22 / 05 / 2018 | Market News

Fundamental Analysis 22.05.2018 – Market Outlook

Market Recap
Attention yesterday Monday 21st of May 2018 was focused on Italy, where a proposal to issue “mini-BOTs” – notes that would be backed by expected tax receipts in the future – sent Italian yields soaring. (BOTs are Buoni Ordinari del Tesoro, a common Italian Treasury bill or short-term credit note.) The move is seen as a way of both getting around the EU’s rules on bond issuance and also in effect creating a parallel currency that would trade at a discount to the euro, since the “mini-BOTs” wouldn’t pay any interest. The very idea sent investors rushing out of Italian bonds and into German Bunds, with the result that the Italy-Germany 2-year spread widened out by 21 bps in one day!



Nonetheless, EUR managed to gain vs USD nonetheless as longer-dated US interest rates declined slightly, removing the main force pushing the dollar higher recently. It’s hard to discern why bond yields declined, however. In fact, TIPS breakevens continued to move higher as US gasoline prices approached $3 per gallon, a price that’s considered expensive in the US

Furthermore, the Fedspeak was generally hawkish. Atlanta Fed President Raphael Bostic (voter) said “inflation is likely to run a bit above 2 percent for a while” and that while monetary policy should be flexible, i.e. the Federal Reserve System (Fed) shouldn’t panic if there is a modest overshoot of inflation, he still favors two more rate hikes this year. Philadelphia Fed President Harker (non-voter) said that inflation might even reach 2.5% this year and that he could be persuaded to support four rate hikes.

With inflation expectations continuing to move higher and Fed officials moving towards more tightening, it’ll be no surprise if bond yields resume their climb soon and the dollar resumes trending upward with them as well.



CAD was the best-performing currency. There seemed to be no particularly cause, just a reaction to the big drop on Friday 18th of May 2018 in a thin holiday market (Canada was on holiday yesterday for Victoria Day). In fact if anything, the US-Canada yield spread moved further in the US’ favor. But oil prices were higher too. CAD may also be benefitting from the move to put the US-China trade war “on hold,” which not only helped all the commodity currencies but also suggests the US isn’t really intent on ripping up existing trade relations. Nonetheless, it still feel that the recent poor data for Canada may cause some reassesment of the likelihood of Bank of Canada tightening and therefore cause CAD to weaken ahead of next week’s Bank of Canada meeting.

Today’s market

There may not be any headlines coming out today, but certainly the main event is the restart of Brexit talks in Brussels. The big debate in the UK is how to finesse the problem of Britain’s border with Ireland. UK Prime Minister Theresa May made a huge concession recently and agreed that all of the UK will have to remain tied to a customs union with the EU after 2021 until they work out some alternative to a “hard border” with Ireland. Under this plan, all of Britain would be covered by the EU’s common external tariff. That would eliminate the need for any customs border between Ireland and the UK.

The plan is deeply unpopular with many of the “Leavers,” as it leaves Britain more attached to the EU than they would like. Furthermore it has no clear end, meaning it could just be a path to “EU-lite.”

The bigger problem though is that the EU has already rejected this approach. “If this is it, we will have a crisis,” said one senior EU diplomat who’s involved in the talks.

We will see this week how the irresistible force of Brexit meets the immovable object of the EU, or more concretely, the Ireland/UK border.

Early in the day, the UK Parliament’s Treasury Committee holds hearings. There will be a reappointment hearing for Bank of England Monetary Policy Committee (MPC) member Jan Vlieghe. And at the same time, Bank of England (BoE) Governor Mark Carney plus some of his MPC colleagues, such as Dave Ramsden, Michael Saunders, and the aforementioned Mr. Vleghe will testify to the committee about the BoE’s recent Inflation Report. To remind you, in the May 2018 inflation report the Bank lowered its growth forecast for this year and projected that inflation would fall faster than it had previously anticipated. The tone of the testimony is therefore likely to be dovish, which could be negative for the pound.



The UK public sector net borrowing (excluding banks) is expected to be up sharply, but since the data aren’t seasonally adjusted, what matters is how that would affect the 12-month moving average. In this case the market consensus forecast would lower the average slightly, meaning the government is still managing to narrow its deficit. This could be positive for the GBP. Note though that there could be a negative surprise (greater-than-expected borrowing) because of the shift in Easter, which could affect VAT receipts.



The Confederation of British Industry (CBI)’s industrial trends survey is a second-tier indicator. It probably won’t get much attention today, what with the Parliamentary testimony and the Brexit talks going on. But with little else on the schedule and lots of mystery surrounding the state of the UK economy, it could. In any event if it does, it’s could be negative as the orders DI is expected to fall. Selling prices are expected to remain constant for the third month in a row. 



Other indicators out today include Canadian wholesale trade sales and Richmond Fed manufacturing index. Overnight we get the Westpac leading index for Australia; no forecast is available.

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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21 / 05 / 2018 | Market News

Fundamental Analysis 21.05.2018 – Market Outlook

Market Recap

The US and China on Saturday 19th of May 2018 announced a face-saving agreement that allows the two to call an early end to their "trade war", right before the 21st of May 2018 deadline for comments about the proposed tariffs. The statement doesn’t make any concrete promises on China’s side, but even so it’s enough for the Administration to claim “victory.” As a result, USD was higher across the board despite a notable decline in US Treasury yield (down 6 bps in the 10-years).

