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Fundamental Analysis 23.04.2018 – Market Outlook

Market Recap

US Treasury Secretary Steven Mnuchin said he’s considering going to China to discuss trade and said he’s “cautiously optimistic” of reaching an agreement. China’s Ministry of Commerce Zhong Shan on Sunday 22nd of April 2018 said it’s aware that the US is considering a visit and welcomes such a move. Steven Mnuchin is considered more of a free-trade proponent than many others in the administration, so the fact that he would be involved in the negotiations indicates a more conciliatory approach. 

USD may also be getting some support from higher US Treasury yields. Yields were higher by 3-5bp across the curve despite the selloff in stocks as the strong correlation between rising equities and rising yields in the first two weeks of April 2018 has started to weaken. The 2yr, 5yr and 10yr yields all hit new 2018 highs on Friday 20th of April 2018. As a result, the US 10-year Treasury spreads vs Bunds and Gilts hit their widest levels in at least 25 years.


Markets remains convinced that that Treasury yields will continue to rise faster than yields in other markets, because US growth and inflation will outpace other countries and the Federal Reserve System (Fed) will be more aggressive than other central banks as a result. It’s notable that the Fed has dismissed the recent weakening of global Purchasing Manager Index (PMIs) (see below) and likely softer growth in Q1 as transitory, while the European Central Bank (ECB) and Bank of England have expressed concern that the growth cycle may have peaked at the same time as inflation has disappointed in both countries. Compounding the issue is the fact that the widening US budget deficit is expected to push up the supply of Treasuries even as the administration admonishes foreign central banks not to buy them!

Let us look at how the CAD is doing. After getting hit earlier this week when the Bank of Canada revised up its estimate of potential growth, Friday’s 20th of April 2018 economic indicators retail sales and core Consumer Price Index (CPI) came in weaker than expected. Positioning in CAD isn’t yet extreme so there’s plenty more room for this to run if the news continues negative. Watch out for tonight’s testimony by Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins to the House of Commons’ Standing Committee on Finance (see below).

Commitment of Traders report

Speculators increased their long EUR positions, long GBP and long NZD. Meanwhile, they went even shorter USD overall. They are now the longest they’ve been in EUR and shortest they’ve been in USD for at least five years. 

The “long inflation trade” also got longer as speculators added to WTI longs and UST shorts. 

Speculators added to their short CHF positions, but there’s still a lot of room to go there before they are anywhere near full.

On the other hand, speculators did start to reverse their gold and silver positions. They aren’t yet shorting gold and buying silver instead, but they are buying more silver than gold. As a result the gold/silver ratio fell to 80.83 from 81.37. Over the last five years, the average ratio has been more like 70.8, which at the current price of gold would means silver at $18.87 an ounce instead of around $17.12. 

Today’s market

The big event today will be the preliminary purchasing managers’ indices (PMIs) for France, Germany, the EU as a whole and the US.

Looking at last month’s PMIs, the overwhelming impression globally is one of decelerating expansion. Most countries are in the fourth quadrant, which is for PMIs above 50 (hence showing expansion) but lower than three months ago. It may also be significant that the only countries in contraction were in Asia, and both have seen significant appreciation of their currency in recent months. This may be a harbinger of what the new US trade policies are going to bring to the world.

This month’s figures are expected to be similar. All the PMIs coming out today are expected to be lower, with the exception of the US service-sector PMI, which is forecast to be one tic higher. That would be depressing except that they are at such high levels already, particularly the German and EU-wide manufacturing PMIs.

That might suggest that the market should be indifferent to a decline in the PMIs, particularly in Europe. And yet we must remember that the ECB repeats at every meeting that “Our monetary policy measures, which have facilitated the deleveraging process, continue to underpin domestic demand.”

The Chicago Federal Reserve System (Fed) national activity index (CFNAI) is different from the other regional fed indices. It’s designed to gauge overall economic activity and related inflationary pressure on a national basis, not regional. It’s comprised of 85 existing monthly indicators of national economic activity. A positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend. Although the components have all been previously announced, the indicator is one of the more closely watched among those issued by the various regional Feds.

The index is expected to slow a bit in March 2018. This would be consistent with what the market expects for Friday’s 27th of April 2018 1Q GDP figure:  2.0% SAAR, down from 2.9% in Q4 2017. If the forecast for today’s figure is correct, the CFNAI will slow to an average of 0.39 in Q1 from 0.46 in Q4, indicating a continued expansion but just not quite as strong a one as in the previous quarter. This should be neutral for USD.

US existing home sales rebounded in February 2018 after two months of large declines. The market expects a further recovery for March 2018, especially as pending home sales were up in the previous month. Nonetheless, another month of increase could be positive for the dollar.

Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins testify on monetary policy to the House of Commons’ Standing Committee on Finance. They will be grilled on last Wednesday’s 18th of April 2018 Monetary Policy Report. The Bank was more optimistic on the prospects for the global economy, but is naturally still cautious about the possible impact of trade conflicts (aka NAFTA negotiations) and geopolitical risks. The aspect that gripped the market the most however was the upgrade to the Bank’s estimate of Canada’s potential economic growth rate (0.4 ppt over the next two years). That implies the economy has more room to grow than previously thought before inflationary pressures emerge. Hence less need to raise rates early = lower CAD.

Overnight Australia announces its consumer price index (CPI). The weighted median is expected to fall back from 2.0% to 1.9%, below the target range. In other words, core inflation is outside the bottom of the RBA’s target band. Meanwhile, housing price are expected to moderate during the year and there’s still downward pressure on consumer goods, meaning there’s little impending pressure on core inflation either. The result could be further negative about the RBA ever raising rates again (the market prices in only a 32% chance of a rate hike this year) and some AUD weakness, depending of course on what happens with metal prices – that’s probably a more important near-term factor.

The Fundamental Analysis is provided by Marshall Gittler who is an external service provider of Claws and Horns (Cyprus) Limited, an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance

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