Markets higher as earnings season gets underway

Earnings season eyed as trade war fears remain

We’re seeing some risk appetite return on Friday even as concerns about trade remain front and centre and shows no signs of improving.

European equity markets are trading in the green on Friday, taking the lead from the US session on Thursday where tech stocks drove a rally that saw the NASDAQ hit a record high. With earnings season getting underway, investors will be looking for reasons to be more optimistic having spent months reading about the risks that a trade war poses to the economy.

JP Morgan, Citigroup and Wells Fargo will kick things off today and over the coming weeks, investors will be paying close attention not just to the results but also references to trade tariffs and the impact they are expected to have on future results, particularly those that have already been targeted in counter-measures taken or proposed against the US.

DAX steady as investors search for cues

Sterling slips as Trump warns of risks to US/UK trade deal

Trump has very much been in the spotlight this week, attending the NATO summit in Brussels before heading over to the UK to meet Prime Minister Theresa May. As ever, Trump was not afraid to express his views on the UK and Brexit ahead of the visit, warning that a trade deal with the US would not be possible under the model that May is seeking with the European Union, while also expressing his belief that Boris Johnson would make a good PM. This appears to have weighed on the pound in trade on Friday given the complications it could cause May and her team.

None of this will go down well with May – who has previously pushed strongly for this visit despite much protest – and comes at a terrible time for her but as Trump well knows, she is in a very weak position right now and is unlikely to fight back and, more importantly, he wants a Brexit that best suits the US. Whether Trump’s comments give more voice to dissenters among Brexiteers is yet to be seen but it certainly doesn’t help the PM as a trade deal with the US has long been touted as one of the benefits of leaving the EU.

First signs of tariffs impact in China’s June trade numbers

Chinese trade surplus increases as Trump plans more tariffs

Chinese trade data released overnight may be used as a source for Trump’s next attack on the world’s second largest economy, with exports having soared once again – rising 11.3% – increasing the surplus the country has with the US to $41.61 billion in June. While the main reason for such a spike is likely to be exporters front loading sales ahead of the tariffs being implemented, it’s likely that a stronger US economy and weaker yuan is also playing a role.

I expect this will be used as another example of the bad trade policies that Trump has repeatedly references but been unable to so far influence. Trump is attempting to force them back to the table with threats of another $200 billion in tariffs, something that has so far only been met with retaliation from China and others.

Economic Calendar

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

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.

Live FX Market Analysis – 10 July 2018 (Video)

In this week’s webinar, Senior Market Analyst Craig Erlam discussed the latest Brexit developments as two members of her team resign after an apparently united and productive meeting on Friday. He also talks Trump, after the latest imposition of trade tariffs and ahead of his trip to the UK and the NATO summit, and previews the week ahead.

Craig also gives his live analysis on EURUSD (12:20), GBPUSD (15:03), EURGBP (17:50), AUDUSD (19:35), USDCAD (24:12), GBPCAD (26:19), NZDUSD (28:31), USDJPY (30:22), GBPJPY (32:25) and EURJPY (34:52).

GBP/USD – British pound steady on modest GDP growth

USD/JPY – Japanese yen dips to 7-week low, inflation reports next

Commodities Weekly: Gold saved by dollar’s retracement

China Seeks Closer Ties With Europe After US Tariffs

China is looking to the European Union as its new best friend amid trade frictions with the United States.

Prime Minister Li Keqiang met eastern and central European leaders in Sofia, Bulgaria, on Saturday, and vowed to open up China’s economy to the wider world. Keqiang is also meeting German Chancellor Angela Merkel on Monday and next week, in Beijing, he will host an EU-China summit.

“Opening up has been a key driver of China’s reform agenda, so we will continue to open wider to the world, including widening market access for foreign investors,” he said. “Countries are welcome to board China’s economic express to share opportunities of China’s development.”

