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Market panorama. 20 September 2017

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I. Market focus:

20/09/2017

The focus of market participants is on the meeting of the Federal Open Market Committee (FOMC), which began yesterday and the outcomes of which will be announced today at 18:00 GMT. The Fed’s gathering is the main scheduled event of the current week. The September meeting of the Fed will be extended so it will be accompanied by an update of economic forecasts and a press conference of its chair (the press conference is to start at 18:30 GM). The Fed is highly expected to remain its interest rates unchanged. But the main point will be whether the regulator will announce the start of the reduction of its huge balance sheet, of which the bank’s officials have been saying for several months. The U.S. Treasuries and mortgage-backed securities, which were acquired by the regulator through three quantitative easing programs (QE), boosted the central bank’s balance sheet to $4.5 trillion. The Fed said that the winding process would be gradual and begin with the termination of the reinvestment of the proceeds from maturing bonds. Further, the size of the roll-off will be incrementally raised over the course of a year to $30 billion per month for Treasuries and $20 billion per month for agency securities and will remain in place through the normalization process. Markets, apparently, resigned to this approach, since after the announcement of plans for the beginning of the winding up, no significant reaction followed. Nevertheless, many details of the process of the balance sheet shrinking are still unknown, and their publication can cause very strong movements in the markets.

In light of the expectations of the FOMC meeting’s outcomes, the reaction to other reports and events may be muted today, although some data will be very important. In particular, attention should be paid to the British retail sales statistics (08:30 GMT), the U.S. data on existing home sales (14:00 GMT) and crude oil inventories (14:30 GMT), as well as New Zealand GDP data (22:45 GMT).


II. The market highlights are:

  • Statistics Canada released its Monthly Survey of Manufacturing Tuesday, which showed that the Canadian manufacturing sales fell 2.6 percent m-o-m in July to CAD52.5 billion, following a revised 1.9 percent m-o-m decline in June (originally 1.8 percent m-o-m decrease). Economists had anticipated a drop of 1.8 percent m-o-m for July. The July fall was primarily the result of lower sales of motor vehicles (-19.9 percent m-o-m) and motor vehicle parts (-11.3 percent m-o-m). Excluding motor vehicles and motor vehicle parts, manufacturing sales increased 0.2 percent m-o-m. Overall, sales were down in 9 of 21 industries, representing 57 percent of the manufacturing sector. Sales of durable goods reduced 4.6 percent m-o-m, while sales of non-durable goods declined 0.2 percent m-o-m.

  • The Commerce Department said Tuesday the building permits issued for privately owned housing units rose by 5.7 percent m-o-m in August to a seasonally adjusted annual pace of 1.30 million, while housing starts reduced by 0.8 percent m-o-m to an annual rate 1.18 million. Economists had forecast housing starts rising to a 1.18 million-unit pace last month and building permits dropping to a 1.22 million-unit rate. According to the report, permits for single-family homes, the largest segment of the market, dropped 1.5 percent m-o-m to 800,000 in August, while approvals for the multi-family homes segment surged 19.6 percent m-o-m to a 500,000 unit-rate. In the meantime, groundbreaking on single-family homes increased 1.6 percent to an 851,000-unit pace in August, while housing starts for the multi-family segment tumbled by 6.5 percent to a 329,000-unit pace.

  • The U.S. Labor Department reported Tuesday the import-price index, measuring the cost of goods ranging from Canadian oil to Chinese electronics, rose 0.6 percent m-o-m in August after a revised 0.1-percent m-o-m increase in July (originally a 0.1 percent m-o-m fall). That was the first gain in import prices since April and the largest advance since January. Economists had expected prices to go up 0.3 percent m-o-m last month. According to the report, the August increase was attributable to higher import prices for both fuel (+4.2 percent m-o-m) and nonfuel (+0.3 percent m-o-m). Over the 12-month period ended August, import prices rose 2.1 percent. At the same time, the price index for U.S. exports increased 0.6 percent m-o-m last month, following a 0.5-percent m-o-m gain in July. That was the largest monthly gain since June 2016. Higher prices for both agricultural (+0.1 percent m-o-m) and nonagricultural (+0.7 percent m-o-m) exports contributed to the August advance. The U.S. export prices grew over the past year, surging 2.3 percent.

