Political "bomb" blew up global financial market

Global Stock Markets

The political crisis in Italy hits the world and financial markets may greet the “Black Tuesday”. In particular, the stock market is madly sold: the European stock market plunged, the Italian stock market fell more than 3%, and Dow is down to over 200 points

Italian President Sergio Mattarella sent the country on Monday to re-election. He appointed former IMF official Carlo Cottarelli as interim prime minister, and assigned him the task of preparing for early elections and passing the next budget.

The financial market is concerned that the earliest possible election in August was seen as a quasi-public vote on Italy’s role in the EU and the euro zone, which may further increase the strength of the suspected European party. Europe's political "bomb" is bound to set off the world!

The European stock market fell across the board. Italian stock market crashed and fell more than 3%. It is expected to set a maximum one-day decline after the Brexit vote. ItalybankThe stock index expanded to 5.2%, which is expected to hit the largest one-day drop in August 2016.

Foreign exchange market: Italy's political crisis has exacerbated the euro's decline - the euro has plunged more than 100 points, the lowest recorded at 1.1506 since July last year; the pound continued to decline, approaching the 1.32 mark; the US dollar index rose above 95, setting a six-and-a-half high of 95.05

From a technical point of view, the current EUR/USD is continuing to fall and has fallen below the low of November 7 last year. The next support level looks at the June high of 1.1427 (a double top is formed here).

Foreign exchange information site FOREXLIVE said that the driving factor behind the sharp decline in the euro/dollar has been not only the Italian election and political uncertainty, but more that the market is digesting the possibility of Italy exiting the euro zone.

According to the research firm Sentix, a measure of Italy’s potential to withdraw from the currency union within the next 12 months has jumped from 3.6% in April to 11.3% in May.

This also pushed the disintegration index across the euro zone to 13%, the highest level in more than a year.

"The difficulty of forming a new government in Italy and the prospect of the coalition and the five-star movement forming an anti-euro coalition have aroused investors' vigilance," said Manfred Huebner, managing director of Sentix.

The European political crisis is heating up, boosting demand for safe havens – USD/JPY has fallen sharply, falling to a low of more than a month at 108.41, while safe-haven gold has risen above 1300 in one fell swoop, with a maximum of $1306.24/oz!

Italy's bond market has been sold out franticly – Italian 10-year bond yields have soared by 76 basis points to 3.44%; Italian 10-year Treasury yields have been higher than comparable US Treasury yields for the first time in more than a year...

U.S. 10-year yield fell 12 basis points to 2.80%, hitting a one-and-a-half month low, due to strong demand for hedging; German 10-year Treasury yields fell 13 basis points to 0.21%, the lowest since April 2017!

Aussie Dollar versus the AUD/USD

AUD/USD has taken a dive to start this week with the largest single-day loss in a month and the steepest three-day plunge since December 2016.

In the process of this collapse, the pair has tentatively fallen through a trendline floor that has guided the pair generally higher since the beginning of 2016. The speculative implications are clear.

However, is this a case of the Aussie Dollar falling apart, the swell from the Greenback or a mix of the two? If you look at the AUD's general performance, the currency was lower against most Monday (the exception being the Yen), but its progress was far more measured and there weren't any other critical technical milestones. 

AUD/USD commands considerable authority over the crosses owing to its liquidity, but there is no guarantee that the Greenback can offer sustained momentum. Perhaps the 1Q CPI update coming up can change that mix, but that is a big 'if'.

Australian shares started the week in a chippier mood with gains on Monday and looks poised to open higher, with futures pointing to the index adding 8 points at the open.  

Prices have found their way higher as earlier Aussie Dollar depreciation factored into calculations while the economy perked up, with PMI surveys pointing to robust momentum in manufacturing- and service-sector activity growth.

Wall Street slides as investors get jittery

Wall Street's three major indexes have declined as investors worried about a jump in US bond yields, with technology stocks leading the decline on nerves about upcoming earnings reports and iPhone demand.

The technology index was the biggest drag on the S&P 500 on Friday with a 1.5 per cent drop after registering three straight days of losses ahead of a key earnings week for the sector.

The Dow Jones Industrial Average fell 202.09 points, or 0.82 per cent, to 24,462.8, the S&P 500 lost 22.98 points, or 0.85 per cent, to 2,670.15 and the Nasdaq Composite dropped 91.93 points, or 1.27 per cent, to 7,146.13.

Despite Friday's decline the S&P eked out a gain of 0.5 per cent for the week to show its second weekly gain in a row.

Equity investors were jittery as the 10-year Treasury yield reached its highest level since January 2014 as a bond sell-off continued for a second day, driving the yield curve steeper after two weeks of flattening.

