Germany DAX Weakness Continues as Auto Sector Woes Continue

Germany is the fourth biggest economy in the world after the United States, China, and Japan. It has a GDP of more than $3.4 trillion. The DAX is the German equivalent to the US Dow Jones Industrial Average. This year, while the Dow has gained more than 5%, the DAX has lost more than 8%. This has happened as the growth in German companies continue to weaken. Sadly, this will likely continue today.

Yesterday, Daimler – one of the biggest constituents of DAX – reported that its sales were lower significantly which led to the firing of the CEO. These declines were attributed to the new energy standards. The same will likely happen to other companies like BMW and Volkswagen. In fact, just last week, Range Rover announced that its sales were significantly lower.

The German auto manufacturers are faced with several major problems. First, they have to invest heavily in the electric vehicle industry. This will suppress their margins. Second, the recently-enacted emissions standards which came after the VW scandal will lead to lower sales. Third, they are faced with a new threat about trade.

Yesterday, the DAX ended the day at £11,964. This was 164 points lower than the yesterday’s open. On the daily chart below, this price is along the lower band of the Bollinger Bands. As the growth problems continue to mount in Germany, the index is likely to continue moving lower.

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What to Look Out For in September Non-Farm Payrolls Data

Today, traders will receive the September employment numbers. This will be a closely-watched data especially after the numbers released by the Automatic Data Processing (ADP). The numbers were a surprise to many investors who expected the economy to add 187K jobs in September. Today, the figure of ADP will be confirmed when the Labour department releases the official numbers. In the past, the difference between the two has been large. Here are the key things to look out for.

Headline Number

This is the number of Non-Farm Payrolls which was created in the month with the exception of farm-related work and those employed in NGOs and the military. It is a good indicator whether the economy is adding jobs or not. It is one of the most-watched economic numbers in the country. Today, traders expect that the data from the labour department will show that the economy added 187K jobs in September. If the numbers beat the ADP’s 230K, the rout in the bond market may continue. Traders will also look at the two-month payroll revision.

Unemployment Rate

The unemployment rate number shows the percentage of unemployed people who are of a working age. In today’s reading, traders expect the numbers to show that the unemployment rate declined to 3.8% from the previous 3.9%. Any number below 3.9% will be satisfactory to many traders. They will also watch the U6 unemployment rate. This is often said to be the real unemployment rate. This is because it adds workers who are working part-time jobs for economic reasons. The current U6 unemployment rate is at 7.4%.

Wages

Wages are very important to traders. The Philips curve usually says that the wages tends to rise as the unemployment rate falls. This is because firms are usually faced with the challenge of attracting talent. When wages rise, it usually sends a signal that the economy is healthy and that more tightening is appropriate. Traders expect the wages to have grown by 2.8% in September. This will be lower than the growth of 2.9% in August. The average week hours are expected to remain at 34.5.

Participation Rate

The participation rate is an important number that shows the proportion of the of working age population that engages in the labour market. This is an important data. Today, the participation rate is expected to remain at 62.7%. An increase in the participation rate is a good thing for the economy.

Meanwhile, Canada too is expected to release the employment numbers. The Canadian unemployment rate is expected to decrease to 5.9% from August’s 6.0%. The net employment is expected to change to 30K while the hourly earnings expected to remain at 2.6%.

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A Guide on How to do Trend Following Well

Trend following is the foundation of trading or investing in the financial market. This is because the goal of any trader is to buy a financial security that is reasonably priced and then riding the upward trend. Similarly, the trader  could sell a security and wait for its price to drop. The trend is a consecutive diagonal movement of a financial asset. To follow the trend, traders may either get in as the trend continues or may get in when it is starting. The difficult part in trend following is in predicting when the trend will happen and when it reverses. This article will explore a few strategies to use when using the trend following strategy.

The trend is your friend

In trading, a common phrase is that the trend is your trend until when it reverses. The general idea about this is that it   may be wrong to attempt to go against the trend. For example, when a currency pair or any security is moving upwards strongly, it may be wrong to go against it. This is known as timing the market. This is because the security will always follow the path of least resistance. When the trend is nearing its end, you will see signs about it. A good example of this is in the Nasdaq chart shown below. After the crisis, the Nasdaq index – and other indices – started a sharp rally. Traders who went against it made huge losses while those who rose the wave have seen their returns more than double.

