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Market panorama. 24 May 2017

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I. Market focus:

24/05/2017

The main morning news in the financial markets is a report that the global credit rating agency Moody's Investors Services downgraded China’s long-term local currency rating to A1 from Aa3 but lifted its outlook to stable from negative. Moody's said in a statement that the downgrade reflected expectations that China's financial strength would "erode somewhat over the coming years, with the economy-wide debt continuing to rise as potential growth slows." That negatively affected the performance of Asian stock indexes and put pressure on the dynamics of the Australian dollar.

Despite the weaker-than-expected data on new home sales, the U.S. dollar retreated from its multi-month lows. The support to U.S. currency was provided by the comments of the Federal Reserve Bank of Philadelphia President Patrick Harker, who repeated an expectation for two more interest-rate hikes in 2017 and said June “is a distinct possibility” for the Fed’s second interest-rate increase this year. The official also noted that the U.S. central bank is continuing to consider different options to unwind its balance, but this process will be "predictable, slow, and as boring as possible ."

Today, the main event will be the Bank of Canada’s (BoC) meeting. Its outcomes will be announced at 14:00 GMT. It is not expected that the Canadian regulator will make any changes to the parameters of its monetary policy, but its rhetoric could be more hawkish, given the recent increase in oil prices and strong data on the labor market. Among the macroeconomic reports, attention should be paid to the U.S. statistics on existing home sales (14:00 GMT) and oil reserves (14:30 GMT). The focus also is to be on the minutes of the last meeting of the Federal Reserve (18:00 GMT) and comments of the ECB President Mario Draghi (12:45 GMT) and Dallas Fed President Rob Kaplan (22:00 GMT).

 

II. The market highlights are:

  • Preliminary data released by IHS Markit on Tuesday showed that business activity in the U.S. service sector rebound to four-months high in May while manufacturing activity eased to an eight-month low. According to the report, the Markit flash services purchasing manager's index (PMI) rose to 54 in May from 53.1 in April, marking an expansion at the strongest rate since January. Economists had expected the reading to stay at 53.1. A reading above 50 signals an expansion in activity, while a reading below this level signals a contraction. At the same time, the Markit flash manufacturing purchasing manager's index (PMI) fell to 52.5 this month from 52.8 in April, recording the slowest pace since September 2016. Economists had expected the reading to increase to 53. As a result, IHS Markit Flash U.S. Composite PMI Output Index came in at 53.9 in May, up from 53.2 in April, pointing to the strongest upturn in U.S. private sector output since February. Commenting on the flash PMI data Chris Williamson, Chief Business Economist at IHS Markit, said: “Growth of US business activity gained a little momentum for a second successive month in May, but the upturn still looks somewhat underwhelming. “Historical comparisons of the PMI against GDP indicates that the PMI is running at a level broadly consistent with the economy growing at a 0.4 percent quarterly rate (1.5 percent annualized). Actual second quarter GDP numbers are likely to be considerably stronger, in part reflecting seasonality in the official data and the weak first quarter.”

  • The U.S. Commerce Department reported on Tuesday the sales of new single-family homes decreased 11.4 percent m-o-m to a seasonally adjusted annual rate of 569,000 units in April, recording the biggest drop since March 2015. Economists had forecast a sales pace of 610,000 last month. March’s sales pace was revised up to 642,000 units from the originally reported 621,000 units. The details of the report revealed that sales declined in all four major regions of the U.S. but were down by the most in the West, where they tumbled 26.3 percent m-o-m, followed by the Midwest, where they fell 13.1 percent m-o-m. In y-o-y terms, new home sales recorded growth of 0.5 percent.

  • The Federal Reserve Bank of Philadelphia President Patrick Harker repeated on Tuesday that he accepted two more interest-rate hikes in 2017. “Based on the strong economic outlook, I continue to see three rate hikes for 2017 as appropriate. That, as ever, is assuming that things unfold in line with my projections”, he told an audience at a Market News International event in New York. Mr. Harker also said The official also noted that the U.S. central bank is continuing to consider different options to unwind its balance, but this process will be "predictable, slow, and as boring as possible." While making comments to reporters following a speech, Harker said that June “is a distinct possibility” for the Fed’s second interest-rate increase this year.

  • Statistics New Zealand released on Wednesday the April figures for the county’s trade balance. According to the report, goods exports rose 9.8 y-o-y to NZD4.80 bln last month, with the increase being led by higher sales of milk powder, butter, and cheese (+35 percent y-o-y), and logs, wood, and wood articles (+18 percent y-o-y). Goods imports rose 4.9 percent y-o-y to NZD4.2 bln last month. The main movements were intermediate goods (+8.1 percent y-o-y) and capital goods (+5.3 percent y-o-y). As a result, the country’s trade balance recorded a surplus of NZD578 mln in April compared to NZD277 mln in the previous month (revised from initially reported NZD332 mln). Economists had projected trade surplus of NZD267 mln.

