Market panorama. 23 May 2018

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I. Market focus:

Wednesday’s session in the foreign exchange market began with the strengthening of the U.S. dollar. The U.S. currency was supported by the reports that the White House intends to offer a new tax cut in the United States. The U.S. President Donald Trump announced about this, but did not provide any details, except that new fiscal incentive will be submitted “sometime prior to November.” In December 2017, the U.S. Senate approved, and the president signed a bill on tax reform, one of the goals of which was to cut the corporate income tax rate. This reform will reduce the U.S. federal tax revenue by $1.5 trillion over the next 10 years, which will be a price for a boost to the U.S. economic growth.

Unlike the dollar, the stock market reaction to reports of a planned new tax cut was neutral. U.S. stock-index futures remained in negative territory in the morning after a decline in the previous session. The lack of a positive response of stock market participants reflects doubts about the effectiveness of the tax reform, as the real acceleration of growth rates is likely to be significantly lower than the Trump administration forecast.

The publication of the UK’s inflation data and the minutes of the Fed’s latest meeting will be the main events of today's session. Inflation indicators of Great Britain will be published at 08:30 GMT. Inflationary pressure in the UK has been weakening this year (the growth rate of the consumer price index slowed from +3.1% y/y in late 2017 to +2.5% y/y in March). But this trend is seen to change in April, and in the near future, we will see a stabilization of price growth at the level of the previous month.

The minutes of the last meeting of the Fed will be released at 18:00 GMT. In the document, particular attention should be paid to the comments on inflation in the United States.

Other important events will include the comments of the RBA governor (08:00 GMT), the U.S. weekly data on crude oil inventories (14:30 GMT) and the New Zealand trade balance report (22:45 GMT).


II. The market highlights are:

  • The preliminary data from IHS Markit revealed on Wednesday that growth of Japan’s manufacturing sector unexpectedly slowed during May. The Nikkei Flash Manufacturing Purchasing Managers' Index (PMI) fell to 52.5 this month from 53.3 in April. That marked the weakest expansion in manufacturing growth since August 2017. A reading above 50 signals an expansion in activity, while a reading below this level signals a contraction. According to the report, output, new order and employment all rose at a slower pace than the previous month. At the same time, input prices soared at the fastest pace since January 2014, and the growth of the output prices also accelerated. Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said: “Despite the promising upturn in April data, May’s flash release erred on the side of disappointment as the headline figure signaled the weakest expansion in manufacturing growth in nine months.”

  • The Conference Board reported its Leading Economic Index (LEI) for China increased 1.5 percent in April to 129.8 (2016=100), while its Coincident Economic Index (CEI) for China edged down 0.1 percent to 111.6 (2016=100).

  • The Australian Bureau of Statistics (ABS) report showed on Wednesday that the value of total construction work done rose 0.2 percent q-o-q in the first quarter of 2018 to AUD51.21 bln in seasonally adjusted terms, following a revised 18.3 percent q-o-q drop in the fourth quarter of 2017 (originally a 19.4 percent q-o-q decline). Economists had forecast a 1.1 percent q-o-q increase. In y-o-y terms, the total construction work done was up 5.0 percent. According to the report, the quarterly advance was driven by gains in engineering work done (+1.5 percent q-o-q) and residential work done (+0.4 percent q-o-q). At the same time, the value of residential work done (-2.6 percent q-o-q) and building work done (-0.7 percent q-o-q) reduced.


III. Market Situation
Currency Market
The currency pair EUR/USD fell slightly, refreshing yesterday's low, due to a resumed strengthening of the U.S. currency in response to reports that the White House intends to offer a new tax cut in the United States. Investors are also awaiting data on the Eurozone’s PMIs, the report on the U.S. housing market, and the minutes from the latest meeting of the FOMC. Market participants concern about the slowdown in the economic activity in the Eurozone during the first quarter of the year, so they will pay attention to any hints that this slowdown was postponed to the second quarter. The May manufacturing PMI will be helpful for a better understanding of where the Eurozone’s economy is heading. According to economists’ forecasts,  the index fell to 56.0 in May from 56.2 in April. As for the U.S. housing market data, economists expect that the new home sales fell to 0.679 million in April from 0.694 million in March. Regarding the minutes of the Fed meeting, experts note that if the regulator’s forecast for the economy is weaker than expected, the dollar's growth may stall. In addition, market participants will scrutinize the minutes for hints about further rate hikes. Resistance level - $1.1997 (high of May 14). Support level - $1.1717 (low of May 21).

The currency pair GBP/USD traded moderately lower, near the low of 2018, weighed down by the broad strengthening of the U.S. dollar, as well as the adjustments of positions by investors ahead of the release of the UK’s consumer price index (CPI). After reaching 3.1 percent in November of 2017 on an annual basis, the inflation rate somewhat weakened, finishing March at 2.5 percent. Economists forecast that the growth of the CPI in April markedly accelerated on monthly basis, but remained unchanged in y-o-y terms. Later this week, the UK will publish a report on its retail sales for April, as well as a revised GDP estimate for the first quarter, which will help to identify the causes of the recent slowdown in country’s economic activity. Resistance level - $1.3616 (high of May 10). Support level - $1.3331 (low of December 21, 2017).

