I. Market focus
The growth of optimism was observed in the global financial markets at the beginning of Tuesday’s session. The market participants reacted positively to reports about the planned visit by Chinese Vice-Premier Liu He to the United States. Investors hope that the visit of the Chinese official can ease the trade tensions between the U.S. and China ahead of the meeting of the leaders of the two nations, which will be held at the Group of 20 nations’ summit in Argentina at the end of the month. Neither the date of the visit, nor its agenda are known at the moment, but the fact of a possible meeting gives hope for progress in the negotiations between the two countries. The U.S. declares that the PRC must submit concrete proposals to get a trade deal. At the same time, the Chinese authorities insist that negotiations should be held before any proposals are made.
Hopes for possible progress in the U.S.-China trade dispute provided support to Asian stock indices. It is expected that the European and American stock indices also will show a positive trend. The yen and gold were under pressure, while commodity currencies rose markedly. Market trends observed in the morning are likely to continue to predominate throughout the day.
The key macroeconomic data today will be statistics on the UK labor market (09:30 GMT). Most likely, the data will indicate a further moderate increase in the number of applications for unemployment benefits, however, this is unlikely to lead to an increase in unemployment, as recruitment consultants continue to report staff shortages. It is also expected the wage growth maintained its strong pace. As a result, data on employment are likely to have a positive impact on the dynamics of the pound, if there are no negative reports on the Brexit talks.
The stock market participants continue to assess the earnings reports of the companies. Today, the focus will be on the results from The Home Depot, Inc. (HD) and Tyson Foods, Inc. (TSN), which will be published before the market opens.
II. The market highlights are:
Statistics New Zealand reported on Monday food prices increased 0.6 percent y-o-y in October, following a 0.1 percent y-o-y uptick in September. According to the report, the main contributors to the October gain were higher prices for meat, poultry, and fish (+2.6 percent y-o-y), non-alcoholic beverages (+1.0 percent y-o-y), restaurant meals and ready-to-eat food (+2.9 percent y-o-y) and grocery food (+0.6 percent y-o-y). At the same time, these advances were partially offset by a drop in fruit and vegetable prices (-5.6 percent y-o-y). On a monthly basis, food prices dropped 0.6 percent in October but rose 0.3 percent after seasonal adjustment.
San Francisco Federal Reserve Bank president Mary Daly said on Monday that the gradual normalization of monetary policy is appropriate in the current economic conditions. She noted that the U.S. economy’s current state is “very good,” adding that the Fed is doing well in achieving its job and inflation goals. Daly said she believes the policymakers should gradually increase rates toward "neutral," when in a healthy economy the level of borrowing costs neither boosts nor slows growth. However, the Fed needs to stay vigilant to incoming data, she cautioned. "The FOMC is not on autopilot, with quarterly rate increases locked in. We are constantly looking at the data and adjusting the monetary policy path as needed in response."
The National Australia Bank (NAB) announced on Tuesday its business confidence index fell 2 points to +4 index points in October from an unrevised +6 last month, dropping below its long-run average of +6 index points. That was the weakest reading since July 2016. A reading above zero signals an improvement in business confidence, and a reading below zero indicates a deterioration. Meanwhile, the NAB’s business conditions index also decreased also 2 points to +12 index points in October from a downwardly revised +14 (originally +15) but remained well above its long-run average of +6. According to the report, the decline in the month was driven by decreases in the employment index (-4 points m-o-m to +7 in October) and profitability (-2 points m-o-m to +12). However, these drops were partially offset by a marginal gain in trading conditions (+1 point m-o-m to +18 in October). The decline in conditions was broad-based across industries with the exception of construction, wholesale and transport and utilities. Commenting on the October Business Survey, Alan Oster, the NAB’s Chief economist, noted, “Although conditions have eased since earlier in 2018, and have been a little volatile over recent months, business conditions remain well above average. This likely reflected a healthy business sector alongside the strength in economic growth through 2018”.
III. Market Situation
The currency pair EUR/USD traded moderately higher, helped by a partial profit taking after yesterday's drop in the pair. Additional support to the pair was provided by the downward correction in the U.S. currency after it hit a 16-month high amid expectations of further Fed rate hikes and concerns over the political situation in Europe. Market participants were also preparing for the release of the ZEW’s business confidence gauges for Germany and Europe. According to the forecast, the index for Germany fell to -25.0 points this month from -24.7 points in October, while the index for the Eurozone improved to -17.3 points from -19.4 points. In addition, investors’ attention was gradually shifting to the U.S. inflation data, set to be released on Wednesday. The consumer price index (CPI) was soft in September. Headline inflation was moderated by a decline in energy prices, but a flat-to-negative performance of food prices also weighed on overall price growth. Excluding food and energy from the CPI, core inflation was also soft in September. However, in this case, the weakness appears to be tied to goods prices, specifically motor vehicles. According to economists’ forecasts, the CPI rose 0.3 percent m-o-m in October, after gaining 0.1 percent m-o-m in September. Resistance level - $1.1446 (high of November 8). Support level - $1.2000 (psychological level).
