Wednesday was the Minutes of the July Fed meeting, which included some surprising points. For example, committee members were concerned about the side effects of yield curve targeting, thus significantly reducing probability that the Fed starts to control medium and long-term rates in September. Equity sell-off and some gains in USD that we saw on Wednesday are basically revision of the odds of this outcome towards zero.

According to the Minutes, FOMC members felt it necessary to provide more clarity on the path of Federal Funds rate. Of course, this is a reference to the so-called “Revision of monetary policy strategy”, which the Fed has been talking about for several months. As part of the current strategy, the Fed communicates its intentions in such a way that it retains some degree of uncertainty. If we think about underlying principles of this strategy, we can draw some interesting conclusions about propagation of policy changes in markets and economy.

Suppose the Fed, based on all available information about the current and future state of economy, decides that it makes sense to raise interest rate at the next meeting. At the same time, it communicates this intention to the public at the current meeting. Clearly, market players will price in the future hike immediately possibly causing divergence of the markets (and economy) from the state expected by the Fed during the next meeting. At the time when the Fed actually hikes the rate, it affects the economy which may be in completely different state and impact of the rate hike may be completely different from expectations of the Fed. In other words, “full openness” policy leads to systematic bias in the Fed expectations about the impact from policy decisions. It seems that the Fed needs to “systematically mislead market participants” but do it smartly to make policy changes effective in boosting output and make correct expectations about the impact of its decisions.

However, due to lack of success of the current policy framework in stimulating inflation, the Fed wants to revise its policy in such a way as to tie its decisions to specific economic outcomes – raising inflation to n%, lowering unemployment to t%, or upon reaching some combination of inflation and unemployment. … In other words, markets can be confident that policy changes will not occur, at least until the economic outcome is realized. In this case, the Fed will still retain uncertainty in its decisions but only after the economic parameters reach some predetermined values.

Lack of enthusiasm in the plans for YCC disappointed the markets a little since after the last meeting and bearish comments from the officials the markets had been actively pricing in this outcome in September.

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EURUSD: Weak August PMIs Increase Chances of a Sell-off

Minutes of the ECB July meeting, released on Thursday, showed that the central bank has little understanding of what lies ahead for the European economy. The word uncertainty (i.e. unquantifiable likelihood of future events) were mentioned in the minutes as many as 20 times. Perhaps this is a record.

It is no coincidence that the ECB tried to speak about why it is important to distinguish between recovery and rebound. EU economy is experiencing some kind of pickup and the central bank wants to make sure that market participants and economic agents understand its characteristics. A rebound can gain momentum, but it is natural to expect that the rebound sooner or later runs out of steam.  In contrast, economic recovery is self-sustained process which can be interrupted only by a shock of some kind. To put it in another way, the ECB doubts that the economic growth we saw in the summer is the beginning of a new expansionary phase of the cycle.

And indeed, it didn’t take long to see first confirmations of these concerns.  On Friday we’ve got first signs of a slack in ongoing rebound on the side of mfg./non-mfg. PMIs:

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Manufacturing and combined manufacturing/non-manufacturing activity in the Eurozone came lower than expected in August. Euro was sold aggressively on the news, which gives us a useful insight – slowing EU recovery may be heavily underpriced in EURUSD because of excessive focus on USD side:

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The minutes also showed that positive economic projections from July were based on the fact that strong support from the monetary policy will remain in place. According to the ECB, normalizing policy too early would be like pulling out a lifeline for drowning, which indicates a reluctance to move the rate in the next year or two.

There were also hawkish moments in the protocol. For example, ECB mentioned that the size of asset buybacks under the pandemic asset buyback program (PEPP) should be viewed as an upper bound, not a target. In addition, according to the ECB, economic reports in recent months have been more surprising in a positive way than in a negative one, and some of the risks that the ECB was concerned about in June have lost their urgency.

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. 73% and 76% 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.

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  • Representatives

Two Big Rules of the Bearish USD Trend

Fatigue is growing in the upward trend of EURUSD, which became rather apparent on Friday, when the release of PMI data provoked sustained sell-off in the pair. The index of activity in the EU non-manufacturing sector showed that almost “mechanical” post-lockdown recovery is losing steam and at best enters plateau.

