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The German manufacturing sector contraction slowed more than expected in January, the preliminary manufacturing activity report from IHS/Markit research showed this Friday.
The German Manufacturing purchasing managers index (PMI) arrived at 45.2 versus 44.5 expected and 43.7 previous, hitting a new eleven-month high.
Meanwhile, Services PMI hit a five-month high level of 54.2 in Jan as against previous months reading of 52.9 and 53.0 anticipated.
The IHS Markit Flash Germany Composite Output Index jumped to a five-month high of 51.1 in January at 49.4 vs. 50.5 expectations.
Key comments from Phil Smith, Principal Economist at IHS Markit:
“A number of positive takeaways from January’s flash PMI survey suggest the storm clouds over the German economy may be starting to clear. The drag from the downturn in manufacturing continues to ease as the sector moves closer to stabilization, while the services economy is back growing at a robust pace.”
“Demand has started to firm up a little both at home and abroad, which is reflected in a first rise in new business for seven months. With confidence starting to return, businesses are reporting clients steadily loosening the purse strings.”
On the upbeat German PMI numbers, the EUR/USD pair jumped nearly 10-pips and reached fresh daily highs of 1.1061.
The German manufacturing sector contraction slowed more than expected in January, the preliminary manufacturing activity report from IHS/Markit research showed this FridayREAD MORE
Here is what you need to know on Friday, January 24:
Coronavirus: While the number of cases continues rising and China canceled several New Year's celebrations, the market mood has calmed. One of the reasons for the relative ease comes from the World Health Organization, which refrained from declaring a global emergency. USD/JPY is off the lows and gold prices have stabilized.
EUR/USD is stabilizing after suffering from the European Central Bank's lack of enthusiasm about the recent upbeat economic figures. President Christine Lagarde announced the launch of a strategic review, set to conclude by year-end. The focus now shifts to Markit's forward-looking Purchasing Managers' Indexes for January.
Italy: Regional elections in Emiglia Romana over the weekend are seen as a test for the stability of the government, which is already vulnerable after Luigi di Maio stepped down from leading the Five-Star Movement.
PMIs are also eyed in the UK. After last week's inflation, retail sales, and Gross Domestic Product missed expectations, this week's jobs report and other statistics were positive. The fresh post-election surveys could be the tipping point for the Bank of England's decision next week. GBP/USD has managed to hold its ground despite USD strength.
Canadian retail sales figures for November are forecast to show a bounce after falling in November. The loonie was hit earlier this week by the Bank of Canada, which expressed concern about recent economic developments and opened the door to cutting rates.
The New Zealand dollar remains bid after the quarterly Consumer Price Index beat expectations with 0.5%. The improved market mood also supports NZD/USD.
Oil prices found their feet after oil inventories data surprised with a smaller-than-expected drawdown. The coronavirus scare continues capping crude prices.
Cryptocurrencies are on the back foot, with Bitcoin trading below $8,400.
Here is what you need to know on Friday, January 24:READ MORE
In an interview with Bloomberg TV on Friday, the European Central Bank(ECB) President Lagarde said that the timetable of strategy review is ambitious.
Markets shouldn't pay too much attention to the review.
Doesn't rule out possible policy changes over the next 12 months.
To think that policy is on auto-pilot is ridiculous.
There are diverse views on how price stability can be procured.
Says it is her job as president to facilitate such a discussion.
On the fresh comments by Lagarde on the monetary policy, the shared currency seems little change, as EUR/USD keeps its range near 1.1050 region so far this Friday.
In an interview with Bloomberg TV on Friday, the European Central Bank(ECB) President Lagarde said that the timetable of strategy review is ambitious...READ MORE
USD/JPY is still expected to inch higher in the next weeks, according to FX Strategists at UOB Group.
24-hour view: “As with yesterday’s update, the immediate risk continues to be on the downside. That said, the move looks increasingly stretched although a further move to 109.50 would not come as a surprise. A sustained push below the strong support at 109.30 is not expected at this juncture. Resistances are at 110.05 and 110.20 and only a move above the latter would indicate that the downside pressure has eased.”
