Weekly Review: Complacency Returns to Markets Even With the Trade Talk

This week, with little economic data coming through, the biggest news was on trade. Trade has continued to dominate the financial markets as the two biggest economies flex their muscles. On Wednesday, the Chinese government announced fresh tariffs on US imports such as cars and crude oil. The total tariffs announced were worth more than $16 billion and showed that the two countries will continue to battle. Earlier in the week, a representative of the Chinese government said that companies like Apple will likely be used for bargaining purposes. Still, the trade issues did not have major impacts on the financial markets. As shown below, the volatility index continued to decline during the week.

The Reserve Bank of Australia met earlier in the week and announced its interest rates decision. The central bank left interest rates unchanged as was expected. In the statement that followed, the bank’s officials said that there was a likelihood that they would move on interest rates in a near future. They pointed to the growing Australian economy, which has seen falling unemployment rate and increased labour market tightening.

After the RBA, the Reserve Bank of New Zealand (RBNZ) met and left rates unchanged. Their rate decision was expected. What was not expected was the decision to leave rates unchanged until 2020. This pushed the New Zealand dollar down to the lowest level in almost one year as shown below.

The British pound was a major loser this week. The decline started on Monday after the Foreign affairs secretary, Liam Fox sounded a warning about the risks of a no-deal Brexit. He said that there was a 60% chance that there will be a no-deal Brexit. This was less than a week after the Bank of England (BOE) governor sounded a warning, saying that the risk of a no-deal Brexit was uncomfortably high. Last week, the European Union main negotiator rejected parts of the proposals of Theresa May. The two sides have a point to prove. The European Union wants to be tough on the UK to prevent other members from leaving. The UK on the other hand wants a deal that will likely lead to other countries wanting to leave the union.

Another big news was about the US sanctions on Russia. The Trump administration announced fresh tough sanctions on Russia for a poisoning incident in the UK. Russia has denied involvements in the poisoning. The sanctions came two weeks after Trump met with the Russian president, Vladmir Putin in Helsinki for a controversial summit. The new sanctions led to a sharp decline in the Russian ruble.

Finally, CPI numbers were big news this week. Yesterday, data from China showed that the CPI was 2.1%, which was higher than the expected 2.0%. The United States is expected to release their CPI data. The US data is expected to show that the CPI rose by 3.0%.

On Friday, data from Japan showed that the GDP for the second quarter was at 1.9%, which was higher than the expected 1.4%. The United Kingdom is also expected to release the GDP numbers.

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Options For the Turkish Lira as it Falls to an All Time Low

Turkey is an important country in Europe and Asia with a GDP of more than $850 billion. The country has in the past applied to join the European Union in a bid to become more Western. The country is known for its vehicle, machinery, and refined petroleum products. It is also known for its large fashion industry.

In recent months, Turkey has not been at peace. Its economic growth has faltered, inflation has risen to more than 15%, and its currency is now at an all time low after losing 30% of value this year. The latter point is a good way to see what happens when the executive branch of a country takes over the monetary policy decisions.

Still, the Turkish government can help stabilize the currency. First, the government can negotiate with the United States. This week, the Trump administration announced fresh sanctions on the Turkish government for the arrest of an American pastor. These sanctions will have a negative effect on the Turkish economy and its currency.

Second, the central bank can move to raise interest rates. With inflation this high, the only logical intervention by the bank is to hike rates, a move that would go against Erdogan’s pledge. Third, the government can talk with IMF in a similar manner to what Argentina did. With a reluctant central bank, this will be unlikely to happen because the IMF will demand a tightening of the economy.  The final option for the Turkish government is status quo. This is still manageable because the country’s budget deficit is at 2% of the GDP, which is significantly low.

The USD/TRY pair reached 5.7412, which is the highest level ever. The pair is now above all the major moving averages and the RSI is currently overstretched at almost 90. This is an indication that for contrarian and long-term traders, this is an ideal period to look at the Turkish Lira. However, in the short term, the pair could continue to move higher.

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Japan Q2 GDP Grow Faster Than Expected as UK GDP Meets Expectations

Earlier today, the Japanese statistics office released the preliminary numbers for the second quarter GDP. The numbers showed that the economy rose by an annualized rate of 1.9% in the second quarter. This was higher than the expected 1.4% annualized rate and the Q1 contraction of 0.9%. The growth in the GDP in the quarter was mostly because of increased capital expenditure which rose by 1.3%. This was higher than the expected growth of 0.6%. Another reason for the growth was the increase in private consumption, which rose by 0.7% in the quarter, higher than the expected 0.2%.