In the analysis of PMI data, it may be helpful to focus on how deviation of actual reading from the forecast changed in time to see how it corresponds with the story of consumer spending impulse. For example, in the August report, we see that PMI reading in the services sector lagged far behind the forecast (50.1 points against the forecast of 54.5 points).

1-29-1024x164.png

In May and June, it was the other way around – the actual values were significantly ahead of the forecasts. This dynamic suggests there is a rise and fading of some impulse (most likely in consumption), which is reflected in respective acceleration and subsequent slowdown in the services sector activity.

Sustained economic momentum in the EU in the first months after lockdown period mixed with less dovish (compared to the Fed) ECB served as a driver for euro advance for some time, but now this factor is gradually fading away.

On Monday, USD came under strong pressure on news that Trump is interested in accelerated approval of vaccines, including foreign-made ones. Such a move, undoubtedly, has a political motive, but this does not negate the fact that it may approach the date of vaccination in the US. However, exploring new lows in USD, in my opinion, will be possible if two conditions are met:

  1. US data will continue to point on sustained economic momentum
  2. The Fed will retain dovish tone or sound more bearish.

If we look closely at the conditions under which the dollar declined in June-July, we can notice that positive economic surprises (i.e. momentum) were combined with expectations of aggressive easing by the Fed. However, in August, the minutes of the Fed meeting in July showed that the central bank, if it continues easing, will be less aggressive than expected. On the data side, we started to see some signs of weakness in the US economic data. Therefore, in my opinion, it becomes much more difficult for USD to make its way to new lows, as the factor of declining real yield weakens. The Jackson Hole symposium, which will take place as an online conference on Thursday, at which Jeremy Powell will have to outline the updated guidelines of the Fed in shaping monetary policy, will clarify a lot in this sense.

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. 73% and 76% 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.

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  • Representatives

A Few Remarks on Yesterday’s Powell Speech

Well, yesterday the Fed, represented by its head Jeremy Powell, formally confirmed that it adjusts reaction function to changes in inflation. Whereas previously the Fed used to target specific rate of inflation (2%), new framework implies average inflation targeting.

The decision was widely expected, but I would like to make a few remarks about why that was necessary and how it could affect expectations on tentative dates of policy normalization.

According to the Fed’s report entitled “Review of The Monetary Policy “, the decision is based on the fact that the US is entering a “new normal”, which is characterized by the following observations:

  • Productivity (output per worker) continues to decline, and the population is aging.
  • The hypothetical neutral interest rate (at which GDP and inflation grow at a stable rate) is decreasing which implies that you need less interest rate hikes to get to the desired level.
  • Increasing the workforce (i.e. the level of labor force participation) should become a priority. By the way, the last decade of monetary stimulus was able to inflate many nominal indicators and raise some real indicators, but it was the LFPR that mysteriously remained at low levels, and drifted even lower during the pandemic:

1-34-1024x381.png

The crucial importance of LFPR in driving inflation can be demonstrated with the following hypothetical example: Suppose unemployment level is 0% which is associated with extreme economy overheating and thus inflation. If LFPR is low, for example 30%, only 30% of the working population will get paid and feed inflation through spending. In this case, contrary of our expectation of high inflation, we may barely see its move towards a target level.

  • A related issue with point 3 is that jobless rate sufficient to generate desired level of inflation decreases over time. Unemployment of 4% now and 10 years ago are clearly different in terms of potential to create inflation pressures.

Now let’s discuss the Powell speech.

The first thing that sticks out is extremely vague definitions. “Moderate” inflation overshoot over 2%, “period” during which inflation will average 2% … What does “moderate” mean in quantitative terms? When this very “period” will start, when it should end – all this remained unclear. According to Powell himself, there won’t be “mathematical formula”, everything will be very flexible (i.e. at the discretion of the Fed). The new framework is clearly a progress towards greater flexibility. We didn’t get nothing concrete except for the strong feeling that in the next 6+ years the rates will be likely near zero. But why? Firstly, from June FOMC projections we know that for the next three years, Central Bank officials expect the interest rate to stay at current level, and Core PCE below 2%:

2-20-1024x489.png

Second, if we recall how long inflation stayed above 2% in the last decade after massive easing and fiscal stimulus…

3-9-1024x422.png

… we can conjecture that pursuing average inflation of 2% without additional stimulus may require quite wide period which extends beyond 2030.

