I. Market focus
The main topic in the global financial markets at the beginning of Friday’s session was Brexit. On Wednesday, the UK government approved a draft text of a Brexit withdrawal agreement. But the next day, two ministers from the UK Prime Minister Theresa May’s cabinet- Brexit Secretary Dominic Raab and Work and Pensions Secretary Esther McVey - resigned in disagreement with this decision. Six more members of the government of lower ranks also quit. Such actions by members of the government indicate that very many people do not like the supported agreement. As a result, the UK is plunging into a serious political crisis that could lead to extraordinary parliamentary elections or a second vote on the EU membership, or both at the same time. At the moment, Teresa May decisively rejects the idea of another referendum, stating that the UK will leave the EU with or without an agreement. It is also worth noting that the resignation of Theresa May is very likely: the informal leader of “Brexiters” Jacob Rees-Mogg announced publicly that he was submitting a letter of no-confidence in the leader of the Conservative Party. A total of 48 letters are required to formally start the process that could end with May’s ousting. Boris Johnson, the former foreign secretary, is seen as the most likely candidate for the post of the UK prime minister. In such a situation, the most likely scenario is “a no-deal” Brexit. In any case, the uncertainty remains very high and all currently available options for further development of the situation are extremely disadvantageous for the UK.
Among other reports that attracted market participants’ attention in the morning were statements of the Chinese Ambassador to the U.S., Cui Tiankai, that ready to work with the United States on co-operation. The representatives of China and the United States continue to prepare for the meeting of the leaders of the two nations, which may be held on the sidelines of the G20 summit in Buenos Aires on November 29. Before this, it is likely that the Chinese side will visit Washington. So, a certain reduction in tension around the trade confrontation between Washington and Beijing is possible in the near future, which should have a positive impact on market sentiment.
Friday’s session will not be busy with important macroeconomic data and events. The most significant scheduled event of the final session of the week will be a speech of the ECB President Mario Draghi at 08:30 GMT. Among today's macroeconomic reports, attention should be paid to statistics on industrial production in the United States (14:15 GMT).
The stock market participants continue to assess the earnings reports of the companies. Today, the focus will be on the results from NVIDIA Corporation (NVDA).
II. The market highlights are:
The U.S. Labor Department reported on Thursday the number of applications for unemployment benefits unexpectedly rose last week, but the underlying trend continued to point to a tightening labor market. According to the report, the initial claims for unemployment benefits increased 2,000 to 216,000 for the week ended November 10. Economists had expected 212,000 new claims last week. Claims for the prior week were unrevised at 214,000. Meanwhile, the four-week moving average of claims rose 1,500 to 215,250 last week.
A separate report from the Labor Department revealed the import-price index, measuring the cost of goods ranging from Canadian oil to Chinese electronics, rose 0.5 percent m-o-m in October, following a revised 0.2-percent m-o-m increase in September (originally a gain of 0.5 percent m-o-m). That was the largest monthly advance since May. Economists had expected prices to edge up 0.1 percent m-o-m last month. According to the report, the price index for import fuels surged 3.3 percent m-o-m in October, after advancing 0.7 percent in September, while the price index for nonfuel imports went up 0.2 percent m-o-m in October, after recording no change in September. Over the 12-month period ended in October, import prices jumped 3.5 percent. At the same time, the price index for U.S. exports increased 0.4 percent m-o-m in October, following a flat m-o-m performance in September. The October advance was the largest monthly increase since May. Higher non-agricultural prices (+0.5 percent m-o-m) more than offset decreasing agricultural prices (-0.3 percent m-o-m). Over the past year, the price index for exports rose 3.1 percent last month.
The report from the New York Federal Reserve showed on Thursday that manufacturing activity in the New York region expanded in November at a faster pace than in October. According to the survey, NY Fed Empire State manufacturing index stood at 23.3 this month compared to an unrevised 21.1 in October. Economists had expected the index to decrease to 20.0. Anything below zero signals contraction. New orders index (-2.1 points to 20.4 in November) edged down slightly, while shipments (+1.7 points to 28.0) increased moderately, and unfilled orders were unchanged. Meanwhile, labor market indicators pointed to an increase in employment levels (+5.1 points to 14.1) and longer workweeks (+9 points to 9.2). With regard to inflation, the prices paid index (+2.5 points to 44.5) remained elevated, and the prices received index (-1.2 points to 13.1) was little changed.