The China agreement is a big win for USD, because if we look at the various uncertainties that the US faces, trade was far and away the #1 question. The latest Baker, Bloom & Davis indices of economic policy uncertainty are mostly below average, certainly so for fiscal and monetary policy, which are the main ones affecting the FX market. Only trade is above average. (Note:  latest data available is from March 2018.) With the uncertainty in this policy area down somewhat, the dollar should be able to rally further, especially as uncertainty with regards to the key fiscal and monetary policy areas in Europe has risen in response to the Italian challenge.

The news is good for US stocks, which were higher in futures trading Monday 21st of May 2018 morning, and therefore for the risk-sensitive currencies AUD and NZD.

It is suspected that Italian politics are manifesting themselves in the currency market through EUR/CHF. As you can see, CHF strengthened considerably vs both USD and EUR on Friday 18th of May 2018 afternoon. It’s since fallen back vs USD, but is steady at the higher levels vs EUR.

CAD was the worst-performing major currency after Friday’s 18th of May 2018 disappointing economic statistics. Retail sales ex autos fell instead of rising as expected while the headline rate of Consumer Price Index (CPI) inflation slowed instead of remaining unchanged as expected. The currency is recovering slightly this morning however. Nonetheless, with inflation apparently slowing and oil prices probably at or near their peak, the prospects for a more hawkish Bank of Canada meeting next week are slim. I’d expect to see CAD weaken further ahead of the 30th of May meeting.

GBP also weakened on yet another threat:  appearing on TV on Sunday 20th of May, Scotland First Minister Nocola Sturgeon said she wanted to “restart a debate” about Scottish independence and would consider another referendum on the topic in the autumn, once there’s some clarity about the Brexit outcome. So now Scotland is added to the Ireland problem and it looks like the United Kingdom isn’t so united any more. Adding this problem too is negative for sterling.

Commitment of Traders (COT) report

Speculators continued to trim their short USD positions both by reducing long currency positions and adding to short positions. There was a small exception in CAD, where investors reduced their shorts a bit.
 

Speculators continue to pile into short CHF positions. They’re now the shortest they’ve been over the last five years, but still less than half what they were back in 2007, so there’s plenty more room to go. Asset managers (not shown) meanwhile held record short CHF positions.

Speculators reduced their “inflation trade” positions somewhat, cutting both their long WTI and short US Treasury positions. No surprise as oil rises to its highest level in four years and bond yields to their highest level in seven years.

Today’s market

The only major indicator out is the Chicago Fed National Activity Index (CFNAI) for April 2018. The CFNAI is different from the other regional Federal Reserve System (Fed) indices, which gauge conditions in that Fed district. The Chicago index is 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. It’s expected to be higher, well above the six-month moving average, which should corroborate the estimates of stronger growth in Q2. It could be positive for the dollar.

European Central Bank (ECB) Governing Council member Ewald Nowotny will give the keynote speech at the Czech National Bank’s Research Open Day 2018. He’s been the most vocal ECB member calling for the end of QE and the normalization of policy. His statements on the subject were market-moving at first, but now he’s just repeating the same theme, so not likely to affect the euro. Just Thursday 17th of May 2018 for example he said the ECB “shouldn’t wait too long with normalizing monetary policy, given the situation of the economy.” “The asset purchase program that runs until September 2018 should be ended around that time, or step by step. There  should be a rate increase within a foreseeable period, and as third step, the ECB should begin to stop replacing the maturing assets.”

Atlanta Federal Reserve System (Fed) President Raphael Bostic will speak on the subject of "Welfare Economics: Trade and a Review of Principles.” I have no idea whether the speech will contain anything market-moving. Bostic is a voting member of the Federal Open Market Committee (FOMC) though so we have to pay attention.

Philadelphia Fed President Patrick Harker, a non-voter, will appear at the Chief Executives Organization’s CEO Financial Seminar 2018 in New York. The title of the speech is “A Conversation with Pat Harker.” He hasn’t spoken very much recently, and when he did speak it was on topics not related to the market, so it’ll be interesting to hear his views. Harker will be speaking again on Thursday 24th of May on the labor market and technology.


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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21 / 05 / 2018 | Market News

Why do oil prices surge

Back in 2008 the price of crude oil reached $100 per barrel. The global financial crisis that started in the same year in the United States (US) spread quickly across the globe. The impact of the financial crisis, for which many economists believe that it was the worst since the Great Depression, forced governments to bail out large financial institutions and implement new monetary and fiscal policies to prevent a possible collapse of the world financial system. Economies worldwide slowed during this period, as credit tightened, and international trade declined.

Because of the economic slowdown, the price of crude oil started to decline reaching $40 per barrel in 2016. As the global economy seems to be recovering in recent years, the demand for oil is rising in response to the increased rate of economic growth. On May 20th 2018, the price of Brent crude oil stood at $78.51 per barrel and the price of West Texas Intermediate (WTI) crude oil at $71.37 per barrel. Oil prices have jumped sending the prices of every oil product such as gasoline higher. 

Venezuela and Iran weigh on oil prices

The US President Donald Trump decided some days ago to exercise the get-out clause in the Iran nuclear agreement and reinstitute sanctions that had been terminated by the previous US President Barack Obama. Economists suggest that the Iranian oil output will be reduced from 3.8mn barrels per day to 3.4mn because of the US-Iran deal’s termination. 

Venezuela which is another major oil producing country is facing large financial problems. Inflation in the Latin American country has soared, and the government of Venezuela has been forced to cut back the oil production as oil workers are unpaid and the much-needed investments in oil fields are not done. Analysts at Barclays estimate that Venezuela’s output in 2018 will be some one million barrels per day less than last year’s 2.3 million barrels per day. 