CNBC

Too Many Rate Hikes Could Harm Economy

Central bankers need to be careful not to increase interest rates too quickly this year because that could slow the economy too much, St. Louis Federal Reserve President James Bullard told CNBC on Thursday.Wall Street expects the Fed to raise rates at next month’s meeting, in the first of what’s seen as at least three total hikes in 2018. The Fed increased the cost of borrowing money three times last year to the current range of 1.25 to 1.50 percent.Hiking rates by a total of 1 percent this year, which would signal four increases of the typical 0.25 percent, would be “priced for perfection,” Bullard said.

Source: Fed’s Bullard: Too many hikes this year could slow economy too much – CNBC

Futures Flat After Hawkish Fed Minutes

Dollar maintains its firmer tone

BoE Hearing and Fed Minutes in Focus

US Futures Continue to Pare Last Week’s Gains

US equity markets are expected to open in the red again on Wednesday, tracking losses in Europe as stocks continue to pare last week’s strong rebound.

It’s been a relatively quiet start to the morning and the week, with the bank holiday in the US and Canada contributing to this. The European session has been dominated by economic data releases so far and that’s likely to continue, with flash manufacturing and services data due from the US shortly after the open. It’s the FOMC minutes that will be released later in the day though that will likely be the standout event from a US perspective, particularly as the statement caused quite a stir at the end of January.

US Yield Curve Now (Orange) and on 29 January 2018 (Purple)

Source – Thomson Reuters Eikon

The sell-off in the markets may have come a couple of days later but part of the initial trigger was a more hawkish sounding Fed, with the jobs report then being the straw that broke the camel’s back two days later. While the minutes may not generate quite the same response, traders will likely monitor what they say very closely for signs that policy makers are now leaning more towards three to four rate hikes this year, rather than two or three.

EUR/USD – Euro Ticks Lower as German Manufacturing PMI Softens

GBP Slips as Unemployment Ticks Higher

Sterling is coming under a bit of pressure this morning after UK jobs data for the three months to December showed wages still growing at a moderate pace and unemployment ticking up to 4.4%. While a higher reading on wage growth may have triggered a more bullish response from the pound, the data turned out to be quite insignificant as it’s unlikely to change the views at the Bank of England.

UK Unemployment Rate

Wages have been slowly ticking higher recently and they could continue to do so as workers demand more due to the higher cost of living and a tight labour market. The move higher in the unemployment rate won’t be a concern at this moment with it potentially being a one-off move and still very low. As long as inflation remains at upper range of what is deemed acceptable, the central bank seems intent on raising rates at least once more this year, despite the temporary factors driving it and economic uncertainty that lies ahead.

Yield-o-Mania

BoE Inflation Report Hearing Eyed as Markets Price in Rate Hikes

Members of the Monetary Policy Committee including Governor Mark Carney will appear before the Treasury Select Committee later on today, during which they will be questioned on their latest inflation report forecasts and expectations for interest rates going forward. While it’s always interesting to get the views of policy makers and the pound will likely be volatile throughout, I wonder how much of what they have to say will now already be priced in, with at least one rate hike now expected this year.

GBPUSD Daily Chart

OANDA fxTrade Advanced Charting Platform

With that in mind and with Brexit transition negotiations likely to dominate the next month, we could see the pound lose some of the momentum that’s been gathering over the last six months or so. It’s recent failed to make new highs on two occasions against the dollar and it’s also slipping against the yen in a possible sign that traders are beginning to lock in profits ahead of what could be a difficult month.

Economic Calendar

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

EUR/USD – Is the Rally Running Out of Steam?

Are We Looking at an Overcrowded Market?

It’s difficult to find anyone at the moment that isn’t bullish on this pair in the long term and under the current circumstances, they may have a point. However, these markets don’t move in a straight line (even bitcoin as the last couple of months has shown us) and corrections along the way are both normal and healthy.

So when I ask if the rally is running out of steam, I’m not necessarily calling a top in the pair and in this case, I’m certainly not. What I’m suggesting is that the recent run higher – and once again it’s been a good one – may be looking a little overstretched and a pull-back could be on the cards.