The growth was hampered by external demand which contracted by minus 0.1%. Traders were expecting it to remain unchanged at 0.1%. This was a reflection of the challenging trade environment. During the quarter, there was a disruption in trade as the US initiated tariffs on steel and aluminium. In addition to the GDP numbers, the country released the PPI numbers which beat analysts’ forecasts. The PPI in July rose by 3.1%, which was higher than the expected 2.9%.

The expansion in the Japanese economy was released a week after the United States released its GDP numbers for the second quarter. The numbers for the United States rose by 4.1%, which was the fastest increase since 2014 and was a reflection of the positive impacts of the tax reform and the spending package released earlier this year. Traders are now waiting for more data to predict whether the economy will continue moving higher in the third quarter.

The Office of National Statistics (ONS) released the first preliminary numbers for the UK GDP. The numbers showed that the economy rose slightly in the second quarter. On an annualized basis, the economy rose by 1.3%, which was expected. In the first quarter, the economy had expanded by 1.3%. On a quarterly basis, the economy rose by 0.4%.

On another positive note, the manufacturing production in June rose by 0.4%, which was higher than the expected 0.3%. It was nonetheless lower than the 0.6% gain in May. On an annual basis, the manufacturing production rose by 1.5%, which was higher than the expected 1.5%. The industrial production too of 1.1% growth was better than the expected 0.7% gain. The trade balance in June of 11.38 billion pounds was better than the expected 12.05 billion pounds and the balance in May of 12.52 billion pounds.

After the data was released, the pound remained lower than the dollar as traders continued to worry about the possibility of a no-Brexit deal. Such a deal will be a game changer for the UK economy whose biggest trading partner is the European Union.

Later today, we will get the CPI data from the United States. Traders expect the CPI to have risen by an annual rate of 3.0% while the core CPI is expected to rise by 1.3%. Still, the EUR/USD pair is lower as traders get concerned about Europe’s exposure to the Turkish Lira.

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Why an Upside is Likely For Silver

Silver is having a bad year. Like other metals, silver has declined by more than 8% this year. It has moved from a YTD high of $17.6 and on Monday, it reached the YTD low of $15.1.

Silver is a different metal than gold. While the two metals are found deep inside the earth’s crust, they have different uses. Gold is used mostly as an investment while silver is used mostly for industrial purposes. It is used in the manufacture of jewellery, mirrors, and kitchen products. The biggest producers of silver are Mexico, Peru, and China.

Silver is often known as gold’s poor cousin. This is because an ounce of silver sells for $15 while the same amount of gold sells for more than $1200. Today, the ratio of gold to silver is 1:81.

This year, silver has been on a decline, which is mostly because of the challenging trade issues. It has also underperformed gold, which is down by 6% this year.

Today, silver has reached $15.45, which is slightly higher than the 50-day EMA and lower than the 100-day EMA. The price is also above a key trendline as shown below. If the price rises, it will likely test the $15.6 level.

There is a likelihood that the price of silver will move higher as gold rises. Last week, the US president attacked the Fed for hiking interest rates. While the Fed will likely ignore the president, there are indications that it will reduce the rate hikes in the coming year. If it does this, the price of gold could move higher as the dollar weakens.

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Weekly Review: Dollar Surges as FOMC Remains Optimistic About the Economy

This week, the global financial markets continued to stabilize following weeks of increased turmoil. Here are some of the most important updates of the week.

Cryptocurrencies

This week, the cryptocurrencies market started positively. On Tuesday, the currencies reached a weekly high with bitcoin reaching a high of $11,797.

Since then, the currencies started going down with bitcoin reaching its weekly low on Thursday when it reached $9,574.

The downward movements happened as traders took profits following a multi-week rally that started a two weeks ago. Since then, the currencies have risen by more than 50%.

The positive news came from South Korea which moved from threats to embracing the currencies.

Central Banks

This week, we received multiple words from key central bankers. On Tuesday, we received minutes from the Royal Bank of New Zealand’s last meeting. The minutes showed that while the members were optimistic about the economy and the hegemony of the global economy, they remained highly concerned about the ballooning mortgage debt. Week-to-date, the AUD is lower 1.50% against the dollar.

On Wednesday, the BOE held the inflation hearings where the members reaffirmed their past statements about hiking rates if inflation continues to rise. The pound is low by 0.44% against the dollar.

