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Market Wrap (Nov 1st, 2017)
Fed, ADP data & FB earnings in focus
By Ipek Ozkardeskaya, Senior Market Analyst LCG
Nikkei rallied (+1.86%) in Tokyo, as Sony soared by 11.44% after announcing a record profit forecast.
European markets took over a bullish market from Asian traders. The FTSE 100 (+0.43%) opened upbeat, as mining stocks (+1.01%) led gains in London. Energy stocks (+0.50%) stretch higher on rising oil prices.
Brent crude advanced to $61.38/barrel, WTI crude traded at $54.95/barrel. Bulls and bears will be competing by $55.00/55.67 (January high). Lower US oil inventories could play in favour of the buy-side. According to the API data released on Tuesday, the US stockpiles declined by 5.09 million barrels last week. The more official EIA data is due today. Analysts look for a 1.5-million-barrel contraction, versus 900K increase a week earlier. We also observe that the sentiment is positive before OPEC’s World Oil Outlook due on November 7.
Cable advanced past 1.33 after EU’s Barnier called for speeding up the Brexit talks. There are signs of possible compromise regarding the exit fee, which could help the UK/EU policymakers to move forward with the negotiations.
The Bank of England (BoE) is expected to raise the interest rate on Thursday’s monetary policy meeting. A 25 basis-point hike is widely priced in by the market, shifting the focus to the accompanying statement. If the BoE opts for a dovish hike (one-off action and a dovish statement), the GBP-bulls could be disappointed, take their profit and walk away. Therefore, a rate hike alone is not a done deal for the success of GBP-long positions this week. Investors demand a commitment for more action if the 25 bp hike remains insufficient to cool down the inflationary pressures in the UK.
Euro under the pressure of declining EZ yields
The euro is under the pressure of lower Eurozone yields and there is not much reason to encourage capital outflows from the Eurozone’s sovereign market after the European Central Bank (ECB) committed to continue buying 30 billion euro worth of bonds every month until September 2018 and longer if needed. The 10-year German bund yield slipped below its 200-day moving average, which makes the currency vulnerable following the readjustment on ECB expectations. If the US dollar picks up more momentum, the EURUSD could extend weakness to test 1.1509 (major 38.2% retracement on April – September rise). A negative breakout below this level should signal a bearish mid-term reversal.
The EURGBP fell off the cliff; the sell-off accelerated after the 200-day moving average (0.8793) was cleared. Whether the pound would consolidate gains against the single currency will mostly depend on the reaction to the BoE’s decision.
Fed decision and US jobs dominate the agenda in the US
The US dollar is strong after the Manhattan attack. The Federal Reserve (Fed) decision is due today and the Fed is expected to maintain the rates unchanged at this week’s meeting. The possibility of a December rate hike should be kept on the table based on strong 3Q corporate earnings, in line with the better-than-expected US growth over the same quarter.
President Donald Trump will likely announce the new Chair Fed on Thursday and the US jobs data will kick in on Friday. The October non-farm payrolls are expected to have surged by 313K, versus -33K printed a month earlier.
The ADP employment data is due today. Analysts’ expectations point at 300K new private jobs in October versus 135K released last month. Strong data could help keeping the USD appetite tight, as investors wait in lie for much-expected details on fiscal reforms.
US equity futures up, Facebook in focus
The US equity futures trend higher. Facebook will release earnings today. FB shares closed above the $180 level on Tuesday. According to the latest Bloomberg survey, 91.49% of investors are positively skewed, 4.26% remain on hold with a 12-month target price of $200.76.
What does the USDJPY need to reach the 115 mark?
The USDJPY trades within the mid and upper Bollinger bands on the back of a clear divergence between the Fed and the Bank of Japan policy outlooks. The first resistance is eyed at 114.45 (October resistance). The macro conditions are encouraging for a further rise to 115.00 mark, yet the pair needs the support of US yields to get there. The US 10-year yield slipped below the 2.40%, down from 2.48% tested on Friday. A rebound above the 2.50% level would increase the USDJPY’s chances to take hold of the 115 level.