A QUICK LOOK AT GLOBAL FINANCIAL MARKETS
It’s been a quite volatile week for global financial markets ahead of Donald Trump’s inauguration in January 20. Mexican peso together with Turkish lira have been the worst performers, the latter hurt by the expectation that Trump will fault free-trade deals that he blamed for costing U.S. jobs. Though Trump has not been vocal about the issue since he got elected as the President, volatility is likely to continue until specifics of Trump’s plans is revealed when he took the post. Turkish lira was tumbled amid parliamentary discussions of constitutional amendments in response to which the Central Bank had to take some shy measures without an outright policy rate hike.
In China, main data release of the week will be fourth quarter GDP. China GDP growth which will be announced on Friday is expected to remain flat at 6.7%. It will be crucial to see whether Chinese growth which met expectations in the first half of the year with 6.7% will be able to preserve that level in the second half as well. Otherwise global growth concerns would aggravate and affect markets negatively starting from Asia.
Other two important releases of the week will be December industrial production and retail sales again to be released on Friday. Indicators providing hint over the growth performance in China in the second half of the year is of utmost importance for global financial markets. Market expects industrial production in December to post 6.1% growth over a year ago, following 6.2% y-o-y in November. Markets may be disappointed by the deceleration in production performance in China. Market expects also December retail sales growth to slightly ease to 10.7% y/y from 10.8% growth registered in November. Data may remain secondary as market would focus on GDP growth and industrial production however should both industrial production and retail sales comes better than market consensus, they may lead to a positive sentiment in Asian financial markets.
Indonesian economy has been suffering from weak foreign demand and low energy prices throughout 2016 and Financial Times Economic Sentiment Index which gauges consumers’ outlook for economy in the next six months, is released this week and revealed that economic sentiment fell for the second consecutive quarter in 4Q16, to 71.5. This is the lowest level since the initiation of the index in 2012. Some companies have cut production and laid off workers, hurting household income, while urban consumers have faced higher prices for imported goods such as cereals and cars, due to currency depreciation, according to FT.
Trade balance will be announced in Indonesia this week on Monday. Import growth is expected to come down 3.5% in December, following 9.9% rise in November while exports are expected to post 13.3% growth over a year ago while growth was 21.3% a month ago. Additionally, Bank of Indonesia will announce its policy rate decision on Thursday. Policy rate is currently 4.75% and lending facility rate is 5.5%. Consensus is no change in policy rates this month.
Brazil with a surprise move cut its policy rate by 75 bps to 13% last week, against the market consensus of 50 bps. The Central Bank stated that weak economic activity, longer than expected recovery period as well as higher than expected fall in inflation to 6.3% at the end of the year has urged them to take a bond action. Whether easing will continue or not will depend on the fate of economic activity.
In Turkey last week, the CBRT surprised the market by an implicit rate hike by cancelling one week repo auction. The CBRT provides funding to the banking system via one week repo rate at 8.0%, O/N lending rate at 8.5% and late liquidity window at 10.0%. Late liquidity window was not used since European crisis, hence the main funding rates are 8.0% and 8.5%, weighted average of which were hovering around 8.30% before the decision. The CBRT by cancelling funding from 8.0%, it pushed weighted average funding rate close to 8.40%. Additionally, the CBRT in Friday evening announced that it lowered the amount that banks can borrow in interbank market to TRY11 bln, which is likely to lead banks to apply late liquidity window where funding rate is 10%. This is an implicit rate hike and may push average funding rate as high as 9.8%. USDTRY having seen 3.90 within the week retreated back to 3.724 by late Friday.
Apart from CBRT actions, October unemployment rate, December budget balance and January expectation survey will closely be followed in Turkey this week. Market consensus for unemployment rate to be announced on Monday at 10:00 a.m. (GMT+3) is 11.5% which is quite higher than the same month of previous year’s 10.5%. December and hence annual budget balance will be announced also on Monday. Budget balance in 2015 December generated TRY18.1 bln overall and TRY13.8 bln primary deficit. Note that fiscal discipline was on track till November in the last 12 months with budget balance around 1.2% of estimated GDP however, a slippage should not be ruled out due to fiscal support for economic activity at the end of the year. The CBRT will announce January expectation survey results on Thursday. We will see the extent of how market revised its inflation expectation after higher than expected realization at the end of the year. Note that 12- and 24- month ahead inflation expectations were 8.04% and 7.31% respectively in the previous survey.
