Tue, Oct 15, 2019 @ 20:42 GMT

DOW and S&P 500 broke 55 Day EMA firmly, heading higher in near term

    The strong close in US indices overnight now cleared up the near term direction. DOW closed up 213.59 pts or 0.87% at 24786.63. S&P 500 gained 28.55 pts or 1.07% to 2706.39. NASDAQ was even better, rising 124.82 pts or 1.74% to 7281.10. All three indices took out nearly flat 55 day EMA respectively.

    DOW’s break of the near term trend resistance at the same time confirms that fall from 25800.35 has completed 2344.52. For the near term further rise could be see back to 25800.35 first. But then, rise from 23344.52 is still having a somewhat corrective look. It’s likely just a leg inside the whole corrective pattern from 26616.71 high. Hence, it could start to feel heavy again when it approaches 25800.35.

    For S&P 500, first hurdle will be trend line resistance at 2746, and then 2081.90 resistance.

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    Into US session: Sterling extends rally, Swiss Franc strong on Pakistan/India tensions

      Entering US session, Sterling is back in the driving seat again and is extending this week’s rally on fading chance of no-deal Brexit. Swiss Franc follows as the second strongest, lifted by escalating Pakistan/India tensions after both shot down each others’ fighter jets. Canadian Dollar is now the third strongest, as oil price rebound. WTI is back above 56.7 as the impact of Trump’s tweet fades. Meanwhile, Aussie and Kiwi are the weakest ones.

      Focus will now turn to Canadian CPI first. US will also release trade balance pending home sales and factory orders. Fed chair Jerome Powell will have the second day of Congressional testimony. But testimony of USTR Robert Lighthizer’s testimony will catch more attention. Lighthizer might reveal some of the little known substantial progress in trade talks with China.

      In Europe, currently:

      • FTSE is down -0.70%.
      • DAX is down -0.37%.
      • CAC is down -0.15%.
      • German 10-year yield is down -0.0127 at 0.107.

      Earlier in Asia:

      • Nikkei closed up 0.50%.
      • Hong Kong HSI dropped -0.05%.
      • China Shanghai SSE rose 0.42%.
      • Singapore Strait Times dropped -0.36%.
      • Japan 10-year JGB yield rose 0.0019 to -0.024.
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      BCC Marshall: Messy and disorderly Brexit a flagrant dereliction of duty of MPs

        British Chambers of Commerce Director General Adam Marshall criticized that the uncertainty of the “Brexit black hole” is generating “a growing list of business casualties and a litany of rising costs”. He also urged MPs to do all to avoid no-deal Brexit. He said “messy and disorderly exit would not just be deeply irresponsible – it would be a flagrant dereliction of duty.”

        Prime Minister Theresa May is still meeting Conservative colleagues and Northern Ireland’s Democratic Unionist Party to seek support on her Brexit deal. House of Commons leader announced there will be another Brexit debate tomorrow, and there might be another meaningful vote.

        Hard-line Brexiteer Jacob Rees-Mogg extended his support to May and urged DUP to “come over to the deal”. But DUP insisted they won’t even abstain but just reject it. Another Brexiteer Boris Johnson told Evening Standard newspaper that “May’s deal si dead”.

        European Commission spokesman Margaritis Schinas warned again that “If the Withdrawal Agreement is not ratified by the end of this week, Article 50 will be extended to April 12 and it is now for the UK government to inform about how it sees the next steps.” On the indicative votes, Schinas added, “we counted eight ‘noes’ last night, now we need a ‘yes’ on the way forward.”

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        Ifo downgraded German growth forecasts notably

          The Ifo said in a report today that “Storm Clouds Gather Over German Economy“. It said, the upswing since last year has “lost impetus” and “international economic risks in particular have growth significantly.

          German GDP growth is expected to slow from 2017’s 2.2% to 1.8% in 2018 and 1.8% in 2019. That’s notable downward revision from Spring forecasts of 2.2% in 2018 and 2.0% in 2019.

          Inflation, though, is projected to climb from 1.8% in 2017 to 2.0% in 2018 and 2.1% in 2019. That’s upward revisions from Spring forecasts of 1.7% in 2018 and 1.9% in 2019.

          Even after the downward revision in growth projection, Ifo noted that downward risks have “increased significantly”. In particular, it singled out the US as external risk. It pointed out “in June 2018 the USA introduced tariffs of 25% on steel and 10% on aluminium imports from Canada, Mexico and the European Union. Although the long-term effects of these tariffs are relatively weak, the USA is currently considering whether it should introduce a tariff on imported cars too. Overall, this would lead to considerably higher GDP losses. At the same time, the EU and China have announced retaliatory tariffs, meaning that the introduction of further trade barriers is no longer a negligible risk.”