How to Identify Trends

Traders use different methods to identify the formation of new trends and confirmation of existing trends. The most important is fundamental analysis. In this, they use the news and economic data to predict how a certain security will move. For example, if a dovish Federal Reserve suddenly changes tune and becomes increasingly hawkish, the dollar value will likely increase. As a result, the dollar index  will likely move in an uptrend while currencies pairs with the dollar as the base currency may accelerate higher.

The next important method is technical analysis. This involves the use of technical indicators and candlestick patterns to predict the future of a trend. There are three most common types of indicators. These are trend following indicators, oscillating indicators, and volume indicators. They are further classified into two: lagging and leading indicators. The former usually track the movement of the security while leading indicators move ahead of the price.

Trend indicators like the moving averages, parabolic SAR, and Bollinger Bands are lagging indicators which send a signal about the strength of the trend. For example, when a double moving average is used, a crossover could indicate that the trend is about to change direction. Similarly, when the parabolic SAR dot is below an upward-moving indicator, it is an indication that the trend may continue. A good example of the double MA is shown in the chart below.

Oscillator indicators are used to show important levels in a security. They are mostly show when the price of a security is overbought and oversold.  Two of the most popular oscillator indicators are the Moving Average Convergence Divergence (MACD) and the Relative Strength Index (RSI). As shown below, the two indicators have been good indicators of the strength of the trend.

Volumes indicators on the other hand are good indicators on the strength of the indicator. They include Accumulation/Distribution and the Money Flow Index (MFI). They are good signals of when to avoid a false breakout. This happens when the reversal of a security is not supported by the volume.

In addition to these, there are tools like the Fibonacci Retracement which tells you where you expect the security to go. It might be a good tool to identify the potential support and resistance points as shown below.

Finally, it is important to understand the candle formations. There are many formations that may help you identify the formation of a new trend. There are multiple types of these. Examples of them are the Hammer and Hanging Man, Engulfing patterns, Dark Cloud cover, piercing patterns, morning star, evening star, shooting star, harami patterns, doji, and three black crows among others.

Understanding these key components of technical analysis may help you know when to enter a trade when a trend is starting and when to exit when it is reversing.

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What is Next for Sugar as it Hits Ten-Year Low

Sugar is one of the most important agricultural commodities in the world. While its increased consumption is often not good health-wise, billions of people around the world cannot do without it. Sugar futures are listed in the main exchanges like the Intercontinental Commodities Exchange (ICE) and Chicago Mercantile Exchange (CME). The prices listed by these exchanges is usually the most followed by investors. However, the reality is that the price of sugar differs from country to country. This is because the sector is very protected by governments, which offer subsidies to protect the farmers. All this makes the price of sugar highly volatile. In the past 30 years, the price per pound has moved from 2.2 cents to a high of 66 cents.

The biggest producer of sugar in the world is Brazil. In the country, sugarcane is mostly used in the manufacture of sugar and ethanol. Therefore, most cars in the country are powered by ethanol. As the Emerging Market economies have suffered, so has the Brazilian Real, which has fallen against the dollar sharply. Since sugar futures are traded in dollars, the decline in the real affected the price of sugar.

In the USA, while sugarcane is grown, most of the sugar comes from beet. In this month’s WASDE report, the sugar production was increased for both the United States and Mexico. The supply and demand dynamics for sugar are summarized in the table below.

As this has happened, the price of sugar has fallen to a ten-year low of 9 cents per pound. As of this writing, sugar was trading at 10 cents per pound with the RSI trading at 41. There is a likelihood that the price will continue moving lower before a rally starts.

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What to Expect from Palladium As It Hikes 25% Since August

Last year, palladium was the best-performing metal, rising by more than 40%. This year, it lost the momentum and dropped sharply. The decline was mostly because of the ongoing trade war between the United States and China. Since palladium is used in the automotive industry, its price is often seen as an indicator of vehicle demand. Therefore, with global growth being affected, traders expected fewer people to buy cars.

Starting from August however, things changed and the price of palladium has soared by more than 25%. This increase is mostly because traders have shrugged the trade fears. It is also attributed to the perception in the market that the Chinese government want to spur growth and the supply deficit in the market. This will be the third straight year of deficit increases. In July, the European Union saw a record in car registrations which was an indication that the demand for vehicles was increasing.

