Will ECB offer any surprises on Thursday?

Euro climbs ahead of ECB meeting

While we may not look back at the ECB meeting on Thursday as one of the defining moments in the eurozone’s long recovery from the global financial and debt crises, or even remember it much at all for that matter, that doesn’t mean there won’t be anything to take away from it, or that markets won’t react.

  • ECB left little to the imagination in June
  • Never a good idea to assume an uneventful meeting
  • Will Draghi succeed in talking down the euro again?

At its meeting last month, the ECB laid out plans for its bond buying program (quantitative easing) beyond the current expiry date of September, opting to extend it until the end of the year at half the pace – €15 billion – and warned that interest rates will remain at present levels “at least through the summer of 2019”.

In providing such a clear path for asset purchases and interest rates for the next year, the central bank effectively covered all bases and barring a significant shift in the data or a change in the global landscape, left few questions if any to be answered, making this meeting a potential non-event.

Juncker/Trump Meeting Eyed as Tariffs Hit Outlook

Should we ever anticipate a “non-event”?

One thing we’ve learned in the past though is not to become complacent when the central banks are involved and in the current environment of trade conflicts and Brexit, things can change very quickly. We have to remember that while the recovery is gathering momentum and making encouraging progress, it is still fragile and could be derailed by a number of events which would require the ECB to step back in and offer its support.

Only this week it has been reported that US President Donald Trump intends to slap 25% tariffs on European auto imports and significantly escalate the trade conflict between the US and EU. Jean-Claude Juncker is currently in Washington looking to calm the growing tensions between the two but it seems that unless he is offering concessions, he may not get very far.

What’s more, the UK and EU don’t appear to be getting much closer to agreeing on the divorce and with eight months to go until exit day, this is a notable downside risk for both economies, with the IMF recently warning that a no-deal Brexit that sees the two revert to WTO rules could wipe 1.5% and 4% off EU and UK output, respectively, by 2030.

In terms of the data, the ECB will likely be relatively content, with unemployment continuing to drop – now at 8.4%, the lowest since December 2008 – the economy growing well despite the dip in the first quarter and inflation gradually increasing, albeit less so on from a core perspective. Nothing has really changed on this front since the last meeting that will concern policy makers.

EURUSD Daily Chart

OANDA fxTrade Advanced Charting Platform

While the euro has been climbing over the course of the last month, after falling following the ECB announcement and very dovish accompanying statements, it’s now only trading back where it was before the meeting which will be a relief to policy makers. It will be interesting to see if anything they say changes this or if Draghi focuses on talking it lower once again.

Live FX Market Analysis – 24 July 2018

In this week’s FX webinar, Senior Market Analyst Craig Erlam discusses the latest events that are moving financial markets – Trump attacks the Fed, Brexit plans widely criticized etc – and previews the week ahead.

Craig also gives his live analysis on EURUSD (9:22), GBPUSD (11:48), EURGBP (18:45), AUDUSD (19:34), USDCAD (21:04), GBPCAD (22:14), NZDUSD (23:31), USDJPY (24:38), GBPJPY (27:41) and EURJPY (29:09).

Markets get busy week off to weaker start

Trump $500 billion Chinese tariffs threat weighs on sentiment

Equity markets are trading slightly in the red at the start of the week, a reflection of the slightly risk averse tone stemming from the prospect of the trade conflict escalating in the coming months.

US President Donald Trump has continued to double down on threats against China, warning he is willing to impose tariffs on all goods imports which equates to around $500 billion. While this isn’t the first time he’s suggested this, it does seem he is becoming increasingly frustrated with the process and that he is not getting the results he expected when he first started down this path.

Unless the two countries find a solution in the next couple of months, the next $200 billion of 10% tariffs that were revealed recently will likely be imposed which could be met with similar measures on the US, if previous actions and rhetoric are anything to go by. While the market rally has stalled this year, with trade being a major contributor, they have shown a certain resilience, something that may not last once tariffs start to take their toll on the economy, with price increases for consumers sure to have an impact.

DAX under pressure after Trump threatens currency war

Earnings eyed but trade could once again be key

This week is likely to see focus remain on trade, with Trump not one to take a back seat and remove himself from the spotlight. Earnings season could provide a welcome distraction from the political theatre of trade wars but even here it’s going to feature as tariffs will have an impact on the outlooks of a number of companies and investors will be keen to hear their views. Around a third of S&P 500 companies report on the second quarter, including three of the four FANG stocks which will typically attract plenty of attention.