Benchmark 10-year notes last fell 12/32 in price to yield 2.9583 per cent, from 2.914 per cent on Thursday.

FTSE 100 finds higher ground, as miners find cheer in China data

European Stock Markets

U.K. large-cap stocks moved higher Wednesday, as gains for Prudential PLC and mining shares helped the market push past the overhang from the firing of U.S. Secretary of State Rex Tillerson.

Miners were on the rise after data showed China’s industrial production grew faster than expected in early 2018, helped by strong overseas demand for Chinese goods.

The FTSE 100 index UKX, +0.18% was up 0.2% at 7,152.64, after tilting lower in the opening stages of the session. The basic materials group topped advancing sectors, but oil and gas and utility shares lagged. On Tuesday, the London benchmark fell 1.1%.

The pound GBPUSD, +0.0215%  bought $1.3947, down from $1.3962 late Tuesday in New York. Sterling on Tuesday leapt 0.4% against the greenback.

At the open, London’s blue-chip stocks looked set for a third straight loss, after logging a steep fall in the prior session. That reflected declines for European SXXP, +0.29%   and Asian stocks NIK, -0.87% HSI, -0.53%  after the unexpected firing of Tillerson raised questions about the future tone of U.S. foreign policy. In addition, reports late Tuesday said the White House is looking at imposing up to $60 billion in tariffs on Chinese goods, stoking fears about global trade wars.

But an early rise for the U.S. dollar against the pound helped lift the FTSE 100. Sterling strength can hurt shares of London-listed multinational companies, which make the bulk of their earnings overseas.

The FTSE 100 also revived as mining shares gained after the Chinese industrial data, which signaled that China’s economy expanded faster than expected in the first two months of 2018, as exports rose. China is a major buyer of industrial and precious metals.

Among mining shares, Anglo American PLC AAL, +1.78%  rose 2.2% and Antofagasta PLC  ANTO, +2.08%  picked up 2%.

Prudential PLC PRU, +4.90% leapt 5% after the financial services company saying it will spin off M&G Prudential. Following that move, M&G Prudential will be an independent provider of savings and investment services.

Wm. Morrison Supermarkets MRW, -1.24%  fell 1.1% even as the company raised its final dividend to 4.43 pence a share and said fiscal 2018 pretax profit rose.

Bitcoin price prediction: $10.000 as the key level to watch for BTC/USD

Global Stock Markets

Bitcoin reached $8479 on Saturday night, setting up a "W" formation, statistically bullish. New regulative actions keep coming, positive in the mid-term but growing doubts in the day-to-day basis

The Crypto sphere is starting the week with more problems for trading platforms, now coming from Finland. The Scandinavian countries have an important role, because there are several Cryptocurrency mining projects stablished there because of the climatic and energetic edge.

The Finnish banks have temporarily blocked the Crypto trading platform accounts, complying with local laws that demand the capital sources of bank accounts to be identified.

Bitcoin is still trading in a technically complicated area, with positive and negative forces colliding, thus complicating the analysis. BTC/USD has drawn a "W" structure during the weekend, which statistically should trigger a turning point to the upside. For now, this is only another ingredient of our analysis, with multiple mixed signals that should be taken into account when drawing a strategy to trade Bitcoin.

Bitcoin price is moving around a congestion zone, an area where the price level attracting more action is $9500. BTC/USD has stopped at this level up to seven times in the last two months, only trading below there in early February, when it set the relative low at $5896.


Looking at key levels for Bitcoin, the first to watch on the upside is the psychological $10000 mark, followed by $10500, where BTC/USD should take back the bullish channel lost on March 7th.

Above this level, another complicated area, where the price could find resistance at $11450 at first, and then at $12000 as the last barrier preventing price from escaping the current negative outlook.

On the downside, BTC/USD is trading inside a tight bearish channel, with the base at the $8900, followed by long-term trends that rule the current bearish leg and are targeting $8500 and $8000.

If buyers don't take reigns of the price action, Bitcoin could fall down to the area where several bearish trendlines are converging, right at $7700, a projected bearish target for the end of this month.
MACD in the Bitcoin 4-hour chart is crossed up, coming from lows.

It is showing a bullish divergence in the candlestick close, but not in the absolute lows, so it lacks some strength. The indicator has some room to grow before facing the equilibrium line.

Directional Movement Index still is not showing any control by the buyers, despite the increase of long positions in the most recent hours. Sellers have fallen a bit, but they are still outnumbering buyers. ADX is sliding and it should follow going south for the time being.