Global Stocks

The global stocks were significantly down this week as traders started questioning the long-term prospects. As of this writing, the Dow and S&P are down 0.94%, 1%, while the DAX and Nikkei were up 1.31% and 1.26% respectively. In the United States, the biggest stocks gainers were Home Depot, Exxon Mobil, and United Health, which gained by 1.32%, 1.30%, and 0.87% respectively.

Currencies

The dollar index was up by 1.41%. The upward momentum for the dollar came as investors forecasted that the Fed was likely to raise interest rates. This came after the Fed released the minutes for their latest FOMC meeting. The minutes showed that the Fed officials were optimistic about the economy, which they believe will be boosted by the tax cuts. Against the Euro, Yen, and Pound, the dollar was up by 0.77%, 0.40%, and 0.31% respectively.

The Canadian dollar continued its multi-month decline, falling to a low of 1.2742. The Australian dollar was also down by 1.50% against the dollar.

Commodities

Gold was up marginally this week. It started the week by reaching a high of $1,349 before losing those gains to currently trade at 1,333. The downward trend came as the dollar strength intensified and as the volatility started to come down. Its poor cousin, silver fell by 0.72% while platinum and palladium fell by 1.51% and 0.35% respectively.

In the crude oil markets, the crude oil continued its upward momentum with the Brent rising by more than 2% and WTI by 1.62%. The upward momentum continued as the EIA data showed reduced stockpiles in the US. The data showed that stockpiles fell by 1.6 million barrels to reach 420.8 million barrels. The data showed that oil production was unchanged to 10.2 million barrels per day.

In the coming week, traders will focus on manufacturing data from China, employment data from Germany, inflation data from European Union, US GDP growth, and manufacturing data from the US.

Sources:

https://www.wsj.com/news/types/central-banks

http://markets.businessinsider.com/indices

https://www.bloomberg.com/markets/stocks

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Week in Review: Crude Oil Disappoints, as the Dollar Triumphs

This week, the focus among traders was about volatility. As you recall, a common theme among investors in the past year has been about the lack of volatility in the market. During the year, the CBOE VIX index, also known as the fear index, was on historic lows.

On Friday last week, all this changed when the jobs report came. Investors started getting worried about inflation, which pushed the VIX higher by more than 100%. Global stocks slumped while bond yields rose.

This week, the global market failed to find a support and yesterday, the S&P 500 officially entered the bear market. As such, these low prices could persist because historically, a bear market tends to stay for more than 72 days.

The chart below shows the weekly performance of the major global stocks.

This week, the Bank of England held its first meeting this year. This meeting ended with the committee leaving interest rates unchanged. However, investors watched the messaging from the committee which was more hawkish than expected. Shortly after the data came out, the pound rose to the highest level in five days. Later in the day, it started to go down. As of this writing, the pound is down 60 bps against the dollar.

This week, the dollar has been a winner, with the dollar index up by 2.04%. This index weighs the dollar against the major currencies like the pound, euro, and yen. The surge in the dollar is attributed to the perceived notion that inflation could peak up which will lead to higher interest rates.

The surge on the dollar has had a negative reaction to gold, which has shed more than 2.3% of its value. As I have written before, gold and the dollar have one of the best negative correlation in the financial market. In most cases, when the dollar rises, gold tends to fall as investors exit their gold positions. This is because many investors buy gold for its store of value and its use as a currency.

This week, there was no major news or data from the EU. The only significant information came from Germany where Angela Merkel and the opposition party made some progress on coalition building. The euro was off by 2%, which was attributed to the stronger dollar.

In New Zealand, the RBNZ met for the first time this year. In their decision on Wednesday, the committee left interest rates unchanged. They announced that they were pleased with the progress of the economy which is experiencing full employment. After the meeting, the Kiwi was little changed against the dollar.

In the cryptocurrencies industry, the main currencies experienced mixed returns. Early in the week, bitcoin reached the lowest point in months when it crossed the $5,000 level. After a senate meeting in the United States, the SEC and CFTC emphasized on the need to regulate the industry instead of implementing a full scale ban. This led the currencies to recover some of their losses.

A big disappointment this week was in crude oil. This week, the EIA reported that the United States had crossed more than 10 million barrels of oil every day. This led the commodity to fall from the three-year high to the current $60.

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Bank of England Review: Brace for Rate Hikes

Today, the Bank of England’s (BoE) Monetary Policy Committee (MPC) completed its two-day policy meeting.