The Commerce Department announced on Thursday that sales at U.S. retailers rose 0.8 percent m-o-m in October, following a revised 0.1 percent m-o-m drop in September (originally an advance of 0.1 percent m-o-m). That was the largest monthly gain in retail trade since May. Economists had expected total sales would increase 0.5 percent m-o-m in October. The October surge in retail sales was mainly attributable to a rebound in purchases of motor vehicles, fuel and building materials after Hurricane Florence may have depressed demand in September. Excluding auto, retail sales rose 0.7 percent m-o-m after an unrevised 0.1 percent m-o-m decline in the previous month, beating economists’ forecast for a 0.5 percent m-o-m advance. Meanwhile, closely watched core retail sales, which exclude automobiles, gasoline, building materials and food services, and are used in GDP calculations, increased 0.3 percent m-o-m last month, following a revised 0.3 percent m-o-m advance in September (originally a 0.5 percent m-o-m increase). In y-o-y terms, the U.S. retail sales climbed 4.6 percent in October, accelerating growth pace from September’s revised increase of 4.2 percent (originally a 4.7 percent surge).
Another report from the Commerce Department showed that business inventories rose 0.3 percent m-o-m in September, following an unrevised 0.5 percent m-o-m gain in August. That was in line with economists’ forecast. According to the report, manufacturing (+0.5 percent m-o-m) and wholesale (+0.4 percent m-o-m) inventories increased moderately in September, while retail inventories (+0.1 percent m-o-m) were little changed.
The U.S. Energy Information Administration (EIA) reported on Thursday that crude inventories surged by 10.3 million barrels to 442.057 million barrels in the week ended November 9. Economists had forecast an increase of 3.182 million barrels. At the same time, gasoline stocks dropped by 1.411 million barrels, while analysts had expected a fall of 1.850 million barrels. Distillate stocks reduced by 3.589 million barrels, while analysts had forecast a decrease of 3.465 million barrels. Meanwhile, oil production in the U.S. rose by 100,000 barrels a day to 11.700 million barrels a day, hitting a new record high. U.S. crude oil imports averaged 7.5 million barrels per day last week, down by 87,000 barrels per day from the previous week.
III. Market Situation
The currency pair EUR/USD rose slightly, approaching the previous day’s high, which was caused by the weakening of the U.S. currency. The dollar was pressured by the growth of commodity currencies due to the upward correction in oil prices. In addition, investors adjusted their positions ahead of the speech of the ECB President Draghi and the publication of the U.S. data on industrial production for October. In September, industrial production rose 0.3 percent m-o-m. High oil prices continued to support growth in mining output over the past few months, while gains in motor vehicles and machinery were evident in manufacturing production. Even with it being the fourth warmest September on record, according to the National Oceanic and Atmospheric Administration, utilities output was unchanged over the month. Despite a decent monthly production growth, headwinds point to a moderation in output. A strong dollar and higher interest rates could negatively affect activity, while trade tensions show no sign of easing up, and uncertainty about the environment will likely be a deterrent for capital spending in the future. According to forecasts, industrial production rose by 0.2 percent in October after increasing by 0.3 percent in September. Resistance level - $1.1446 (high of November 8). Support level - $1.1215 (low of November 12).
The currency pair GBP/USD traded slightly higher, correcting after yesterday’s 1.8-percent drop in response to news of the resignation of Brexit Secretary Dominic Raab and several other government officials, as well as calls for a no-confidence vote on Prime Minister May. In addition, the pound was under pressure due to weak retail sales data in Britain. With an empty economic calendar in the UK. ahead, traders will closely monitor the latest news on Brexit, and will also focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3071 (high of November 14). Support level - $1.2696 (low of October 30).