Conclusion
After the recent price action, BTC/USD has gained some bullish potential, but the big number of hurdles leaves some doubts to the bulls. Just those ones with the possibility of taking immediate positions with no delay should now be aggressive, as the key levels are pretty tight and the scenario could worsen quite rapidly. For those that can operate with ease, tight stops below the key levels are recommended.

Japan stocks lower at close of trade; Nikkei 225 down 0.73%

Asian Stock Markets

Japan stocks were lower after the close on Wednesday, as losses in the Paper&Pulp, Transport and Construction sectors led shares lower.

At the close in Tokyo, the Nikkei 225 declined 0.73%.

The best performers of the session on the Nikkei 225 were Dentsu Inc. (T:4324), which rose 2.61% or 120.0 points to trade at 4715.0 at the close. Meanwhile, Nichirei Corp. (T:2871) added 2.22% or 61.0 points to end at 2806.0 and Taisei Corp. (T:1801) was up 2.10% or 110.0 points to 5355.0 in late trade.

The worst performers of the session were Kobe Steel, Ltd. (T:5406), which fell 7.56% or 84.0 points to trade at 1027.5 at the close. Showa Denko K.K. (T:4004) declined 6.00% or 290.0 points to end at 4545.0 and Tokai Carbon Co., Ltd. (T:5301) was down 5.04% or 90.0 points to 1696.0.

Falling stocks outnumbered advancing ones on the Tokyo Stock Exchange by 2191 to 1125 and 204 ended unchanged.

The Nikkei Volatility, which measures the implied volatility of Nikkei 225 options, was down 9.76% to 25.62.

Crude oil for April delivery was down 0.73% or 0.46 to $62.14 a barrel.

Elsewhere in commodities trading, Brent oil for delivery in May fell 0.76% or 0.50 to hit $65.29 a barrel, while the April Gold Futures contract fell 0.05% or 0.70 to trade at $1334.50 a troy ounce.

USD/JPY was down 0.41% to 105.70, while EUR/JPY fell 0.30% to 131.24.

The US Dollar Index Futures was down 0.04% at 89.52.

Update on Currency

FM Wealth Management News Letter

When we look at the last six months, currency traders have had to re-adjust to the dollar (UUP) diverging from rate differentials. In simpler terms, the dollar and yields (TLT) are moving in different directions.

Originally it was dismissed as temporary, but by looking at the EUR/USD chart since September (that is when the second leg of the yield rally was in full swing) tells us it isn’t going away any time soon.
If this isn’t enough to convince you, we are also including the USDJPY divergence.

It’s a Trilemma
A concept introduced by ING, the “Trump Trilemma” is in a note released the 15th February. They state,
“The conflicting market narratives of the Trump administration’s ‘America First’ economic policy agenda underscore the “Trump Trilemma” – which stipulates that out of three potential market dynamics, only two can co-exist at any one time. The three dynamics are as follows:

(1) rising bond yields (a function of greater government borrowing / rising supply of US Treasuries to fund fiscal spending)
(2) a weaker US dollar (to address US trade / external imbalances)
(3) confidence in the long-run US economy (at least relative to the rest of the world)”

Right now we can clearly see points 1 rising bond yields and 2 a weaker US dollar, which means there cannot also be point 3 a lack of long term confidence in the US economy. This may seem strange given the economy is apparently strengthening and US equities are at near all-time highs. ING explains this by:

“the heightened focus once again on the US economy’s ‘twin deficits’ – which has only been exacerbated by (1) the GOP’s debt-financed tax cuts and (2) the relative cyclical strength in other parts of the global economy.”

This was a point also made in a Unicredit note released in February. Where they describe how massive foreign inflows into the US since the financial crisis of 2008 are set to stop and potentially reverse.  According to Unicredit:

“This is likely because US policy responses to the crisis were relatively timely, growth picked up considerably faster than in the rest of the world, while for most part of the last decade the euro area has been mired in disintegration risks and China has been in the process of rebalancing towards slower (albeit more-sustainable) growth. In effect, for many years US assets provided a very attractive risk-reward ratio and contributed to US investors’ increasing home bias.

But over the last couple of years, things have moved on, and on several dimensions: the eurozone has seen two consecutive years of growth higher than that in the US, EMU political risk premiums have dissipated, US assets have started looking very expensive and now the US administration is in the midst of pursuing unprecedentedly loose fiscal policy that will make the economy extremely vulnerable once the next cyclical downturn hits (and with the US business cycle being so mature, odds are that the next slowdown is approaching).”

Going back to the “trilemma”, yields and the dollar could therefore rise in tandem if the situation above changed. In other words if there was confidence in the long-run US economy (at least relative to the rest of the world) coupled with rising bond yields, then we would have to rule out point 2 a weaker US dollar.