Next 1-3 weeks: “After breaking above the major 109.75 resistance earlier last week, the gain made by USD has been relatively modest as it touched 110.28 last Friday. Despite the lack of ‘urgency’ after breaking a major resistance, the risk is still clearly on the upside. However, the lackluster price action suggests the prospect for a sustained rise above the next strong resistance at 110.67 is not high. On the downside, only a breach of 109.45 (no change in ‘strong support’ level) would indicate the current USD strength has run its course.”
USD/JPY is still expected to inch higher in the next weeks, according to FX Strategists at UOB Group.Key Quotes:READ MORE
EURO, ECB, LAGARDE, CORONAVIRUS – TALKING POINTS:
All eyes are on a monetary policy announcement from the European Central Bank (ECB) on Thursday. No changes to benchmark rates or QE asset purchases are expected but the follow-on press conference with President Christine Lagarde will command attention as markets try to divine the way forward.
Regional PMI surveys suggest the pace of manufacturing- and service-sector activity growth – while still muted – mounted a cautious recovery in the fourth quarter. Meanwhile, recent economic news-flow has increasingly topped forecasts, implying sturdier conditions than the markets have accounted for.
The extent to which this translates into rosier remarks from Ms Lagarde is likely to be front-of-mind for traders. A cautious tone despite signs of improvement may be interpreted as dovish relative to baseline projections, weighing on the Euro and contributing to an emerging risk-off tilt in global markets.
Indeed, markets were in a defensive mood in Asia Pacific trade: the anti-risk US Dollar and Japanese Yen rose alongside US Treasury bonds – the perennial haven asset – while regional stocks and bellwether S&P 500 futures well with yields. Newswires flagged worries about the spreading coronavirus as the catalyst.
Further details on the upcoming ECB policy review will also be of note. Lagarde said after the last policy conclave and in recent testimony to the European Parliament that re-evaluating the central bank’s price stability mandate will be at the heart of this process.
Details are scarce thus far, and the President will probably avoid over-indulging speculative interest by keeping her comments somewhat vague. Nevertheless, the markets will be keen to gauge whether it is likely to carry directional bias implications for monetary policy over the longer term.
All eyes are on a monetary policy announcement from the European Central Bank (ECB) on Thursday. No changes to benchmark rates or QE asset purchases are expected but the follow-on press conference with President Christine Lagarde will ..READ MORE
Here is what you need to know on Thursday, January 23:
Chinese authorities have shut down access links to Wuhan, the large provincial capital where the coronavirus originates from. The news, coming ahead of the Chinese Lunar New Year, is weighing on markets. USD/JPY is on the back foot, trading well below 110.
The Australian dollar is rising after the land down under reported an increase of 28,900 jobs and its Unemployment Rate fell to 5.1%. The chances that the Reserve Bank of Australia cuts rates have diminished.
The European Central Bank is set to leave its interest rate unchanged. President Christine Lagarde may reveal details of the ECB's strategic review. The bank may consider allowing inflation to run at higher levels in order to compensate for past low prices.
The Bank of Canada sent the loonie plunging after it expressed concern about the economy and revealed that it had considered cutting rates already now. Governor Stephen Poloz sounded somewhat more optimistic, but USD/CAD continues trading above 1.31.
Brexit: Prime Minister Boris Johnson "got Brexit done" after the House of Lords gave its final seal to the UK's exit at the end of the month. Johnson remained optimistic about clinching a deal on future relations with the EU by year-end.
The pound jumped on Wednesday after the UK CBI Industrial Trends figure beat expectations with -22. The indicator rarely impacts the pound. The final word related to the Bank of England's rate cut comes on Friday with Markit's Purchasing Managers' Indexes.
The loonie was also hit with falling oil prices. WTI is trading below $55 ahead of the release of Crude Oil Inventories later on Thursday.