Hence, the bond market reaction to the Powell speech was mainly concentrated at the far end of the yield curve – the yield on long bonds rose, as the risks of increased inflation in the longer term increased. In the closer parts of the yield curve, there was less news from the speech, so the reaction wasn’t so strong.

The main conclusion from Powell’s speech is that rates will remain at a low level for a longer time. It is a key ingredient in further, sustained declines in US real yields, a powerful driver of USD depreciation and Gold gains that have already shown its potential this year.

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. 73% and 76% 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.

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  • Representatives

Fed’s Mester: Rising Corporate Profits in 3Q Doesn’t Mean Recession is Behind

Economic activity and hiring have been constrained during coronavirus outbreak, confirming that the recovery will be slow and economy will need more support from monetary and fiscal authorities, Cleveland Federal Reserve Bank chief Loretta Mester said on Friday.

“I really think the recovery will be slow,” Mester told CNBC.

The economic data is likely to point to third-quarter growth after companies resume operations, but that doesn’t mean the economy is no longer in danger, Mester said.

“I actually think there are more challenges ahead and we will have to support the economy to overcome them,” she added.

Powell speech on Thursday indicated that the Fed becomes increasingly inclined to hold rates near zero bound for a very long time to generate inflation above 2% for some time. This inflation risk spooked investors in long-term bonds as well as fuelled speculations that the Fed will make additional easing of monetary conditions in the coming months. USD is expected to remain under pressure next week because of these expectations.

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. 73% and 76% 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.

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  • Representatives

Long-term bond yields rise. Will the Fed conduct “Operation Twist 2”?

Following Jerome Powell’s speech at Jackson Hole last week, 30-year bond yields advanced to the highest level for two months on Friday. There are signs that the market expects consumer inflation to accelerate, and these expectations hit the far end of the yield curve hardest due to longer maturity.

As the Fed needs to keep borrowing costs under control, including long-term rates, the outflow of investors from long-term bonds started to gradually shape expectations that this demand will be replaced by the Fed purchases on the open market, i.e. increased QE. However, it is not clear how much the yields should rise, that the Central Bank started to worry.

Since the start of the pandemic, the Fed has bought nearly $2 tn in government bonds from the open market bringing its Treasury holdings to $4.36 tn. Short bonds prevailed in the composition of purchases.

In a similar situation after the GFC, when the yields of long-term bonds began to rise faster than short ones (steepening of the yield curve), the Fed resorted to a technique, which consisted in changing the composition of treasuries on the balance sheet – selling short and using proceeds to buy long-term bonds (so-called operation twist). The Fed began to do this in September 2011, curiously, it coincided with gold making a U-turn after it reached the then all-time high of $1900:

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Perhaps this happened because investors tried to front-run purchases of the Fed, dumping safe gold and increasing demand for long-term bonds anticipating large buyer would soon appear on the market. If the Fed hints in September that it is interested in conducting “Operation Twist 2” there is a risk that the market reaction may be similar. It is necessary to closely monitor how the Central Bank will comment/react to the rally of long-term yields.

Consumer inflation in the US (Core PCE metric) accelerated in July, which was the expected development amid data on unemployment and retail sales. Consistent with the volatility in economic data in the post-pandemic period, consumer spending also exceeded expectations (1.9% monthly growth, 1.5% forecast), so the effect was small. Much more interesting and unexpected was the report from U. Michigan on consumer sentiment and expectations for August. It is August that is the hypothetical starting point for the second phase of the US economic recovery – the phase of deceleration, so the data for August may pave the way for risk appetite in the market. In August, the sentiment index rose slightly – from 72.5 to 74.1 points, remaining in the same depressive range after it plunged in April.

The more important point of the report was inflation expectations. They rose to 3.1% in August, up from 3.0% in July, the report showed on Friday. Market metric of inflation expectations – the difference between the yield on unprotected and inflation-protected bonds reacted immediately, strengthening to 1.77%, the highest since mid-January 2020:

2-22-1024x379.png

Since the Fed decided to play openly, announcing its readiness to keep rates low for a long time and tolerate inflation, the risk of a further decline in the dollar increases due to increasing risk of acceleration of inflation expectations including due to the Fed commitment.