Palladium is mostly used in vehicle manufacturing. It is a metal similar to the platinum. Their uses are almost similar with the only difference being that while palladium is mostly used in gasoline cars, platinum is used mostly in diesel cars.

The price of palladium jumped from a low of $833 in August to a high of $1060 in September. As the demand for cars and other industrial machines increase, and as the supply for palladium decreases, the price of palladium is likely to continue moving up.

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Weekend Review: Oil Rises After OPEC Meeting as China Halts Trade Talks

This weekend, China announced that it would halt all trade negotiations with the United States. This happened after the US issued sanctions on China for its purchases of Russian military equipment. This was a blow to free traders who hoped that the two countries would come to a deal. Over the weekend, China summoned its US envoys to discuss the sanctions. The latest development comes after China concluded that making a trade deal with the US was difficult. This is because China is unlikely to sign a deal that goes against the strategies like joint ventures that have built its economy. In the new decision, the country hopes to influence the American elections in states like Iowa where Donald Trump won.

An important OPEC meeting happened this weekend to discuss the key issues in the oil market and the impact of Iran on the prices. After the meeting in Algiers, the officials said that they saw no need for increasing output despite the increasing pressure from the United States. The latest decision by OPEC is aimed at accommodating Trump’s demand for lower oil while supporting the price. In recent months, the US has become the world’s biggest producer of crude oil. The only problem facing producers is the lack of enough truck drivers to take the crude to the refineries. This is an interesting fact because more foreign truck drivers can help the US support the oil prices. Trump is however an immigration hawk who won the election mostly because of his stand on immigration.

On Friday, the price of metals rose sharply after renewed interest from traders who saw a breakthrough in global trade. Copper, nickel, and zinc rose by 4%, 4.7%, and 2.1% in the London Metals Exchange. This increase was despite the fact that the dollar was strong during the week. The decision by China to halt trade talks with the US led the metals to fall during the Asian session today as shown below.

In the United States, the political deadlock concerning the confirmation of Judge Kavenough to the supreme court continued. This will be a major test to Donald Trump and republicans as we head towards the mid-terms. After his confirmation hearings, Democrats leaked a report of sexual abuse brought forward by a California professor. She accused the judge of sexually abusing her when they were both in high school. This week, traders will follow closely her testimony to congress. If Democrats win by blocking his nomination, it will be a major blow to Donald Trump and his agenda ahead of the midterms.

The Hong Kong dollar traded at elevated levels against the US dollar on Monday morning. The currency latest surge against the USD led to the interbank lending rates to move above a post-crisis high. This sends a major warning to the country’s housing market ahead of the Fed decision on Wednesday.

This weekend ended the long journey to the ownership of Sky, the UK cable news channel. In an auction, Comcast won the deal to acquire the company for 30 billion pounds.

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Weekly Review: US-China Tariffs, BOJ and SNB, and Brexit News Take Center Stage

The biggest news this week was about trade. On Tuesday, the US moved to apply a ten percent tariff to imported Chinese goods worth more than $200 billion. While this was an anti-trade move, the markets reacted in awe because the tariffs were less than the 25% traders were expecting. The decision by Trump came after months of threats about the new tariffs and after the public hearings period ended two weeks ago. In the announcement, the Trump administration said that additional tariffs will be put in place next year if the two countries don’t have a trade deal in place. In response, China announced fresh tariffs worth $60 billion.

On this issue, in an interview, the commerce department secretary said that the Chinese government did not have enough ammunition to counter the US. On a purely trade perspective, his thinking was correct. This is because China imports very little from the US compared to the more than $500 billion that the US imports from China. However, from a strategic perspective, China has a lot of ammunition. For example, China is the biggest holder of US bonds and stocks. If the country announced that it will stop additional purchases or sell the current holdings, the US economy would be significantly affected. In addition, China’s communist regime can announce large boycotts of American firms like Apple that are very popular.

The week started by the huge weather implications in Asia and in the United States. The US had just been hit by Hurricane Florence while Asian countries were hit with the Typhoon Mangkhuk. This led to the massive sell-off in the stocks in Hong Kong. As the week progressed, the impacts of the typhoon reduced and the stocks started to move up. Similarly, as shown below, the Hong Kong dollar rose sharply against the US dollar.

