Bill Hubard’s Market Overview 23 August ‘17

Bill Hubard’s Market Overview 23 August ‘17

Bill Hubard’s Market Overview 23 August ‘17

Wednesday, August 23, 2017 - 13:45
Bill Hubard’s Market Overview 23 August ‘17

Will the bulls stay with USD after Jackson Hole?

Trump America

*     The marginally negative FTSE open comes after a tale of 2 Trumps entertained US traders overnight. On the one hand, reports of significant progress towards the long-awaited tax reform look to have rekindled the so-called ‘Trump trade’ in the US overnight, with many now expecting a proposal – including a significant change to the repatriation tax to encourage overseas profits to be returned to the US – to be put to Congress in October.

*     On the other, Trump not only threatened to derail NAFTA, but also to bring the US government to the brink of shutdown in order to force Congressional budget approval for his proposed Mexican border wall, a cornerstone of his election pledges. The world waits with bated breath to see which side of President Trump will prevail.

*     The Trump administration also applied pressure on China and Russia to isolate North Korea by imposing sanctions on various Chinese and Russian companies with alleged links to Pyongyang. The latest measures reflect growing concerns in Washington over North Korea’s potential capability to hit targets in the US. We feel that the most likely course is that trade policy will play a crucial role given that military options to solve the conflict between the US and North Korea seem infeasible.

Greenback pressure

*        Despite the USD regaining some ground ahead of today’s speech by Draghi and Friday’s Jackson Hole Symposium, USD/CNY has remained under selling pressure. The 3-year RMB-denominated sovereign bond auction drew good demand, following last auction attracting the strongest bidding on records going back to 2005. We expect the RMB to remain bid as China tries to attract foreign funds into the country via its Stock and Bond Connect programmes. Domestic liquidity conditions are tight, manifested by banks' aggregate excess reserve ratio falling to only 1.0%.

*       The low reserve ratio could cause unwelcome volatility. There are choices for the PBoC. Either it helps the central bank's foreign exchange purchase position to increase sharply, or the PBoC may have to inject a large amount of liquidity. We think the PBoC may opt for the first option and recent data suggests that it is on the right track. Overseas investors increased their China onshore bond holdings by RMB62bn ($9.3bn) in Q3 after a reduction of RMB22bn in Q1.

*     Yesterday was VERY quiet but overall positive for the USD as an equity rally supported while bonds were put under pressure. The EUR focus is very much on Draghi speaking on Friday at the Jackson Hole conference, the market hoping for some clear direction on tapering from the ECB, although it is worth noting that he is speaking this morning too, in Landau, Germany at 08.25BST according to the ECB website.

*      USDJPY made some gains during the Asian morning, continuing the trend from yesterday but the morning gains have been pared as resistance at 109.80 pushed it lower to around 109.50 as Europe opened. 


*      FTSE has opened -18 points on Wednesday at 7369 following a failed overnight test of 7400, however remaining underpinned by the 2-week falling highs resistance conquered yesterday having now turned support. Bulls will be hoping the newfound support provides a springboard for a fresh test of 7400. Bears meanwhile hope this is only a temporary reprieve from the overnight sell-off, with a break below support at 7360 coming shortly after the open. Watch levels: Bullish 7380Bearish 7360.

*      The lone FTSE corporate release this morning comes from WPP, with the advertising giant announcing a notable cut to revenue growth forecasts (0-1.0% v 2.0% previous) as companies’ dial back on advertising spending in Q2.

Asian Indices

*      Asian equity markets are noticeably mixed, with Japan’s Nikkei looking set to break a run of 5 consecutive negative sessions for the first time since April 2016, while Australia’s ASX is offside as a result of corporate results. Note Hong Kong’s Hang Seng is closed as Typhoon Hato forces traders to stay home. US equity markets closed sharply higher yesterday in reaction to the update on the Trump administration’s tax reform plans, with the Dow enjoying its best trading session since April with a gain of 196 points. The S&P500 closed 1.0% higher as Tech names led the index higher, buoyed by the prospect of cheaper profit repatriation costs, whilst unsurprisingly the Nasdaq outperformed, closing 1.4% stronger

Commodities – oil, gold

*       Crude Oil prices remain underpinned by 1-week rising lows support, despite paring yesterday afternoon’s gains as API inventory data disappointed. Whilst reporting an almost 3.0m/bbl draw in crude oil stocks, roughly a third of last week’s drawdown, a gasoline inventory build offset bullishness. Brent remains supported at $51.50, while WTI sees support at $47.60.