So the next question becomes, “what has to change in order to boost confidence in the long term US economy?” Unfortunately this is where ING answers,  ”we’re scratching our heads at finding any new positive US demand or supply shocks that could change the landscape for an economy in the 10th year of its expansion cycle.”

Both Unicredit and ING see the dollar continuing a downtrend for some time, could be even years.
On the other hand we could have a significant correction in US assets to make them attractive again. So if we look at the crash of 1987 which led to a positive correlation between the dollar, the S&P 500 (SPY) and yields after they moved in opposing directions for many years in a situation which is not unlike the one we find ourselves in.

We are not stating that this going to happen now, we just want to point out that it is a possibility.

Your Takeaway

The divergence in the dollar and rate differentials is continuing and many investors and analysts are wondering at when or what will make it end. We can tell you that the answer does not rest with the with the next inflation figures or  the Federal Reserve, but squarely on the “Trump Trilemma” and long term confidence in the US economy compared to the rest of the world. Until this changes, we should be wary of any strength in the dollar as it is likely only temporary.

US Markets : Top 5 Things to Know today

Global Stock Markets

Top 5 Things to Know in the Market today

1. Global Stocks Slump Amid Fed-Driven Jitters

Global stocks were on the backfoot, after minutes of the Federal Reserve's January meeting underlined expectations for faster U.S. interest rate hikes, souring appetite for riskier assets around the world.

Asian markets ended broadly lower, with Hong Kong's Hang Seng and Japan's Nikkei 225 faring the worst, closing down around 1.5% and 1.1% respectively.

But Chinese markets were in a better mood, returning from their long holiday break with a gain of about 2.2% for the Shanghai blue-chip index.

In Europe, stocks were notably weaker in mid-morning trade. The Stoxx Europe 600 index, the region's broadest measure of share prices, fell 0.9%, with all sectors and major bourses in negative territory.

Meanwhile, early indications from U.S. futures suggest another day in the red for Wall Street. Dow futures were down nearly 100 points, or around 0.4%, while S&P 500 futures fell 5 points, or about 0.2%. Nasdaq 100 futures lost 30 points, or roughly 0.4%.

U.S. stocks ended a tumultuous session firmly lower on Wednesday, with the Dow erasing gains of nearly 300 points following the release of the hawkish Fed minutes.

2. Dollar, Treasury Yields Stand Tall Thanks To Hawkish Fed View

The U.S. dollar rose to a one-and-a-half-week high against a basket of major currencies, boosted by speculation the Fed will raise interest rates at a faster pace than currently expected.

The dollar index, which gauges the U.S. currency against a basket of six major rivals, reached its best level since Feb. 12 at 90.17 in overnight trade. It was last at 90.05, well above a three-year low of 88.15 touched last week.

Meanwhile, yields on the 10-year bond were last trading at 2.925%. They rose to a four-year peak of 2.957% a day earlier, creeping ever closer to 3% - a huge psychological milestone for bulls and bears alike.


3. Oil Under Pressure Ahead of EIA Weekly Supply Report

The U.S. Energy Information Administration will release its weekly report on oil supplies, which comes out one day later than usual due to Monday's Presidents' Day holiday, at 11:00AM ET (1600GMT), amid analyst expectations for a gain of nearly 1.8 million barrels.

The American Petroleum Institute said late Wednesday that U.S. oil inventories fell by 0.9 million barrels last week. There are often sharp divergences between the API estimates and the official figures from EIA.

Oil prices were under pressure, with WTI crude futures dropping 1% to $61.11 per barrel, while Brent crude futures were at $64.91 per barrel, down 0.8%.

4. Bitcoin Slides Back Towards $10,000-Level

The prices of major cryptocurrencies continued lower for the second day in a row, with Bitcoin, Ethereum and Ripple all suffering significant declines, as overall market sentiment waned.

The price of the world's biggest virtual currency by market cap, Bitcoin lost around 4% to $10,521, after hitting an overnight low of $10,200. After nearly doubling in price since the Feb. 6 low close to $6,000, traders have begun dumping some of their holdings, market participants said.

The news was no better for other major digital currencies, with Ethereum, the world’s second largest cryptocurrency by market cap, falling around 5% to a one-week low of $842.20.

The third largest cryptocurrency Ripple slumped around 4% to trade at $0.96571. It has declined more than 60% so far this year, making it one of the worst performing digital currencies of 2018.

5. UK Economic Growth Revised Lower

Britain's economy grew more slowly than first thought during the three months to December, official figures showed, raising questions about the economy's strength as the Bank of England prepares to raise interest rates.