  • The Department of Commerce reported Tuesday the U.S. current account deficit widened to $123.1 billion (preliminary) in the second quarter of 2017 from $113.5 billion (revised from $116.8 billion) in the first quarter, while economists expected a gap of $115 billion. That was the biggest deficit since a gap of $150 billion in the fourth quarter of 2008. According to the report, the deficit increased to 2.6 percent of current-dollar gross domestic product (GDP) in the last quarter from 2.4 percent in the prior quarter. The $9.6 billion q-o-q rise in the current-account deficit reflected a $7.5 billion increase in the secondary-income deficit, a $2.9 billion decrease in the surplus on primary income and a $0.8 billion increase in the goods-trade deficit.

  • The Ministry of Finance of Japan announced Tuesday that the country’s trade balance came in at a surplus of a JPY114 bln in August, compared to a trade surplus of unrevised JPY419 bln in July. The August reading marked a shift to surplus from a JPY 34.6 bln gap in August 2016. Economists had projected JPY93.9 bln surplus for August. The report showed Japan’s exports increased faster than imports last month. Exports rose 18.1 percent y-o-y in August, following a 13.4 percent y-o-y climb in July, while imports surged 15.2 percent y-o-y last month, compared to a 16.3 percent y-o-y increase in a month earlier.

  • Westpac Bank reported Wednesday its leading index for the Australian economy fell -0.1 percent in August after gaining 0.1 percent in July. The Bank also noted that its leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell to slipped from -0.04 percent in July to -0.19 percent in August. The deterioration mainly reflects international factors including a sharp turnaround in Australia’s commodity prices in Australian dollar terms. Westpac’s Chief Economist, Bill Evans noted, “The growth rate remains negative for a third consecutive month pointing to below trend momentum and a sharp turnaround from strong positive, above trend reads at the start of the year.” The Bank said it is currently forecasting growth of 2.5 percent in 2018 compared to the RBA’s 3.25 percent. Trend growth is generally assessed as 2.75 percent.


III. Market Situation
Currency Market
The currency pair EUR/USD rose slightly, continuing yesterday's dynamics, and approaching the high of September 11, due to adjustments in the dollar position ahead of the U.S. Federal Reserve meeting, the outcomes of which will be announced later today. Recall, the September meeting of the Fed will be extended, so it will be accompanied by an update of economic forecasts and a press conference of its Chair Janet Yellen. The Fed is highly expected to remain its interest rates unchanged. But the main point will be whether the regulator will announce the start of the reduction of its $4.5 trillion balance sheet, of which the bank’s officials have been saying for several months. In addition, investors will focus on how Yellen characterizes recent economic developments for clues on the timing of further rate hikes. At the moment, Fed fund futures price in a 58.3 percent probability of the rate increase at the Fed's December meeting, compared to 48.7 percent a week ago. Apart from the Fed meeting’s outcomes, market participants will pay attention to the U.S. data on the existing home sales. Resistance level - $1.2091 (high of September 8). Support level - $1.1914 (low of September 18).

The currency pair GBP/USD consolidated near the opening level, holding within the yesterday’s range, due to the lack of new drivers. Investors are waiting for the British data on retail sales, as well as the outcomes of the US Federal Reserve meeting. It is expected that retail sales in August increased 0.2 percent m-o-m and 1.1 percent y-o-y. In addition, investors will continue to monitor the situation around the British Foreign Secretary Boris Johnson. The Daily Telegraph reported yesterday that Mr. Johnson might resign if Prime Minister Theresa May adopts a "Swiss-style" Brexit approach. Resistance level - $1.3700 (psychological level). Support level - $1.3157 (low of September 14).

The currency pair AUD/USD trading higher, nearing the high of September 18, due to the broad weakening of the U.S. currency ahead of the announcement of the results of the Fed’s September meeting. However, the further growth of the pair is limited by the Australian data. Westpac Bank reported its leading index for the Australian economy fell -0.1 percent in August after gaining 0.1 percent in July. The Bank also noted that its leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell to slipped from -0.04 percent in July to -0.19 percent in August. The deterioration mainly reflects international factors including a sharp turnaround in Australia’s commodity prices in Australian dollar terms. Westpac’s Chief Economist, Bill Evans noted, “The growth rate remains negative for a third consecutive month pointing to below trend momentum and a sharp turnaround from strong positive, above trend reads at the start of the year.” Resistance level - AU0.8058 (high of September 11). Support level - AUD0.7938 (low of September 18).

