I. Market focus
At the beginning of Thursday’s session, moderate optimism preserved in the global financial markets regarding the possible progress in the trade dispute between the United States and China. The source of optimism continued to be the recent statements by the U.S. President Donald Trump, who once again confirmed his intention to get a trade deal with China, and the release of Huawei's Chief Financial Officer Meng Wanzhou on a bail. Commenting on the arrest of a top executive of the Chinese company, Trump said he could intervene in the case of Meng Wanzhou if it would help secure a trade deal with Beijing.
The focus of market participants was on reports that British Prime Minister Theresa May won a confidence vote in her leadership of the Conservative Party on Wednesday evening. 200 lawmakers backed May and 117 voted against her. Thus, May remains the leader of her party and retains the post of prime minister of the country. Though the distribution of votes is ambiguous, May is now immune from a leadership challenge for another year. The fact that Teresa May remained the head of the government reduces the risks of a political crisis, but the chances of a no-deal Brexit remain very high.
Markets await the completion of the monetary policy meetings of the Swiss National Bank (SNB) and the ECB. They will be the main expected events on Thursday. The outcomes of the meeting of the Swiss central bank will be announced at 08:30 GMT and any surprises are unlikely. It is widely expected that the regulator will not make any changes to the parameters of its monetary policy.
The ECB meeting will be more interesting. Its outcomes will be announced at 12:45 GMT and the press conference of the regulator’s head will begin at 13:30 GMT. It is expected that the ECB may announce the end of its quantitative easing (QE) program today. The completion of the asset repurchase program is already priced into the expectations of market participants, but the question remains about reinvestment of maturing debt back into bonds.
II. The market highlights are:
The Labor Department announced on Wednesday the U.S. consumer price index (CPI) was unchanged m-o-m in November after increasing 0.3 percent m-o-m in October. Over the last 12 months, the CPI rose 2.2 percent y-o-y last month, following a 2.5 percent m-o-m gain in the 12 months through October. That was the lowest rate since February. Economists had forecast the CPI to be flat m-o-m and to increase 2.2 percent y-o-y in the 12-month period. According to the report, a decline in the gasoline index (-4.2 percent m-o-m) offset gains in an array of indexes including shelter (+0.3 percent m-o-m) and used cars and trucks (+2.4 percent m-o-m). Other major energy component indexes were mixed, with the index for fuel oil (-2.9 percent m-o-m) falling but the indexes for electricity (+0.3 percent m-o-m) and natural gas (+0.7 percent m-o-m) rising. The food index (+0.2 percent m-o-m) rose in November, with the indexes for food at home (+0.2 percent m-o-m) and food away from home (+0.3 percent m-o-m) both increasing. Meanwhile, the core CPI excluding volatile food and fuel costs increased 0.2 percent m-o-m in November, following a similar advance in the previous month. In the 12 months through November, the core CPI rose 2.2 percent, accelerating from a 2.1 percent advance in the year through October. Economists had forecast the core CPI to rise 0.2 percent m-o-m and 2.2 percent y-o-y in November.
The U.S. Energy Information Administration (EIA) reported on Wednesday that crude inventories fell by 1.2 million barrels to 442 million barrels in the week ended December 7. Economists had forecast a decrease of 2.99 million barrels. At the same time, gasoline stocks rose by 2.1 million barrels to 228.3 million barrels, while analysts had expected a build of 1.8 million barrels. Distillate stocks dropped by 1.5 million barrels to 121.1 million barrels, while analysts had forecast an increase of 1.3 million barrels. Meanwhile, oil production in the U.S. reduced by 100,000 barrels a day to 11.600 million barrels a day. U.S. crude oil imports averaged 7.4 million barrels per day last week, up by 174,000 barrels per day from the previous week.
III. Market Situation
The currency pair EUR/USD traded near the opening level, as investors take a breather after the previous day’s rally while awaiting the outcomes of the ECB meeting. Analysts expect the Bank will confirm its plans to end its quantitative easing (QE) and detail its strategy of reinvesting proceeds from maturing bonds, to keep its balance sheet stable. The ECB also will publish its newest staff projections for economic growth and inflation for the next three years. While it is expected that the central bank will lower its outlook for growth for the next two years, the numbers are also expected to remain just punchy enough to underline the case to exit their QE. Resistance level - $1.1442 (high of December 10). Support level - $1.1306 (low of December 11).
The currency pair GBP/USD consolidated near the opening level, following a significant increase the day before due to reports that British Prime Minister Theresa May would face a confidence vote as a senior Tory publicly backed such a move. However, May won a confidence vote on Wednesday evening. 200 lawmakers backed May and 117 voted against her. The victory means that she can keep her positions as party leader and prime minister and is safe from a leadership challenge for another year. With an empty economic calendar in the UK ahead, market participants will focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets, as well as fresh news on Brexit. Resistance level - $1.2789 (high of December 7). Support level - $1.2480 (low of December 11 and 12).