Cryptocurrencies are gradually retreating with Bitcoin trading below $8,500.
Here is what you need to know on Thursday, January 23:READ MORE
EU-US TRADE WAR, EURO OUTLOOK – TALKING POINTS
EURO AT RISK FROM EU-US TRADE WAR
What once seemed to be blue skies appears to have been more a fickle moment of respite as the Euro now finds itself under the dark clouds of a looming but familiar fundamental risk: a revived EU-US trade war. At the World Economic Forum (WEF) in Davos, Switzerland, US President Donald Trump threatened to impose auto tariffs against the EU “if they don’t make a deal that’s a fair deal”
What this essentially does is render the prior trade truce Mr. Trump established with his French counterpart, Emmanuel Macron, worthless. Trade policies with single EU member states are agreements with the entire bloc. By levying tariffs against one, it is essentially an attack against all. Consequently, the regional bloc would have to respond in kind. Another trade tiff would likely boost ECB rate cut bets and pressure the Euro.
A cross-Atlantic trade war would batter the Eurozone’s growth prospects and push inflation expectations lower. In the IMF’s World Economic Outlook report, analysts pointed to signs of economic stabilization but warned that geopolitical risks – like growth-hampering trade policies – could make GDP fall under the projected baseline
EUR/USD TECHNICAL ANALYSIS
EUR/USD has broken and closed below the lower bound of the 1.1091-1.1121 (gold-dotted lines) support-turned-resistance range, opening the door to testing the floor at 1.1039 (white-dotted line). The pair is also testing a key upward-sloping support channel (labeled as “October Uptrend Beta”), which, if broken may catalyze an aggressive decline beyond the 1.1039 floor.
What once seemed to be blue skies appears to have been more a fickle moment of respite as the Euro now finds itself under the dark clouds of a looming but familiar fundamental risk: a revived EU-US trade war...READ MORE
Asian stock markets were largely unfazed Wednesday by the rising global concerns over an outbreak of a coronavirus that can cause deadly pneumonia, despite investor worry over the impact the health emergency may have on travel and tourism ahead of the Lunar New Year that starts Saturday.
Stocks in China traded higher, with the Shanghai Composite SHCOMP, +0.28% up 0.2% and the Shenzhen 399106, +0.72% rising 0.8%. Hong Kong HSI, +1.27% stocks, which took a hit Tuesday, were rebounding by about 1.1% on Wednesday.
UBS believes China learned lessons from the SARS outbreak in 2002. The mortality rate of the Wuhan pneumonia seems notably lower than SARS. However, the ongoing travel peak season -- the lunar new year starts Saturday -- is a tremendous challenge, which could complicate the disease diffusion.
If the pneumonia couldn’t be contained in the short term, expect China’s retail sales, tourism, hotel and catering, travel activities likely to be hit, especially in 1Q and early 2Q. UBS’ forecast of sequential growth rebound in the first half of 2020 would face some downside risk.
“There is a legitimate threat to travel,” Henry Harteveldt, a travel industry analyst in San Francisco, told the Associated Press. “It’s small now, but with the potential to become much larger with just some innocuous event such as an undetected passenger getting through (health) screening at an arrival airport like San Francisco International, Kennedy or LAX.”
Harteveldt said the situation also could become worse for airlines if companies start to restrict travel to China.
Royal Caribbean said in a statement, “In China, guests and crew are receiving enhanced health screening before boarding. The health and safety of our guests and crew is our top priority. We are monitoring the situation closely together with health authorities, and our ships are prepared to take additional preventive measures as circumstances indicate.”
Japanese stocks were rising early Wednesday in the face of concerns about tourist demand during the Lunar New Year holidays due to the spread of coronavirus. The Nikkei NIK, +0.70% closed up 0.7%.
Other stock markets in Asia were also slightly higher early Wednesday.