In their meeting, the committee voted unanimously to leave the interest rates at the current level of 0.5%. The traders expected this.

What the traders didn’t expect was the committee’s deep statement. In the statement, they unanimously agreed that there were chances of interest rates rising earlier than expected.

As we wrote yesterday, traders were expecting three rate hikes this year with the initial one coming in May. In addition, as we mentioned, the current meeting came at an interesting period in the financial markets where volatility has risen and the global stock markets. Also, the meeting came at a time when there are uncertainties in the UK, crude oil are rising, and the inflation rate is above the target.

In the meeting, the committee unanimously agreed to set the inflation rate target of 2% and agreed to raise the growth forecasts of the UK economy. They also agreed to maintain the stock of the non-financial investment-grade corporate bond purchases at 10 billion pounds. They also voted to maintain the bond purchases at 435 billion pounds. This language was similar to that of their September meeting which came a month before the first hike.

In the highly anticipated letter to the chancellor, Carney said:

“Monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report.”

There are downsides to the MPC’s projections. First, the policy statement did not factor in the case for increasing oil prices. Today, the price of crude oil has soared to the highest level in three years, which could affect the country’s inflation. For the short term, Carney suggested that inflation could accelerate.

Also, the meeting did not factor in the risks presented by the Brexit. In their statement, the committee agreed to forecast the growth leaving all factors on Brexit constant.

Before the meeting, traders were waiting for the language of the statement. They wanted to hear whether any committee member would dissent and bring more hawkish views.

Traders were also waiting for the language Mark Carney would use in the press conference. In the conference, Carney talked about their thinking about the current UK economy, the uncertainties ahead, and the risks associated with Brexit.

On the economy, he said that the committee expected the UK economy to continue growing, with the unemployment rate slowing, and wages rising. On the uncertainties surrounding Brexit, he said that future forecasting was still possible even with these uncertainties.

After the interest rate decision, the pound, which was trading lower against the dollar, rose to the highest level since Monday. As of this writing, it is trading at the 1.3976 level.

Before the decision today, traders expected the bank to have 3 more rate hikes this year with one coming in May. Today’s statement suggested that the hike could come early and forecasted two more hikes in the next three years.

In the press conference, Carney made it clear that the rate hike program, which is two years behind the Fed, would be better for jobs and maintaining the inflation rate. He also maintained that the hike will be gradual and that the committee will use forward guidance to warn investors beforehand.

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Exciting Times as Volatility Returns

One of the major hallmarks of the Bull Run after the financial crisis was the lack of volatility. The implications of this lack of volatility has been dire. In the past few quarters, the trading revenues from big investment banks has fallen while others have been forced out.

As shown in the chart below, the Chicago Board’s volatility index peaked in 2008 when it soared to slightly below 100. After the peak, the index started declining. Last year, it spent all its time at the all-time low level.

Surprisingly, it was at these prices when global risks were rising. For example, the VIX had very little movements even when North Korea tested its missiles. It remained at historically low levels even when Trump was threatening fire and fury to North Korea. It also remained low at a time when hurricanes and fires engulfed a significant part of the United States.

All these were signs of complacency among investors. By being complacent, they believed that markets would always move up. They bought the dips whenever they happened.

For traders, the lack of volatility was a bit difficult because it was near possible to make trading decisions. How do you do comprehensive technical analysis when financial assets are only moving up?

The lack of volatility also attracted many traders to the risky world of cryptocurrencies. Most people who rushed to buy bitcoins and other cryptocurrencies knew nothing about them. All this pushed cryptocurrencies to almost a trillion dollar valuation before they started to crash in January.

To measure the volatility or fear in the financial markets, traders use the CBOE Volatility index, also known as VIX.

This index was started in 1993 by CBOE. At the time, the index was created to measure the expectations of the 30-day volatility implied by at-the-money S&P 100 index option prices. Later, the CBOE teamed with Goldman Sachs to update the VIX model. The updated VIX is based on the S&P 500. It estimates the expected volatility by averaging the weighted prices of the S&P 500 puts and calls over different strike prices.

Often, a rise in volatility leads to low stocks price as investors put their funds from the stocks.

For a while, an anonymous trader (or group of traders) started to bet that the era of low volatility was almost over. The trader(s) is commonly known in the financial markets as 50 Cent.

In March last year, CNBC reported the trader had continued to lose money by betting that volatility would peak up. At that time, he had lost more than $75 million. At the end of last year, the trader had lost more than $197 million.