The currency pair USD/JPY demonstrated a slight decrease, due mainly to the partial profit-taking and adjustments of positions before the announcement of the outcomes of meetings of the U.S. Federal Reserve and the Bank of Japan (BoJ). It is expected that the BoJ will leave its monetary policy unchanged. But, if the BoE reduces the scale of its purchases of Japanese government bonds, the currency pair USD/JPY may fall sharply. In the morning, some support for the pair was provided by the Japanese data. The Ministry of Finance of Japan announced Tuesday that the country’s trade balance came in at a surplus of a JPY114 bln in August, compared to a trade surplus of unrevised JPY419 bln in July. The August reading, however, marked a shift to surplus from a JPY 34.6 bln gap in August 2016. Economists had projected JPY93.9 bln surplus for August. Resistance level - Y112.19 (high of July 26). Support level - Y109.53 (low of September 15).

Stock Market

Index

Value

Change

S&P

2,506.65

+0.11%

Dow

22,370.80

+0.18%

NASDAQ

6,461.32

+0.10%

Nikkei

20,310.46

+0.05%

Hang Seng

28,085.61

+0.12%

Shanghai

3,366.37

+0.28%

S&P/ASX

5,709.09

-0.08%


U.S. stock indexes closed higher on Tuesday, hitting new-all time highs, a day ahead of the release of the outcomes of the Federal Reserve’s two-day policy meeting. The focus also was on a batch of economic data. The Commerce Department said the building permits issued for privately owned housing units rose by 5.7 percent m-o-m in August to a seasonally adjusted annual pace of 1.30 million, while housing starts reduced by 0.8 percent m-o-m to an annual rate 1.18 million. Economists had forecast housing starts rising to a 1.18 million-unit pace last month and building permits dropping to a 1.22 million-unit rate. Another report from the Commerce Department revealed the U.S. current account deficit widened to $123.1 billion (preliminary) in the second quarter of 2017 from $113.5 billion (revised from $116.8 billion) in the first quarter, while economists expected a gap of $115 billion. That was the biggest deficit since a gap of $150 billion in the fourth quarter of 2008. Meanwhile, the U.S. Labor Department reported the import-price index rose 0.6 percent m-o-m in August after a revised 0.1-percent m-o-m increase in July (originally a 0.1 percent m-o-m fall). That was the first gain in import prices since April and the largest advance since January. Economists had expected prices to go up 0.3 percent m-o-m last month.

Asian stock indexes closed mixed on Wednesday, as were in a wait-and-see mode ahead of the outcomes of the U.S. Federal Reserve two-day policy meeting, which are to be released later today. The Australian equity benchmark edged down, reacting to the performance of he commodities prices. Japanese stock benchmark closed flat as the yen rose slightly, putting pressure on the Japanese export-oriented companies.

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


Bond Market
Yields of US 10-year notes hold at 2.24% (-1 basis points)
Yields of German 10-year bonds hold at 0.45% (0 basis points)
Yields of UK 10-year gilts hold at 1.33% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in October settled at $50.27 (+0.74%). The crude oil prices rose, supported by the latest report from the American Petroleum Institute (API), which revealed the U.S. crude supplies increased by 1.4 million barrels for the week ended Sept. 15. At the same time, gasoline stockpiles dropped 5.1 million barrels, and inventories of distillates declined by 6.1 million barrels, API said. Market participants are now awaiting weekly data on U.S. crude inventories from the U.S. Energy Information Administration (EIA).

Gold traded at $1313.60 (+0.20%). Gold prices rose as the U.S. dollar demonstrated a broad weakening and investors awaited the outcomes of the U.S. Federal Reserve’s policy meeting. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell 0.07 percent to 91.73 Since gold prices are tied to the dollar, a weaker dollar makes the precious metal cheaper for holders of foreign currencies.

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


08:30

United Kingdom

Retail Sales

13:00

Switzerland

SNB Quarterly Bulletin

14:00

U.S.

Existing Home Sales

14:30

U.S.

Crude Oil Inventories

18:00

U.S.

Fed Interest Rate Decision

18:00

U.S.

FOMC Economic Projections

18:30

U.S.

Federal Reserve Press Conference

22:45

New Zealand

Visitor Arrivals

22:45

New Zealand

GDP



Market Focus

  • US nonfarm payrolls rise more than expected in July
  • Canada’s merchandise trade deficit widens in June
  • Canada unemployment rate falls to lowest level since October 2008
  • Canada Ivey PMI falls less than expected in July
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All posted material is a marketing communication solely for informational purposes and reliance on this may lead to loss. Past performance is not a reliable indicator of future results. Please read our full disclaimer.

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