Political risk of a trade war continues to drive sentiment

Political risk of a trade war continues to drive sentiment

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  Weekly Outlook Monday 26thMarch 2018 by Richard Perry, Market Analyst Forex and CFDs are high risk leveraged products that can result in losses greater than your initial deposit and you should therefore only speculate with money you can afford to lose. FX and CFD trading are not suitable for everyone. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. You should first carefully consider your investment objectives, level of experience, and risk appetite and only invest funds you are prepared to lose entirely. For our full risk warning, please go to the end of this report. WHEN: Thursday, 29th March, 1330BST LAST: +1.5% YoY FORECAST: +1.6% YoY Impact: The Federal Reserve expects that its preferred inflation reading, the core PCE, will be +1.9% by the end of this year. Core PCE has been stuck at +1.5% for the past four months and shown little sign of ticking higher towards the Fed’s expectation. Inflation is still a key sticking point for the Fed (as shown in last week’s projections) but the longer it remains subdued, the dollar will be pressure as there will be little need for the Fed to be more aggressive. In a quiet week for economic data, this is likely to be a market mover, especially on longer dated yields and the dollar. Key Economic Events Date Time Country Indicator Consensus Last Tue 27th Mar 1400BST US S&P CS House Price Index +6.2% +6.3% Tue 27th Mar 1500BST US CB Consumer Confidence 131.0 130.8 Tue 27th Mar 1500BST US Richmond Fed Manufacturing +23 +28 Wed 28th Mar 1330BST US GDP (Q4 2017 Final) +2.7% +2.5% Wed 28th Mar 1500BST US Pending Home Sales +2.1% -4.7% Wed 28th Mar 1530BST US EIA Crude Oil Inventories -2.6m Thu 29th Mar 0930BST UK GDP (Q4 2017 final) +0.4% +0.4% Thu 29th Mar 0930BST UK Current Account -£24.0bn -£22.8bn Thu 29th Mar 1330BST US Core Personal Consumption Expenditure +1.6% +1.5% Thu 29th Mar 1500BST US University of Michigan Sentiment (revised) 102.0 102.0 T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 1N.B. After daylight savings time shift, please note all times are British Summer Time (BST) i.e. GMT +1. Data: Reuters Macro Commentary Markets are being hit as risk appetite has dramatically deteriorated. The growing prospect of trade protectionism between the world’s two most powerful economies is increasingly of major concern to investors. The big question in the coming weeks is how China will react to Donald Trump specifically targeting then with $50bn to $60bn of trade tariffs. China has already said that it does not fear a trade war with the US but is yet to respond to the targeted tariffs. It is estimated that US tariffs would negatively impact the Chinese economy by around a quarter of a percent of GDP growth. So not anything too serious seemingly. However Trump could go further as he looks to reverse a $375bn US/China trade deficit. The strength of the response in the coming weeks could play a key role in the development of risk appetite. However, investors are also concerned by the increasingly hawkish re-composition of Donald Trump’s administration. New national security advisor John Bolton is a hawk advocating a more aggressive stance on North Korea and Iran, and comes hot on the heels of the resignation of the moderate Gary Cohn who was a balancing force as Trump’s economic advisor. However, another factor to consider in the coming weeks is that short term funding rates for companies around the world are rising as the US three month US dollar Libor rates have rise to their highest since 2008. This tightens financial conditions further and negatively impacts risk appetite. Must Watch for: US Core Personal Consumption Expenditure US Core PCE Will the Fed’s preferred inflation gauge start to tick higher? Consensus implies not there may be signs of life.
