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I. Market focus
Risk aversion has increased significantly in the global financial markets. The U.S. stock indexes fell more than 2 percent to lowest levels in more than a year. The sell-off was triggered by weaker-than-expected macroeconomic reports.
In particular, the National Association of Homebuilders (NAHB) released the report, which unexpectedly revealed a further deterioration in builder confidence in December. The report said the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell to 56 points in December from 60 points in November. Economists had expected the index to rise to 61 points. That was the lowest HMI reading since May 2015. Data on manufacturing activity in the New York region from New York Federal Reserve also were below expectations. Further market sentiment will depend on the outcome of the Fed meeting, which will end tomorrow. According to economists’ forecasts, the Federal Reserve will hike the target range for the federal funds rate to 2.25 to 2.50 percent at its last meeting in 2018. However, more important than the actual rate increase is the regulator’s outlook for the coming years. At its previous expanded meeting, the Fed signaled three rate hikes in 2019. Now, it seems highly likely that the Bank will pare its anticipated rate increases for next year to two.
The New Zealand dollar demonstrated the highest volatility during the Asian session, as ANZ’s report on business confidence in New Zealand caused a strong increase in the currency. The ANZ business confidence index improved significantly in December, unexpectedly reaching an eight-month high. By the beginning of the European session, the NZD/USD pair has risen to the range of a significant resistance area. In the absence of new drivers, it is unlikely that the morning growth will continue.
The focus of market participants continues to be on the Brexit developments. The British Prime Minister Theresa May announced yesterday that the postponed vote on UK’s divorce agreement with the European Union (EU) will be held the week of January 14. Initially, the vote was scheduled for December 11, but it was delayed as the withdrawal agreement did not find support in parliament. In response to the announcement of a new voting date, the leader of the main opposition Labour Party, Jeremy Corbyn, submitted a motion of no-confidence in the prime minister over her delays. Last week, Theresa May won a confidence vote in her leadership of her party. No date was immediately set for the confidence vote.
The main macroeconomic data on Tuesday will be the U.S. statistics on the housing market (housing starts and building permits), which will be published at 13:30 GMT. Today's data are likely to confirm the further weakening of the U.S. housing market, putting additional pressure on market sentiment.
II. The market highlights are:
The report from the New York Federal Reserve showed on Monday that manufacturing activity in the New York region expanded in December at a slower pace than in November. According to the survey, NY Fed Empire State manufacturing index stood at 10.9 this month compared to an unrevised 23.3 in November. That was the lowest reading since May 2017. Economists had expected the index to decrease to 20.6. Anything below zero signals contraction. The new orders index slipped six points to 14.5, and the shipments index dropped seven points to 21.0. Meanwhile, the employment index rose twelve points to 26.1, indicating that employment grew strongly, and hours worked increased modestly. With regard to inflation, the prices paid index, while still elevated, moved down five points, and the prices received index held steady.
The National Association of Homebuilders (NAHB) announced on Monday its housing market index (HMI) fell four points to 56 in December. That was the lowest reading since May 2015. Economists forecast the HMI to increase to 61. A reading over 50 indicates more builders view conditions as good than poor. All three HMI components were lower this month. The current sales measure declined six points to 61 in early December. The index charting expectations in the next six months decreased dropped four points to 61. Meanwhile, the indicator measuring buyer traffic registered a two-point fall to 43. NAHB Chairman Randy Noel noted: “We are hearing from builders that consumer demand exists, but that customers are hesitating to make a purchase because of rising home costs. However, recent declines in mortgage interest rates should help move the market forward in early 2019.” Meanwhile, NAHB Chief Economist Robert Dietz said: “The fact that builder confidence dropped significantly in areas of the country with high home prices shows how the growing housing affordability crisis is hurting the market. This housing slowdown is an early indicator of economic softening, and it is important that builders manage supply-side costs to keep home prices competitive for buyers at different price points.”
The Australian and New Zealand Banking Group (ANZ) reported on Tuesday its business confidence index in New Zealand improved to -24.1 in December from -37.1 the previous month. That marked the least decline in 8 months. According to the report, a net 24 percent of respondents reporting they expect general business conditions to deteriorate in the year ahead. According to the report, firms’ views of their own activity lifted 6 points to a net 14 percent of firms expecting an improvement. Expected profitability and employment, investment and export intentions rose, and perceived availability of credit climbed sharply. The construction sector continued to be the most optimistic at +22 percent. At the same time, the retail sector remained the least positive (1.9 percent).
The Reserve Bank of Australia (RBA) published on Tuesday the minutes from its December 4 policy meeting, at which the benchmark cash rate was expectedly left unchanged at a record-low 1.5 percent. The minutes showed the Reserve Bank board members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease. However, they still believed there was no strong case for a near-term adjustment in monetary policy. “The Australian dollar remained within its range of recent years on a trade-weighted basis”, while “GDP growth was expected to remain above potential over this year and next”, the minutes said. Members assessed holding the stance of monetary policy unchanged to be a source of stability and confidence for the RBA, while low income growth, high debt levels and declining house prices were all called out as “downside risks”.