Experts comment on oil prices

A Goldman Sachs report, released on May 9th 2018, forecast that the price of Brent crude oil could reach $82.50 per barrel during the summer months of 2018. Goldman Sachs’ experts said that increased geopolitical tensions in the Middle East, plunging Venezuelan production, and now the U.S. withdrawal from the Iran nuclear deal could push oil prices higher. They also commented that the probable cutback in the Iranian crude oil supply could push up oil prices by around $6.20 per barrel, adding that ‘such elevated oil geopolitical risks exacerbate the upside risks to Brent forecasts and reinforce our view that oil price volatility will continue to increase.’

The International Energy Agency (IEA) announced on May 20th 2018 that it is ready to act if necessary to ensure that markets remain well supplied. On May 12th 2018, the IEA had commented that the restoration of sanctions on Iran may have implications for the oil market balance. ‘The IEA is discussing and will discuss oil market conditions and outlooks with relevant stakeholders, both oil consumers and producers. For now, the rapidly changing geopolitical landscape will move the attention away from stocks as producers and consumers consider how to limit volatility in the oil market,’ said the IEA’s Executive Director Keisuke Sadamori when he was asked by reporters about the current oil market situation. 

STO and commodities trading

STO offers its clients an optimal trading experience, with 7 asset classes and over 300 CFD (Contracts for Difference) instruments to trade on. STO clients can trade on one of the most active CFD markets in the world, currencies and commodities such as Brent and Crude oil, gold, platinum, palladium and silver.  

Trading Forex and CFDs, which are leveraged products, are high risk investments and puts your capital at risk. You may sustain a loss of some or all of your invested capital. Only speculate with money you can afford to lose.
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18 / 05 / 2018 | Market News

Fundamental Analysis 18.05.2018 – Market Outlook

Market Recap

Rising Treasury yields exerted their influence on the FX market and the dollar rose.

The US data was good – following the better-than-expected Empire State manufacturing index earlier in the week, the Philadelphia (Philly) Federal Reserve System (Fed) index unexpectedly rose 11.2 points (a 2.2-point decline was expected) to the highest level in a year. New orders surged, which implies that manufacturing will remain strong in coming months, and the prices received index rose to the highest level since 1989, implying upwards pressure on inflation. The Conference Board’s leading index rose for the seventh consecutive month and the four-week average of initial jobless claims edged down a new low. While higher yields weighed on the S&P 500, which closed slightly lower, the Russell 2000 index of small-cap stocks hit a record high.

Nonetheless, looking at the timing of the Treasury market moves, they don’t seem to have been so directly influenced by the data – rather, it appears that yields started to drift higher around 2 PM New York time. We’ve seen similar action many times in the last few week.

Given the rise in Treasury yields and USD/JPY’s sensitivity to US interest rates, it’s no surprise that JPY was the biggest loser on the day. The yen weakened steadily throughout the day, helped this morning by the announcement of a larger-than-expected slowdown in Japan’s inflation rate. JPY is expected to continue to weaken as US yields over 3% prove attractive to Japanese investors. US 5-year nominal yields are now higher than the 10-year yields of any other G10 currency.


CAD was lower as the US administration failed to meet yesterday’s Thursday 17th of May 2018 deadline to notify Congress about a North American Free Trade Agreement (NAFTA) agreement. Now any agreement will have to be approved by the new Congress that’s seated in January 2019, if indeed they can reach agreement at all. With a Mexican presidential election coming up on the 1st of July 2018, it  will be increasingly difficult to reach an agreement. US Trade Representative Robert Nighthizer said the countries are “nowhere near close to a deal.” With the Consumer Price Index (CPI) expected to remain steady today (see below), we could see further weakness in CAD.

The Italy situation seems to be clearing up a bit. Reports surfaced yesterday that the final agreement between the League and 5 Star Movement wouldn’t include asking the European Central Bank (ECB) for debt relief to Italy nor would it call for Italy to leave the euro. But a larger fiscal deficit and greater bond issuance does seem likely. The League’s leader said Monday 21st of May 2018  would be the “make or break” day for the discussions between the two parties. Italian spreads over Bunds fell by 4 bps, but this hardly makes a dent in the 20 bp jump on Wednesday 16th of May 2018, implying that the market isn’t totally reassured yet.

Today’s market

The day starts with a speech by Cleveland Fed President Loretta Mester on macroprudential and monetary policy at an European Central Bank (ECB) conference on the topic. She’s a voting member of the Federal Open Market Committeee (FOMC) and one of the more hawkish members. She just spoke a few days ago and said that a) inflation hadn’t yet reached the 2% target on a sustained basis (even though it has actually reached the target), and b) it might be necessary for rates ultimately to rise higher than she had previously anticipated.

After that, it’s pretty much Canada Day. These are the last major Canadian indicators before the Bank of Canada meeting on the 30th of May 2018 and so will be closely scrutinized.

Canadian retail sales are forecast to grow more slowly than in the previous month, but still at a pace above the recent trend. The figures are expected to be taken as encouraging and could therefore be modestly positive for CAD. 


 

However, there’s little doubt that the Canadian CPI, which is released at the same time, will be the more important indicator. Canada has a bewildering number of ways of measuring inflation, but almost all of them are expected to show the rate of inflation staying the same (except for the “CPI core – trim yoy%”, which is forecast to accelerate to 2.1% yoy from 2.0%). In theory no change in inflation should mean no change in currency expectations either, but what we saw last week with the US CPI was that an unchanged CPI can lead to a fall in the currency which could be negative for CAD.



