WEEKLY OUTLOOK 13-17 February 2017

A QUICK LOOK AT GLOBAL FINANCIAL MARKETS EMERGING MARKETS Rising hopes for a breakthrough in another Greece bailout for its €7bln redemption due July seems to have provided sort of a relief in emerging markets although fragile indebtedness and Greece’s reluctance to meet Troika’s requirements like cuts in pension costs still keeps the issue on top agenda among 2017’s fragilities. On US-China front, tension seems to have eased a bit between two countries with Trump and Chinese President Xi Jinping’s phone call over the week that revealed Trump’s commitment to One China policy, recognizing Beijing as Chinese governmental center. Political agenda on both EU and Asia seems to weigh on markets more but there are important releases to be followed in Asian developing markets this week. In China, CPI inflation will be announced on Tuesday at 9:30 a.m. (UTC + 8). Y/Y inflation is expected to be 2.4% in January, up from 2.1% a month ago. Rising inflation is welcomed in China as it represents recovering economic activity. Not only demand side but also supply side factors are contributing to rising inflation. Chinese Yuan which depreciated around 6.0% in 2016 is expected to depreciate further in 2017 and push inflation higher.

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 in January 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. Hence, interest rate decision to be announced on Thursday will be quite important. Market consensus is no change in the policy rate at 4.75%. Rationale behind the consensus is the Central Bank’s tendency to protect the economy against global financial risks including capital outflows and inflationary pressures from higher food and utility prices.

CPI inflation in India will be announced on Monday at 5:30 p.m. (UTC + 5:30). Market consensus for January inflation is 3.22% whereas it was 3.41% a month ago. Another important release will be foreign exchange reserves to be released on Friday at 5:00 p.m. (UTC + 5:30). Foreign reserves according to previous release stood at $363.1 bln.

In Turkey this week, CBRT expectation survey, balance of payments, unemployment rate and budget balance will be widely followed. Monthly expectation survey which is held by the CBRT will be announced on Monday. Market will follow how market participants and business environment revised their inflation expectations following sharp increase in inflation in January. End year inflation expectation was 8.5% in the previous survey. Medium term inflation expectations will be more important for the conduct of monetary policy and January survey revealed that 12 and 24 forward looking inflation expectations lie at 8.19% and 7.59% respectively. Any pick up on those rates will be a warning for the CBRT for further tightening. December balance of payments will be announced by the CBRT on Tuesday at 10:00 (GMT+3). Market consensus for current account deficit is $4.6 bln. This would carry 12m trailing deficit from $33.6 bln in November (4.3% of estimated GDP) to $34.0 bln in December (4.4% of estimated GDP). Data has no material market impact however surprisingly low or high realization may lead to a volatility in exchange rate. Turkstat will announce November labor market statistics on Wednesday at 10:00 (GMT+3). Market expects unemployment rate to rise to 12.1% in November, quite higher than 10.5% registered in the same month of previous year. Seasonally adjusted unemployment rate in October was 11.7% and though there is no market consensus, weak private demand might have hurt employment in the final quarter. Data may have negative market impact if it comes in line with market consensus.

MAJOR MARKETS Global financial markets have followed a positive course within the week. One major reason was quite favorable earnings season in US with an average 8.4% growth in 4Q16 based on 70 percent of the S&P 500 firms’ results. This is reported to be the best performance since 3Q14, according to Thompson Reuters. Stock indices this week have broken new records with President Trump’s new economic agenda and oil prices’ boost to energy shares. Economic agenda will include Fed Governor’s semi-annual testimony on Tuesday and US inflation data as the most important items, among other releases. No major deviation from latest FOMC statement is expected from Mrs. Yellen speech however Q&A session would include Fed’s stance against President Trump’s fiscal loosening plans. Her explanations may provide a hint over whether Fed might move faster and/or earlier than expected. Expectations mostly point to June for the next Fed rate hike while market give 13.3% probability to a rate hike in March meeting. Among data releases in US, retail sales, industrial production, inflation, Treasury International Capital (TIC) data and housing data will be quite important. As inflation is one of the two pillars of Fed’s dual mandate, market will seek a hint out of next Fed moves. Market consensus for the data to be released on Wednesday at 8:30 a.m. (UTC-5) is 0.3% m/m and y/y inflation is expected to pick up to 2.4% in January from 2.1% a month ago. Core inflation on the other hand is expected to remain flat at 2.2%. Acceleration in headline inflation may prompt investors to price an early rate hike than June hence push DXY higher. Conversely, a worse than expected realization would delay Fed rate expectations and support EM economies. As another widely followed inflation indicator, real average weekly earnings in January will also shape market expectations about Fed’s next move. There is no consensus about the data but market will follow whether January realization will exceed December outcome of 0.2%.