Global financial markets’ has followed volatile course this week amid opening of US earnings season with bank balance sheets, Britain’s preparations for Brexit and prevailing volatility over emerging market exchange rates. Data agenda is quite heavy this week in US, while Fed Governors’ speeches including Yellen will closely be followed. Dudley among Fed Governors will speak on Tuesday, Williams and Kaskari will show up in Wednesday, Harker and Yellen will speak on Friday. Statements regarding growth and inflation will be considered as hints over the monetary policy conduct and may impact bond yields and dollar index.
Among data releases in US, industrial production, inflation, Treasury International Capital (TIC) data and housing data will be quite important. Industrial production which is one of the main growth indicators for US is expected to be announced on Wednesday and post 0.6% m/m growth in December. It posted a 0.4% drop in the previous month. Similarly, capacity utilization is also expected to slightly increase to 75.5% in December from 75.0% in November. Production growth stronger than expectations would support the acceleration in dollar index.
As one of the main pillars of Fed decisions, CPI inflation in US will be announced on Wednesday as well. Market expects m/m inflation to be 0.3%. Headline y/y inflation is expected to pick up to 2.1% in December from 1.7% a month ago whereas core inflation is expected to remain flat at 2.1%. Acceleration in headline inflation may prompt investors to price an increase in the possibility of a rate hike in the first half of the year hence push DXY higher. Conversely, a worse than expected realization would delay Fed rate expectations and favor EMs. As another widely followed inflation indicator, real average weekly earnings in December will also shape market expectations about Fed’s next move. There is no consensus about the data but market will follow whether December realization will exceed November outcome of 0.5%. A slowdown in earnings growth would lead to a drop in US bond yields and dollar index.
Net TIC flows for November will be announced on Wednesday as well. It is quite crucial for the fate of US exchange rate and bond markets. Data shows the foreign inflows to US equity, Treasury bond and private corporate bond markets. Flight to secure assets amid global financial volatility keeps US bonds attractive for investors. There is no consensus estimate for the data however net foreign inflows to US assets in October have been $18.8 bln while long term net inflows were 9.4 bln. Acceleration in inflows would put upward pressure over dollar and hence support depreciation in EM currencies
Housing starts as a critical indicator of economic strength which reflects the number of privately owned new houses on which construction has been started is an important ingredient in market players’ expectation of next Fed move. In December, market expects housing starts to post 10.1% rise over previous month to 1200K while there was 18.7% drop in the previous month. Building permits as another key indicator of demand in the housing market measures the change in the number of new building permits issued by the government. It is expected to post m/m increase of 0.7% in December to 1220K, following 4.7% drop in November. Market impact would be negative for EMs but positive for US should indicators point to further recovery in US housing market. This would support dollar index and lead to a sell off in bond market.
In Eurozone, ECB Governing Council meeting will be the main agenda. There is no expectation of a policy rate change in the meeting however ECB Governor Mario Draghi’s statements will be quite important as he may provide hints over whether bond buying program will be extended further or monthly purchase target might be revised up again if need be. Concrete statements regarding support for economy would further push EUR/USD down from its current level little above 1.06.
Among data releases, ZEW Expectation survey and final reading of CPI inflation will be followed in Eurozone. For ZEW index, any realization better than December outcome of 18.1 would be considered good for economic recovery in EU as it points to a better standing in financial sector’s perception about peripheral Europe. As for CPI inflation in Eurozone, it is expected to be 0.5% m-o-m according to final numbers. This stands for a y-o-y realization of 1.1%, same as the previous release. Core inflation is also expected to remain flat at 0.9% y-o-y. A lower realization would put downward pressure over EUR/USD.
In UK, news regarding preparations of Brexit will weigh on markets. PM Theresa May will reveal Brexit plan on Tuesday and will announce her views about the UK’s existence in single market and customs union. Though government rejects the claims, Mrs. May is expected to opt for hard Brexit that would take Britain from single trade area where all goods circulate freely, whether made in the EU or imported from outside. Should statements of Mrs. May’s on Tuesday hint that Britain is ready to forego its trade relations with EU sterling may face a sharp drop from its current levels of 1.218.
Additionally, December inflation will be announced this week in UK. CPI inflation to be announced on Tuesday is expected to be 0.3% m/m in December which will push y/y inflation to 1.4% from 1.2% a month ago. Core inflation in the meantime is expected to remain constant at 1.4%. Amid concerns over growth performance after Brexit, rising inflation may be considered positive as it will hint economic activity and demand conditions were not hurt yet. This would also support GBPUSD, ceteris paribus, but Theresa May’s statements on the same day may revert the course.
03 Jul 18 (Tue)
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