  • The Australian Bureau of Statistics (ABS) report showed Wednesday that the value of total construction work done fell 0.7 percent q-o-q in the first quarter of 2017 to AUD 46.416 bln in seasonally adjusted terms, following a revised 0.6 percent q-o-q increase (originally a 0.2 percent q-o-q fall) in the fourth quarter of 2016. Economists had forecast a 0.2 percent q-o-q decrease. In y-o-y terms, the total construction work done was down 7.2 percent. According to the report, the decline was driven by a slump in total building work done (-2.8 percent q-o-q and -2.1 percent y-o-y).

  • Global credit rating agency Moody's Investors Service announced Wednesday it had downgraded China’s long-term local currency rating to A1 from Aa3 but lifted its outlook to stable from negative. According to the Moody's statement, the downgrade reflected expectations that China's financial strength would "erode somewhat over the coming years, with the economy-wide debt continuing to rise as potential growth slows." Moody’s analysts expect China's potential growth to fall to 5 percent by the end of the decade, and its direct fiscal debt to reach 40 percent of GDP by the end of next year and 45 percent by 2020.

 

III. Market Situation
Currency Market
The currency pair EUR/USD consolidated near the opening level, as investors took a breath after yesterday’s sharp decline, caused by broad strengthening of the U.S. dollar, higher U.S. bonds yields and increased chances the Fed would hike its rates next month. Fed-funds futures now show an 83.1 percent probability of rate increase in June compared to 78.5 percent recorded yesterday and 78.5 percent a week earlier (on May 17). Analysts expect that the U.S. currency will receive additional support as the U.S. economy is growing and the Fed is aimed at further raising its interest rates. Federal Reserve Bank of Philadelphia President Patrick Harker repeated that he expected two more interest-rate hikes in 2017 and said June “is a distinct possibility” for the Fed’s second interest-rate increase this year. Today, the minutes of the Fed’s last meeting will be released, which will be examined by investors for clues about a possible rate hike next month. The focus also will be on U.S. data on existing home sales April. According to forecasts, sales fell to 5.65 mln units from 5.71 mln units in March. Resistance level – $1.1266 (high of May 23). Support level – $1.1075 (low of May 18).

The currency pair GBP/USD demonstrated a moderate increase, mainly due to partial profit-taking after yesterday’s sharp fluctuations. With an empty economic calendar in the UK ahead, investors are expected to focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Ahead of the official start of formal Brexit negotiations, investors will assess this week preliminary data on the capital investments of the British companies in the first quarter, which will be released on Thursday. The focus also will be on the second estimate of the UK’s GDP growth in the first quarter, which will also be published on Thursday. According to preliminary data, the British economy slowed sharply in the first three months of the year, as consumers reduced their expenses due to accelerated inflation and slow growth of wages. It is expected that GDP grew by 0.3 percent q-o-q and by 2.1 percent y-o-y in the first quarter of 2017. Recall, the UK’s GDP rose 0.7 percent q-o-q and 1.9 percent y-o-y in the fourth quarter of 2016. Resistance level - $1.3046 (high of May 18). Support level - $1.2828 (low of May 4).

The currency pair AUD/USD fell noticeably, reacting to news that global credit rating agency Moody's Investors Service cut China's rating. Recall, the Australian economy is closely connected with China, which is Australia's largest export market. Moody's Investors Service downgraded China’s long-term local currency rating to A1 from Aa3 but lifted its outlook to stable from negative. According to the Moody's statement, the downgrade reflected expectations that China's financial strength would "erode somewhat over the coming years, with the economy-wide debt continuing to rise as potential growth slows." Moody’s analysts expect China's potential growth to fall to 5 percent by the end of the decade, and its direct fiscal debt to reach 40 percent of GDP by the end of next year and 45 percent by 2020. Resistance level - AUD0.7515 (high of May 23). Support level - AUD0.7326 (low of May 9).

The currency pair USD/JPY traded in a narrow range, near the opening level, due to the lack of new drivers. Yesterday, the pair rose significantly in response to the broad strengthening of the U.S. currency as the chances the Fed would hike its interest rates in June increased. In addition, the focus was on the Trump administration's first full budget proposal, aiming at cutting government spending by $3.6 trl and balancing the budget over the next decade. Trump's budget called for an increase in infrastructure and military spending, along with steep spending cuts in food stamps, Medicaid health insurance payments, disability benefits, low-income housing assistance and block grants that fund meals-on-wheels for the elderly. The budget also predicts a strong economic growth. Today, the main focus will be on the minutes of the Fed’s May meeting. Resistance level - Y114.35 (high of May 10-11). Support level - Y110.23 (low of May 18).