Gross domestic product grew by 0.4% between October and December, the Office for National Statistics said, below economists' forecasts and a preliminary estimate of 0.5%. In year on year terms, downwardly revised growth of 1.4% was the weakest in more than five years.

The pound lost ground against the dollar, with GBP/USD falling to a one-week low of 1.3880.

Dollar hits one-week high

Global Stock Markets

The dollar rose to its highest level in a week against a basket of currencies on Wednesday, as investor focus shifted to the minutes of the Federal Reserve’s last policy meeting. World stocks looked set to fall for a third straight day. 

The dollar index, which measures the greenback against a basket of peers, was up 0.2 percent. The index has bounced almost 1 percent so far this week, after slumping 1.5 percent the previous week to its lowest level in three years [/FRX].

MSCI’s world index of stocks was down 0.1 percent, set for its third straight decline this week, as a down day in Europe offset earlier gains in Asia.

Investor attention is on the minutes of the Fed’s last policy meeting in late January, due later in the day. The last readings of U.S. wages and inflation came in higher than expected, with some blaming the numbers for prompting a violent selloff in stocks earlier this month.

The U.S. currency has been weighed down by a variety of factors this year, including concerns that Washington might pursue a weak dollar strategy and the perceived erosion of its yield advantage as other countries start to scale back their easy-money strategies. Confidence in the dollar has also been shaken by mounting worries over the U.S. budget deficit.

U.S. Treasury yields helped to strengthen the dollar, rising as the bond market braced for this week’s $258 billion deluge of new government debt. The two-year Treasury yield touched 2.282 percent, the highest since September 2008. [US/]

Increased government borrowing has put upward pressure on Treasury yields. The Treasury Department has issued more debt in anticipation of a higher deficit from last year’s major tax overhaul and a budget deal that will increase federal spending over the next two years.

The stronger dollar weighed on commodities, with Brent crude futures losing 1 percent to $64.61 per barrel and U.S. crude oil futures also slipping 1 percent to $61.16.

U.S. crude hit a near two-week high the previous day on news of inventory declines at a key storage hub and from expectations that top OPEC producers could extend cooperation beyond 2018. [O/R].

Spot gold touched a one-week low of $1,329.42 an ounce, having declined 1.4 percent so far this week. 

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.7 percent after slipping earlier in the session following the U.S. market losses, which snapped a six-session winning streak.

Chinese financial markets will resume trading on Thursday after being shut for the past week for the Lunar New Year.

Japan’s Nikkei trimmed earlier gains but still ended the day 0.2 percent higher.

Australian stocks were nearly flat and South Korea’s KOSPI gained 0.55 percent. Hong Kong’s Hang Seng rose 1.2 percent.

European shares retreated in early trading, under pressure from a continued rise in bond yields, with pan-European STOXX 600 index down 0.6 percent and Germany’s DAX falling 0.2 percent.

Bond yields did not rise across the board however - lower- than-expected readings of purchasing manager surveys in France, Germany and the euro zone all came in lower than expected, stabilizing euro zone bond markets 

Gold Price Remains Underpinned by US Recession Fears

Global Stock Markets

Gold’s recent rally may pause for breath but higher prices look likely in the longer-term if US recessionary fears continue to build.
 

The US Treasury 2-year/10-year yield spread may narrow further but strong chart support will limit the move.

A weak US Dollar and increased worries that narrowing US Treasury yields spreads are pointing to a recession has seen spot gold gain around $120/oz since mid-December 2017. Gold is a traditional hedge used by investors when fears of a recession grow. On the weekly chart a break above the June 2016 double-top at $1,375/oz leaves the March 2014 high at $1,394/oz easily within reach, but the market may need to consolidate recent gains before it moves higher.
 
Inflation expectations in the US are also on the rise after recent hard data showed price pressures building, while the recent announcement of tax cuts and increased infrastructure spending also fueled fears of further price pressures. The market has priced in three 0.25% Fed rate hikes in 2018, yet despite this the path of least resistance for the greenback remains lower.

A weak US Dollar and increased worries that narrowing US Treasury yields spreads are pointing to a recession has seen spot gold gain around $120/oz since mid-December 2017. Gold is a traditional hedge used by investors when fears of a recession grow. On the weekly chart a break above the June 2016 double-top at $1,375/oz leaves the March 2014 high at $1,394/oz easily within reach, but the market may need to consolidate recent gains before it moves higher.
 
Inflation expectations in the US are also on the rise after recent hard data showed price pressures building, while the recent announcement of tax cuts and increased infrastructure spending also fueled fears of further price pressures. The market has priced in three 0.25% Fed rate hikes in 2018, yet despite this the path of least resistance for the greenback remains lower.