The pair first started to look a little overbought earlier this month when it failed to make a new high and even appeared to have formed a small double top, but as we saw, the dollar bashing wasn’t quite over yet and despite breaking the neckline, we didn’t see much of a pull-back before it was once again tearing higher.

EURUSD Daily Chart

OANDA fxTrade Advanced Charting Platform

Once again though, we find ourselves testing the 1.25 region and we appear to be finding a lot of resistance. The two notable differences on this occasion though is that we did make a new high and we did not have the momentum indicators – MACD and stochastic – confirming the moves. This has left us with a negative divergence between price and momentum that is red flag for the bulls.

USD/JPY – Yen Edges Lower in Thin Holiday Trade

It’s worth noting at this point that a divergence in itself is not a sell signal, nor does it indicate that a pair won’t make a new high. It quite easily could, although if it does so with less momentum again, this would be a second red flag and further suggest that a correction may be coming. If a new high is made on rising momentum it would, however, suggest that bulls have found further reason to be bullish and negate the previous red flag warning.

With the pair now showing a divergence though and Friday’s daily candle looking rather bearish, having rallied above Thursday’s high and closed well below its low, I wonder whether the downside is at least going to be tested.

The first interesting level for me is 1.2320, this was a resistance level in mid-January that became support shortly after and then the neckline of the double top that never fully completed it’s corrective projection. While we broke above here quite easily on the way back up, it could prove more tricky this time if indeed the market is still bullish. A break below may be an early correction confirmation signal.

Gold Trading Sideways in Thin Holiday Trade

The more interesting level is 1.22 though, with it being roughly the area where the last two dips found support. A failure to do so on this occasion would be a bearish signal and could create an imperfect double top with the neckline here and the peaks being 25 January and 16 February highs. It would also signal an arguably overdue correction in the dollar with the last having been a little brief considering the move that preceeded it.

Given the size of the double top – roughly 1.25 to 1.22 – this could give us a possible price projection of 300 pips, creating possible support around 1.19. This would bring us back to a prior area of support and resistance and represent a 61.8% retracement from the November lows to the recent highs at which point traders longer term bullish appetite could be tested.

US Indices on Course For Full House

Futures Point to Full Week of Gains After Sharp Correction

US equity markets could end the week with a full house of gains as long as indices manage to hold onto the small gains being seen in futures ahead of the open.

This would also bring an end to two shocking weeks for equity markets that saw more than 10% quickly wiped off indices, the first time we’ve seen such a move since the start of 2016. While the prospect of higher yields and interest rates, combined with a surge in volatility, have been blamed for the decline, the rebound we’re now seeing reaffirms the belief that fundamentals are still strong which should prevent the situation deteriorating further.

There are a few economic releases that traders will likely be aware of as the week draws to a close. The UoM consumer sentiment reading is always an interesting release, given the importance of the consumer to the US economy. Building permits and housing starts will also be released ahead of the open on Friday. The bulk of companies may have already reporting numbers for the fourth quarter but there are still some more to come today, with 13 due to release earnings including Coca Cola and Kraft Heinz.

US Bond Auction TIPS the dollar

Sterling Resilient After Poor Retail Sales Figures

UK retail sales data for January was once again disappointing, providing further evidence that the post-Brexit squeeze on consumers is heaving an economic impact. While this could be partially reversed as sterling continues to rebound off its lows and wage growth picks up to offset higher living costs – assuming it does – we’re seeing few signs that the squeeze is easing and that’s being reflected in the spending figures.

The pound has actually been quite resilient to the data in the aftermath of the release. While it has since declined against the dollar, this has primarily been driven by the bounce in the greenback. The consumer squeeze and economic implications of it are already known and priced in, traders are far more concerned with wages and inflation and the impact this will have on interest rates, which makes the jobs report next Wednesday far more important.

