I. Market focus
In the global financial markets, the second session in a row began with the release of weak Australian macroeconomic data. After the data on GDP released the day before, which turned out to be well below the economists’ forecast, the trade balance data were published today, which also missed expectations. The Australian dollar weakened noticeably in the morning. The main reason for the decline, however, was the increased risks of further escalation in trade tensions between the United States and China, following the reports that the Canadian authorities detained Huawei Technologies Co.’s chief financial officer Wanzhou Meng at the request of the U.S. government. Meng was arrested over potential violations of U.S. sanctions on Iran and was facing extradition to the U.S. Against this backdrop, market participants’ hopes that Washington and Beijing will find a compromise on controversial issues dwindled significantly. This resulted in a sell-off in the stock markets (major Asian stock indices dropped more than 2 percent, while the U.S. stock-index futures fell in the morning fell more than 1 percent), and an increase in demand for relatively safe assets (the yen strengthened to a two-week high against the U.S. dollar in the morning). The trend observed in the morning is likely to preserve in the near future.
Thursday’s session will be very busy with important events and data releases. A meeting of members of the Organization of the Petroleum Exporting Countries (OPEC) is to take place in Vienna, Austria, today. The media reported yesterday that a monitoring committee of OPEC and its allies agreed on the need to cut oil production in 2019. A recommendation for an output cut and the size of such a reduction will be put to a vote today. The details of reducing output levels were not reported. Investors also will pay attention to the comments of the heads of the Bank of Canada (13:35 GMT) and the Fed (23:45 GMT), as well as the U.S. reports on employment from ADP (13:15 GMT), trade balance (13:30 GMT) and the ISM Non-Manufacturing index (15:00 GMT), and the Canadian trade balance data (13:30 GMT).
II. The market highlights are:
The Bank of Canada (BoC) left its benchmark interest rates unchanged at 1.75 percent on Wednesday, as widely expected. At the same time, the Bank warned that weaker oil prices in Alberta could impact the rate hikes in the future. The BoC also reiterated its view that the policy interest rate would need to rise into a neutral range to achieve the inflation target. At the same time, the Bank said that the appropriate pace of rate increases will depend on a number of factors, including the effect of higher interest rates on consumption and housing, and global trade policy developments. “The persistence of the oil price shock, the evolution of business investment, and the Bank’s assessment of the economy’s capacity will also factor importantly into our decisions about the future stance of monetary policy,” Canada’s regulator said.
The Federal Reserve's Beige Book, which collected information on economic conditions on or before November 26, 2018, from the twelve Federal Reserve Districts, indicated that economic activity expanded at a modest or moderate pace in most districts, while labor markets tightened further amid raising wages. Most Districts reported that firms remained positive; however, optimism has waned in some as contacts cited increased uncertainty from impacts of tariffs, rising interest rates, and labor market constraints. With regard to inflation, prices rose at a modest pace in most Districts, although a few noted moderate increases.
The Australian Bureau of Statistics (ABS) reported on Thursday that Australia’s retail sales rose 0.3 percent m-o-m in October, following a revised 0.1 percent m-o-m gain in September (originally a 0.2 percent m-o-m advance). Economists had forecast retail sales would increase 0.2 percent m-o-m in October. According to the ABS, the rises in clothing, footwear and personal accessory retailing (+2.6 percent m-o-m), household goods retailing (+0.6 percent m-o-m), other retailing (+0.5 percent m-o-m), food retailing (+0.2 percent m-o-m), and department stores (0.4 percent m-o-m) were offset by a fall in cafes, restaurants and takeaway food services (-0.9 percent m-o-m).
Another report from ABS showed Thursday that Australia’s trade surplus in seasonally adjusted terms narrowed to AUD2.316 in October from a downwardly revised AUD2.940 billion surplus in September (initially a surplus of AUD3.017 billion). Economists had expected a surplus of AUD3.200 billion. According to the report, the exports increased 1.3 m-o-m last month, after jumping 0.9 percent m-o-m in September. Meanwhile, imports surged 3.2 percent m-o-m October, following a 0.9 percent m-o-m drop in the prior month.