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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18 / 05 / 2018 | Market News

How to improve your trading productivity

Trading speculative derivatives such as Contract for Differences (CFDs) is the activity of buying and selling financial instruments with the intent of profiting from price movements in the underlying asset. Since traders are not owners of the underlying asset, they are just speculating on the price movements of the underlying asset. Therefore, traders could benefit from rising markets as well as from falling ones. However, trading also involves significant amount of risk of loss to your invested capital. 

The leveraged nature of the financial instruments means that the effects of small movements in prices are magnified and can have large impacts on the value of trade positions, both in respect of profits made and losses incurred. The higher the leverage rate, the higher the potential of making profits and the higher the risk of experiencing significant losses. The world of trading is competitive. Possible measures for mitigating the risks of loss on trading accounts, are for example actively monitoring your trading accounts to ensure there is always available margin on their accounts, stay updated with market news, utilise education material to enhance your knowledge of trading CFD products and first practice trading on demo accounts rather than live trading accounts.

Traders need to be productive even if sometimes trading can be a tiring process because of the long hours needed and the influx of information. However, there are ways with which traders could improve their productivity and expand their range of knowledge. This article will suggest some ways in which investors could improve their trading skills. 

Performing in-depth market analysis

Being a trader without learning about the market updates is a quite difficult task. The lack of knowledge about what is going on in the financial markets could be a serious handicap in the world of trading. Many traders are devoting part of their capital to pay for financial news from various professional research or financial news agencies and providers in order to remain up to date at all times. 

Seasoned traders suggest that making decisions related to trading requires from traders to accurately evaluate all influencing factors beforehand. This could be a difficult task mainly because of the limited time available but the more experienced traders insist that achieving the desired targets, an in-depth market research should be carried out. 

Paper trading

The expression 'paper trading' may sound unusual but some traders consider it to be a useful type of practice. Paper trading helps traders learn the secrets of trading. Paper trading is a concept that has to do with trading stocks with pretend money but doing it with real numbers in real time. The combination of the paper trading practice and the internet makes for a good educational package which could help in developing the traders' skills without taking any real money risk. Trading paper money also helps traders to test new ideas without incurring the kind of emotional trauma when real money is lost. 

Analysing new charts 

Technical traders use the price history of any asset, and the price patterns that are formed, as a basis for making trading decision and analysis.  The technical analysis is a technique that uses the price chart of an asset as a key component in forecasting where the price will head next. Chart patterns are a key tool in a technical trader's portfolio.

Seasoned traders suggest that a good practice for a trader could be picking, for example, five completely new charts of financial instruments they would like to trade and analyse them carefully. The trader who wants to practice his skills in this way could expand his range of knowledge regarding the financial instruments and later put the new skills in use while trading in real markets. 

The suggested strategies above are some of the ways in which some seasoned traders have improved their trading productivity, however traders and investors must be aware that there is never any guarantee of any trading technique or strategy to improve trading productivity, as there are many risk factors involved when trading speculative derivatives such as CFDs. Before making any investment decisions, you should be aware of the key risks involved by reading the Risk Disclosure document on our STO website. 

Trading with STO

STO has set as a goal to offer an optimal trading experience to its clients. STO pays special attention to its clients’ educational needs by arranging educational courses such as webinars and providing its clients with the latest market news reports. STO account owners are able to trade on the most active shares in the US, German and Italian stock markets. 

Trading Forex and Contracts for Difference (CFDs), which are leveraged products, are high risk investments and puts your capital at risk. You may sustain a loss of some or all of your invested capital. Only speculate with money you can afford to lose.
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17 / 05 / 2018 | Market News

Fundamental Analysis 17.05.2017 – Market Outlook

Market Recap

The day of the commodity currencies! AUD, CAD and NZD led the ranks. Meanwhile USD fell even though US interest rates continued to rise, hitting a new high for this economic cycle.

In contrast to Tuesday 15th of May 2018, the higher US yields didn’t derail the US stock market, which managed to close higher – possibly because of a better-than-expected US industrial production figures. Higher bond yields due to stronger economic activity are a different matter to higher bond yields because of higher inflation. Housing starts disappointed but the forward-looking permits were better than expected.

It looks like Italy’s problems are starting to have an effect on the markets. Not only are the two parties still struggling to reach agreement on forming a coalition, but one of the points they seem to be discussing is whether to ask the European Central Bank (ECB) for debt forgiveness. Greece was bad enough, but Italy is the largest bond market in Europe, with EUR 2.4tn in bonds outstanding. One politician said they are discussing an EUR 250bn write-off, although another politician denied it. They are also reported to be discussing the renegotiation of European treaties, reform of the Stability & Growth Pact, and a revision to Italy’s budget contribution. Italian yields jumped and most peripheral bond spreads ended the session at their wides for the day, aided by a “flight to quality” within the EU that saw 10yr Bund yields decline 4 bps.

However, German Chancellor Angela Merkel in effect rebutted these ideas. Noting that the ECB’s loose monetary policy won’t last forever, she called for more integration of the Eurozone economies, saying: “the global view of joint currency unions states that you need to have some kind of element of last resort.” This could be a hint of measures to be discussed at the EU summit on 28-29 June 2018.

Given the tumult in Europe and the rise in US yields, it’s surprising to me that USD weakened vs EUR. Especially, the UST/Bund yield spread is now the widest it’s been since the inception of the ECB. It is unlikely that this is a tenable situation, particularly since Bund yields are negative out to 5 years –  USD is expected to recover in short order.