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  • Representatives

Bears in SPX Still Struggle to Make Downside a Base Case

US stock futures declined on Wednesday, followed by European indices, promising a tough day for those who are betting on extension of Wednesday bounce. S&P 500 futures slipped below 3400 points, but moderate selling indicates that the acute phase of the correction had passed and a period of “healthy” consolidation in the 3250-3400 range is coming.

Short-term tests below the range are possible, however, there are no fundamental catalysts in sight nor U-turn in market sentiments for consolidation below the lower bound.

1-7-1024x694.png

On September 4, when the S&P500 dropped below 3,400, Goldman Sachs maintained its year-end projection of 3,600. The presidential election now poses the greatest risk as Trump is again betting on anti-Chinese rhetoric and “bring back manufacturing jobs in the US.” This adds uncertainty to the political and economic course of the next US leader. It is unknown how far he can go in his campaign pledges. So far, the incumbent has threatened to strip firms from federal contracts which try to save on labor by moving jobs to China.

Corporate reporting of the US firms included in the S&P 500 for the second quarter beat forecasts in 23.1% of cases (data from Lord Abbett), which is a way higher than 4.7%, the average for the previous 5 years. In the context of yield suppression in alternative asset classes better-than-expected 2Q performance may give some justification to their market valuations.

The US Senate, controlled by Republicans, is going to vote on a fiscal package, the proposed volume of which is significantly thinner compared to previous proposals and amounts to only $300 billion. This is much less than what the Democrats want to pass ($2 tn). Approval of a fiscal package worth at least $1tn would be a powerful shot of optimism for risk assets, but time shows that the GOP wants to approve less and less, increasing uncertainty about the final size date of approval.

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. 73% and 76% 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.

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  • Representatives

Stalemate in Fiscal Talks, Growing Slack in eco Data put a dent in Equities Rally

US equities were unable to develop positive start of Thursday session and bulls ceded ground to sellers later. There may be growing conviction in the market that US lawmakers (both the Fed and Congress) will not be able to enact monetary or fiscal support before the US presidential elections. This is a negative scenario for equity markets which reinforces the case for consolidation.

Yesterday I wrote that the GOP wanted to adopt skinny fiscal package – in the amount of only $300 billion. The vote on it was scheduled for Thursday. The vote failed and it looks like that the talks headed for a dead end.

A break below 3300 points in SPX early in the session today may set persistent corrective tone for risky assets extending for the rest of the session. However, rising US index futures indicate that breaking support won’t be an easy task.

In the economic calendar, the focus is on the US CPI release for August. Core inflation is expected at 1.6%, and the market will be more sensitive to negative deviations from the forecast than positive ones. Market response to accelerating inflation is limited by the Fed’s new “patient” inflationary stance (FAIT). Slowing inflation in the US is critical for sentiment, since nothing can be opposed to it yet due to the stalemate in fiscal negotiations. Yesterday’s PPI release which beat estimates indicates that inflation pressure could rise in the prices of consumer goods as well.

The report on unemployment claims in the US released on Thursday was a blow to market optimism. The number of unemployed increased for the fourth consecutive week. This is a subtle signal that slack in economic activity is growing in the US.

1-8-1024x674.png

Key points from the September ECB meeting

Earlier in this week I wrote that the chance for the resumption of EURUSD rally is high, since the ECB cannot stop the growth of the Euro with any specific measures. This statement can be strengthened by considering key meeting takeaways:

  • The ECB’s response to the Fed’s new inflation targeting concept is in the works, so the euro could not get anything out of it;
  • Inflation forecasts for 2020, 2021 are unexpectedly revised upwards – the ECB’s bias to ease policy becomes lower;
  • The ECB is closely monitoring the exchange rate of the euro and believes that the expensive euro slows inflation. However, targeting of Euro exchange rate is not included in monetary policy objectives. This is the verbal intervention that we talked about, and which did not make an impression on the euro. The base scenario for EURUSD, despite the growing chances of the dollar bullish pullback in the next two weeks, is continue rally towards 1.25 level.

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. 73% and 76% 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.