 

Stock Market

Index

Value

Change

S&P

2,398.42

+0.18%

Dow

20,937.91

+0.21%

NASDAQ

6,138.71

+0.08%

Nikkei

19,742.98

+0.66%

Hang Seng

25,412.36

+0.04%

Shanghai

3,063.79

+0.06%

S&P/ASX

5,768.98

+0.15%


U.S. stock indexes closed higher on Tuesday, as investors cheered unveiled President Trump’s budget proposal, claiming to cut the government spending within a decade, as well as upbeat European data, signaling that the region’s economy is on firm footing. While the U.S.President is on an overseas trip, stocks were also helped by a lack of news updates regarding the political turmoil in Washington. On the data front, preliminary data released by IHS Markit showed that business activity in the U.S. service sector rebound to four-months high in May while manufacturing activity eased to an eight-month low. According to the report, the Markit flash services purchasing manager's index (PMI) rose to 54 in May from 53.1 in April, marking an expansion at the strongest rate since January. Economists had expected the reading to stay at 53.1. A reading above 50 signals an expansion in activity, while a reading below this level signals a contraction. At the same time, the Markit flash manufacturing purchasing manager's index (PMI) fell to 52.5 this month from 52.8 in April, recording the slowest pace since September 2016. Economists had expected the reading to increase to 53. As a result, IHS Markit Flash U.S. Composite PMI Output Index came in at 53.9 in May, up from 53.2 in April, pointing to the strongest upturn in U.S. private sector output since February. Meanwhile, the U.S. Commerce Department’s report revealed the sales of new single-family homes decreased 11.4 percent m-o-m to a seasonally adjusted annual rate of 569,000 units in April, recording the biggest drop since March 2015. Economists had forecast a sales pace of 610,000 last month. March’s sales pace was revised up to 642,000 units from the originally reported 621,000 units.

Asian stock indexes closed mainly little changed on Wednesday as investors were cautious amid reports Moody’s Investors Service cut its rating on China’s debt and expectations of the minutes from the latest meeting of the Federal Reserve. Recall, Moody's reduced China’s long-term local currency rating to A1 from Aa3 but lifted its outlook to stable from negative. According to the Moody's statement, the downgrade reflected expectations that China's financial strength would "erode somewhat over the coming years, with the economy-wide debt continuing to rise as potential growth slows." Meanwhile, the Japanese stock benchmark outperformed as the yen fell against the U.S. dollar, providing support to the Japanese export-oriented companies.

European stock indexes are expected to trade higher in the morning trading session.

 

Bond Market
Yields of US 10-year notes hold at 2.28% (0 basis points)
Yields of German 10-year bonds hold at 0.41% (+1 basis points)
Yields of UK 10-year gilts hold at 1.08% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in July settled at $51.60 (+0.25%). The crude oil prices rose slightly, supported by the latest report from the American Petroleum Institute (API), which showed that crude oil inventories in the U.S. fell by 1.5 mln barrels last week. Analysts forecast a draw of 2.3 mln barrels. At the same time, gasoline inventories reduced by 3.15 mln barrels, while analysts projected a decline of 2.4 mln barrels. Distillate inventories rose by 0.9 mln barrels, while analysts expected a fall of 0.74 mln barrels. Market participants are now awaiting weekly data on U.S. crude inventories from the U.S. Energy Information Administration (EIA).

Gold traded at $1249.00 (-0.17%). Gold prices fell slightly as the U.S. dollar strengthened against other major currencies. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose by 0.10 percent to 97.45. Since gold prices are tied to the dollar, a stronger dollar makes the precious metal more expensive for holders of foreign currencies. The gold prices remain under pressure as investors await the release of the minutes of the Fed’s latest meeting, which may provide signals about a possible hike in the Fed’s interest rates at the regulator’s  next meeting. Recall, increases in interest rates are negative for gold prices.

 

IV. The most important news that are expected (time GMT0)

 

06:00

Germany

Gfk Consumer Confidence Survey

07:15

Switzerland

Industrial Production

08:30

Eurozone

ECB's Peter Praet Speaks

12:45

Eurozone

ECB President Mario Draghi Speaks

14:00

Canada

Bank of Canada Rate

14:00

Canada

BOC Rate Statement

14:00

U.S.

Existing Home Sales

14:30

U.S.

Crude Oil Inventories

18:00

U.S.

FOMC meeting minutes

22:00

U.S.

FOMC Member Kashkari Speaks

 

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