          In addition, Ifo pointed to US triggered supply side driving oil price surge as another risk. It noted, “the increase in oil prices up until the beginning of this year were largely demand-side driven. Since then friction between the USA and Iran have promoted a supply-side in-crease in oil prices, which is likely to have a dampening impact on the world economy. If the pressure from the US government on the EU were to become so great that the EU revoked the nuclear agreement, oil prices would continue to rise and curb growth in world production.”

          Full releases here.

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          USD jumps ahead of US session, EUR/USD breaks yesterday’s low

            Dollar rally picks up momentum again in enter into US session. In particular EUR/USD has now taken out yesterday’s low at 1.2181 to resume recent fall to 1.2154 support.

            As seen in the D heat map, only GBP/USD’s is holding above yesterday’s low for now. NZD, AUD, CHF and CAD are trading as the weakest ones.

            Action bias table also shows overwhelming momentum.

            Let’s see how far USD can go in a day with no important economic data featured.

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            Eurozone PMIs: Overall growth remains subdued, pace restricted by uncertainty and risk aversion

              Eurozone PMI Manufacturing rose to 47.8 in June, up from 47.7 but missed expectation of 48.0. It’s also staying well below 50 level. PMI Services rose to 53.4, up from 52.9 and beat expectation of 53.0. It’s the highest level in 7 months. PMI Composite rose to 52.1, up from 51.8, also the highest in 7 months.

              Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

              “The eurozone economy picked up further momentum in June, with the headline PMI rising from the lows seen earlier in the year to hint that the worst of the current slowdown may be behind us. However, the overall rate of expansion remains weak, with the survey data indicative of eurozone growth of just over 0.2% in the second quarter.

              “However, growth trends between the core and the periphery have widened. Germany and France are both showing improved performances compared to earlier in the year as one-off factors (such as the political unrest in France) continue to drop out of the picture, but the data highlight a growing concern that the rest of the region is sliding closer towards stagnation.

              “Growth also remains very much dependent on the service sector, which in turn largely reflects the relative strength of domestic consumer demand and improving labour markets. Manufacturing, in contrast, remains in a steep downturn which is only showing tentative signs of moderating.

              “The overall rate of growth consequently remains subdued, and a further deterioration in business confidence about the year ahead suggests the pace of expansion will continue to be restrained by uncertainty and risk aversion. Concerns about weaker economic growth at home and in export markets, rising geopolitical risks and trade wars continue to dominate the picture and dampen business spending, investment and sentiment.”

              Full release here.

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              Fed Powell: Balance runoff likely settles at around 16-17% of GDP

                In the second day of Congressional Testimony, Fed Chair Jerome Powell said Fed will stop the balance sheet runoff this year. The balance sheet will then be at around 16-17% of GDP, up from 6% before the financial crisis. Considering that the US GDP is currently at around USD 20T, the balance sheet would eventually be between USD 3.2T and USD 3.4T. The Balance sheet is currently just over USD 4T.

                Powell said “we’ve worked out, I think, the framework of a plan that we hope to be able to announce soon that will light the way all the way to the end of balance sheet normalization”. And, “we going to be in a position … to stop runoff later this year.”

                He also bluntly noted that Fed is “not looking at a higher inflation target, full stop”, even if Fed is rethinking its policy framework for this year.

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                UK Johnson said EU position on Irish backstop needs to change before Brexit talks

                  UK Prime Minister Boris Johnson’s spokesman said today that John is ready for Brexit talks, only when EU is willing to change its position.

                  The spokesman said “the PM has been setting out to European leaders the position … that the Withdrawal Agreement with the backstop has not been able to pass parliament on the three occasions it was put in front of parliament. Therefore it needs to change”.

                  And, “the prime minister would be happy to sit down when that position changes. But he is making it clear to everybody he speaks to that that needs to happen.”

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                  USTR Robert Lighthizer testimony on China trade negotiations

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                    Japan industrial production rose 1.3%, but retail sales dropped -2.0%

                      A batch of mixed economic data was released from Japan today. Industrial production rose 1.3% mom in July, well above expectation of 0.3% mom. Growth was supported by increased production of cars and chemicals, which offset decline in oil products. The somewhat solid rebound in production offered a hopeful sign that manufacturers are weathering global slowdown and escalation of US-China trade war so far.

                      On the other hand, retail sales dropped -2.0% yoy in July, much worse than expectation of -0.6% yoy. The contraction raised concerns that momentum of domestic demand was much weaker than originally expected. In particular, consumption could be further strained by the planned sale tax hike later in the year.