IG Client Sentiment data show63.9% of traders are net-long Spot Gold with the ratio of traders long to short at 1.77 to 1. The number of traders net-long is 8.8% higher than yesterday and 8.3% higher from last week, while the number of traders net-short is 2.5% higher than yesterday and 6.1% higher from last week.
 
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Spot Gold-bearish contrarian trading bias.

The Dollar vs Trump

FM Wealth Management News Letter

Interest rates are rising yet the US dollar (UUP) is declining. As demonstrated here by EURUSD., this has created some striking divergences in rate differentials.

We can find several explanations for the weak dollar. We can chalk most of it as a function of strength in other currencies.

The Euro has strengthened in anticipation of a Quantitative Easing taper, with CPI at 3% the Bank of England decided to raise rates, and the Yen recently has gone up on speculation of normalization brought on by slowing bond purchases. Domestically the dollar has been weakened by subdued inflation and the Trump Administration rhetoric.

However for the dollar to ignore rates during a Federal Reserve hiking cycle is harder to understand.  So we need to drill down and take a look at similar historical precedents to understand what’s going on. The dollar declined in the mid to late 1980s and the mid 2000s under similar circumstances.

In fact it is important to note that the dollar’s 3.3% decline in January is the worst January performance since 1987 when twin deficits weighed. In other words, a key medium-term driver of dollar weakness, the current account deficit, is starting to kick in. In the fourth quarter, the US trade deficit widened sharply and leading indicators suggest the deficit will worsen over this year.

All this comes at a time when the US fiscal balance will likely worsen. We have seen the sum of the fiscal and current account balance (this twin deficits) has crossed the 6% of GDP threshold, which has coincided with major multi-year downtrends in the dollar. The prospect of further fiscal stimulus will therefore only make matters worse. SO as in the mid 80’s and 2000’s, welcome back to the world of twin deficits.

What Does This Mean?
Investors and markets have a habit of fixating on certain things and ignoring others. The focus changes when a tipping point is reached. The recent equity market sell off in response to higher interest rates is a good example – equities ignored rising rates since they reached bottom in September, but in recent weeks rates went too high, too fast, and this is dominating the headlines.
So therefore investors and the market are once more fixated on rates and at least temporarily, it seems the dollar is trying to find a bottom,

Though the Fed’s actions have not helped the dollar we suspect at weaker and weaker dollar levels, rates will gradually exert influence and help slow the pace of dollar depreciation.
Technical support also should help slow the slide The dollar is now trading at the 200-month moving average in confluence with the 2008-2010 breakout level.

So Where Does This Leave Us?
Many of you will be tempted to look for a contrarian trade and reversal in the dollar’s trend. We are seeing that the majority of analysts were bullish at the early 2017 highs, and are now almost universally bearish at the early 2018 lows. Goldman Sachs just lowered their targets to 86.8.
We think that the short players are outstaying their welcome. Our target from October was 88 based on a decline with similar proportions and drivers (with a longer timeframe).

We want to state that any reversal is purely speculative at this point in time, but even President Trump has recently stated, The dollar is going to get stronger and stronger and ultimately I want to see a strong dollar.”

This statement was mainly in response to Steve Mnuchin’s and Mario Draghi’s comments, but at some point Mr. Trump will want the decline to end, especially if the chart below has any significance.

Your Take Away
Last year rates have had little effect on the dollar as other concerns such as twin deficits have taken priority.  Of course in recent weeks interest rates have come back sharply into focus, just as the dollar is testing technical support and data is coming in strong. Even though it may seem very unlikely we believe that a reversal of the downtrend is not out of the question.

Dollar slips against yen as investors remain cautious

Asian Stock Markets

The dollar lost half a percent against the yen on Wednesday, handing back earlier gains, as investors remained cautious after a heavy selloff in stock markets, and with many viewing the Japanese currency as undervalued. 

A sharp decline in global share markets in recent days has had only a muted effect on the currency market, with traditional safe havens such as the yen and Swiss franc seeing only modest gains this week.

While most analysts believe this week’s heavy selloff across stock markets has run its course for the moment, allowing volatility to abate a little, the prospect of monetary tightening across the globe remains a challenge for the long term, and pushed up the yen against the U.S. currency.

The dollar traded as low as 108.92 yen, erasing all of the previous day’s gains.

The greenback had reached a high of 109.720 yen earlier in the day as regional equities such as Japan’s Nikkei soared, taking their cue from a late rebound on Wall Street.