There are also a number of other events to focus on this week including the ECB meeting on Thursday – although this may be more of a low key affair with the central bank having already laid out plans for the next year. Theresa May will also meet with her cabinet on Monday for their final meeting before the summer recess, in which the Brexit white paper may be discussed, given the widespread opposition to it and apparent rejection of aspects of it by the European Union chief negotiator Michel Barnier. Needless to say, with only months to go until exit day, negotiations are not progressing as hoped.

Trade and currency wars a market threat

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

OANDA Market Insights podcast (episode 23)

OANDA Senior Market Analyst Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Trump NATO summit meltdown, Tory big beasts depart Cabinet, PM May defends Brexit white paper, Bank of Canada raises interest rates and the ECB releases the minutes from its June meeting.

Trade war and Trump European trip boost US dollar

GBP/USD – British pound slips over white paper blues

What sparked the dollar rally ? ( OANDA Trading Podcast on Money FM 89.3)

The sky hasn’t fallen just yet

Trade War Escalates, but the sky hasn’t fallen just yet as optimism crept back into the market on reports of fresh bilateral trade negotiations between China and the US coupled with a slightly firmer RMB scrim. “Where there is a will, there is a way”. But when it comes to backroom negotiations, one can only imagine that talk is not going to come cheap.

The broader market continues to remain in wait and see mode for further details on how China might retaliate on trade, while equity markets continue to press higher under the guise that “no escalating news is good news”. Indeed equity markets continued to retrace the sharp mid-week sell-off. But again, the US technology sector comes shining through as US internet and technology stalwarts are leading markets to a solid finish in Thursday’s New York session.

While investors could be breathing a sigh of relief, they’re probably just happy their investment portfolios are breathing and alive and kicking after the latest trade war episode. But even the most pessimistic investors must take note of just how enduringly bullish these markets are, after having everything thrown at them including the kitchen sink (Trade, Italy Germany, Long Bond Rates). It’s incredible what global bourses have withstood all this harmful noise and continue to march higher. But indeed, the solid foundation of a bull market is that it ignores the bad news and keep on grinding higher. And one can only imagine what levels the S&P would be trading if trade war fizzled out.

Equities shrug off trade tariff tensions

Speaking of bull markets, USDJPY continues to grind higher and perhaps a bit of the above is starting to factor in (i.e. ignore the bad news and keeps moving higher). The break above 111.75 was one of the most unambiguous signals in some time, and a move into the 113’s could trigger an unwind in longer-term structural risk-off (long JPY) positions which could see this current rally extend much higher.

There was little movement on Powell interview on Marketplace but here are the full transcripts.

Chairperson Powell’s Marketplace interview

And the NATO summit ended on a more cheerful note, with President Trump reaffirming his commitment to the alliance while focusing more closely on the financial obligations of the other countries. So, the market is happy to hear the NATO band marching on.

Oil market

The oil markets are trying to make some inroads after Wednesday’s spill, but are having trouble holding both tops and momentum. I think this is a one-part trade war and one-part supply coming back online. But Wednesday was one of those steep selloffs on record volumes that will give even the bravest of bull’s cause /pause for thought about holding long positions, especially into the weekend. On the supply front, the latest news from Libya is short-term bearish with the El Feel or Elephant field restarting for the first time since February, and there is some discussion suggesting the supply rebound could increase and more than offset the impacts from the Eastern port closures.

Gold market

The precious space continues to hold critical support at $1,240, but the Gold complex is still hovering in the mixed territory zone. The global equity market is bouncing higher overnight, and there are very few defensive allocations into Gold. However, with Fed Chair Powell not ringing any alarm bells for more aggressive fed tightening, gold picked up a bit of goodwill. But ultimately, the USD looks to be on solid footing while preparing to take the driver seat once again, especially on USDJPY, which should hold the gold bulls at bay.

Currency Markets

The USD is looking to get back in in the driving seat once again.

JPY: USDJPY is signalling the most significant break out in years, and the long USDJPY is a position severely under-owned which suggests the pair will explode higher on any positive news. One can only imagine where spot will trade if an intense wave of risk on kicks in or trade war fizzles out.

CNH: The Yuan remains at the centre of all the action, but with further signs of policy easing on the cards given the economic slowdown has been much deeper rooted than feared, markets will continue to buy dips until a definitively positive shift in trade war sentiment.