GBPUSD Daily Chart

OANDA fxTrade Advanced Charting Platform

Bitcoin Struggling to Overcome Psychological Barrier

Bitcoin is once again threatening the psychological $10,000 barrier but as was the case on Thursday, it’s struggling to maintain its push above and once again finds itself falling slightly short. While a break above $10,000 should be no more significant than any other, it would appear to represent an end to the plunge in bitcoin that saw it fall around 70% from its mid-December highs and for this reason, it’s proving a difficult hurdle to overcome.

Bitcoin (CME) Daily Chart

Source – Thomson Reuters Eikon

Those expecting a similar response to breaking above $10,000 that we saw last time – a near 100% increase in less than three weeks – may also be disappointed. We’re not seeing the kind of euphoria that accompanied the break at the end of November when the speculative fomo trade was contributing greatly to its meteoric rise. The crash of the last couple of months has made this less of a one-way move and those that got burned may not be so keen to jump back in.

DAX Gains Ground as Dollar Under Pressure

All of this is assuming that bitcoin will break above $10,000 which is far from certain when you consider the gradual – by its own standard – bounce from its lows. This could quite easily be another corrective move and the lows may be tested once again. The absence of a constant negative news flow is helping but whether this can be sustained is debatable.

Economic Calendar

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

Fundamentals Remain Positive Despite Sell-Off

Despite the recent fluctuations and concern about major corrections in global equity markets, Craig Erlam, senior market analyst at Oanda, says fundamentals, like corporate earnings, remain positive.

CAC Climbs on Strong German, Eurozone GDP Reports

Futures Higher But Market Remains Vulnerable

Will it be a Valentines Day Massacre for the Dollar?

Futures Higher But Market Remains Vulnerable

Inflation and Retail Sales Data Eyed Markets Gradually Stabilize

US futures are pointing to a stronger open on Wednesday, building on the small gains posted at the start of the week and offering some hope that stability is slowly returning to the markets.

Given the volatility that we’ve seen over the last week or so, which was initially attributed to higher interest rate expectations following the January jobs report, traders will be closely monitoring the US inflation and retail sales releases today. Both numbers will be released shortly before the open on Wall Street and could be the trigger for further volatility, especially if the CPI exceeds expectations.

While the CPI number isn’t the Federal Reserve’s preferred inflation measure – which could impact how traders respond to it – it is released a couple of weeks earlier than the core PCE price index and so is seen as being indicative of inflationary trends. This means markets can be sensitive to the release, particularly during times of increases sensitivity, like we’re seeing at the moment.

DAX Gains Ground on German, Eurozone Growth

Markets Still Appear Vulnerable to Downside Shocks

Volatility has remained since the initial spike last Monday although the VIX has more than halves since then, so things are calming down a little. That said, investors still appear jittery and equity markets remain some way off their highs. Yields are back at last Monday’s levels and have pushed above them in recent days so this blip hasn’t had any lasting impact on medium-term interest rate expectations, although that could change if we see further episodes.

The dollar has been one of the beneficiaries of the recent volatility, with the increased US interest rate expectations lifting the greenback off its lows after months of significant downside pressure. The dollar index rose briefly above 90 late last week before some profit taking set in and while it remains vulnerable to further selling, I wonder whether we’re going to see more of a bounce in the near-term, particularly if we get some decent numbers today.

US Dollar Index (Reuters) Daily Chart

Source – Thomson Reuters Eikon

Will it be a Valentines Day Massacre for the Dollar?

Bitcoin Making Steady Gains But More Pain May Lie Ahead

Bitcoin has been making steady improvements over the last week, having fallen below $6,000 briefly, roughly 70% from its high reached in December. While cryptocurrency enthusiasts will be encouraged by the period of stability in price and gradual gains during that time, I think it still looks vulnerable to near-term pain before a bottom can be claimed.

I think $9,000 to $10,000 will pose some real challenges for bitcoin but if it can overcome these levels, it will be a very encouraging sign for those bullish on the cryptocurrency. Negative news flow has been a major test for bitcoin so far this year and if that keeps coming, I struggle to see how it can gain any real upside momentum.

Bitcoin (CME) Daily Chart

Economic Calendar

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