Asian stock markets were largely unfazed Wednesday by the rising global concerns over an outbreak of a coronavirus that can cause deadly pneumonia, despite investor worry over the impact the health emergency may have on travel and tourism ahead of the Lunar New Year that starts Saturday...READ MORE
Analyst at Nordea Markets, argues that “market expectations for a January cut have rapidly increased, but it is not yet a done deal.”
“Carney’s last BoE meeting will instead be like Christmas for central bank watchers. We give you the arguments for and against a cut. We expect BoE on hold.
Three factors make us go with unchanged rates in January of which a predicted PMI rebound on Friday is the main reason.
Moreover, the timing of a potential rate cut would be at odds with Brexit happening the day after and the BoE’s reaction function post the Brexit referendum.
Only a small PMI rebound would make us go with a rate cut instead. If market pricing is >70% for a rate cut, the BoE should deliver.
If the BoE cuts in January, this should not be perceived as the beginning of a big easing cycle.
Risk-reward favors a slightly stronger GBP and higher Gilt yields in the coming week. On a 3-6-month horizon, however, we do expect the GBP to weaken.”
Analyst at Nordea Markets, argues that “market expectations for a January cut have rapidly increased, but it is not yet a done deal.”...READ MORE
President Donald Trump is expected to speak at the World Economic Forum (WEF) in Davos.
The centre of the debate is expected to be the climate change amidst the well-known scepticism from the US President.
In addition, Trump is expected to meet with European peers to discuss trade issues following the recent signing of the ‘Phase 1’ deal with China.
President Donald Trump is expected to speak at the World Economic Forum (WEF) in Davos...READ MORE
The Federal Reserve appears content to leave the federal funds rate—now targeted at 1.5% to 1.75% —steady through 2020. Growth looks solid enough and inflation within Chairman Jerome Powell’s comfort zone but longer term, the economy faces challenges that may require better monetary-policy tools.
Until late last year, President Donald Trump’s detractors, who view his tax cuts as irresponsible and tariffs on China and others ill-conceived, advocated for further rates cuts. They argued his tax cuts created a sugar high in consumer demand, the majority of corporate CFOs were planning for a recession in 2020, and the stock market rally SPX, +0.39% was thin—driven mostly by big tech stocks.
The facts then shifted. Consumer confidence remains robust, USMCA will likely be ratified soon, a phase-one trade deal with China promises more exports, cyclical stocks are contributing more to the stock market rally, and analysts expect corporate profits this year to advance 9.4%. As businesses continue to add jobs each month, the latter inspires optimism for sustained growth.
Central bank interest rate cuts have diminishing returns.
Healthy businesses are flush with capital and spend a lot less on structures and machines in a service-oriented economy than they did when manufacturing dominated. And global markets are flush with funds looking for places to invest, as savings have risen with aging populations.
Manufacturers are focused more on artificial intelligence and product transformation—for example, self-driving and electric vehicles. The emphasis is on R&D rather than new factories and machines, and businesses would rather finance the former out of cash flow rather than by borrowing.
WeWork may have been mismanaged but the potential market for small and temporary office space reflects that individuals and small groups can start businesses with laptops instead of lathes and metal presses—even from home if commercial rentals are too rigid or high. All reduce demand for new commercial space.
Mortgage rates fell long before the Fed started cutting rates in August. While those boosted mortgage lending, rates did not drop further on cue from the Fed afterwards.
Optimism notwithstanding, another recession will happen sooner or later, and likely will be triggered by promiscuity in the financial sector again.
In Europe, German and Italian banks have not adequately restructured in the wake of the financial crisis. In China, Beijing has been buying equity stakes in private firms to relieve debt burdens.
In the United States, Moody’s and other bond raters have been assigning generous assessments to companies in the B and C brackets, and many auto loans exceed the drive-off price of vehicles.
With the federal funds rate so low, the Fed has little room to lower interest rates further in a crisis. And jumping into the longer-term Treasury and mortgage-security markets won’t do any more to stem the hemorrhaging than quantitative easing did from 2008 to 2014.
The Fed should consider issuing digital currency to household and businesses and with the Treasury, seek authority from Congress to issue helicopter money in a crisis.