USDAsia
Strong demand on the platform for long USDAsia is consistent with the general market views.

Trade war escalation is a definite plus for the dollar and coupled with robust US economic data; it does support this view.

MYR: Despite some optimism creeping back in on reports of bilateral trade negotiations between China and the US, while most of $Asia pulled back from yesterday morning highs, the Ringgit continued to lag the moves.

The Ringgit continues to suffer from political risk and fiscal uncertainty. If the USD does start to reassert itself and coupled with short-term bearish signals on oil prices,  the USDMYR will likely slice through the 4.05 level like a hot knife through butter in this environment.

INR The Ruppe hit and all-time interday  low and has now plummeted over 7.6 % versus the USD will wiping out a significant portion of carry-trades in its wake. But the Rupee will continue to trade at the mercy of oil prices

KRW.After testing 1130.00, the dissenting policy vote injected some life into the Won and coupled with the firmer RMB backdrop saw the USDKRW fall below the 1124 level. The won will be the go-to trade on the escalation of trade war tensions, but in the meantime, the RMB complex will continue to dictate the pace of play

US Inflation Eyed as Markets Pare Losses

Markets higher after tariff-related losses

It’s been a more positive start to trade on Thursday, with equity markets in the green and paring Wednesday’s losses as investors continue to weigh up what impact the latest trade tariffs will have on the global economy.

While markets have typically reacted negatively to any escalation on trade, the overall impact has been relatively modest under the circumstances which suggests investors are far from panic mode right now. Many agree that tariffs will ultimately be bad for the global economy and therefore markets but there still seems to be some hope that common sense will prevail and a full blown trade war will be averted.

With Donald Trump now pursuing another $200 billion in tariffs against China though, we may have to wait a while as he is not easing up and China – and others – is determined to prove it will not be bullied into submission. Perhaps if the economy starts to suffer or the Republicans do badly in the midterms in November Trump will be forced to consider an alternative approach.

Equities shrug off trade tariff tensions

US inflation seen rising further

As it stands though, the economy is doing very well – aided by last year’s tax reforms – and the Federal Reserve is on course to raise interest rates twice more this year, having increased them on two occasions already. The central bank is clearly more concerned about the economy overheating right now than the prospect of a trade war – although this is also on their radar – and the inflation data we’ve seen very much justifies their view.

While CPI is not the Fed’s preferred measure of inflation, it does provide valuable insight and is typically released a couple of weeks before the core PCE price index. Today’s release is expected to show prices rising by 2.9% in June compared to a year earlier, with core inflation having risen by 2.3%, above the Fed’s 2% target. The core PCE price index may be a little behind this at 2% but this is at target and on the rise. Any unexpected increase today may suggest a similar rise is on the cards for the PCE numbers as well.

(Update 1) A tenuous and unstable state of affairs

ECB minutes eyed after dovish tightening last month

The minutes from the most recent European Central Bank meeting will also be released today. The ECB confirmed at the last meeting that it will end its quantitative easing program at the end of the year and won’t raise interest rates until at least the middle of 2019, which was largely in line with expectations. The dovish spin that was put on it though weighed on the euro at the time and it will be interesting to see whether the minutes have a similar impact.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

When the going gets tough, the tough get going

When the going gets tough, the tough get going

U.S. stocks are trading off their intraday highs late in the NY session weighed down by financials profit-taking ahead of the deluge of bank earnings reports on Friday, robust US economic data had temporarily overshadowed fears over global trade disputes. That was until a late NY session headline suggesting the US is reportedly preparing the release of a new $200B China tariff list according to two people familiar with the matter. But a list is a list and not an actual tariff, so lots to be ironed on this one. But regardless, it will put the  markets back on the defensive for the time being

Until that point, the market was indeed embracing the raft of outstanding US economic data, and despite the apparent downside risks from an escalating trade war the fact investors continue to plough cash into equities, that was a central dictating market theme. And given the likelihood of a strong earnings season, and at one point investors were heard yelling down Wall Street “what trade war”?? Indeed, when the going gets tough, the tough get going. That was until the latest headline when much of the tough slogging was quickly unwound in minutes as the SPX shed 100 points in the flash of an eye reminding investors we are in tricky markets, and nothing can be taken for granted.