Retail sales which is widely followed by markets to assess domestic trade activity in US will be announced at the same day and time with CPI inflation. Core retail sales which exclude automobile and gas is expected to post 0.4% growth in January over previous month whereas it posted no change in December. Such realization will be considered positive by markets and may support dollar index. Retails sales may remain secondary due to inflation. Industrial production will be announced at 9:15 again on Wednesday as another important data release of the week.  Market expects industrial production to post 0.0% m/m change in January whereas production grew 0.8% in December. Capacity utilization in the meantime is also expected to remain flat at 75.5% in January compared to a month ago. Rise in production growth would encourage market participants who expects Fed to resume rate hikes in the second half of the year. We may see dollar index to edge down should realization comes in line with expectations. Net TIC flows which will be announced on Wednesday at 16.00 (UTC-5) 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. Rise in global bond yields keep data important for markets. There is no consensus estimate for the data however net foreign inflows to US assets in November has been $30.8 bln while long term net inflows were $23.7 bln. Acceleration in inflows would put upward pressure over dollar and hence support depreciation in EM currencies. On the contrary we may see further pick up in US bond yields if we see outflow from US assets continue. 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 January, market expects housing starts to post 0.3% rise over previous month while there was 11.3% rise 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 a m/m increase of 0.2% in January following 1.3% rise in December. 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 selloff in bond market. In Eurozone, ZEW Expectation survey and second estimate of GDP growth for 4Q16 will be followed in Eurozone. For ZEW index to announced on Tuesday, any realization better than January outcome of 23.2 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 GDP growth in Eurozone to be announced on the same day, q/q expectation is 0.5%, same as previous reading. This stands for a y-o-y realization of 1.8%, same as the previous release. A lower realization would put further downward pressure over EUR/USD.

In UK, January inflation will be the main releases of the week. January inflation to be announced this week on Tuesday is expected to be -0.5% m/m which will push y/y inflation to 1.9% from 1.6% a month ago. Core inflation in the meantime is expected to rise from 1.6% to 1.7%. 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.

Japan GDP will be announced on Monday at 8:50 a.m. (UTC + 9). Preliminary estimate for 4Q16 suggests 1.1% GDP growth y/y whereas it was 1.3% in the previous quarter. A worse than expected realization would hurt USD/Yen. Additionally, market will follow industrial production in Japan to be announced on Tuesday at 1:30 p.m. (UTC + 9). There is no consensus but previous estimates were suggesting 3.0% growth y/y. A better than expected realization would support USD/Yen.   EUR/USD - The pair moved downwards from 1.0780 to 1.0625 support level and closed the week below the 1.0666 referance level. In order for the Euro to gain more value, it needs to go beyond 1.0666. Otherwise, the increase may be limited. In this case, we will face support levels at 1.0625 and 1.0555. If the price rises above 1.0666, the next resistance levels will be at 1.0730 and 1.0780. Support Levels : 1.0625 – 1.0555 – 1.0510 Resistance Levels : 1.0666 – 1.0710 – 1.0780

 Technical Analysis

GBP/USD – The pair found buyers from 1.2345 to 1.2580 and then pulled back toward the 1.2448 main support level last week. As long as the pair trades above 1.2448, the GBP may continue to gain momentum and we will face the 1.2580 and 1.2685 resistance levels. However, if the price drops below 1.2448, we will follow 1.2345 and 1.2250 as the next support levels. Support Levels : 1.2448 – 1.2345 – 1.2255 Resistance Levels : 1.2580 – 1.2685 – 1.2775   USD/JPY – Last week, the pair tested the 111.90 major support level and then bounced up to 113.60. As long as the price remains stable below the 113.60 resistance level, the increase might be limited and we will face the support levels at 112.75 and 111.90. However, if the pair goes beyond 113.60, the next resistance level will be at 114.80. Support Levels : 112.75 – 111.90 – 110.50 Resistance Levels : 113.60 – 114.80 – 115.85   GOLD – After it broke down the support level of 1236, we saw the profit taking process move towards the 1226 support level last week. As long as the price remains stable above 1226, the risk appetite might continue and we will face resistance levels at 1236 and 1255. However, if Gold trades below 1226, the next support level will be at 1210. But while pullbacks stay above 1210 main support level, we expect the yellow metal to resume rally towards new highs. Support Levels : 1226 – 1210 - 1197 Resistance Levels : 1236 – 1255 - 1273   U.S. OIL – The price dropped dramatically to the support level of 51.55 and then bounced up just above 53.80. In order for the U.S. Oil price to gain more value, it needs to go beyond the 54.25 main resistance level. In this case the next resistance will be at 56.24. Otherwise, the increase may be limited and we will follow the support levels at 53.80 and 53.20. Support Levels : 53.80 – 53.20 – 52.55 Resistance levels 54.25 – 56.24

05 Jul 18 (Thu)

02:17 pm


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