Already commercial banks, asset managers and hedge funds have digital accounts at the Fed that pay interest—practices that did not exist prior to the financial crisis. That is where commercial banks park required and excess reserves but in a crisis the Fed adding to those reserves hardly guarantees risk-averse banks will lend to businesses and consumers.
These days banks carry reserves far in excess of what the Fed requires and often refuse to lend excess funds to businesses, even those offering Treasury securities as collateral. Simply, the banks would rather pay checking and short-term money-market account customers less than 0.2% and earn 1.55% at the Fed.
To break this reticence, the Fed should end interest payments on excess reserves and in a recession, focus more on injecting additional excess reserves on to bank balance sheets than cutting rates further.
Congress could authorize the Treasury to print bonds, place those on the Fed balance sheet and directly inject cash into business and consumer accounts. That would be more effective than slow-moving infrastructure projects or toying with the tax system.
Incentivizing banks to lend by not rewarding passive reserves and the capacity to directly inject money directly into business and consumer checking accounts would give the Fed sharper tools in a crisis.
The Federal Reserve appears content to leave the federal funds rate—now targeted at 1.5% to 1.75% —steady through 2020. Growth looks solid enough and inflation within Chairman Jerome Powell’s comfort zone but longer term, the economy faces challenges that may require better monetary-policy tools...READ MORE
The GBP/USD pair edged up and refreshed daily tops, around the 1.3035-40 region in reaction to better-than-expected UK employment details.
The pair added to the previous session's modest uptick and gained some follow-through positive traction for the second consecutive session on Tuesday. The uptick got a minor lift during the early European session after the latest UK jobs report came in to show that the number of people claiming unemployment-related benefits fell to 14.9K in December.
UK jobs report provided a modest lift to the GBP
Adding to this, the previous month's reading was also revised lower to 14.9K from 28.8K reported earlier. Meanwhile, the unemployment rate held steady at 3.8%, while Average Earnings (Including Bonus) recorded a growth of 3.2% during the three months to November as compared to consensus estimates pointing to a modest downtick to 3.1%.
The data, however, did little to dampen prospects for an imminent rate cut by the Bank of England at its upcoming meeting on January 30. This coupled with concerns that Britain will crash out of the European Union at the end of this year might hold investors from placing aggressive bullish bets and eventually keep a lid on any runaway rally for the major.
With the GBP price dynamics turning out to be an exclusive driver of the intraday price action, the pair seemed rather unaffected by the prevalent bullish sentiment surrounding the US dollar and thus, warrant some caution. Hence, it will be prudent to wait for some strong follow-through buying before positioning for any further near-term appreciating move.
The GBP/USD pair edged up and refreshed daily tops, around the 1.3035-40 region in reaction to better-than-expected UK employment details...READ MORE
The EUR/USD pair witnessed some aggressive follow-through selling for the second consecutive session on Friday and tumbled to levels below the 1.1100 round-figure mark amid some follow-through US dollar buying interest. The greenback remained well supported by the previous session's upbeat Retail Sales and got an additional boost from signs that the consumer remains in good shape. Data released on Friday showed the University of Michigan's preliminary consumer sentiment index for January edged down to 99.1 from a seven-month high of 99.3 in December.
Adding to this, housing starts rose 16.9% to a seasonally adjusted annual rate of 1.61 million units in December and largely offset a 3.9% decline in building permits to a rate of 1.42 million units. The incoming economic releases added to growing expectations that the US economy will continue to expand and might have also reduced the likelihood of any further interest rate cuts by the Fed. This comes on the back of the latest optimism over the US-China phase one trade-deal and allowed the US Treasury bond yields to tick higher, which eventually underpinned the USD.
The pair finally settled near the lower end of its weekly trading range but once again managed to find some support near monthly lows, around the 1.1085 region. The pair managed to regain some positive traction on the first day of a new trading week as the focus now shifts to this week's key event risk – the latest monetary policy update by the European Central Bank (ECB) on Thursday. This will be followed by the flash version on Eurozone Manufacturing and Services PMI prints, which will play a key role in influencing the sentiment surrounding the shared currency and provide a fresh directional impetus.