III. Market Situation
The currency pair EUR/USD demonstrated a slight decline due to the broad strengthening of the U.S. dollar. In recent months, market participants have strengthened the U.S. currency, betting that trade conflicts will have a less negative impact on the U.S. than on other economies. Today, investors will focus on the U.S. statistics on employment from ADP, trade balance and the ISM Non-Manufacturing index. Resistance level - $1.1418 (high of December 4). Support level - $1.1268 (low of November 28).
The currency pair GBP/USD traded slightly lower, pressured by the positive dynamics of the U.S. currency. In addition, investors adjust their positions ahead of parliamentary debates on a draft Brexit agreement. Theresa May’s government faces a difficult struggle for parliament to support a deal it has agreed with the EU. If May loses the key parliamentary vote on the Brexit deal on December 11, it will open up a huge range of possible outcomes, including a “no-deal” Brexit, snap election or a second referendum. The UK’s Chancellor Philip Hammond said yesterday a Brexit outcome that left a large segment of the British people feeling betrayed would damage the country more than the small economic cost of Prime Minister Theresa May’s preferred Brexit plan. Resistance level - $1.2839 (high of December 4). Support level - $1.2589 (low of June 21, 2017).
The currency pair AUD/USD dropped significantly, approaching the low of October 27. The decline was triggered by a reignited concerns about U.S.-Chinese tensions, following the reports that the Canadian authorities detained Huawei Technologies Co.’s chief financial officer Wanzhou Meng at the request of the U.S. government. Meng was arrested over potential violations of U.S. sanctions on Iran and was facing extradition to the U.S. Against this backdrop, market participants’ hopes that Washington and Beijing will find a compromise on controversial issues dwindled significantly. China is the main trading partner of Australia. Resistance level - AUD0.7392 (high of December 3). Support level - AUD0.7198 (low of November 27).
The currency pair USD/JPY fell sharply, reaching a low of December 4, but then erased about half of those losses. The reason for the pair’s fall was the flight of investors from risks, which increased the demand for the yen, which is traditionally considered a safe haven asset. The focus of traders was also gradually shifting to tomorrow's data on the U.S. labor market, which will show how steady the growth of the economy is. Strong data will increase the likelihood of tightening the Fed's policy, supporting the U.S. currency. Resistance level - Y113.23 (high of December 5). Support level - Y112.29 (low of November 20).
U.S. stock markets were closed on Wednesday for a national day of mourning to honor former President George H.W. Bush.
Asian stock indexes closed lower on Thursday, as the arrest of the chief financial officer of China tech giant Huawei Technologies Co. reignited investor concerns about U.S.-China tensions.
European stock indexes are expected to trade lower 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 0.27% (-1 basis points)
Yields of UK 10-year gilts hold at 1.17% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in January settled at $52.56 (-0.57%). The crude oil prices fell moderately on the back of investors' flight from the risks and ahead of a meeting by producer group OPEC, which is expected to result in a supply cut. The media reported yesterday that a monitoring committee of OPEC and its allies agreed on the need to cut oil production in 2019, but the size of such a reduction and the baseline for cuts were being debated. Market participants were also awaiting weekly data on U.S. crude inventories from the U.S. Energy Information Administration (EIA), set to be released later today.
Gold traded at $1,235.90 (-0.10%). Gold prices fell slightly, due to the strengthening of the U.S. currency and partial profit taking after the recent growth. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.08 percent to 97.18. Since gold prices are tied to the dollar, a stronger dollar makes the precious metal more expensive for holders of foreign currencies.
IV. The most important scheduled events (time GMT 0)
RBA Assist Gov Debelle Speaks
ADP Employment Report
Continuing Jobless Claims
Initial Jobless Claims
Unit Labor Costs
BOC Gov Stephen Poloz Speaks
Ivey Purchasing Managers Index
Crude Oil Inventories
FOMC Member Bostic Speaks
AiG Performance of Construction Index
FOMC Member Williams Speaks
Fed Chair Powell Speaks
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