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Wednesday May 2: Five things the markets are talking about

Overnight, equities have gained in Europe after they declined in Asia, as many return from holidays to digest the latest earnings reports and shift their focus to today's Fed rate decision (02:00pm EDT) and trade talks between the U.S and China.

Currently, the ‘big' dollar trades under pressure despite U.S treasury yields backing up towards the psychological +3% handle once again. Gold prices are higher.

Fixed income dealers are not anticipating a rate increase at today's FOMC meeting, although they do expect one at the Fed's next meeting in June. Fed fund futures last put the probability of a June rate increase at +100%. Perhaps, the fed will become more open to raising interest rates another three times this year? Keep looking for those clues.

Note: Fed Chairman Powell won't be holding a press conference after the meeting, and officials are not releasing any new economic projections.

The market is also keeping an eye on the U.S trade delegation's trip to Beijing on Thursday – neither superpower wants to lose face.

On tap: U.S earnings season continues and ADP non-farm employment change (10:15 am EDT).

1. Stocks mixed results

Global stocks dithered overnight, as investors looked for signals ahead of today's Federal Reserve's monthly policy statement.

In Japan, the Nikkei share average slipped on Wednesday amid Fed caution and Friday's U.S jobs data, although the ‘big' dollar's bid against the yen (¥109.82) also helped to stem some of the losses. The index ended the day down -0.16%, while the broader Topix dropped -0.15%

Note: Japanese markets will be closed on Thursday and Friday for public holidays.

Down-under, Aussie shares advanced overnight, driven by gains for industrials after Qantas Airways forecast a record annual profit. The S&P/ASX 200 index rose +0.6%. On Tuesday the benchmark added +0.5%. In S. Korea, the Kospi slipped -0.3%.

In Hong Kong, the Hang Seng fell -0.4% on weakness in real-estate firms and banks. Shares in Hang Seng-listed United Co. Rusal – the worlds number two aluminum company, recently battered by the prospect of U.S. sanctions – had last jumped +10.2%

In China, both the Shanghai and Shenzhen composite indexes were down -0.1% after the unofficial purchasing managers index (PMI) data signalled tepid growth in the country's manufacturing sector last month.

In Europe, regional indices trade higher across the board led by the DAX, which trades over +1% higher following yesterday's May Day holiday, and positive earnings in the technology sector.

U.S stocks are set to open in the ‘black' (+0.1%).

Indices: Stoxx600 +0.7% at 387.6, FTSE +0.6 at 7564, DAX +1.2% at 12765, CAC-40 +0.3% at 5535, IBEX-35 +0.9% at 10069, FTSE MIB +1.0% at 24206, SMI +0.1% at 8896, S&P 500 Futures +0.1%

2. Oil rises on Iran worries, but surging U.S supplies cap market, gold higher

Oil prices have rallied a tad overnight, pushed up by concerns that the U.S may re-impose sanctions on major exporter Iran, although soaring U.S supplies is capping gains.

Brent crude oil futures are at +$73.42 per barrel, up +29c, or +0.4% from their last close. U.S West Texas Intermediate (WTI) crude futures are up +45c, or +0.7%, at +$67.70 per barrel.

Note: U.S President Trump has until May 12 to decide whether to restore the sanctions on Iran that was lifted after an agreement over its disputed nuclear program.

Capping gains is U.S inventories – API data yesterday showed inventories rose by +3.4m barrels to +432.5m in the week to March 27.

Note: Rising inventories are in part a result of soaring U.S production, which has jumped by +25% in the last two-years to 10.6 million bpd, making the U.S the world's number two crude oil producer.

More U.S oil will likely flow as U.S drillers' added +5 oilrigs looking for new production in the week to April 27, according to Baker Hughes.

Expect traders to take their cues from today's EIA report (10:30 am EDT).

Ahead of the U.S open, gold prices have rallied overnight, ticking up from a four-month low hit in Tuesday's session as Chinese buyers returned to the market following the Labour Day holiday. Investors are now waiting for cues on the U.S monetary policy. Spot gold is up +0.5% at +$1,310.30 per ounce, while gold futures for June delivery has rallied +0.3% to +$1,310.80 per ounce.

Note: Gold fell to +$1,301.51 in yesterday's session, its lowest since December, 2017.

3. Yields too low in Canada?

In a speech delivered in Yellowknife, in the Northwest Territories, Canada yesterday, the Bank of Canada (BoC) Governor Poloz said that “the current policy rate is well below the neutral rate” and “that moving too slowly on rate hikes would mean further accumulation of household debt and rising vulnerabilities.”

Note: Canadians owe an average of +170% of their disposable income, up sharply from 20-years ago and largely concentrated in mortgage debt. About +8% of borrowers owe +350% or more of their gross income, which represents one-fifth of overall Canadian household debt.

The Governor is concerned that interest rates are really low compared to anything that could be described as ‘neutral'. He also suggested “forces in the economy suggest that this is not the time to be at neutral.”

Bank of Korea (BoK) April minutes saw one official note that current accommodative policy was “desirable as both internal and external uncertainties arise.” Employment had not improved despite economic growth. Policy makers need to closely watch Sino-US trade dispute.