 

The good performance of stock markets, plus the successful rollover of some Argentinian short-term notes sparked a general risk-on tone and a relief rally in emerging market currencies.

GBP gained after the Telegraph newspaper reported that the UK will tell the EU that it’s prepared to stay in the customs union beyond 2021. The question is though, will that be acceptable to the hard-core Leave faction in the Cabinet? It seems to be “Brexit-lite,” leaving the EU in name but not in reality, as remaining in the customs union also means adhering to various EU rules and regulations without having any say in their making. 

NZD was up after the government raised its forecsats for the budget surplus for the fiscal years out to 2020. AUD/NZD continued to rally nonetheless as Australia’s employment data beat expectations – total employment was more or less in line with expectations (+22.6k vs +20.0k expected), but the mix was excellent – full-time jobs +32.7k, part-time -10.0k. The unemployment rate rose but that was due to a rise in the participation rate, which is a good sign. Given the longer-term headwinds to NZD, AUD/NZD could continue to rally somewhat.

Today’s market

Not much on the schedule today. Only one minor bit of data during the European and US days.

Retiring ECB Vice President Vitor Constancio will be making closing remarks at an ECB colloquium being held in his honor, then 1 ½ hours later he will make the opening address at the third annual ECB macroprudential policy and research conference. 

The Philadelphia Federal Reserve System (Fed) survey is expected to be down slightly but to remain firmly in expansionary territory. This compares with Tuesday’s 15th of May 2018 Empire State index, which had a similar forecast but wound up rising notably.

Bank of England Chief Economist Andy Haldane will give the closing remarks at a conference on economic measurement. The conference will cover all aspects of the measurement and use of economic statistics. Haldane could say something interesting about the bias in statistics and how the Bank of England adjusts for it, or which statistics it’s looking at particularly closely, which could be useful. 

Dallas Fed President Robert Kaplan (non-voter) will speak in a moderated Q&A session. He just spoke on Tuesday 15th of May, so nothing much is expected from him today.

Overnight we get Japan’s national Consumer Price index (CPI). Inflation is forecast to fall back notably, as it did with the Tokyo measure, which comes out about a week earlier (the purple line in the graph). The slowdown in core inflation is likely to be particularly disappointing for the Bank of Japan.



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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17 / 05 / 2018 | Market News

Why is the Swiss Franc considered to be a safe haven currency

Switzerland’s economy is one of the world’s most stable economies. The majority of the population works in the services sector which accounts for over 70% of total employment in Switzerland, according to the employment report published by the Swiss Federal Statistical Office published in March 2018. The Swiss economy ranked first in the 2017 Global Competitiveness Report published by the World Economic Forum on September 26th 2017. 

The Swiss Franc is the currency and legal tender of Switzerland and Lichtenstein. Traditionally, many investors and traders consider the Swiss Franc to be a safe haven. A safe haven is an asset that is expected to retain its value even if markets suffer a downturn. During the volatile days of the 2008 US financial market crisis, investors and traders scrambled to buy the Swiss Franc and the Japanese Yen while the US Dollar was falling as a result of the fear of spread in the markets. The sovereign debt crisis that erupted in the Eurozone in 2010 pressed even more the Swiss Franc which increased significantly in value against the Euro and the US Dollar forcing the Swiss National Bank (SNB) to take immediate action. 

The SNB pegged the Swiss Franc to the Euro in 2011, noting that “the increased value of the Swiss Franc has become a threat to the Swiss economy.” On 14th January 2015, the Swiss National Bank (SNB) suddenly announced that it would stop holding the Swiss Franc (CHF) at a fixed exchange rate with the Euro (EUR), as it had been doing since September 2011. The Swiss Franc soared against the single market currency, the Swiss market recorded losses, and many traders ended up with negative balances and the fear that their brokers would demand to get paid to cover their losses. 

Why is the Swiss Franc considered safe?

Switzerland has refrained from taking part in any armed conflict in the European continent since 1847. The Swiss economy has all the elements of a strong economic system such as limited population, well-thought exploitation of natural resources and increased investments in the manufacturing and agricultural sectors. These key factors are offering stability to the Swiss economy and to the Swiss Franc. Furthermore, it should be noted that Switzerland is the sixth largest creditor to the United States (US) according to the SNB’s data, owning more than $192bn of US government issued debt. 

Switzerland is one of the few countries in Europe that doesn’t have a budget deficit. In February 2018, the Swiss finance minister Ueli Maurer announced that the country managed to have a CHF 2.8bn budget surplus in 2017, despite the projection for a CHF 250mn deficit. The idea of the government having to pass an emergency budget for the first time in Swiss history never materialised. 

The SNB’s independent monetary policy and low inflation are two more reasons why the Swiss Franc is considered safe compared to currencies of other European countries. According to data released by the SNB in May 7th 2018, the Swiss Consumer Price Index (CPI) inflation stood at 0.8% on an annualised basis, which is a seven-year high. The SNB’s Governor Thomas Jordan said on April 27th 2018 that the Swiss Franc is still highly valued but added that it would be premature to tighten its monetary policy. 

STO and the Swiss Franc

Despite the safe haven perception there are many risks that any cautious investor should carefully consider before making any investment decisions. The Swiss Franc to US Dollar and the Swiss Franc to British Pound are just two of the currency pairs you can trade with on the STO platform. STO clients can select from a variety of over 30 currency pairs and plan the suitable trading strategy for them. STO provides traders with daily fundamental and technical analysis that aims to help them reduce the trading risks. 