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  • Representatives

The RBA left cash rate unchanged on Tuesday but gave clear-cut indications that it wants to float additional easing measures at the next meeting to stimulate hiring.

“The Board continues to consider how additional monetary easing could support jobs as the economy opens up further”, the policy statement said.

Three out of four major Australian banks - Westpac, NAB and ANZ expect the central bank to cut the cash rate in November.

The implicit pledge of the RBA to reduce borrowing costs was made just before the release of the government's budget for 2020/21. The government is expected to ramp up borrowing, but accommodative policy of the RBA should help the government bond market to absorb increased supply.

We can also notice a subtle shift in emphasis in the policy statement towards employment goals (instead of routine discussion of inflation targets) which is reminiscent of the Fed’s shift toward flexible average inflation targeting policy.If it’s true, then the RBA may be willing to tolerate higher inflation as well in exchange for lower future unemployment. Of course, this development bodes ill for the national currency, AUD.

From the technical perspective the RBA’s dovish bias helped AUDUSD to complete formation of the double-top reversal pattern in the pullback that started on September 28, which in turn was part of the bearish trend initiated in September:

picture2.png

A breakthrough of the local minimum at 0.7130 should allow us to consider targets at 0.7080 and 0.70 levels.

The AUDUSD decline of more than 5% in September and the episode of "resistance" since September 28 were consistent with waves of correction and rally in equity markets, indicating a link between the events. Then a further decline in AUDUSD suggests a nix in the stock markets, which is very likely to happen due to upcoming pre-election volatility. Earlier, retail brokers in the US (such as IB) announced an increase in initial and maintenance margins for some instruments, mentioning the risks of "elevated volatility" ahead of the elections.

The trade balance of Australia in August was almost half of the forecast (2.64 billion against 5.15 billion Australian dollars), which indicates a reduction in exports. Business activity in Australia is especially sensitive to the dynamics of foreign trade, therefore, the weakening of exports is an additional blow to Australian assets and hence the demand for AUD.

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.

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  • Representatives

Last Chance for Trump to Narrow the gap

 

Biden’s lead in polls declined last week, albeit slightly, which still kept markets under pressure. The event which jumps into the foreground this week is the second presidential debate. It is Trump's last big chance before the election to leap forward and narrow the lead. In my opinion, if Trump manages to weaken Biden’s advantage, it will be a risk-off event since this outcome increases the chance of contested elections (which is a great source of uncertainty). Extension of Biden’s lead should be a boon for the markets helping them to extend the rally.

Important data on the US economy this week will be new home sales, the Fed's Beige Book and, of course, the initial jobless claims, which will receive a little more attention as the jobs market exhibited some weakness last week. The rest of the calendar for America is not particularly remarkable.

On Monday, the USD index began to decline aggressively, continuing the downward trend from September 25. Recall that at the same time the probability of Biden's victory and the probability of a complete victory for the Democrats began to rise:

1-1603107182.png

The Covid situation in the United States was generally calm in September, but became alarming in early October:

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The numbers are not so critical yet to tighten measures (and crash the market), but let’s keep the finger on the pulse.

In my opinion, there are little grounds to expect some surprise in Trump performance on the debates and expectations that Biden will extend or retain its lead should drive USD decline this week. The target for USD index is 93.00 level and 1.1830 - 1.1850 in EURUSD.

The data on Chinese economy left a mixed impression. GDP in the third quarter increased by 4.9% (forecast 5.2%), but the growth of industrial production in September (which is tied to external demand) beat expectations - 6.9% against the forecast of 5.8%. Retail sales jumped 3.3% YoY last month, against a more modest forecast of 1.8%. Unemployment has dropped.

Today, a meeting of the OPEC + joint monitoring commission is scheduled, at which it will be discussed how responsibly the participants are approaching production cuts. Europe has tightened measures due to rising incidence of Covid-19, which curbs fuel demand and OPEC is increasingly aware of the need to adjust supply. Specific decisions, however, may happen at the full OPEC+ meeting due on November 30 - December 1, but today's meeting should contribute to the discussion about what OPEC + will do at the full meeting.

