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Thursday September 28: Five things the markets are talking about

The Trump reflation trade is coming back in vogue with a bit more details on the U.S tax plans.

The dollar and global sovereign yields have rallied after President Trump yesterday proposed the biggest shake-up of the U.S tax system in thirty-years and strong U.S data further supports the case for another Fed rate hike later this year.

Nevertheless, investors should expect the proposed bill to face an uphill battle in congress with Trump's own Republican Party divided over it and Democrats hostile as critiques suggest the plan favours businesses and the rich and could add trillions of dollars to the U.S deficit.

Today's U.S data on GDP and personal spending (08:30 am EDT) should provide further clues as to the potential Fed policy path.

1. Stocks mixed signals

Global equities trade mixed as investors began to assess the implications of the much-anticipated U.S tax proposal.

In Japan, stocks rebounded overnight after Wall Street gained and the dollar rallied against the yen (¥112.81) on hopes that President Trump may be making progress on his tax plan. The Nikkei gained +0.5%, while the broader Topix rallied +0.7%.

Note: Japan's PM Abe dissolved lower house to make way for snap elections announced for Oct. 22

In Hong Kong, stocks fell, mirroring weakness in some other Asian markets, as investors worried about a possible slowdown in China await Q3 economic data. The Hang Seng index ended down -0.8%, while the China Enterprises Index lost -1.5%.

In China, equities were little changed as investors await Q3 data and counted down to a weeklong National Day holiday starting on Sunday. The blue-chip CSI300 index was unchanged, while the Shanghai Composite Index was down -0.2%.

Note: Mixed August data have raised concerns that China economic recovery could be losing steam.

In Europe, regional indices are trading mostly higher as rising bond yields lift the financial sector, materials stocks are being pulled own by commodity prices, including oil which is impacting energy stocks.

U.S stocks are set to open little changed.

Indices: Stoxx600 +0.1% at 385.8, FTSE +0.1% at 7319, DAX +0.4% at 12701, CAC-40 +0.2% at 5293, IBEX-35 +0.3% at 10399 , FTSE MIB +0.1% at 22653, SMI +0.2% at 9117 , S&P 500 Futures flat

2. Oil steadies as North Iraq, Kurdish pipeline stays open, gold melts

Oil prices trade steady, taking a breather after gains spurred by rising tension in northern Iraq following Kurdistan region's vote for independence in a referendum.

Brent crude oil is unchanged at +$57.90 a barrel. On Tuesday, it hit a two-year high print of +$59.49 after Monday's referendum vote prompted Turkey to threaten to close the region's oil pipeline, before pulling back.

U.S. light crude is +5c higher at $52.19 after rising +26c yesterday to just below a five-month high.

U.S. crude prices found some support from a surprise fall in U.S stocks. Crude inventories fell -1.8m barrels last week according to the U.S. Energy Department, versus forecasts for a +3.4m build.

Note: The crude ‘bears' remain sceptical about further price gains due to higher oil output from the U.S. The EIA said that production from wells in shale formations would rise for a 10th month in a row in October.

Gold fell to a new one-month low overnight as the ‘big' dollar rallied on expectations of a U.S interest rate hike in December. Spot gold is down -0.2% at +$1,278.36 per ounce, as strong U.S economic data took sheen off the precious metal.

3. A global bond rout deepens

The prospect of higher U.S debt levels and expectations for another Fed hike has sent 10-year Treasury yields to their highest since mid-July, with the 2-10 year yield curve steepening to its highest in a month.

Comments this week from Fed Chair Janet Yellen that the U.S central bank needs 'to continue with gradual rate hikes' have cemented expectations for policy tightening by year-end.

Note: U.S two-year notes are the most sensitive to overnight rates – yields have backed up to a nine-year high of +1.49% in anticipation of a rate rise in December.

The yield on U.S 10's has gained +3 bps to +2.34%, the highest in more than two months. In Germany, 10-year Bund yields increased +3 bps to +0.49%, the highest in almost two months, while the U.K's 10-year Gilt yield has climbed +1 bps to +1.398%, the highest in eight months.

4. Dollar gets a lift from Tax cuts, and Fed expectations

Expectations that the Fed will continue to raise interest rates and the prospect of U.S tax reform has boosted the dollar across the board. Are its gains short lived?

The EUR (€1.1764), GBP (£1.3373), and CAD (CA$1.2478) are all trading higher from their worst levels seen overnight, as too is yen (¥112.82) with the dollar after having hit a three-month high of ¥113.26 yesterday.

EUR ‘bears' continue to see a potential risk of the single unit falling as low as €1.15 if investors remain worried about German politics and optimism about the U.S.

Note: After Sunday's German elections, worries have resurfaced about the rising populism in the eurozone, and about whether Chancellor Merkel and French President Macron will be able to strike a deal on deeper eurozone financial integration.

Down under, the Reserve Bank of New Zealand (RBNZ) left rates unchanged as expected yesterday, noting that weaker currency ((NZ$0.7186) is best for dealing with 'tradable inflation.'