                      Also released, unemployment rate dropped to 2.2% in July, beat expectation of 2.3%. Housing starts dropped -4.1% yoy, versus expectation of -5.4% yoy. Tokyo CPI slowed to 0.7% yoy in August, down from 0.9% yoy, missed expectation of 0.8% yoy.

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                      US ADP employment grew 156k, job growth still healthy but slowing

                        US ADP private employment grew 156k in July, slightly above expectation of 150k. Prior month’s figure was revised up from 102k to 112k. Goods producing jobs rise 9k. Service-providing jobs rose 146k.

                        “While we still see strength in the labor market, it has shown signs of weakening,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “A moderation in growth is expected as the labor market tightens further.”

                        Mark Zandi, chief economist of Moody’s Analytics, said, “Job growth is healthy, but steadily slowing. Small businesses are suffering the brunt of the slowdown. Hampering job growth are labor shortages, layoffs at bricks-and-mortar retailers, and fallout from weaker global trade.”

                        Full release here.

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                        Eurozone industrial production rose 0.9% mom in May, above expectation

                          Eurozone industrial production rose 0.9% mom in May, well above expectation of 0.2% mom. Comparing by industrial grouping, production of non-durable consumer goods rose by 2.7%, durable consumer goods by 2.3%, capital goods by 1.3% and energy by 0.7%, while production of intermediate goods fell by 0.2%.

                          EU 28 industrial production rose 0.8% mom. Among member states for which data are available, the highest increases in industrial production were registered in Denmark (+4.4%), Ireland (+2.3%) and France (+2.1%). The largest decreases were observed in Finland (-2.9%), Romania (-1.9%) and Croatia (-1.7%).

                          Full release here.

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                          Australia NAB Business confidence dropped to 0, conditions improved slightly

                            Australia NAB Business Confidence dropped to 0 in September, down from 1. On the other hand, Business Conditions improved to 2, up from 1. Looking at some details, Trading Condition rose from 3 to 4. Profitability Condition rose from -3 to -2. Employment Condition rose from 2 to 3.

                            Alan Oster, NAB Group Chief Economist “The results of the September survey suggest more of the same for the business sector. Conditions edged up, and confidence was marginally lower, but both remain below their long run average – well below the levels seen just over a year ago. This suggests that activity in the business sector has slowed and we fear the risk that this spreads to both investment and employment intentions”.

                            And: “We continue to watch the business sector closely – the housing downturn and the weakness in the retail sector are likely to continue to play out further, adding to private sector weakness in the economy. Rate cuts will help but will lag and with a weak consumer and higher global uncertainty, we are unlikely to see a material improvement in the short-term”

                            Full release here.

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                            RBA Lowe: Evenly balanced chance of hike or cut in next move

                              Australian Dollar drops sharply after RBA Governor Philip Lowe dropped the rhetoric that the next move in interest rate is more likely a hike than a cut. Instead, he said the probabilities of hike and cut are now more “evenly balanced”.

                              Lowe delivered a speech “The Year Ahead” to the National Press Club of Australia today. Lowe maintained the view that ” tighter labour market and reduced spare capacity will see underlying inflation rise further towards the midpoint of the target range.” And given that, RBA “maintained a steady setting of monetary policy” yesterday.

                              However, he also noted given the uncertainties ” it is possible that the economy is softer than we expect, and that income and consumption growth disappoint.” In particular,  “in the event of a sustained increased in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point.

                              Thus, on the scenarios of next-move-is-up and next-move-is-down, “the probabilities appear to be more evenly balanced.” Though Lowe also maintained that RBA “does not see a strong case for a near-term change in the cash rate”.

                              Lowe’s full speech here.

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                              UK Hunt anticipates pretty fierce discussion on the Brexit plan

                                UK new Foreign Minister Jeremy Hunt anticipated a “very very lively debates” in the parliament on the soon to be published Brexit White Paper. He added that “this is one of the biggest decisions that we have taken as a country in our political lifetimes so there’s going to be a pretty fierce discussion but the prime minister has found a way forward.”

                                Present in the NATO summit in Brussels, Hunt also said he had “good discussions with my French, German and Dutch counterparts, many other counterparts here, explaining to them that this is the way we get that deep and special partnership with Europe.” He acknowledged the EU had “had a lot of concern about, for example how we’re going to avoid a hard border with Northern Ireland, whether it is possible to have frictionless trade without a customs union.” Hunt assured that “what we’ve shown them is that that is possible. This is a very very significant step… I think we have the basis that we can move forward.”

                                New Brexit Minister Dominic Raab said the White Paper got “detailed proposals” and he wanted to assure EU Brexit negotiator Michel Barnier on that.

                                The white paper is scheduled to be released today.

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                                Germany, France and Britain seek US sanction exemptions in Iran

                                  Reuters reported that Germany, France and Britain sent a letter to US Treasury Secretary and Secretary of State on June 4, requesting US sanction exemptions in EU companies in Iran.