*        Gold continues to trade at rising lows support around the $1,286.5 mark having traded sideways overnight. The USD’s recovery rally has paused, helping the precious metal to rally from its overnight lows of $1,283, however the wider US equity rally has kept the safe-haven asset’s gains capped at $1.287.

German indices & stocks

*       In terms of data published on Tuesday, as mentioned earlier, Germany’s ZEW economic sentiment indicator fell sharply to 10 in August from 17.5 in July – well below the consensus expectation of 15. ZEW President Achim Wambach commented that the decline “reflects the high degree of nervousness over the future path of growth in Germany. Both weaker-than-expected German exports as well as the widening scandal in the German automobile sector in particular have helped to contribute to this situation.”

*        While the VW diesel scandal and allegations that other major German car manufacturers also rigged emission tests had a strong negative impact on the latest ZEW survey, it has to be stressed that it is a survey of financial market professionals. For the assessment of business sentiment we will have to wait until the Ifo survey is published on Friday. If a similarly sharp decline in the Ifo business climate materialises, it would be a warning signal that the German economy could be running out of steam.


*     Over to the UK, the role of the European Court of Justice in settling disputes is the Brexit topic du jour. PM May had promised with a great deal fanfare to remove the UK from the court’s influence. However, this morning press reports suggest that the UK will NO longer be under the “direct jurisdiction” suggesting it may still have a role. The EU believes that the ECJ should have a role in enforcing the rights of EU nationals in the UK after Brexit, though this is not accepted by many Eurosceptics. Yesterday’s release of the latest UK public finances data brought good news in the shape of the FIRST July budget surplus since 2002. The high level of employment in the UK brought a boost from self-assessed income tax. However, on the back of higher financing costs for inflation-linked bonds, debt costs in the fiscal year to date soared by 23%. This trend MAY severely limit the Chancellor’s wiggle room at his November budget.

*        Sure, media reports of Brexit Secretary Davis proposing to soften the UK's Brexit stance on the ECJ today is a positive factor, but this move does reveal a deep split within the government, leading to additional speculation concerning the political future of PM Theresa May. PM May has previously argued that leaving the jurisdiction of the ECJ would be essential to complete Brexit. It appears this position may NO longer command a majority within the government.

*        The political tail risk in the UK seems to be rising ahead of the early October Tory party conference. The worst-case scenario could lead towards ‘new’ elections. This scenario would receive more support should the next few weeks see the successful launch of centre ground party ‘The Democrats’, leading to possible defections of centrist Labour and Tory MPs, which could lead the informal partnership of the Tories with the Northern Irish DUP to lose its majority within the Commons.

*      Meanwhile, the Recruitment and Employment Confederation said an index of economic conditions has fallen to the lowest level so far this year, with a greater proportion of survey respondents saying things are getting worse. It seems that the lack of clarity in respect of the UK’s post-Brexit position may start hitting investment plans. However, signs of declining investment are not only spotted within businesses. Take the prime London housing market as another indicator.

Sterling GBP

*        Here, GBP weakness is NO longer inspiring foreign buyers to come into the market. Brexit appears to be putting the UK economy into a relatively weaker position when comparing within G-10. Moreover, the UK’s C/A revision to 5.2% of GDP for 2015 suggests that foreign funding dependence may be a BIGGER issue than previously assumed. Obviously, the UK has entered Brexit at a time of relative weakness and vulnerability. We like GBP shorts even against an otherwise weak USD. We feel EUR/GBP longs look to be the best GBP bearish trade.

*     There are NO UK data releases today, but there are other reasons why GBP is expected to trade lower. Next to the CHF, JPY, USD and NZD, we identified GBP as one of our preferred shorts in July, arguing that the combination of the BoE staying on the side lines and inflation comfortably exceeding its 2.0% target will keep 10-year Gilt real yields near -2.0% for now. GBP/USD’s crucial support is at $1.2810, which we expect will be broken today.

*       Cable support levels below $1.2800 are few and far between; the next major support is at $1.2715 followed by $1.2587 which are levels both seen as recently as June. EUR/GBP has made incre-mental progress lately with further progress, or not, may be down to whatever Draghi has to say on tapering, or not.


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