III. Market Situation
The currency pair EUR/USD fell slightly due to partial profit-taking after the previous day’s rally and a new wave of strengthening of the U.S. currency. Investors were also adjusting their positions ahead of the release of the data on the U.S. housing market. It is expected that housing starts fell to 1.225 million in November, following October’s 1.5 percent rise to a 1.228 million unit pace. All of the previous month’s increase came from the volatile multifamily sector, which has seen some renewed strength in recent months as apartment demand has proved to be much more resilient than had been expected this year. Single-family starts dropped 1.8 percent in October, following a 1.0 percent decline in the prior month. Sales have slowed in recent months and the November NAHB Wells Fargo Homebuilders Index tumbled eight points during the month, with expectations for future sales fell 10 points. New home inventories have also risen, which is expected to cause builders to hold off on speculative projects. Apartment starts were also likely negatively impacted by fires out West and heavy rain across much of the South. Resistance level - $1.1400 (high of December 11). Support level - $1.1267 (low of November 28).
The currency pair GBP/USD consolidated near the opening level, due to the lack of new catalysts. The pair remained under pressure due to the Brexit-related uncertainty. With empty economic calendar ahead, investors will focus today on the dynamics of the U.S. currency and the general market sentiment toward risky assets, as well as news on Brexit. Market participants will also be preparing for a meeting of the Bank of England (BoE), set to be held on Thursday. Analysts expect that all 9 members of the Monetary Policy Committee (MPC) will vote to keep the interest rate at 0.75 percent since the uncertainty around Brexit requires a “wait and see” approach. Resistance level - $1.2686 (high of December 13). Support level - $1.2480 (low of December 11 and 12).
The currency pair AUD/USD rose moderately at the beginning of the session, but then lost more than half of the gains amid the strengthening of the U.S. dollar. Market participants also digested the minutes from the latest Reserve Bank of Australia’s (RBA) policy meeting, which revealed its board members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease. However, they still believed there was no strong case for a near-term adjustment in monetary policy. “The Australian dollar remained within its range of recent years on a trade-weighted basis”, while “GDP growth was expected to remain above potential over this year and next”, the minutes said. Members assessed holding the stance of monetary policy unchanged to be a source of stability and confidence for the RBA, while low income growth, high debt levels and declining house prices were all called out as “downside risks”. Resistance level - AUD0.7245 (high of December 13). Support level - AUD0.7151 (low of November 14).
The currency pair USD/JPY continued falling, reaching its low of December 10, due to the flight of investors from risks and increased demand for the yen, which is considered a safe-haven asset. Investors also adjusted their positions ahead of the Fed’s meeting and statements by Fed Chairman Powell on Wednesday. The U.S. regulator is expected to raise rates and only marginally adjust its economic forecasts. Despite this, the Fed policymakers may remove their claims of "further gradual increase" in interest rates and take a wait-and-see approach to future policy decisions. Most likely, the forecast of the Fed management will assume two more rate increases in 2019, rather than three, as expected in September. Resistance level - Y113.70 (high of December 13). Support level - Y112.23 (low of December 6 and 10).
U.S. stock indexes closed sharply lower on Monday, as softening economic data fueled concerns about the growth outlook ahead of an anticipated decision from the Federal Reserve later this week on the path of U.S. interest-rate hikes. The report from the New York Federal Reserve showed that manufacturing activity in the New York region expanded in December at a slower pace than in November. According to the survey, NY Fed Empire State manufacturing index stood at 10.9 this month compared to an unrevised 23.3 in November. That was the lowest reading since May 2017. Economists had expected the index to decrease to 20.6. Meanwhile, the National Association of Homebuilders (NAHB) announced on Monday its housing market index (HMI) fell four points to 56 in December. That was the lowest reading since May 2015. Economists forecast the HMI to increase to 61. A reading over 50 indicates more builders view conditions as good than poor.
Asian stock indexes closed lower on Tuesday, following another tumble on Wall Street overnight. Japan’s Nikkei underperformed, as the yen firmed against the U.S. dollar, putting pressure on the Japanese large export-oriented companies. Investors also remained cautious ahead of the U.S. Federal Reserve’s rate decision on Wednesday.
European stock indexes are expected to trade lower in the morning trading session.
Yields of US 10-year notes hold at 2.85% (-1 basis points)
Yields of German 10-year bonds hold at 0.26% (0 basis points)
Yields of UK 10-year gilts hold at 1.13% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in February settled at $49.48 (-1.43%). The crude oil prices fell sharply, continuing yesterday's trend. The pressure on prices was exerted by fears of an oversupply amid rising inventories and oil production in the U.S. Investors were also preparing for the release of the data on oil inventories in the U.S. Today, the American Petroleum Institute (API) will publish its weekly data on the U.S. crude oil stockpiles. Tomorrow, the focus will be on official report on crude inventories in the U.S. from the U.S. Energy Information Administration (EIA).
Gold traded at $1,246.10 (+0.02%). Gold prices consolidated near the opening level, as investors were cautious ahead of the Fed meeting. It is expected that the Fed will hike the target range for the federal funds rate to 2.25 to 2.50 percent at its December meeting but focus of market participants will be on hints on the regulator’s future path.
IV. The most important scheduled events (time GMT 0)
IFO - Expectations
IFO - Current Assessment
IFO - Business Climate
Westpac Consumer Sentiment
Trade Balance Total
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