                                  The letter state that “as close allies, we expect that the extraterritorial effects of U.S. secondary sanctions will not be enforced on EU entities and individuals, and the United States will thus respect our political decisions.”

                                  EU expected exemptions on pharmaceuticals, healthcare, energy, automotive, civil aviation, infrastructure and banking companies.

                                  EU ministers also warned that “An Iranian withdrawal from the (nuclear agreement) would further unsettle a region where additional conflicts would be disastrous.” And they emphasized that the 2015 JCoPA was “the best basis on which to engage Iran and address those concerns”.

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                                  Swiss SECO raised 2019 growth forecasts to 1.2%, still below average

                                    Swiss State Secretariat for Economic Affairs expects growth to remain “below average” this year on subdued outlook and high uncertainty. But growth forecasts for 2019 was revised slightly up to 1.2%, from 1.1%. For 2020, growth projection was kept unchanged at 1.7%.

                                    SECO noted that “declining momentum in the international economy, the development of world trade is weak and demand for Swiss products is flattening out, slowing down the export economy.” And, “downside risks continue to predominate for the global economy”.

                                    It warned that with the recent tariff increases between US and China, the trade dispute has taken an “unfavourable turn”. Swiss economy would “cool off more strongly” if situation were to intensify further, particularly if EU and Germany were to be significantly affected. Meanwhile, “political uncertainty remains high in Europe”, including Brexit and Italy.

                                    Full release here.

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                                    USTR seeks auto tariffs equalization from China

                                      Just days ahead of the Trump-Xi meeting, the US Trade Representative Robert Lighthizer issued another statement regarding China’s auto tariffs today. Is it setting the stage for Trump to claim victory on some Chinese concessions? Or, Trump said yesterday that GM’s plant closures prompted him to study auto tariffs. At the same time, is he thinking about selling more cars to China to “equalize” the imports from EU and Japan?

                                      The statement noted, “As the President has repeatedly noted, China’s aggressive, State-directed industrial policies are causing severe harm to U.S. workers and manufacturers. We are continuing to raise these issues with China. As of yet, China has not come to the table with proposals for meaningful reform.”

                                      “China’s policies are especially egregious with respect to automobile tariffs. Currently, China imposes a tariff of 40 percent on U.S. automobiles. This is more than double the rate of 15 percent that China imposes on its other trading partners, and approximately one and a half times higher than the 27.5 percent tariff that the United States currently applies to Chinese-produced automobiles. At the President’s direction, I will examine all available tools to equalize the tariffs applied to automobiles.”

                                      USTR statement here.

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                                      UK wage growth accelerated to fastest since 2008

                                        UK unemployment rate was unchanged at 4.1% in the three months to October, matched expectation. However, wage growth was rather impressive. Average weekly earnings including bonus rose 3.3% 3moy, above expectation of 3.0% 3moy. Average weekly earnings excluding bonus also rose 3.3% 3moy, above expectation of 3.2% 3moy. Wage growth was indeed fastest since 2008. Also claimant count rose 21.9k in November, above expectation of 13.2k.

                                        Full release here.

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                                        Into US session: Sterling weakest on BoE forecasts downgrade, Yen jumps on falling yields

                                          Entering into US session, Sterling is now the weakest one for today after BoE kept interest rate unchanged but lowered both growth and inflation forecast. According to the Quarterly Inflation Report, even with the assumption of smooth Brexit, BoE projects to hike only once through Q1 2022. UK Prime Minister Theresa May’s visit to Brussel appears to be rather fruitless too. Canadian Dollar is currently the second weakest one followed by New Zealand Dollar. The latter was weighed down by weaker than expected job data released earlier today. Euro is mixed even though EU slashed 2019 growth forecast by -0.6% to 1.3% only.

                                          At the time of writing, Yen is the strongest one on risk aversion, while Swiss Franc is the second. Both are also helped by sharp decline in German yields. Australian Dollar is the third strongest mainly thanks to weakness elsewhere. Also, Aussie is just taking a breather after yesterday’s steep selloff. Dollar remains generally firm and is set to extend gain against all but Yen, and probably Franc.

                                          In Europe, currently:

                                          • FTSE is down -0.08%.
                                          • DAX is down -1.45%.
                                          • CAC is down -0.82%.
                                          • German 10-year yield is sharply lower by -0.0204 at 0.126.

                                          Earlier in Asia:

                                          • Nikkei dropped -0.59%.
                                          • Japan 10-year yield closed up 0.0069 at -0.009, staying negative.
                                          • Singapore Strait Times rose 0.50%.
                                          • Hong Kong and China were still on holiday.
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