But it drifted lower as the Nikkei, which rose as much as 3.4 percent, gave back most of its gains on anxiety over more weakness in U.S. share markets. U.S. stock futures fell during Asian trade, stoking such fears. [.T]

The focus remains on U.S. stocks, which looked set to open a little lower again, and which have been the source of the latest turbulence in global markets and currencies.

The surge in long-term U.S. bond yields to four-year highs helped trigger the slide in the equity market, and while yields have pulled back from those peaks, they still remain elevated.

The Australian dollar, which tends to suffer during risk aversion, was 0.3 percent lower at $0.7879.
The Swiss franc, a perceived safe haven along with the yen, was flat at 0.9357 francs per dollar, and up only a third of a percent for the week.

Dollar slips but investors seek safe havens in equity rout

Global Stock Markets

The U.S. dollar slipped on Tuesday after earlier gaining when investors had dumped riskier assets for the relative safety of the greenback, but currency markets were generally calm compared with the rout in equity markets. 

The sell-off across world stock markets sent investors rushing into the dollar on Monday, helping the U.S. currency perform well against the euro, British pound and commodity-linked currencies.

But in early European trading on Tuesday the dollar gave back some of those gains, with currency markets not showing the sort of panic movements seen in other asset classes.

The euro rose 0.4 percent, clawing back some of Monday’s drop, to trade above $1.2417. Against a basket of currencies, the dollar was down 0.1 percent, after a big jump on Monday.

Tan said if the sell-off in risk assets continued, he expected the dollar to gain further against commodity-linked currencies like the Australian and Canadian dollars but to struggle against the euro and yen.

The Japanese yen and the Swiss franc, which tend to lure investors at times of market stress, both rose but gains were muted.

The dollar slipped to as low as 108.46 yen as the shakeout in equities persisted in Tuesday’s Asian trade, but later pared its losses and last changed hands at 109.29 yen.

Investor risk aversion triggered a drop in U.S. bond yields, leading to the fall in the dollar against the yen, said Sim Moh Siong, FX strategist for Bank of Singapore.

The U.S. 10-year Treasury yield slid about eight basis points to 2.719 percent in Asian trade, down from a four-year high of 2.885 percent set on Monday.

Against the euro, the Swiss Franc was flat on Tuesday at 1.1526 franc, its best level since October.
The Australian dollar steadied after falling on Monday. The Australian currency traded at 78.86 cents, extending a sell-off since late January.

Stock market fall is a number game

New Zealand Stock Markets

Some basic numbers illustrate the rationale for the sharp loss in value in US stocks. 

Over the 4 years 2013 to 2017, the average blended forward PE valuation for the S&P 500 index was 16.1 times earnings. The average 10-year bond yield over the same period was 2.17%

Recently both the bond yield and stock market valuations rose in a situation suggesting something might give. The 10-year bond yield is now at 2.7% but the S&P forward PE remains above average at 16.75. It peaked recently at 18.5.

There is a lot more to stock valuation than the simple relationship between the risk free bond yield and earnings yield on stocks. However, these numbers illustrate how vulnerable the market was to a pull back, once the tide of sentiment turned.

The local stock market will open sharply lower this morning but could outperform US markets if the current sell-off extends over coming weeks.

At 15.9, the blended forward PE on the ASX 200 is above the 2013-17 average of 15.2. However, at 2.83% the 10-year bond yield is still below the 3.05% average that applied during that period

The upcoming profit-reporting season could also help the local market fall less than the US if the current sell-off extends

Oil fell last night while base metals were slightly firmer. This indicates that pressure on oil markets is largely about concerns over increasing shale oil supply rather than a general risk off move in commodities.

The Aussie Dollar, on the other hand has been a risk off casualty, falling heavily against major currencies.

The market impact of major data releases today including retail sales, balance of trade and the RBA statement could be important in that context.

Markets would be encouraged if retail sales data can provide further comfort that consumption has continued to recover from its late winter/early spring funk.

Market Update - Part I

FM Wealth Management News Letter

Unlike what you have been led to believe there is no big secret to how the markets work. In reality, it is really quite simple. Unfortunately that does not mean that specific smaller degree moves in the market will be just as simple.

Markets act the same wherever you look. Whether it is the equities, metals, Forex, crypto-currencies, etc, they all react in the exact same way. Markets simply move from one extreme to another.  We need to be able to identify where those extremes can cause a turn.

So therefore in making your determination of turning points, there is no one definitive point at which a market must turn. So really we are dealing in probabilities when we attempt to analyze that which is non-linear in nature, such as the financial markets.

For Clients and Newsletter readers that have followed FM Wealth Management and FM Wealth Management reports for years, would know that this is exactly how we apply our wave analysis.