The currency pair AUD/USD rose moderately, reaching the previous day’s high. The pair was supported by higher commodity prices and signs of easing trade tensions between the U.S. and China (Australia’s main trading partner). Earlier this week, the U.S. President Donald Trump once again confirmed his intention to get a trade deal with China, and said could intervene in the case of Huawei executive Meng Wanzhou if it would help secure a trade deal with Beijing. In addition, China's central bank firmed the yuan against the dollar, which was considered by market participants as a sign that the U.S.-Chinese trade talks are proceeding well. Resistance level - AUD0.7392 (high of December 3 and 4). Support level - AUD0.7177 (low of December 10).
The currency pair USD/JPY traded noticeably higher due to weaker demand for the “safe” yen due to improved US-China relations. In addition, investors were preparing for the release of the Bank of Japan's (BoJ) Tankan Survey. This survey is a closely watched economic release, offering forward insight into Japan’s economic performance. Given a contraction in Japan’s economy in the third quarter, market participants will be looking for any signals into Japan’s future economic output. Any indications for a rebound in GDP growth would be a welcome sign after the economy also contracted in the first quarter and has dealt with decelerating growth as a result of several natural disasters in the country throughout the year. In the third quarter, the large manufacturers’ index fell for the third time this year. Economists forecasts for the fourth quarter suggest a further decline to 17 points from 19 points. The expected small drop suggests economic stability, rather than economic strength. Resistance level - Y113.82 (high of December 3). Support level - Y113.13 (low of December 12).
U.S. stock indexes closed higher on Wednesday, amid optimism that trade relations between the U.S. and China were progressing. The Wall Street Journal’s report that China was working to increase access to foreign companies, also helped lift sentiment. This plan, the report says, would replace the country's Made in China 2025 plan, a framework aimed at making China a leader in industries like clean-energy cars and robotics. In addition, investors digested the U.S. inflation data. The Labor Department reported the U.S. consumer price index (CPI) was unchanged m-o-m in November after increasing 0.3 percent m-o-m in October. Over the last 12 months, the CPI rose 2.2 percent y-o-y last month, following a 2.5 percent m-o-m gain in the 12 months through October. That was the lowest rate since February. Economists had forecast the CPI to be flat m-o-m and to increase 2.2 percent y-o-y in the 12-month period. Meanwhile, the core CPI excluding volatile food and fuel costs increased 0.2 percent m-o-m in November, following a similar advance in the previous month. In the 12 months through November, the core CPI rose 2.2 percent, accelerating from a 2.1 percent advance in the year through October. Economists had forecast the core CPI to rise 0.2 percent m-o-m and 2.2 percent y-o-y in November.
Asian stock indexes closed higher on Thursday, on the back of positive signals from Wall Street and investors' optimism about the US-China trade relations.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 2.90% (-1 basis points)
Yields of German 10-year bonds hold at 0.28% (0 basis points)
Yields of UK 10-year gilts hold at 1.14% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in January settled at $51.26 (+0.12%). The crude oil prices rose slightly, amid signs of easing trade tensions between the United States and China. Investors also continue to digest the latest data from the U.S. Energy Information Administration (EIA), which showed that crude inventories fell by 1.2 million barrels to 442 million barrels in the week ended December 7. Economists had forecast a decrease of 2.99 million barrels. At the same time, gasoline stocks rose by 2.1 million barrels to 228.3 million barrels, while analysts had expected a build of 1.8 million barrels. Distillate stocks dropped by 1.5 million barrels to 121.1 million barrels, while analysts had forecast an increase of 1.3 million barrels. Meanwhile, oil production in the U.S. reduced by 100,000 barrels a day to 11.600 million barrels a day. U.S. crude oil imports averaged 7.4 million barrels per day last week, up by 174,000 barrels per day from the previous week.
Gold traded at $1,246.10 (+0.05%). Gold prices traded little changed due to the stabilization of the U..S. dollar. In addition, the growth of gold prices was limited by improved risk appetite, which reduces the demand for gold, which is considered a safe-haven asset.
IV. The most important scheduled events (time GMT 0)
Producer & Import Prices
SNB Interest Rate Decision
SNB Press Conference
ECB Interest Rate Decision
ECB Press Conference
New Housing Price Index
Continuing Jobless Claims
Initial Jobless Claims
Import Price Index
Business NZ PMI
BoJ Tankan. Non-Manufacturing Index
BoJ Tankan. Manufacturing Index
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