50 Cent was not alone in this. Recently, another trader, known as VIX Elephant started accumulating VIX options. In December, he bought more than 2 million VIX contracts. He lost between $20 and $30 million that month.

Starting Friday, the volatility the elephant and 50-cent have bet on for years has returned. In the past five days, the VIX index has gained by more than 100%. The VIX has gained as investors have become increasingly worried about inflation, which could accelerate the rate of interest hikes. For traders, the return of volatility is welcome because it increases the swings of financial assets and thus increasing the potential for returns. Of course where there is volatility there is risk, something a fact that some trading on volatility may overlook.

Source:

http://fortune.com/2018/02/06/bitcoin-stock-volatility-vix-sec/

https://www.bloomberg.com/gadfly/articles/2018-02-06/regulators-let-wall-street-turn-vix-index-on-its-head

https://www.ft.com/content/4eeac462-0bb9-11e8-8eb7-42f857ea9f09

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BoE Preview: Will Carney Live to the Expectations?

BoE Preview: Will Carney Live to the Expectations? Today, the Bank of England’s (BOE) starts its two-day meeting, which will culminate in tomorrow’s decision on interest rates.

The meeting comes at an interesting period for the global financial markets. As you already know, global markets have seen significant swings in the past two days. These swings have wiped out most gains they had established in the first month.

The market turbulence started on Friday when the Bureau of Labor Statistics (BLS) announced the January’s jobs numbers, which beat expectations. After this release, global investors started thinking again about the chances of high inflation which would trigger an increased pace of rate increases.

Therefore, today’s meeting comes at a very different time compared to the previous meeting when everything seemed normal.

For this meeting, investors expect the bank to leave interest rates unchanged at 0.50%. Therefore, tomorrow, traders will not focus on the headline numbers.

Instead, they will focus on two things. First, they will focus on the letter from Governor Carney to Philip Hammond explaining the current rate of inflation. As you recall, the rate of inflation in December soared to 3.1%, triggering the letter-writing scenario. In January, the inflation rate dropped marginally to 3.0%.

Second, they will focus on the statement from the MPC. This statement will help them decide on the expected pace of rate increases.

In the recent past, despite the increasing market volatility, traders have placed a 50% chance that the BoE will hike interest rates in May. They have also priced in two more rate hikes, possibly in September and in December.

The problem for this is that sky-high expectations often lead to disappointments.  As you recall, in the November meeting, the BoE raised interest rates for the first time. While traders were pleased with the headline number, they were disappointed that the officials omitted language they had used previously saying the markets were underpricing the rate trajectory. At the end, the pound fell by more than 14 bps while the 10-year gilt yields fell by 8 bps. This was the biggest drop since the rate cut in 2016.

In other words, traders have become more hawkish which could complicate things for the BoE. Disappointing language could lead to another sell off in the pound amidst another one in the stocks market.

In addition, the decision comes at a time when the pound is doing well. In January, it climbed more than 50 bps against the dollar, which is its best start of the year on record. In addition, large money managers have increased their bullish bets on the currency to the highest level since 2014.

The meeting comes at a time when Brexit is a hanging cloud. Yesterday, a note released by the EU increased the complexity of the situation. According to the note, the EU will be at will to punish the United Kingdom, even by increasing tariffs and shutting down their market unless the UK made concessions. All these issues have made the political environment in the country very difficult for Theresa May who is struggling.

Sources:

https://www.bloomberg.com/news/articles/2017-09-13/boe-preview-pound-may-benefit-as-hawkish-tone-seen-in-rate-vote

http://gulftoday.ae/portal/e17668bb-aa5a-4fc3-8bd4-3e7696b720b1.aspx

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USD/JPY: More Downside

USD/JPY: More Downside. In the past year, the USD/JPY has been a boring pair. Unlike other currency pairs, this pair has traded in a narrow range with a high of 115.29 and a low of 107.67.

As shown below, the pair has had a near-perfect horizontal support and resistance.

Today, the pair erased the gains made in the past five days when the pair moved from a low of 108.39 to a high of 110.48. The pair is currently trading at 108.93.

The decline is associated with the current global sell off in equities, which started in the United States on Friday.

To predict the future movements of the pair, I used the 6-month chart, which shows the downward pressure may take the pair downwards to the 107.32 level.

An alternate scenario is where the pair bounces back after establishing a double bottom. This could see the pair touch the 108.8 level.

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