COT data showed that long positions of Brent speculators increased by 37,531 lots in the last reporting week. The net position increased to 120,108 lots. Most of the changes occurred in short covering - 28K out of 37K (~ 75%). It looks like speculators were unwilling to stay short ahead of news from OPEC + this week which creates opportunity for prices to test some monthly resistance levels:

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SPX and USD Index: What to Expect in the Second Half of the Week?

 

Looking at recent volatility, especially vigorous move to the upside, stock markets could rally on hopes that fiscal deal will be approved before the elections. But on Tuesday, much hoped talks fell through once again. House Speaker Pelosi and Mnuchin still “hold hope” and continue tense negotiations almost 24/7, but rumors suggest that there is no progress on key differences. Reuters reported that the GOP’s head in the Senate Mitch McConnell would not want to approved aid before the elections.

The SPX was unable to sustain gains, bouncing down from the level of 3500 last week, without much upside impulses this week. The slide was accompanied by a sharp decline of the odds of Democratic sweep outcome:

1-1603279345.png

On the hourly chart we see that 200-day SMA test failed, but on October 19 the market gave up important support:

2-1603279352.png

Now the battle unfolds for the horizontal level of 3420. It has sustained multiple tests so far due to weak sellers’ indecision, but chances are good that we will go lower with 50-day MA on the daily chart (the next important support at 3400) as the next target. Depending on the struggle at the level it will be seen whether the prospects remain to switch quickly to the growth. Accordingly, there is an opportunity for a near-term short trade, and a pause is assumed for buyers, since they can wait for more discount.

The dollar sold heavily in line with the ideas set forth in my Monday post. The tests of 93.00 and 92.76 levels have been successfully complete and, in my view, it is time to correct upwards with potential entries in the 92.70 - 92.45 area. For EURUSD, this should be the zone 1.1890 - 1.19160:

3-1603279359.png

The reason is potential downside in the US stock market.

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.

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SPX Tests 50-day SMA at 3400 Points. Will the Level Hold?

 

The "jingle" from the Congress, Treasury and the US administration about coronavirus aid was hollow again. Controversial messages culminated in Trump's trash talk in Twitter that Democrats want to hand out cash to Democratic states - poorly run and with high crime rates. Who would doubt that the fiscal deal is nothing more than a convenient opportunity to please traditional and potential voters and earn extra political points. The horse trading that we observe looks like attempts to hog the covers.

As long as the harm from delaying the aid (i.e. wrath of constituents) does not outweigh the expected political gain from striking a deal with an opposing party, it makes sense to delay it. There is no urgent need, judging by the US labor market data and retail sales, yet. Democrats can deliberately pursue disadvantageous for the GOP channels of cash distribution, based on Biden's lead in polls.

It is not entirely clear why futures reacted up yesterday after so many promises and hopes, but awareness came quickly. The test of 3400 level in SPX futures, which we discussed yesterday, is almost complete, the USD is correcting upward, also in line with yesterday post:

1-1603364786.png

SPX sellers weren’t especially confident or assertive yesterday, but this is just the first test of important level. 200-hour SMA has flipped down but given that the lead of Biden and Democrats in polls has retraced slightly (which drives up the odds of contested elections i), there is little reason to switch to brisk rally and a slightly larger correction and a second test of the 50-SMA are likely.

The situation with the virus in the US continues to be tense, the news front is filled with reports of some kind of new measures there. Europe also actively dampens optimism. I would not be in a hurry to go into longs on the benchmark, even at 3400 level.

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.

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EURUSD: Case for Deeper Pullback as Markets Enter Turbulent Pre-election Week

US index futures slipped into negative territory on Monday as the greenback went on a massive offensive (gained both against major and EM currencies). Oil bounced down. US 10yr bond yield dropped indicating some fresh demand for risk-free assets. There are good chances that the last week before the US elections will be marked by risk-off, as by the end of last week there was little confidence that Trump would not resist the outcome of the elections.

Another important theme for the markets is the number of Covid-19 new cases in the US, which has set a new record:
picture1-1603715258.png

In my view, US government and local authorities currently don’t have means to resist other than returning part of restrictions, decreasing mobility and thus increasing social distancing. But they will probably be less severe than in the first wave. Nevertheless, as we have already seen with the example of European assets, these measures weigh heavily on market sentiments. While the US stock market compensated for the fall in September with subsequent rebound, European equities failed to soar in the same fashion, remaining largely in consolidation mode.

