by Richard Perry, Market Analyst

Transcription

1 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. Macro Commentary Although there are a myriad of factors that could be attributed to the recent market sell-off, the basis probably does lie at the door of fear over inflation. With the US firing on all cylinders and (at or around full employment) the market has been wondering for months when the Phillips Curve would finally kick in to throw wages higher and stoke the fires of inflation. Yields spiked higher recently to multi-year highs on these fears. However, the payrolls report shows that earnings are not sustainably strong yet, whilst US CPI included a downside surprise last week. It is interesting to see current expectations (according to Bloomberg) suggest headline inflation has peaked and will be stable around 2.2% to 2.3% throughout much of the next 12 months. The market is record short on US Treasuries (in substantial size) and at some stage there could be a sizeable short-squeeze that would pull yields back lower again. In addition to inflation expected to tail off next year is also a tail off in growth expectations. Donald Trump has spent much of the past week goading the Fed about making a mistake on tightening (and incredibly that he knows more than them). If inflation does indeed remain subdued then there is a possibility that the Fed may actually pull the reins a touch on its tightening. This could be a signal that all these record shorts on Treasuries need to induce a bout of covering and a decline in yields. Dollar strength that has been a feature of recent weeks looks less certain now. On a short covering of Treasuries the dollar correction of the past week could be small fry in comparison. Must Watch for: US Retail Sales WHEN: Monday 15 th October, 1330BST LAST: FORECAST: Ex-autos +0.3% MoM Ex-autos +0.3% MoM Impact: Around two thirds of US growth comes from consumer spending, so retail sales will always be an incredibly important data to gauge the US economy. Year on year retail sales are running hot at well over 5% for much of the year (especially in recent months as the tax cuts have kicked in). A +0.3% monthly growth would imply this run rate around 6% and still a strong number. Treasury yields will be reactive as strong retail sales would fit into growing inflationary pressures. An upside surprise would be yields positive, dollar positive and increasingly worry equity traders. US Retail Sales Has seen month on month growth every month this year. However, consensus has only got it right on two occasions in the past 12 months. Revisions are also common and makes it a hard data point to read/trust. Key Economic Events Date Time Country Indicator Consensus Last Mon 15 th Oct 1330BST US Retail Sales (ex-autos MoM) +0.3% +0.3% Tue 16 th Oct 0230BST China CPI / PPI +2.5% / +3.5% +2.3% / +4.1% Tue 16 th Oct 0930BST UK Unemployment / Average Weekly Earnings 4.0% / +2.6% 4.0% / +2.6% Tue 16 th Oct 1000BST Eurozone German ZEW Economic Sentiment Tue 16 th Oct 1415BST US Industrial Production / Capacity Utilization +0.2% / 78.2% +0.4% / 78.1% Wed 17 th Oct 0930BST UK CPI (headline / core) +2.6% / +2.0% +2.7% / +2.1% Wed 17 th Oct 1000BST Eurozone CPI (final) No change +2.1% / +0.9% +2.0% / +1.0% Thu 18 th Oct 0930BST UK Retail Sales (ex-fuel MoM / YoY) -0.4% / +3.7% +0.3% / +3.5% Fri 19 th Oct 0300BST China GDP +6.6% +6.7% Fri 19 th Oct 0300BST China Industrial Production / Retail Sales / FA Inv +6.0% / +9.0% / +5.3% +6.1% / +9.0% / +5.3% N.B. Please note all times are British Summer Time (BST) i.e. GMT +1. Data: Reuters 1

2 Foreign Exchange Brexit is still a key issue as the main driver of sterling which has been outperforming again over the past two weeks. This comes as latest EU summit takes place this week amid progress on the Withdrawal Agreement. There are two factors that need resolving to get the deal done. Firstly the seemingly impossible task of the Northern Ireland border. Maintaining the integrity of the UK (i.e. no border in the Irish Sea) is incredibly difficult to achieve without a hard border on the island of Ireland. But then there is an issue (not mutually exclusive of the backstop and a customs union. Theresa May needs a deal that solves these two issues but also is palatable to her Tory MPs (and DUP MPs) in Westminster on the meaningful vote. Subsequently, it may be difficult to get something done this week, instead an a fudge towards another summit in November is far more likely. Sterling may struggle to maintain its momentum this week unless something relatively solid is achieved. However, the mood music is still towards a deal and this should underpin sterling corrections to be bought into. Sterling is trading on rate differentials, so US yields also have a part to play. Inflation fears may begin fade if US earnings season begins to look more concerned about the trade dispute. The dollar needs further record highs on yields to drive continued dollar strength, especially with the mid-terms now on the horizon. Finally, keep an eye on the Canadian dollar which may begin to outperform with a BoC hike likely next week. WATCH FOR: EU Summit on Wednesday, US retail sales UK CPI, wages and retail sales FX Outlook EUR/USD Watch for: The old support of $ has become a key gauge now. Outlook: A mini recovery on the euro in the past week from a low of $ has taken the market back above a pivot and support band $1.1500/$ which is seen as an important gauge for the outlook. However, there is still a negative configuration to momentum which continues to point towards ongoing dollar strength and that rallies will be sold into. If the support around $ is broken which has been previously a key floor would open $ once more but the lows of the August nadir around $ come back into focus again. The resistance at $ needs to be broken to help improve the outlook again. GBP/USD Watch for: Brexit remains a key driving factor as the uptrend begins to look more uncertain Outlook: It is difficult to underplay the importance of Brexit driving the direction of sterling in the coming days and weeks. Another weekend of disappointment in front of an EU summit sets us up for further volatility this week If considerable progress towards a deal can be made then sterling could see sizeable gains, but another failure (similar to September) will see Cable back below $ again. The technicals are still positive, but momentum in the recovery is tailing off again. The eight week uptrend comes in at $ early this week, with the reaction low at $ being a key support now to watch as a breach would scupper the recovery. 2