5. Eurozone business, consumer confidence surges

Data this morning showed that the EC's Economic Sentiment Indicator for September was stronger than expected, rising to 113.0 from 111.9, compared with a consensus forecast of 112.0.

It's the highest level since June 2007, and included Germany, France, Italy and Spain. The rise is a fresh sign that the economy has grown in Q3 at roughly the pace it did in Q2, and suggest that the region is poised for robust end to the year.

The data would also suggest that businesses and households are not that concerned about the prospect of a reduction in ECB stimulus sometime soon.

Daily Pivots: (S1) 132.13; (P) 132.43; (R1) 132.79; More...

Intraday bias in EUR/JPY remains neutral as corrective trading from 134.39 is still in progress. Outlook stays bullish as long as 131.69 support holds. Above 133.02 minor resistance will turn bias back to the upside. Sustained break of 134.20 fibonacci level will extend larger up trend to 141.04 resistance next. However, break of 131.69 will be an early sigh of medium term reversal and will target 127.55 key support level instead.

In the bigger picture, current rise from 109.03 is seen as at the same degree as the down trend from 149.76 (2014 high) to 109.03 (2016 low). 61.8% retracement of 149.76 to 109.03 at 134.20 is already met. Sustained break there will pave the way to key long term resistance zone at 141.04/149.76. On the downside, break of 127.55 support is needed to be the first signal of medium term reversal. Otherwise, outlook will remain bullish.

Daily Pivots: (S1) 150.48; (P) 151.04; (R1) 151.56; More

No change in GBP/JPY's outlook. Correction from 152.82 could extend lower. But downside is expected to be contained by 38.2% retracement of 141.17 to 152.82 at 148.36 to bring rally resumption. Break of 152.82 will extend the larger rise from 122.36 to 61.8% projection of 122.36 to 148.42 from 139.29 at 155.39 next.

In the bigger picture, medium term rebound from 122.36 is in progress. Firm break of 38.2% retracement of 196.85 to 122.36 at 150.43 will carry long term bullish implications. In that case, GBP/JPY could target 61.8% retracement at 167.78. For now, the bullish scenario is preferred as long as 139.29 support holds.

Crude Oil is edging higher above the $50 level. Key support is given at 45.40 (17/08/2017 high). Strong resistance found at 52.43 (26/09/2017) has been broken. Expected to show another leg higher.

In the long-term, crude oil has recovered after its sharp decline last year. However, we consider that further weakness are very likely. Strong support lies at 35.24 (05/04/2016) while resistance can now be found at 55.24 (03/01/2017 high).

Silver has reversed and has broken uptrend channel by breaking support implied by its lower bound. Strong resistance is given at 18.65 (17/04/2017 high) while support can be found at 16.58 (15/08/2017 high). Expected to show further bearish move.

In the long-term, the trend is rater negative. Further downsides are very likely. Resistance is located at 25.11 (28/08/2013 high). Strong support can be found at 11.75 (20/04/2009).

Gold has weakened again below 1300. Hourly support is now given at 1277 (intraday low). Hourly resistance is located at 1357 (08/09/2016). Stronger support lies at 1204 (10/07/2017 high). Expected to show further bearish move.

In the long-term, the technical structure suggests that there is a growing upside momentum. A break of 1392 (17/03/2014) is necessary ton confirm it, A major support can be found at 1045 (05/02/2010 low).

Bitcoin has taken a dive after strong interest over the summer. The digital currency has set up a new support at 2975 (22/08/2017 low). Sell walls around $4000 have been broken. Key resistance can be located at 4921 (01/09/2017 high). The road is wide open for further shortterm increase.

In the long-term, the digital currency has had an exponential growth. There are decent likelihood that the asset will reach $10'000.

EUR/CHF is riding lower within uptrend channel. Buying pressures are still strong. Strong resistance is now given at 1.1623 (22/09/2017 high). Expected to bounce back within uptrend channel.

In the longer term, the technical structure has reversed. Strong resistance is given at 1.20 (level before the unpeg). Yet, the ECB's QE programme is likely to cause persistent selling pressures on the euro, which should weigh on EUR/CHF. Supports can be found at 1.0184 (28/01/2015 low) and 1.0082 (27/01/2015 low).

EUR/GBP is trading mixed today. Yet, the pair is facing selling pressures. As long as prices remain below the resistance at 0.8899 (19/09/2017 low), the short-term technical structure is biased to the downside. Hourly support is given at 0.8719 (16/06/2017). Strong resistance lies at 0.9306 (29/07/2017 high).

In the long-term, the pair has largely recovered from recent lows in 2015. The technical structure suggests a growing upside momentum. The pair is trading above from its 200 DMA. Strong resistance can be found at 0.9500 (psychological level).

AUD/USD is weakening in the short-term. Hourly resistance is given at 0.8164 (14/05/2017 high). The pair is approaching support at 0.7786 (18/07/2017 low). Expected to show continued weakness.

In the long-term, the trend is turning positive. Key supports stands at 0.6009 (31/10/2008 low) . A break of the key resistance at 0.8164 (14/05/2015 high) is needed to invalidate our long-term bearish view.