This week, the Salzburg summit happened and was a major blow to Theresa May, who is now fighting to save her Chequers plan. In the informal summit, the EU leaders took turns to ‘rubbish’ the plan, indicating that they will not accept the plan as it stood. Leaders like Donald Tusk and Emmanuel Macron took turns to mock the plan. This happened ahead of the UK’s conservative party’s forum. In the past two weeks, there have been optimism that the two sides will come to an amicable solution to the current disputes. These hopes are now hanging on a balance as May continues to face pressure from the pro-Brexit members of her party.

The Bank of Japan left interest rates unchanged and showed signs that the negative rates will continue to persist. The move by the BOJ was expected but traders were expecting a change of language in the statement as the economy improves. On Thursday, Shinzo Abe received the support of his party which will make him the longest-serving Japanese prime minister. The Abenomics economic policies of low interest rates will therefore continue. Yesterday, the Swiss National Bank (SNB) left rates unchanged and pointed that they will remain lower. The bank still believes that the Swiss franc is overvalued against the peer currencies.

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Week Ahead: Trade War, Inflation Data, and BOJ Decision to Remain in Focus

The biggest news this week will be about trade. On Saturday, the Wall Street Journal reported that the Trump administration was ready to implement fresh tariffs on Chinese goods worth $200 billion. The news dashed the hopes of a compromise deal between the US and China that rose last week. In response to the threat, Chinese officials said that they will respond to the tariffs by imposing more of their own. The worry among traders is that China might prefer a route of non-tariff methods such as currency devaluation and halting of US treasuries purchases.

Traders will continue to watch the weather and environmental conditions in China and the United States. Over the weekend, Hurricane Florence made landfall in North and South Carolina. While the hurricane was downgraded to category one, the floods led to major destruction in the two states. Historically, hurricanes affect the local economies negatively as people stay out of work. Afterwards, the reconstruction helps boost the economies as people increase their spending. In Asia, the Mangkhut typhoon led to major damages and death to a number of Chinese cities like Hong Kong and Macau. This week, traders will focus on the two environmental catastrophes and assess their impacts to the market.

On Wednesday, the Bank of Japan (BOJ) will release its interest rates decision. Traders expect the bank to leave interest rates unchanged. While other BOJ meetings tend to have no major news around them, traders expect the BOJ to provide a guidance on monetary policy. This is because the Japanese economy is booming, with low unemployment rate. Data released two weeks ago showed that the economy expanded by 3.0% in the second quarter. However, the economy continues to suffer from low rate of inflation, which could force the bank to continue holding negative interest rates for a longer time. The fear is that the low interest rates will cause the economy to overheat and leave the bank with no way of managing a potential meltdown. Two days after the decision, the country will release its CPI numbers.

On Thursday, the Swiss National Bank will release its interest rates decision. As the bank has done in the past, traders don’t expect any monetary policy changes. This is because the officials feel that the Swiss franc is currently overvalued against other currencies.

This week, traders will also focus on inflation data from key countries. Today. The EU will release its inflation data. Traders expect the headline numbers to remain at an annualized rate of 2.0%. The core CPI is expected to remain at 1.0%. A higher-than-expected CPI will mean a higher euro because it will make the case for tightening by the ECB.

On Wednesday, we will receive the CPI numbers from the UK. Traders expect the headline number will reduce to 2.4% from last month’s 2.5%. The core CPI is expected to slow to 1.8%, from July’s 1.9%. Still, these numbers will show that the CPI is comfortably near the 2.0% target. On Friday, we will receive the CPI data from Japan.

Other key data expected this week will be the GDP numbers from New Zealand, Germany manufacturing PMI, Canada CPI, US building permits, and UK retail sales.

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Is Donald Trump Losing His Trade War? Data Suggests Soo

In 2016, Donald Trump ran the most unconventional campaigns in recent memory. He campaigned mostly on immigration and trade. On immigration, he promised to build a wall between the US and Mexico and to ban refugees. On trade, he ridiculed the United States for the previous trade deals. He called NAFTA the worst trade deal in the world. He also promised to exit the Trans Pacific Partnership (TPP) that Obama’s administration had negotiated with 12 other countries. After he became president, he terminated the deal, which was in the final stages.