The yield on U.S 10-year Treasuries gained +2 bps to +2.99%, the highest in a week, while in Germany, the 10-year Bund yield climbed +2 bps to +0.58%, the biggest surge in more than a week.

4. Dollar a tad softer ahead of FOMC

USD saw its initial gains dwindle away as the Eurozone region saw decent PMI Manufacturing data in the session (see below). The greenback has been testing a number of key levels against G10 currency pairs. Focus now shifts to the FOMC rate decision and statement for further guidance on the rate path.

GBP (£1.3652) has moved away from its four month lows with focus on a U.K “War Cabinet' meeting on Brexit as PM May tries to align her party policy stance. Aiding the pound is this morning's U.K Construction PMI release (see below), as it moves back into expansion.

EUR/USD (€1.1997) is testing below the psychological €1.20 level, but has moved off its worst levels of the session after European PMI Manufacturing data was generally better-than-expected and remaining in growth territory.

USD/JPY (¥109.84) is once again encroaching the psychological resistance level of ¥110.

5. Eurozone manufacturing slowed in April

Data this morning showed that Eurozone manufacturing activity slowed down further at the start of Q2, with the composite PMI for the sector slipping to 56.2 in April from 56.6 in March (Beats: Eurozone, France, Spain, Swiss, Norway, Poland; Czech; Misses: Italy, Sweden, Hungary, In-line: Germany).

According to IHS Markit, the outcome for last month marks a slight upward revision from a flash estimate of 56.0 and they commented that “the upturn has lost noticeable momentum” since December's record high, and incoming survey data “will provide important clues as to the degree to which underlying demand may be waning and the extent to which policymakers should be concerned about the health of the economy.”

Other data from the U.K showed that business activity in the U.K.'s construction sector rebounded in April after hitting a 20-month low in March.

IHS Markit said its purchasing managers' index for the construction industry rose to 52.5 in April, up from 47.0 in March. Sterling (£has found its first bid in six-sessions.

Note: It's the metric's highest since November 2017.

The DAX index has posted sharp gains in the Wednesday session. Currently, the DAX is trading at 12,738 points, up 1.00% on the day. On the release front, German and eurozone manufacturing reports were within expectations and continued to point to expansion. Preliminary Flash GDP came in at 0.4%, matching the estimate. In the US, the Federal Reserve will set the benchmark interest rate and release a rate statement.

On the manufacturing front, German and eurozone PMI reports softened in March, but still met expectations. German Manufacturing PMI edged lower to 58.1, matching the forecast. The eurozone release dropped to 56.0, shy of the estimate of 56.2 points. The readings continue to point to expansion in the manufacturing sector, but there is concern as both indicators dropped for a fourth straight month. The markets are hoping that after a sluggish first quarter, eurozone data in Q2 will improve in the second quarter.

The Federal Reserve will be in the spotlight and the markets will be closely monitoring the rate statement. Policymakers are expected to maintain the benchmark rate at a range between 1.50% and 1.75%, and analysts will be keeping a close eye on the rate statement for clues about future rate hikes. Although the Fed is currently projecting three rate hikes in 2018, there is growing sentiment that the Fed will bump this up to four increases. The Fed last raised rates in March, and some analysts see the Fed raising rates once each quarter – in June, September and December. Higher inflation has raised speculation that the Fed will consider raising its rate hike forecast. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures price index, hit the Fed’s target of 2% inflation for the first time in a year in March.

EUR/USD has stemmed this week’s losses in the Wednesday session. Currently, the pair is trading at 1.1999, up 0.05% on the day. On the release front, German and eurozone manufacturing reports were within expectations and continued to point to expansion. Preliminary Flash GDP came in at 0.4%, but matched the estimate. In the US, ADP Nonfarm Payrolls are expected to slide to 200 thousand. As well, the Federal Reserve will set the benchmark interest rate.

On the manufacturing front, German and eurozone PMI reports softened in March, but still met expectations. However, there is concern as both indicators dropped for a fourth straight month. The markets are hoping that after a sluggish first quarter, eurozone data in Q2 will improve in the second quarter.

All eyes are on the Federal Reserve, which will release a rate statement on Wednesday. Policymakers are expected to maintain the benchmark rate at a range between 1.50% and 1.75%, and analysts will be keeping a close eye on the rate statement for clues about future rate hikes. Although the Fed is currently projecting three rate hikes in 2018, there is growing sentiment that the Fed will bump this up to four increases. The Fed last raised rates in March, and some analysts see the Fed raising rates once each quarter – in June, September and December. Higher inflation has raised speculation that the Fed will consider raising its rate hike forecast. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures price index, hit the Fed’s target of 2% inflation for the first time in a year in March.

• Fed would release its statement on its monetary policy
• The US trade envoys have already started to adjust the market expectations
• Brexit talks are back on the main stage

Naysayers had to face it badly once again as Apple proved that it doesn’t need to sell a record number of iPhones to attract investors. In its earnings report yesterday, Apple topped revenue and sales forecast while the number of iPhones sold fell short of expectations. The number of iPhones sold (52.2 million) was nearly 3% higher as compared to the last year while the forecast was 52.3 million.