The currency markets, however, are a different kettle of fish where the market risk is relatively light with Forex traders doing little more than rotating from what currency pair is hot from what is not. In other words, chasing the fear of missing out seems to be a common theme among G-10 trades after a considerable volume of USD long positions have been culled over the past few weeks, especially against the EUR and AUD. There is a reason why risk is so low in currency land; it’s the real fear of getting sideswiped by trade war headline risk.

Oil Markets

Oil prices continue to gain on yet more production outages with Brent briefly breaching the $ 80 per barrel high water mark as strikes by workers in Norway and Gabon added to global production outages.

Without question, supply risk continues to dominate trader psyche and after the API reported another massive draw traders are now positioning for another sizeable drop in today’s EIA weekly report.

ON the bigger picture, the markets continue to access the intermediate-term supply impact as the Nov. 4 US-imposed deadline for allies to halt Iranian imports moves nearer. All the while the Libyan disruptions continue to run on.

At the end of the day, supply concerns and more disruptions  continue to skew bullish for oil prices

Gold Markets

After a brief peak above 1265 Gold prices resumed its downward path as global stock markets trade well. However Gold prices pulled came off session lows on NATO concerns as the EU countries are worried about possible side agreement between Putin and Trump which could profoundly weaken the alliance. Also, the latest tariff headlines suggesting the US is reportedly preparing the release of a new $200B China tariff list according to two people familiar with the matter should keep a bid under the market. Gold dips remain attractive especially for investors knowing that gold should be an essential part of any diversified portfolio, especially in these highly charged political times.

Currency Markets

With this morning’s tariff headline risk, I need to remind myself that the trade war is good for the dollar, as the US has the upper hand in negotiations and whichever way this issue gets resolved it’s likely to be positive for the US current account.

GBP: Cable remains the land of the brave requiring a sharp eye and quick trigger given the plethora of Brexit headline risk. But indeed, in this muddied UK political landscape it does suggest the endgame will be the UK  never leaves the EU, and in this scenario, the Pound is ” cheap as chips”. When the UK political malaise subsides, Sterling  will be the shining star of the market

JPY: The USD did look poised to break out topside given the fading of trade rhetoric and a real risk-on environment developing. US equities have held up remarkably well as the bull market keeps marching her despite the reams of negative news thrown at the benchmarks. Long USDJPY is entirely under-owned as risk-off trades are still prevalent vs the JPY, and on a break of 111.50-75 levels, dealers will be forced into a risk on trade. But as usual, nothing ever works out as planned so we may have to re-explore this scenario later once we iron our fact from fiction over the latest US trade escalation headline.

MYR: It was an up and down day for the Ringgit which was in high demand and dare I say outperformed early on Bond related inflows as investors position for dovish pause for the BNM. The MGS curve was in firm demand particularly the attractive long end yields which are usually the domain for real money investors and pension funds. Indeed, last weeks Bond market awakening was the real deal!!

As for the BNM policy decision, we anticipate no actual shift in rates, Nor Shamsiah is a BNM veteran, and it would suggest policy continuity, but the markets will be more focused on forwarding guidance. Given the political and fiscal struggles ahead, I think it’s easy to assume this will not be a hawkish pause.

Oil prices continue to flourish and should push higher given the bullish supply skews which should go a long way in supporting the government coffers.

Trade war -will cooler heads prevail ?( OANDA Trading Podcast with BFM Radio KL )

Stephen Innes, Head of Trading in Asia-Pacific, OANDA, Singapore

On July 6, the US imposed a 25% import tariff on US$34 billion worth of Chinese goods. China has since retaliated, and accused the US of igniting ‘the largest trade war in economic history’. Stephen comments on how trade tensions are affecting market sentiment, versus the economic fundamentals of the world’s two largest economies.

 

BFM Radio Kuala Lumpur

ECB Optimistic But Cautious

The euro rose to a day’s high on Thursday shortly after the European Central Bank (ECB) released minutes of its January meeting.The currency hit $1.23085 at around 12:30 p.m. London time (7:30 a.m. ET) but it eased some of that strength a few minutes later.ECB minutes showed that inflation, the most important economic indicator at the central bank, is set to finally rise. As a result, some market participants briefly interpreted that as an indicator that monetary stimulus will come to an end earlier than previously thought.

Source: European Central Bank leaves policy on hold, inflation set to rise – CNBC

Futures Flat After Hawkish Fed Minutes

Dollar maintains its firmer tone