Trading Forex and CFDs, which are leveraged products, are high risk investments and puts your capital at risk. You may sustain a loss of some or all of your invested capital. Only speculate with money you can afford to lose.
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16 / 05 / 2018 | Market News

Fundamental Analysis 16.05.2018 – Market Outlook

Market Recap

US yields started moving higher during the Asian day yesterday Tuesday 15th of May 2018 and even higher during US trading.

Good US economic news was behind the jump in yields. On the one hand, US retail sales came out as expected or even a little weaker, but the previous month’s data was revised up notably, including the crucial “control” measure, which feeds into the Gross Domestic Product (GDP) calculation – meaning Q2 GDP may be higher than expected. At the same time, the Empire State manufacturing index unexpectedly rose instead of falling slightly as expected, with the prices paid component – a forward-looking indicator of inflation – rising to the highest level since 2011. Just for good measure, 1 ½ hours later the National Association of home builders (NAHB) index registered an unexpected increase. 

Last week, the dollar fell as US yields fell; this week, the dollar rose as US yields rose. The interesting question is, which market is leading which? In fact there may well be some feedback between the two markets in which higher yields push the dollar higher, and the higher dollar pushes yields up too. That’s because a stronger dollar reduces the likelihood of foreign central bank intervention and thereby eliminates one major source of demand for Treasuries. At the same time, a stronger dollar boosts inflation globally so long as commodity prices – denominated in dollars – are stable to rising, as they are now. Rising commodity prices will give central banks more confidence that they’re likely to hit their inflation targets and can therefore proceed with normalizing policy. A more hawkish environment for central banks coupled with the Federal Reserve Systems (Fed’s) continued normalization of policy means a less favorable picture for bond markets around the world.

Which currencies are most closely correlated with US yields alone (ignoring the question of yield gaps)? Looking just at the last two months, it’s clearly JPY and CHF, which makes sense: Japanese yields never move, so any change in UST yields equals a change in the US-JP yield spread, while Swiss yields are not just the lowest in the world, but actually the lowest in recorded human history (the two-year yield is currently -0.82%. Yes, that’s minus.) (Note: 2-year yields and 10-year breakevens were used because those have the highest correlation with currency moves.)

Rising tensions in the Middle East and a possible breakdown in the growing strained relations with North Korea, plus falling stock markets and a big increase in VIX, all make for a good background for the “safe haven” currencies.

Risk aversion and a flight to safe-haven currencies may also explain why JPY only fell slightly. One might have expected a greater decline considering that Japan’s Q1 Gross Domestic Product (GDP) undershot expectations and actually contracted.

The safe-haven explanation seems reasonable, as both JPY and CHF tend to strengthen when the US stock market falls and when the VIX index rises, which both occurred yesterday Tuesday 15th of May 2018 too.

Today’s market

The day starts out with an European Central Bank (ECB) colloquium in honor of ECB Vice President Vitor Constancio, who’s retiring. There will be a welcome address by ECB President Mario Draghi, and then Board Member Benoit Couere chairs the first session and ECB Chief Economist Peter Praet chairs the second session. There’s no indication what these sessions will be about. Since Coeure and Praet just spoke on Monday 14th of May nothing new is expected.

Canadian manufacturing sales are expected to grow, but not by as much as in the previous month. Nonetheless, this is an erratic series and two consecutive months of decent growth is fairly encouraging. In fact the expected rise of +1.0% mom is above the trend rate of +0.7% mom. Much of the increase though is apparently caused simply by higher energy prices. Nonetheless, the turnout could be positive for CAD.

 

US housing starts and building permits are both expected to be slightly lower. Although permits are obviously the more forward-looking of the two indicators, the market tends to pay more attention to starts, and since that’s expected to be almost unchanged, the figures are not expected to have much of an impact on the dollar. Remember that January’s 1339k figure was the highest since the Global Financial Crisis, so a small decline from that is still quite a high level of starts.

Atlanta Fed President Raphael Bostic, a voting member of the Federal Open Market Committee (FOMC), will give an economic update. He’s spoken a lot this month, most recently on the 9th of May 2018 when he gave a speech on the economic outlook and monetary policy, so nothing new is expected. Note though that the April 2018 Consumer Price Index (CPI) came out on the 10th, so he could have adjusted his view on inflation after seeing that number – that will be the main point of interest in the speech. 

US industrial production is expected to accelerate a bit to be more or less in line with the recent trend. Aggregate factory hours were strong in the April 2018 employment report and the rig count increased slightly, indicating gains in manufacturing and mining. The news could be neutral to supportive for the dollar.



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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16 / 05 / 2018 | Market News

How to prepare for market volatility

You have done your research, made the right investments according to your plan but a sudden market downturn and you are suffering losses on your investment portfolio. It’s that moment that you are starting to wonder what went wrong and why did you lose some or all of the invested capital. One of the key reasons for this; market volatility.  
Volatility is an inherent characteristic of all markets which can vary in extremity at different times. A volatile market is where prices rise and fall rapidly and unpredictably.

During market events such as economic or political events, market volatility will be at its greatest and profits and losses fluctuate far more than usual.  People who don’t feel comfortable with the prices moving against their interest may wish to avoid investing or trading in markets which are famous for their volatility. Investors and traders should be ready to understand and financially cope with the risks from a volatile market. However, there are some benefits that can be garnered from a volatile market. Seasoned investors and traders know that market volatility should be anticipated and could be used in their advantage if they take the proper precautions. 