President Trump who rants about Witch hunt by using Twitter is likely to face more pressure Robert Muller who believes that he has sufficient grounds to subpoena a sitting president if he refuses to attend the court. If President Trump does receive a subpoena, investors would lose their confidence in terms of risk on trade. The US futures confirmed the direction of the trade yesterday.

Treasury yields and the dollar index would remain very much in the focus as the Fed would release its statement on its monetary policy. The dollar index has nudged lower but the overall strength in the index cannot be undermined. It took the wind out of the bull rally for metals; copper, Nickel and the precious metal.

As for the Eurozone, we expect the Eurozone’s economy to show some effects of the cold weather and its growth number may be feeble. If the number prints a reading below 0.4% it would further create obstacles for the ECB’s Hawkish monetary policy stance. The Euro/dollar pair broke the 1.20 mark yesterday for the first time since January.

The trade war between the US and China which soothed many investors because of the rosy picture painted by the like of Steven Mnuchin may actually change the situation. The US trade envoys have already started to adjust the market expectations as they are likely to return home empty hand from their trip. Commerce Secretary has also increased the noise by saying that the only solution out of this is where White House is also pleased otherwise he would return home earlier than expected.

Brexit talks are back on the main stage and investors are going to keep a close tap on it as the British pound fell to a fresh low against the dollar for this year. The next round of talks between the U.K. and the E.U begins today and the Irish border issue remains a thorny point. An outcome under which there is no deal would make the Brexit process complicated even further.

The Aussie dollar bounced above 0.75 handle and former key support which was broken on Tuesday, signaling that larger bears may take a breather before resuming.

Oversold conditions and slightly stronger momentum studies on daily chart also support scenario.

Extended upticks should be capped by falling 10SMA (0.7583) to keep bearish structure intact, while break higher would signal stronger correction and sideline bears.

Bearish continuation on sustained break below 0.7500 would extend towards key support at 0.7320 (Fibo 61.8% of larger 0.6818/0.8135 rally, also 09 May 2017 trough.

Completion of double-top pattern on weekly chart supports negative scenario.

Res: 0.7529, 0.7550, 0.7583, 0.7631
Sup: 0.7472, 0.7423, 0.7356, 0.7320

Broader bulls are consolidating under psychological 110.00 barrier which was approached on Tuesday’s rally to 109.88 (the highest since early Feb).

Barrier is reinforced by 200SMA (110.21) and firm break here would generate strong bullish signal for extension of larger uptrend from 104.63 (26 Mar low).

Weekly cloud twists this week (110.89) and could also attract bulls.

Meanwhile, the pair may hold in extended consolidation or correct deeper before eventual probe through 110 zone, as daily studies started to lose momentum and are overbought.

Consolidative action was so far narrow, with deeper dips expected to face strong supports at 109 zone (higher base, reinforced by rising 10SMA).

Res: 110.00, 110.21, 110.48, 110.89
Sup: 109.64, 109.23, 109.00, 108.65

Bitcoin rise started in mid-April starts back, currently trading above 9100 and heading along the 9300 range. Bitcoin bearish pattern started in March 2018 weakens. The pair is contained between hourly support and resistance given at 6306 (13/11/2017 low) and 10232 (01/02/2018 high). The technical structure suggests shortterm increase.

In the long-term, the digital currency has had an exponential growth but also presented important downturns. There is decent likelihood that the currency could stabilize between 7'000 - 12'000 in 2018. Bitcoin is trading slightly above its 200 DMA (8200 range).

Crude oil is bouncing off from 66.85, currently trading along 67.75 and approaching the 67.85 range. Crude Oil is trading at December 2014 high. The bullish pattern started in mid-February 2017 is maintained. Hourly support and resistance are given at 65.56 (17/04/2018 low) and 69.54 (12/01/2014 high). The technical structure suggests short-term upward moves.

In the long-term, crude oil has recovered after its sharp decline last year. However, we consider that further weakness is very likely. For the time being, the pair lies in an upside trend since June 2017. Support lies at 42.20 (16/11/2016) while resistance is located at 77.83 (20/11/2014). Crude oil is trading largely above its 200 DMA.

Silver is starting a recovery phase, bouncing off from 16.06 low and heading along the 16.35 range. Hourly support and resistance are given at 16.03 (05/12/2017 low) and 16.87 (06/03/2018 high). The technical structure suggests shortterm increase.

In the long-term, the trend remains negative/ sideways. Further downside is very likely. The pair is trading below its 200 DMA. Resistance is located at 21.58 (10/07/2014 high). Strong support can be found at 11.75 (20/04/2009).

Gold is bouncing off from 1302 low, heading along the 1315 range. Hourly support and resistance are given at 1300 (29/12/2017 low) and 1329 (08/03/2018 high). The technical structure suggests short-term increase.

In the long-term, the technical structure suggests that there is a growing upside momentum. A break of 1'392 (17/03/2014) is required to confirm it. A major support can be found at 1'045 (05/02/2010 low).