In addition, on Friday we saw the indexes of activity in the EU service sector for September, which behaved significantly worse than the manufacturing ones, i.e. services business is suffering again.

The ECB will hold a policy meeting this week, where the focus will be on regulator's response to the recent weakening of activity in the service sectors and downgrade of the EU growth forecasts by market experts. Together with increased demand for USD on risk-aversion, I would consider another downside correction in EURUSD this week with targets at 1.178 and 1.17:

picture2-1603715276.png

In addition, the plight of the EU services sector suggests that soon the fiscal or monetary authorities will have to offer some substantial monetary cushion, putting medium-term pressure on the Euro.

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.

 
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What can we expect from the EURUSD after the ECB meeting?

 

As expected, EURUSD crashed after the ECB meeting on Thursday, as policymakers almost openly stated that the central bank will continue to ease credit conditions in December. The only question is what policy instruments will be involved (depo rate cut, increase in QE, expansion of TLTRO or increased asset-purchases within the PEPP). The coronavirus impacts began without warning, causing the ECB to act almost preemptively:

picture1-1604054429.png picture2-1604054436.png

All members of the ECB governing council unanimously supported the need for intervention in December. Recent tightening of social restrictions in Europe threaten to plunge the economy into another recession (this becomes the baseline scenario now!).

ECB President Lagarde announced that all instruments will undergo recalibration. In fact, this means that in December a mix of a rate cut, an increase in QE, etc. can be announced. Amid a pause in the actions of other central banks, yesterday's announcement by Lagarde is a very hard blow for the euro. Common currency was sold much faster than expected.

As a result, a noticeable imbalance of statements in favor of the ECB is formed in the central bank policy environment. The virus activity in the US has not yet forced the Fed to announce similar easing of credit conditions, which could balance the pressure on the euro in EURUSD. Also, judging from the dynamics of the disease in the United States, no urgent statements by the Fed are expected:

picture3-1604054444.png

The United States has already “visited” the ~ 70K daily case zone in July, so I think that the US is quite away from the critical point of depletion of healthcare reserves. Therefore, there is no need to impose tougher curbs or introduce lockdowns. This means that there is no need for the Fed to rush to ease monetary policy. Hence, the Central Bank policy imbalance will linger for some time which should be properly priced in the Euro.

I expect that the pressure on the euro will continue in November and most likely we will see a breakthrough of the September low in EURUSD (1.161) after the elections.

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  • 3 weeks later...
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German Government may be Preparing a Surprise for the Markets

Increasing social restrictions in the US in response to unabated advance of coronavirus cases appears to be a convenient reason to extend stocks correction on Thursday. SPY and QQQ closed down 1.2% and 0.74% on Wednesday while decline of index futures on Thursday suggests that US markets are likely to open lower today. USD index, bouncing to the upside is an extra signal of strong risk-off mood as key bullish catalysts (Biden’s win, vaccine news) have been already reflected in prices.

The release of manufacturing activity figures from the Philly Fed, initial claims for unemployment benefits, US home sales today are expected to pass unnoticed as the focus is on the short-term impact of the new social curbs. New York's decision to move schools to distance learning was a punch to economic recovery as this may also lock at home a good part of economically active population (i.e. parents). In addition, it leaves the question open about extension of restrictions as the path to new records appears to be unchecked. Meanwhile, the daily growth in the US has renewed record this week exceeding 190K cases, while the 7-day trend remains upward:

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Note that the Europe brought its epi curves under control after more or less strict restrictions were introduced. The United States will probably have to follow the same path.

It is important to keep tab on the deadlines for extension/easing of lockdowns in Europe as potential catalysts for stocks decline/rebound:

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Germany decides on the current lockdown on November 30, but today the head of the Koch Institute (advising the government on the epidemic) apparently has tried to leave a room for a possible extension, stating the following:

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So, on November 30, there is a chance to see a shocking announcement from German authorities and current price action in equities may reflect these concerns already.

On November 22, the decision on lockdowns is expected in Italy, the shape of the epi curve there, as well as in Germany, draws the second peak (see chart below). On this basis, we can assume that Italy decision can help to predict German’s one:

1-1605789865.png

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.

 
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