Clarification of strategy

Forming a strategy is a top priority for every investor and trader. Having prepared a solid strategy helps in reducing the risks deriving from a volatile market but doesn’t eliminate them. Building a strategy requires certain factors to be taken into consideration such as goals, risk tolerance and time horizon. People who would like to invest in or trade the financial markets should decide beforehand if they are going to implement short, medium or long-term strategies. Each of these factors carries their own advantages and disadvantages so careful research is needed for the optimal solution to be selected. 

Risk tolerance also plays a role in forming a strategy whether it is for the purposes of self -trading or investment management. Risk tolerance is the degree of variability in returns that an investor could withstand. In times of significant market volatility knowing your risk tolerance limits would prove useful as the persons who invest in or trade in the financial markets would have already decided how much they could lose if the markets were to move against their interest. 

Hands-off approach

Sometimes people who would like to invest prefer a hands-off approach and may prefer to choose the option of managed accounts. Managed account services are especially useful for people who don’t have the necessary time available to follow the updates in global financial markets. Authorised and regulated investment managers take charge of an investor’s account and plan the strategy on their client’s behalf. Their experience could prove useful when the market is volatile as they most likely know how to take advantage of market movements. Therefore, the client investor can remain calm that their savings are in the hands of a seasoned professional. It should be noted that even the most seasoned of authorized and regulated investment managers may not benefit from volatile markets all the time.

Timing is essential

In volatile markets it is common for investors and traders to feel uneasy. Regardless of experience it is natural that nobody wants to see the market moving against the prepared plan and eventually to lose capital. Psychology always plays a vital role in how an investor or a trader understands the market movements and affects the decisions taken in order to resolve problems. However, it is commonly known by people with experience of financial markets that investors and traders should remain calm despite the short-term fluctuations and to stay focused on long-term trends and long-term targets. 

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15 / 05 / 2018 | Market News

Fundamental Analysis 15.05.2018 – Market Outlook

Market Recap

The European Central Bank (ECB) turned hawkish and the Federal Reserve System (Fed) hawk turned (slightly) dovish.

ECB Board member and Bank of France Governor Francois Villeroy de Galhau said the ECB still plans to end its Quantitative Easing (QE) program later this year, probably in September 2018 or December 2018, and the first interest-rate hike could come “at least some quarters, but not years” afterwards. He said inflation will resume accelerating as the EU’s temporary weakness passes and underlying price pressures increase. Currently, the ECB’s QE program is scheduled to run at least until September 2018, and rates are to stay low until “well past” the end of the purchases.

Villeroy’s comments echo those of Austria Central Bank Governor Ewald Nowotny, who said in early April 2018 that the ECB would end its bond-buying program by the end of the year and then raise the deposit rate to -0.2% from -0.4%, followed by another hike that would also include a rise in the key refinancing rate. The key point to note today though was that shortly after Ewald Nowotny spoke, an ECB spokesman issued a statement saying that his comments did not reflect the opinion of the Governing Council but rather his own personal views. 

Speaking at the same event, Cleveland Federal Reserve System (Fed) President Loretta Mester said “it is too soon to say that we have met our inflation goal on a sustained basis.” She said some of the higher inflation recently is just due to commodity prices and base effects and is therefore “likely to be temporary.” So she was not declaring “mission accomplished” even though the personal consumption expenditure (PCE) deflator recently hit the Fed’s 2% target.

This is not to say though that she thought the Fed should pause. Rather, she argued that monetary conditions are still “accommodative” and cited several examples – e.g., the real Fed funds rate is still negative (-0.3%) – and called for a continued “gradual upward path” to interest rates. (Note that if the Fed were to bring the real Fed funds rate back up to the pre-crisis average, it would be 4.38% right now, not 1.69%) And she said that as the expansion continues, it might be necessary to push rates above what’s considered to be the long-term equilibrium level, currently estimated at 3.0%. This is in line with the Federal Open Market Committee (FOMC’s) current thinking as expressed in the “dot plot,” which sees end-2020 rates at 3.38%, but is far above what the market is expecting. 

This morning in Asia, the key thing to note is that the US Treasury 10-year yield broke above 3% after Commerce Secretary Ross said the “gap remains wide” between China and the US on trade. Rising US yields have supported the dollar in Asian trading, reversing the gains made after Francois Villeroy’s comments.

NZD was the loser of the day. The movement was interesting – the currency strengthened slightly as NZD bond yields moved lower, but then suddenly in Asian trading this morning NZD yields jumped higher and the currency plunged. The spread of mycoplasma bovis, a cattle disease that’s been found in some parts of the country, is undermining confidence in the sector.

 

Today’s market

It’s a busy day today, with a lot of news coming out, including the most important US indicator of the week – retail sales – plus the most important speakers – the testimony of the two new nominees for the FOMC.

We start the day early with the first estimate of German Q1 Gross Domestic Product (GDP). It’s expected to show some slowdown in growth.

Three hours later we’ll get the second estimate of EU-wide Q1 GDP, and that’s expected to be unchanged from the first estimate. As the graph shows, revisions are a) rare and b) usually minor when they do occur. So the German figure would just be filling in the details.

The UK employment data will be more interesting. The news is expected to be mixed. The job market is expected to remain solid: the unemployment rate is forecast to remain at the current extraordinarily low level, the lowest since 1975, while the number of people working is forecast to rise at an above-trend pace.