The currency pair GBP/USD traded slightly higher, recovering after the previous day’s fall. The pair was helped by the renewed weakening of the U.S. currency. Investors were also adjusting their positions ahead of the publication of the UK’s labor market data, which are likely to indicate a further moderate increase in the number of applications for unemployment benefits (+4,300) and the maintenance of unemployment at 4 percent. The wage growth is also expected to maintain its strong pace - at 3 percent. As a result, data on employment are likely to have a positive impact on the dynamics of the pound. Apart from the data, the focus also will be on the dynamics of the U.S. currency, the general market sentiment toward risky assets, and the Brexit-related news as well. Resistance level - $1.3173 (high of November 7). Support level - $1.2800 (psychological level).
The currency pair AUD/USD rose noticeably, erasing all of the yesterday's losses, supported by the reports that U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He have resumed talks on trade, and a potential Washington visit by Liu is being considered before the nations’ leaders meet later this month. However, a slight pressure was exerted by the Australian data, which revealed that the National Australia Bank’s (NAB) business confidence index fell 2 points to +4 index points in October from an unrevised +6 last month, dropping below its long-run average of +6 index points. That was the weakest reading since July 2016. A reading above zero signals an improvement in business confidence, and a reading below zero indicates a deterioration. Meanwhile, the NAB’s business conditions index also decreased also 2 points to +12 index points in October from a downwardly revised +14 (originally +15) but remained well above its long-run average of +6. According to Alan Oster, NAB Group Chief Economist, “The decline in the month was driven by weakness in the employment component – though at these levels the survey still suggests ongoing employment growth at around 20k per month. At this rate, we should see the recent labor market gains maintained”. Resistance level - AUD0.7302 (high of November 8). Support level - AUD0.7121 (low of October 30).
The currency pair USD/JPY rose significantly, as the improvement in risk appetite weakened investor demand for the safe yen. In addition, market participants were cautious ahead of the publication of the preliminary data Japan's GDP for the third quarter (due at 23:50 GMT). In the second quarter, the real GDP growth in Japan demonstrated a rebound after weak quarterly showings in the previous two quarters. Private consumption increased by 2.9 percent y-o-y, and business investment grew at the fastest pace since the first quarter of 2015. However, despite the increase, Japan’s year-over-year real GDP growth is just 1.3 percent compared to a 2 percent pace in the second half of 2017. Economists’ forecasts suggest that real GDP dropped by 1 percent y-o-y in the third quarter. Resistance level - Y114.55 (high of October 4). Support level - Y112.94 (low of November 7).
U.S. stock indexes closed sharply lower on Monday, as the shares of Apple (AAPL; -5%) tumbled after several suppliers to the company reduced their forecasts, weighing on information technology sector and the broader market as well. The focus also was on the statements of the San Francisco Federal Reserve Bank president Mary Daly, who said that the gradual normalization of monetary policy is appropriate in the current economic conditions.
Asian stock indexes closed mixed on Tuesday. The Japanese equities plunged, following a tech-led slump on Wall Street overnight. Meanwhile, the Chinese shares rose hopes for progress in the U.S.-China trade dispute, which were powered by reports about the planned visit by Chinese Vice-Premier Liu He to the United States.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 3.16% (-2 basis points)
Yields of German 10-year bonds hold at 0.39% (-1 basis points)
Yields of UK 10-year gilts hold at 1.32% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in December settled at $59.23 (-1.17%). The crude oil prices fell sharply, as investors reacted to the U.S. President Donald Trump’s tweet, calling OPEC not to cut supply to prop up the market. “Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!”, the president wrote in a Twitter post on Monday.
Gold traded at $1,203.70 (+0.30%). Gold prices rose moderately, correcting after the previous day’s fall. Gold was also supported by the negative dynamics of the U.S. currency. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell 0.11 percent to 97.44. 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's Peter Praet Speaks
Producer & Import Prices
Average earnings ex bonuses
ILO Unemployment Rate
ZEW Economic Sentiment
ZEW Survey - Economic Sentiment
FOMC Member Daly Speaks
Westpac Consumer Confidence
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