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  Weekly Outlook Monday 26thMarch 2018 by Richard Perry, Market Analyst Foreign Exchange Of the majors, the US dollar will be the loser of a trade war between the US and China. Although the Chinese are yet to respond to Trump’s $50bn/$60bn of tariffs, markets are taking it that we can expect a reciprocal move, i.e. ultimately meaning zero sum gain for the US, but a tit for tat trade war that negatively impacts global trade. This would hit economic growth in the US. With the FOMC concerned over how a trade war would pan out, far from becoming more aggressive in its tightening, this could actually lead to a less aggressive tightening. The dollar, already under pressure from deteriorating twin deficits and a late stage tightening cycle, will come under pressure in the coming weeks. Below 89.40 on Dollar Index would be a near term break to open a retest of the mid-February low support at 88.25. It is interesting to see that with all the significant fundamental factors of the past week, the euro has all but matched the moves of the dollar. Could it be that the euro rally potential is fading, at last near term? Eurozone PMIs are now in decline and there are suggestions that the market may be overextended in its positioning near term. This could limit significant euro gains, whilst a weaker dollar is likely to be the driver of EUR/USD. Another by-product of the trade war with the US could become the Aussie dollar. There are conflicting arguments as the Aussie is a high risk major with which China is a major trading partner, however do not discount the fact that Australia could benefit from China re-aligning its trade patterns. WATCH FOR: Trade tariffs developments impacting risk, US core PCE is another key for the dollar T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 2 FX Outlook USD/JPY Watch for: Rallies will be seen as a chance to sell under 106.65 lower high Outlook: The run of lower highs put pressure on the key lows around 105.23/105.60 which finally gave way on Friday. With a decisive close lower the bears are in control and downside pressure is growing. This means that the old support will become a basis of resistance this week. Momentum indicators are significantly bearishly configured with the MACD, RSI and Stochastics all in decline but also with downside potential. Rallies will be seen as a chance to sell this week, with the downtrend falling around 106.60 adding to the resistance of last week’s lower high which comes in at 106.65. EUR/USD Watch for: A support band around $1.2150 remains a key area for the longer term bulls. Outlook: EUR/USD continues to be stuck in a broad 400 pip trading range of the past 10 weeks but the outlook is becoming even more neutral and in need of a decisive catalyst. Will it get one this week? Aside from core PCE there is little to shift the market if the raft of volatility factors failed to do so last week. There is a resistance band between $1.2390/$1.2445 which comprises lower highs of the past three weeks which protect the $1.2555 key February high. However the support at $1.2240 protects the range low at $1.2155. Momentum indicators are becoming ever more neutralised. This is a market in need of a jolt.
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  Weekly Outlook Monday 26thMarch 2018 by Richard Perry, Market Analyst Equity Markets Equities are a relatively high risk asset class, and markets closely aligned to global trade are being hit as risk appetite has deteriorated as protectionist fears have increased. Subsequently the DAX which is an export heavy index, is underperforming other European indices such as the FTSE 100 and the CAC over the past week. The near term outlook shows markets under pressure, with volatility elevated, however is this a good time to buy into markets again? Eurozone markets were expected to perform strongly in 2018 as reduced political risk, improving economic position and far better relative valuations compared to US markets. Although global risk factors are weighing markets down in the past couple of months, once the selling pressure begins to subside then valuations will look even more enticing. Catching a falling knife is a risky way to play markets, but markets are already between 11% to 13% off their highs. In the long run this will be seen as an opportunity. On technicals, it was interesting to see the DAX and CAC bouncing from key February lows, meaning a key technical breakdown has been averted. This leaves 11,830 as key support on the DAX and 5050 being key support on the CAC. The FTSE 100 looks far worse though on a technical basis, having seen a decisive breach of 700 to take the market to 15 month lows. There is now considerable resistance for the bulls to overcome between 7060/7100. On Wall Street, the situation is far less perilous with long term uptrends still intact. This is reflected in the S&P 500 and Dow Jones Industrial Average both hanging on to the rising 144 day moving average on Friday, suggesting this remains a correction within the longer term bull market (as long as the sell-off does not continue this week). WATCH FOR: Trump’s tariffs are still important for sentiment, but also the FOMC meeting will be key T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 3 DAX Xetra Watch for: Holding on to the 11,830 support is crucial this week Outlook: Sharp selling pressure has swamped the DAX in recent sessions, however it is interesting to see the support of the key February low at 11,830 broadly holding as the market rebounded from Friday’s lows. This now means that this support is incredibly important in the coming sessions. The problem is that momentum indicators are deteriorating with downside potential. There