   

But like elsewhere, the robust labor market is not necessarily translating into robust wage growth. While growth in base wages is forecast to accelerate a bit, growth in overall average wages is expected to slow by more. The Bank of England’s recent Inflation Report 10th of May 2018 said that “as slack has been absorbed the drag on wage growth is easing,” and that’s one of the reasons they have confidence that inflation will get back to trend. They called wage costs “a significant indicator of domestic inflationary pressures.” In that case, the decline in average wages suggests a decline in inflationary pressures, which means less need for a rate hike any time soon.

The question is, which among these four indicators do the markets watch the most closely? Research shows that the change in the number of jobs is overwhelmingly the major determinant of the subsequent movement in the currency. In fact, the wage data is largely uncorrelated with the subsequent movement in the currency. That being the case, The news could be positive for the pound.

Germany’s Centre for European Economic Research (ZEW) survey is expected to be another confirmation of the slowdown in the German and EU economies. The “current conditions” index is expected to fall further from its record-high level in January 2018, while the “expectations” index is forecast to remain steady in negative territory. This could be negative or neutral for the euro.

 

Dallas Federal Reserve System (Fed) President Robert Kaplan will speak to the Council on Foreign Relations in New York about the outlook for the energy market and the economy. Kaplan is a non-voting member of the FOMC. He spoke just a few days ago (7th of May 2018) and said that his base case for this year was still three rate hikes. He also said that energy is in a fragile supply/demand equilibrium, because shale production is unlikely to keep up with growth in global demand and major oil companies haven’t been investing in long-term projects. 

The Empire State manufacturing survey is expected to decline only slightly and remain firmly in expansionary territory (as is the Philadelphia Fed survey, due out on Thursday 17th of May 2018). This could be positive for the dollar.

But probably the US retail sales figures that come out at the same time are likely to be more important. It’s expected to show sales slowing back to trend at the headline level. That’s discouraging, especially since the previous month was a not-particularly-strong rebound from three months of declines. Apparently the slowdown this month is due mostly to lower auto sales and the other measures are expected to be either unchanged or higher. But the FX market tends to react mostly to the headline number, so this could still be negative for the dollar.

 

The National Association of Home Builders (NAHB) index for May 2018 is expected to rebound a bit, which in fact means remain in about the same range it’s been in recently – This could be neutral for the dollar.

Next up is probably the most interesting event of the week:  the Senate Banking Committee confirmation hearings for two FOMC appointees:  Richard Clarida, nominated to be Fed vice chairman, and Michelle “Miki” Bowman, nominated to be a Fed governor. As both would be voting members, their views are quite important.

Richard Clarida, a professor at Columbia University, is a highly respected macro economist with considerable experience in both the theory and practice of monetary policy. He’s made significant contributions to the academic study of monetary policy, particularly with a set of ideas known as “New Keynesian economics.” At point the academic view was that central banks shouldn’t worry about stabilizing the economy and should focus entirely on restraining inflation, but Clarida and his collaborators successfully argued that central banks could successfully intervene to revive economies – something we saw in earnest in the wake of the Global Financial Crisis.

At same time, he also knows Washington:  he was on President Reagan’s Council of Economic Advisers and was an Assistant Secretary of the Treasury under George Bush. And he’s an advisor to Pacific Investment Management Company (PIMCO), the huge mutual funds company.

With the departure of former Fed Chair Janet Yellen and Vice Chair Stanley Fischer, and the pending departure of New York Fed President William Dudley, the FOMC has lost a lot of its senior leaders. Clarida should reassure the markets that the Fed continues to have experienced and knowledgeable leadership.

Given that Clarida’s views are now virtually the orthodoxy among central bankers, he could be expected to align fairly well with the views of the center of the Committee, which have gradually been shifting towards four rate hikes this year. He could add another “dot” for four rate hikes and thereby tip the median.  

Bowman is an attorney who’s currently the top banking commissioner in Kansas. Her board seat is reserved for someone who works at or regulates community banks.

Bowman’s CV is far different from most other FOMC members. She has an undergraduate degree in Advertising and Journalism and a law degree. (Fed Chair Powell also has a law degree rather than an economics degree.) Much of her career was spent in Washington:  she was a counsel to the US House Committee on Transportation and Infrastructure and Committee on Government Reform and Oversight. Following the 9/11 attacks, she was appointed Director of Congressional and Intergovernmental Affairs at the Federal Emergency Management Agency (FEMA),  and, upon the establishment of the Department of Homeland Security, she was made Deputy Assistant Secretary and Policy Advisor to the-then Secretary. She also led a government and public affairs consultancy based in London.

San Francisco Fed President John Williams will speak to the Economic Club of Minnesota. He also spoke recently (4 May 2018), when he said that low neutral interest rates will be with us “for the rest of our lives.” Williams, a voting member of the FOMC, will take over as head of the New York Fed in June 2018. 

Finally, overnight Japan announces its Q1 Gross Domestic Product (GDP). It’s expected to show no growth from the previous quarter, owing to weak private consumption, housing investment and public investment. It’s not clear though whether this marks the beginning of a trend or is just a one-off caused by a) the payback from an increase in smartphone demand in Q4, and b) a drop in purchasing power because of a weather-related rise in vegetable prices. Still, consumer sentiment is weakening, so it may be that spending is unlikely to recover much. At the same time, investment spending is likely to decrease as well (the ratio of real private capital investment to real GDP is already near its historic high) and real exports are slowing too, so Japan can’t expect much growth from investment or net exports. All told the figures will probably spark some thoughts that Japan is entering a slump and the Bank of Japan and Ministry of Finance will try to help by weakening the yen, which could be negative for JPY.



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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