The currency pair AUD/USD showed a significant decline, due to renewed risk aversion after the U.S. President Trump voiced dissatisfaction with the trade negotiations with China and suggested that his meeting with the leader of the DPRK might be delayed. Weaker-than-anticipated data on Australia’s construction work done exerted some additional pressure on the pair's performance. The Australian Bureau of Statistics (ABS) report revealed that the value of total construction work done rose 0.2 percent q-o-q in the first quarter of 2018 to AUD51.21 bln in seasonally adjusted terms, following a revised 18.3 percent q-o-q drop in the fourth quarter of 2017 (originally a 19.4 percent q-o-q decline). Economists had forecast a 1.1 percent q-o-q increase. In y-o-y terms, the total construction work done was up 5.0 percent. According to the report, the quarterly advance was driven by gains in engineering work done (+1.5 percent q-o-q) and residential work done (+0.4 percent q-o-q). At the same time, the value of residential work done (-2.6 percent q-o-q) and building work done (-0.7 percent q-o-q) reduced. Resistance level - AUD0.7620 (high of April 24). Support level - AUD0.7488 (low of May 18).

The currency pair USD/JPY fell sharply, refreshing its low of May 18. The yen, which is considered a safe haven asset, strengthened on renewed concerns over U.S.-China trade talks together with the possibility that the U.S. President Donald Trump’s meeting with North Korea’s leader Kim Jong Un, might be delayed. While meeting with South Korean president Moon Jae-in at the White House, Trump said there is a “very substantial chance” the talks could be postponed from the scheduled date of June 12 if the countries failed to come to terms on various issues. Investors also digested the preliminary data from IHS Markit, which revealed that growth of Japan’s manufacturing sector unexpectedly slowed during May. The Nikkei Flash Manufacturing Purchasing Managers' Index (PMI) fell to 52.5 this month from 53.3 in April. That marked the weakest expansion in manufacturing growth since August 2017. A reading above 50 signals an expansion in activity, while a reading below this level signals a contraction. According to the report, output, new order and employment all rose at a slower pace than the previous month. At the same time, input prices soared at the fastest pace since January 2014, and the growth of the output prices also accelerated. Resistance level - Y111.39 (high of May 21). Support level - Y110.03 (low of May 16).


Stock Market

Index

Value

Change

S&P

2,724.44

-0.31%

Dow

24,834.41

-0.72%

NASDAQ

7,378.46

-0.21%

Nikkei

22,689.74

-1.18%

Hang Seng

30,802.47

-1.38%

Shanghai

3,169.24

-1.40%

S&P/ASX

6,032.50

-0.16%


U.S. stock indexes closed lower on Tuesday, as the U.S. President Trump voiced dissatisfaction with the trade talks with China and cast doubt on a meeting with North Korean leader Kim Jong Un.

Asian stock indexes closed sharply lower on Wednesday, following a weak lead from Wall Street overnight and amid increased geopolitical uncertainty after Trump’s comments about the upcoming summit with North Korean leader Kim Jong Un and trade talks with China. The Australian stock market dropped moderately, as growing metal prices supported the shares of mining companies. The Japanese equity market tumbled as renewed concerns over the U.S.-China trade tensions and uncertainty over North Korea summit lifted the yen, putting pressure on the Japanese large export-oriented companies.
European stock indexes are expected to trade mixed in the morning trading session.


Bond Market
Yields of US 10-year notes hold at 3.05% (-1 basis points)
Yields of German 10-year bonds hold at 0.56% (0 basis points)
Yields of UK 10-year gilts hold at 1.52% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in July settled at  $71.94 (-0.36%). The crude oil prices fell moderately, on the back of partial profit-taking after the recent rally and reports that OPEC may decide to increase oil production. In addition, investors digested the latest data from the American Petroleum Institute (API), which showed that U.S. crude supplies reduced by 1.3 million barrels for the week ended May 18. Analysts had forecast a 2.8 million barrel decline in crude oil inventories. At the same time, gasoline stockpiles rose by 980,000 barrels, while inventories of distillates dropped by 1.3 million barrels. Market participants are now awaiting weekly data on U.S. crude inventories from the U.S. Energy Information Administration (EIA).

Gold traded at $1,290.80 (-0.01%). Gold prices consolidated near the opening level, as increased demand for safe-haven assets was offset by the appreciation of the U.S. currency. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.09 percent to 93.69. Since gold prices are tied to the dollar, a stronger dollar usually makes the precious metal more expensive for holders of foreign currencies.

IV. The most important scheduled events (time GMT 0)

07:00

France

Manufacturing PMI

07:00

France

Services PMI

07:30

Germany

Services PMI

07:30

Germany

Manufacturing PMI

08:00

Eurozone

Services PMI

08:00

Eurozone

Manufacturing PMI

08:00

Australia

RBA's Governor Philip Lowe Speaks

08:30

United Kingdom

Producer Price Index - Output

08:30

United Kingdom

Producer Price Index - Input

08:30

United Kingdom

Retail Price Index

08:30

United Kingdom

HICP ex EFAT

08:30

United Kingdom

HICP

10:00

United Kingdom

CBI retail sales volume balance

13:45

U.S.

Services PMI

13:45

U.S.

Manufacturing PMI

14:00

Eurozone

Consumer Confidence

14:00

U.S.

New Home Sales

14:30

U.S.

Crude Oil Inventories

18:00

U.S.

FOMC meeting minutes

18:15

U.S.

Fed Kashkari Speech

22:45

New Zealand

Trade Balance

Focus market

  • ECB's Weidmann says first ECB rate hike could follow the end of QE more closely than in the U.S
  • Industrial producer prices rose by 0.1% in the euro area (EA19) and by 0.2% in the EU28
  • European Commission forecasts Euro Zone inflation will accelerate to 1.6 pct y/y in 2019 from 1.5 pct y/y seen in 2018
  • UK service providers signalled a modest rebound in business activity - Markit
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All posted material is a marketing communication solely for informational purposes and reliance on this may lead to loss. Past performance is not a reliable indicator of future results. Please read our full disclaimer.

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