In the first year of his presidency, Donald Trump focused on tax reform, which he delivered within the first year. The reform included the lowering of the individual and corporate taxes. He also focused on deregulating the industry, measures that were taken positively by investors.

This year, he purged his economic team, which was made up of democrat, Gary Cohn. In its place, he surrounded himself with hawkish officials like Peter Navaro and Wilbur Ross. With this company, the president moved to implement his promises on trade. He started by imposing tariffs on all imported steel and aluminium. After that, he announced that he would impose tariffs on Chinese goods worth more than $50 billion. He added more tariffs and now, traders are waiting for additional tariffs worth $200 billion and another one worth $267 billion.

He has also moved to renegotiate NAFTA and just two weeks ago, he announced a deal with Mexico. He then announced that his next target on trade will be Japan, the third largest trading partner.

Therefore, a few months into the conflict, how is the trade war going on? A good place to start is to look at the export and import data between the US and China. The table below from Census Bureau shows the progress.

As shown above, China continues to dominate the US with trade. In fact, the trade deficit is rising as Chinese exports to US increase.

This will probably get worse if Trump continues with his threats on China. There are a few reasons for this. First, a trade deficit is not necessarily a bad thing for a country. This is because a large trade deficit means that the people are spending more money buying goods in the other country. For example, when you go to a shop and buy a loaf of bread. This does not mean that the shop keeper is better than you. In other words, you have not lost the $10 you used to buy the loaf.

Second, China has retaliated against US goods as well. For US, the sectors that have been imparted are more specific than those of China. For example, China has imposed tariffs on US crude oil and agricultural crops. This means that China will likely find alternatives in other countries. This makes American exports less competitive.

Third, the new tariffs will not lower the volume of trade from China. This is because American firms are already heavily invested in China. Therefore, the new tariffs will only lead to higher prices for American consumers. This is evident with the statement released by Apple last week. The company said that the new tariffs will mean a taxation to American consumers. Therefore, as things stand, the US president is losing the trade war.

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Cotton Recent Fall Presents an Interesting Buying Opportunity

Cotton is an important agricultural crop used for the apparel industry. Cotton-made products are known for their quality, beauty, and their durability but lightweight. As the world’s population has increased, so has the need for cotton. This is because every day, cotton-made clothes are worn by more than 6 billion people.

Cotton’s producing industry is highly fragmented. The biggest producers are China, India, United States, Pakistan, and Brazil which produce 33M, 27M, 18B, 10M, and 9M bales of cotton every year. Most of the demand comes from China and other South Asian countries, which are the biggest when it comes to the manufacture of apparel.

The increased population and the global growth has led to more demand for cotton. This is simply because more people mean more demand for clothes. As shown below, the price of cotton rose from a low of $66 in mid-2017 to a high of $96 cents in June this year. This happened as other agricultural commodities showed some weaknesses.

After reaching the high of $96 cents, the price of cotton has dropped and is currently at $83. The decline in the price is mostly because of the issue of trade. Early this year, the Trump administration announced that it would place tariffs on a collection of imports from China. China on the other hand announced an assortment of retaliatory tariffs on American goods. Traders believe that the disruption of the industry will lead to higher-priced clothes which will in turn lead to lower demand for clothes. Lower demand translates to lower prices. However, for cotton, tariffs might not have major implications to the demand of cotton.

Another reason for the falling price is the latest World Agricultural Supply and Demand Estimates (WASDE) released by the Department of Agriculture. For any agricultural trader, the WASDE report is a handy document that should always be read. In the latest report, the department said that the acreage of cotton in the United States is on an upward trajectory. In 2016/17 season, 10 million acres were planted. This rose to 12.6 million acres in the 2017/18 season. It will rise to 13.52 million acres in the 2018/19 season. Most of the cotton harvested in the US is exported to the Asian countries.

As shown below, the price of cotton has been falling in the past few months. It is now declining with the aim of testing the 80 cents level. The current price is above the 42-day moving average and below the 21-day moving average, with the commodity channel index fading. In the short term, as traders focus on the ongoing issue of trade, the price could continue moving lower. However, in the medium-term, the pair is likely to recover and continue the upward trend.

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