From a technical perspective, the pair, so far, has held a support marked by 61.8% Fibonacci level of the 1.0981-1.1239 positive move. This is closely followed by the 1.1065 confluence region, comprising of the lower end of near four-month-old ascending trend-channel and 100-day SMA, which if broken will set the stage for a further near-term depreciating move. Below the mentioned support, the pair is likely to accelerate the slide towards challenging the key 1.10 psychological mark before eventually sliding to November monthly swing lows support near the 1.0980 region.
On the flip side, immediate support is now pegged near the 1.1110 region (50% Fibo. level), above which the positive move could get extended back towards the 1.1140-50 supply zone – nearing 38.2% Fibo. level. Any subsequent strength might continue to confront some resistance near the 1.1175-80 region (23.6% Fibo. level), which if cleared might negate the near-term bearish outlook. The pair then seems all set to surpass the 1.1200 handle and aim towards retesting late December swing high resistance near the 1.1240 region. The momentum could further get extended towards the 1.1300 round figure mark en-route a resistance marked by the top end of a multi-month-old ascending trend-channel, currently near the 1.1320 region.
The EUR/USD pair witnessed some aggressive follow-through selling for the second consecutive session on Friday and tumbled to levels below the 1.1100 round-figure mark amid some follow-through US dollar buying interest...READ MORE
Here is what you need to know on Monday, January 20:
GBP/USD is under pressure after the UK Chancellor of the Exchequer Sajid Javid said that the UK may stray away from EU rules after Brexit. Concerns about fraught EU-UK trade talks have been weighing on investors' mood.
Oil prices have advanced with WTI nearing $60 once again. In Libya, warlord Khalifa Haftar has blocked oil exports from the part of the country he controls, knocking down 800,000 barrels out of global supply. Protests in Iraq have also limited output.
The US dollar is holding onto its gains against majors from late last week, as upbeat US retail sales and consumer confidence kept the greenback bid.
US markets are closed on Monday, limiting liquidity. Ahead of the Chinese New Year holiday, authorities pumped around 200 billion yuan into the financial system. AUD/USD and NZD/USD are bid.
President Donald Trump and other politicians and business leaders are descending on Davos, Switzerland, for the World Economic Forum.
Cryptocurrencies have fallen off the highs with Bitcoin trading below $8,700 after topping $9,000 over the weekend. Other digital coins made the same round trips.
Here is what you need to know on Monday, January 20:READ MORE
According to Carsten Brzeski, Chief Economist at ING Germany, this week's European Central Bank meeting should be rather uneventful regarding monetary policy but the official start of the strategy review should be the highlight.
“Waiting for more guidance on growth and inflation developments, the highlight of this week’s meeting should be the announcement of the official start of the strategy review. A lot has been said and speculated, both by market participants and ECB officials. Now, with all changes in the ECB’s Executive Board behind us, it is time to set out some parameters like, for example, scope and timing of the review. Christine Lagarde already gave some ideas at the December meeting, also stating that in her view the review should be concluded before the end of the year.”
“In this regard, decisions to include external parties, be it academics, politicians, ‘ordinary people’ or other interest groups would have a clear impact on the length of the process, making the deadline of end-2020 more ambitious than it currently sounds. According to Lagarde, the review would also look at the monetary policy instruments. A recent working paper of more than 300 pages by influential ECB officials already gives an idea of where the ECB currently stands.”
“In our view, the most important part of the review will be an assessment of the definition of price stability and how to reach it. We still think that eventually, a new definition (of “around 2%) would institutionalise symmetry while at the same time provide maximum flexibility; more than any point range would offer.”
According to Carsten Brzeski, Chief Economist at ING Germany, this week's European Central Bank meeting should be rather uneventful regarding monetary policy but the official start of the strategy review should be the highlight...READ MORE