is now resistance over overhead supply between 12,000 to 12,160 to breach that is restrictive for a recovery this week. The bulls need to hang on to 11,825 to prevent a huge top pattern forming. FTSE 100 Watch for: A 8 week downtrend resistance coincides with overhead supply 7060/7100. Outlook: Lower highs and lower lows in recent weeks, with the market forming a strong downtrend that falls between 7100 and down to 7060 this week. There is a degree of overextension that has developed with the recent selling pressure and this could induce a technical rebound, however the resistance of the overhead supply of old key lows in the range 7060/7100 will be a key factor in how far the market can recover. For now, rallies remain a chance to sell and the bulls have an extremely tough job on their hands to form a sustainable recovery. The next key support is 6610/6690. Index Outlook
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  Weekly Outlook Monday 26thMarch 2018 by Richard Perry, Market Analyst Other Assets: Commodities & Bonds As the dollar outlook has deteriorated in the wake of the Fed announcement, in addition to a sharp move into safe havens on the protectionist fears, we see gold has rallied again. It is incredible to see the support of the long term pivot band $1300/$1310 once again holding firm, with the bulls storming back as last week drew to a close. There had been a suspicion that gold was becoming a yield play, but it was certainly the dollar weakness that played a role in the upside break above $1341 and as such the dollar moves will be key this week. Oil is a play on global growth and concerns over trade tariff s and protectionism will act as a drag on the price, however it is interesting to see supportive comments from the Saudi energy minister suggesting that the agreement on production cuts between OPEC and Russia could continue into 2019. As ever, watch for the EIA inventories which surprisingly showed a crude oil drawdown last week in a move that helped to pull oil strongly higher. US yields have fallen sharply in the wake of the Fed decision. Clearly there was a risk aversion factor behind the move that should not be ignored, however, this is hardly a ringing endorsement of the Fed’s hike last week. A failure to signal a more aggressive tightening now questions how viable it is for the 10 year yield to break above 3.00%. A downside break on the 10 year below 2.79% would imply a move back to 2.66% again. WATCH FOR: Trade tariff fears remain key, but the core PCE is the only major data this week T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 4 Gold Watch for: The breakout above $1341 has opened the highs again with weakness a chance to buy Outlook: The medium term range that has formed throughout the early months of 2018 is still intact. The bulls have certainly taken on far more control within the range as the market has broken above $1341. A retest of the $1366 key January high is now back on. The bulls will now view a support band between $1330/$1341 as a near term “buy zone” should there be any unwinding move this week. The momentum indicators have taken a significant turn for improvement but traction needs to continue for the bulls to decisively trust the move higher on the MACD lines. Markets Outlook Brent Crude oil Watch for: Bulls in control and any weakness to find support around $67.90 is a chance to buy Outlook: A decisive near term breakout on Brent Crude last week above resistance at $67.90 has re-opened the path to test the key January multi- year high again at $71.30 this week. Momentum indicators have put an end to their corrective phase as the seven week downtrend has been broken. The RSI and MACD lines are both strongly configured and this will mean that any corrective move will be seen as another chance to buy. The old resistance at $67.90 is now a basis of support, with a near term “buy zone” $65.85/$67.90.
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  Weekly Outlook Monday 26thMarch 2018 by Richard Perry, Market Analyst T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 5 Risk Warning for Financial Promotions This report is issued by Hantec Markets Limited, who is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, No. 502635. The report is prepared and distributed for information purposes only. Trading in Foreign Exchange (FX), Bullion and Contracts for Differences (CFDs) is not be suitable for all investors due to the high risk nature of these products. Forex, Bullion and CFDs are leveraged products that can result in losses greater than your initial deposit. The value of an FX, Bullion or CFD position may be affected by a variety of factors, including but not limited to, price volatility, market volume, foreign exchange rates and liquidity. You may lose your entire initial stake and you may be required to make additional payments. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. Before deciding to enter into FX, Bullion and/or CFD trading, you should carefully consider your investment objectives, level of experience, and risk appetite. You should only invest in FX, Bullion and/or CFD trading with funds you are prepared to lose entirely. Therefore, only your excess funds should be placed at risk and anyone who does not have such excess funds should completely refrain from engaging in FX and/or CFD trading. Do not rely on past performance figures. If you are in any doubt, please seek further independent advice. This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such. All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability. Trust Through Transparency Hantec House, 12-14 Wilfred Street, London SW1E 6PL T: +44 (0) 20 7036 0850 F: +44 (0) 20 7036 0899 E: [email protected] W: hantecfx.com