The currency pair AUD/USD consolidated near the opening level. The pair performance was also influenced by news on the U.S.-China trade relations. Initially, the media reported that the U.S. Trade Representative Robert Lighthizer had told some industry executives the next round of China tariffs are on hold. But later, Lighthizer's office denied this reports. Meanwhile, the Chinese Ambassador to the U.S., Cui Tiankai, said that China is ready to work with the United States on co-operation. The representatives of China and the United States continue to prepare for the meeting of the leaders of the two nations, which may be held on the sidelines of the G20 summit in Buenos Aires on November 29. Before this, it is likely that the Chinese side will visit Washington. Resistance level - AUD0.7313 (high of September 26). Support level - AUD0.7164 (low of November 13).
The currency pair USD/JPY demonstrated a moderate decline, as the yen strengthened as demand for safe-haven assets increased amid falls in Asian stock markets and continuing uncertainty over Brexit. Investors’ focus also was on the statements of William Hagerty, the U.S. ambassador to Japan, who said that a drop in the Japanese auto exports to the U.S. is needed to reduce the trade imbalance. He also added that Japan should increase imports of American cars and beef. Resistance level - Y114.15 (high of October 12-13). Support level - Y112.94 (low of November 7).
U.S. stock indexes closed solidly higher on Thursday, helped by a rebound in tech stocks, hopes of easing U.S.-China trade tensions, as well as better-than-expected retail sales data. The Commerce Department reported that sales at U.S. retailers rose 0.8 percent m-o-m in October, following a revised 0.1 percent m-o-m drop in September (originally an advance of 0.1 percent m-o-m). That was the largest monthly gain in retail trade since May. Economists had expected total sales would increase 0.5 percent m-o-m in October. The October surge in retail sales was mainly attributable to a rebound in purchases of motor vehicles, fuel and building materials after Hurricane Florence may have depressed demand in September. Excluding auto, retail sales rose 0.7 percent m-o-m after an unrevised 0.1 percent m-o-m decline in the previous month, beating economists’ forecast for a 0.5 percent m-o-m advance. Meanwhile, closely watched core retail sales, which exclude automobiles, gasoline, building materials and food services, and are used in GDP calculations, increased 0.3 percent m-o-m last month, following a revised 0.3 percent m-o-m advance in September (originally a 0.5 percent m-o-m increase). In y-o-y terms, the U.S. retail sales climbed 4.6 percent in October, accelerating growth pace from September’s revised increase of 4.2 percent (originally a 4.7 percent surge).
Asian stock indexes closed mixed on Friday, despite the overnight rally on Wall Street and optimism that China and the U.S. can de-escalate their trade dispute. Japan’s Nikkei lagged, dragged down by the shares of semiconductor companies, which plunged after Nvidia Corp. gave a disappointing sales forecast.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 3.11% (0 basis points)
Yields of German 10-year bonds hold at 0.37% (+1 basis points)
Yields of UK 10-year gilts hold at 1.23% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in December settled at $56.84 (+0.67%). The crude oil prices rose moderately amid expectations of supply cuts by the OPEC and partners. However, the further growth was limited by the latest data from the U.S. Energy Information Administration (EIA), which revealed that crude inventories surged by 10.3 million barrels to 442.057 million barrels in the week ended November 9. Economists had forecast an increase of 3.182 million barrels. At the same time, gasoline stocks dropped by 1.411 million barrels, while analysts had expected a fall of 1.850 million barrels. Distillate stocks reduced by 3.589 million barrels, while analysts had forecast a decrease of 3.465 million barrels. Meanwhile, oil production in the U.S. rose by 100,000 barrels a day to 11.700 million barrels a day, hitting a new record high. U.S. crude oil imports averaged 7.5 million barrels per day last week, down by 87,000 barrels per day from the previous week. Market participants are now awaiting weekly data on the U.S. oil rig count from Baker Hughes.
Gold traded at $1,215.40 (+0.18%). Gold prices rose slightly on the back of increased demand for safe assets in response to the government crisis in the UK. Gold prices were also supported by weakness in the U.S. currency. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell by0.05% to 96.89. 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 scheduled events (time GMT 0)
ECB President Mario Draghi Speaks
Harmonized CPI ex EFAT
Foreign Securities Purchases
Baker Hughes Oil Rig Count
Total Net TIC Flows
Net Long-term TIC Flows
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