3 Equity Markets Equities have been smashed recently. The question is whether the stabilization of markets on Friday is just near term respite or whether it is (according to Treasury Secretary Mnuchin) a natural correction. First of all how big have these sell-offs been? On Wall Street, from the recent all-time highs to the selling nadir (following Friday s rebound which has left initial support in place), the S&P 500 was off -7.8%, with the Dow -7.6% lower and the NASDAQ -10.6%. This would suggest the tech sector has been a key driver of the move. In Europe the declines have been longer coming over a number of weeks and much deeper. The broad large cap index, the STOXX 600 is -11.0% lower, whilst the FTSE 100 is -11.5% down and the DAX (seen as a higher risk market due to its large export focus) is down a whopping -15.3%. This certainly seems to be something more than a shot across the bows but is also comparable to the February sell-off which was borne of similar fears (rising inflation expectations from the spike higher on US earnings growth leading to fears of potential need for the Fed to accelerate its tightening cycle). In the two week February sell-off, the S&P 500 fell -12.0%, the Dow down -12.2% whilst the DAX was down -11.8% and FTSE -9.7%. So if it is just a correction, the lows may have already been seen. Commentators have pointed to a number of excuses to blame on the recent sell-off, but if bond yields push decisively higher again then this would prevent a recovery and likely induce further selling pressure. So watch the yields. However there is also the added spice of Q3 earnings season too. Recent quarters have been very positive but there are heady expectations to fill, especially if outlooks are littered with fears over trade tensions. WATCH FOR: US Treasury yields remain key, whilst earnings season will also be a driver. Index Outlook DAX Xetra Watch for: A failure to reclaim resistance at 11,726/11,865 would be bearish. Outlook: A breakdown of simply huge proportions means that the bulls are under considerable pressure now. The move below 11,726 was the lowest level since February 2017 and now completes a very worrying top pattern. A failure to reclaim the overhead supply band 11,726/11865 would be extremely bearish now and imply further weakness. There is support to an extent around 11,400 but there is little real support until 10,800 beyond there. The market is officially in corrective territory (with a fall of more than 10% from the all time high), but there is the potential for further weakness on a close below 11,400 this week. FTSE 100 Watch for: Selling momentum remains and a test of the key March low is the risk Outlook: As the support has begun to form, the question is whether we have seen the limit of the selling pressure. The disappointing close on Friday would suggest that the market is still fearful and there are still significant sellers preventing a recovery. On a technical basis, the concern is that the lack of buyers and negative momentum configuration means that further weakness towards 6866 should not be ruled out. In this move. With considerable overhead supply having built up following the break under 7065 and 7220 means that rallies will struggle even though the RSI is around the mid-20s. 3

4 Other Assets: Commodities & Bonds Is this the time to trust a gold rally? After weeks stuck in a sideways range, gold completed the largest one day percentage gain since the Brexit vote last week. The outlook seemed to shift. A record short gold position on COMEX came just prior to the sharp rebound, but long term factors for owning gold look decent at this stage. If the Fed continues to hike rates at current pace, the risk is that investors become increasingly fearful and turn to gold. If the dollar strengthens there will be some restriction to this move, but if the greenback weakens (which is likely in 2019 as the economic impact of tax cuts fall away and say if the Fed takes its foot off the gas) then gold should also be underpinned. It increasingly looks as though the selling pressure may now have dissipated. Oil has suffered as increased risk aversion has impacted in recent sessions. Fears over rising yields and dollar strength hitting demand have dragged oil lower. But if these fears begin to dissipate then support could form. Could Saudi Arabia respond to increased criticism by restricting supplies seeing oil shoot higher? However, this comes as OPEC have cut forecasts for 2019 global oil demand (due to weaker economic growth). Furthermore, on supply, Russia has picked up the slack of Iran s decline of 150,000 bpd, and total global supply rose to 99m bpd in September. The IEA suggests that global oil output has risen by 1.4m bpd since May. Bond yields are still key and focus will be on whether Treasuries and BTPs stabilise after recent volatility. WATCH FOR: US Retail Sales, risk appetite impacting on yields and commodities. Markets Outlook Gold Watch for: The six week trading range looks set to continue with a mild bear bias ongoing Outlook: The gold bulls have a really important few sessions ahead of them. The confirmation of last Thursday s big bullish candle is still in doubt. A pullback correction needs to begin to build support around or above $1208/$1214 to maintain the bullish momentum of the break to a two month high. Momentum indicators are trying to sustain an improving outlook and if the bulls can begin to trade above the breakout at $1217 there is serious capacity for continued recovery towards a test of the key medium term pivot at $1236. A failure of the breakout support $1208/$1214 would be a disappointment that could pull the market back under $1200 again. Brent Crude oil Watch for: If support around $80.50 fails there is further downside potential in the correction Outlook: Can the bulls begin to find the bulls to build the market higher once more? On a medium term basis this recent correction is merely unwinding Brent back to the key breakout at $80.50 which is now a basis of support. However the bulls are facing rather significant technical corrective momentum near term and there would be further to go in the move. There is a pivot around $75.00 which comes back into play if the support band $77.35/$80.50 is breached this week. Since February, each of the big corrections has seen the RSI find renewed buying pressure around 40, so there is further downside potential. 4

5 Trust Through Transparency Hantec House, Wilfred Street, London SW1E 6PL T: +44 (0) F: +44 (0) E: W: hantecfx.com 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 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. 5