As an example, we were able to identify major shift changes in the US Dollar Index (DXY) when we called for a multi-year rally in 2011 when DXY was at the 74, with a long-term target to 103.50.

Another example was when we came within $6 of the top in the gold market in 2011. For those who recall, our initial expectation was that gold would see a 40% pullback before gold even struck its high.

At that point we pointed out that if that 40% drop would not hold support, it could open the door for gold to correct all the way back down to the $1,000.

 Many analysts and clients disregarded our analysis at the time because everyone was so certain it would easily eclipse the $2,000 region during the parabolic phase it was in at the time we made this call. So, when gold gave us a 40% correction from our top call, we began looking for a resurrection of the bull market.

However when the market made it clear that it was not going to resurrect, we began looking for the price to come down to $1,000-1100 before looking for another bottoming structure.

So we remain flexible, as we do not believe that anything MUST happen within the financial markets.

Asian currencies still cheap in real terms, analysts say

Asian currencies are cheap in historical trade-weighted terms despite a steady rise to multi-year highs over the past year on broad U.S. dollar weakness and strong flows into the region, analysts say. 

Malaysia’s ringgit, for instance, has appreciated more than 15 percent against the dollar since the beginning of 2017, but in real effective exchange rate terms (REER), it is still 5 percent below its 10-year average.

REER is calculated on a trade-weighted basis against a basket of currencies and adjusted for inflation.

The Japanese yen, Philippine peso and Indonesian rupiah are also trading below their 10-year averages.

The rise in regional currencies against their trading partners’ currencies over the past year has been much lower than their gains on the dollar, keeping them attractive even now, analysts say.

The South Korean won and the Thai baht have gained more than 12 percent each against the dollar since Jan 2017, but their REER rates rose just about 4 percent in that period.

China’s yuan and South Korean won’s REER rates are the highest in the region, trading at 122.6 and 110.7 respectively, according to a JP Morgan REER index based at 100 in 2010.

Asian exports have largely managed to absorb the rise in regional currencies while benefiting from robust global demand and a recovery in commodity prices.

China’s exports increased in 2017 for the first time in three years, while Japan’s exports saw their biggest growth in seven years.

Despite the baht gaining about 10 percent against the dollar, Thai exports grew 9.9 percent last year, the biggest rise in six years.

Regional trade momentum is set to continue this year with South Korea, for example, showing robust export growth in January driven by computer chips and petroleum products.

Nonetheless, the operating profits of Asian companies making much of their revenue from exports are expected to take a hit from the sharp rise in their domestic currencies. 

Dollar rises after six weeks of losses

Global Stock Markets

The dollar edged higher against a basket of currencies on Monday, helped by rising bond yields and a week packed with U.S. data starting with a central bank policy decision, though the broader outlook remained murky for the greenback.

Conflicting signals from top U.S. officials last week did little to discourage bearish positions, with net short dollar bets increasing to their highest level since October, according to latest positioning data. The dollar is set to post its biggest monthly decline since March 2016.

Against a basket of currencies, the dollar bounced a quarter of a percent higher to 89.30 after scoring six consecutive weeks of losses.

On a monthly basis it is set to fall 3 percent.

Over the last decade, including the global financial crisis in 2008, it has fallen only 10 times by that extent.

Treasury Secretary Steven Mnuchin gave U.S. currency bears a major boost last week with a tacit endorsement of a weak dollar. While Trump tried to row back from those comments, the damage had already been done and the dollar’s downturn since November showed little sign of abating.

The greenback is also losing its relative yield attraction for investors. Short-term interest rates are expected to rise in other countries as the European Central Bank and many others start to scale back their easy monetary policy.

Bond yields in Germany jumped to multi-year highs on Monday after weekend comments from Dutch central bank president Klaas Knot that the ECB should be clear on ending asset purchases after September.

Against the yen, the dollar was up 0.3 percent to trade at 108.95 yen, after hitting a low of 108.28 yen on Friday, its lowest level since mid-September.

Comments from Bank of Japan Governor Haruhiko Kuroda in Davos on Friday that the central bank is finally close to the inflation target sparked expectation of an exit from its massive stimulus.

“Many foreign players are now betting on a BOJ policy change. The dollar/yen has no major support if it falls below its September low of 107.32. A break of that level probably means a shift to a new trading range,” said Yukio Ishizuki, senior strategist at Daiwa Securities.

The euro traded at $1.2400, down 0.2 percent and off a three-year peak of $1.2538 touched on Thursday.

Its failure over the past couple of days to stay above $1.25 is seen by some traders as a sign of fatigue in its six-week old rally.

Data from U.S. financial watchdog Commodity Futures Trading Commission showed speculators’ net long position in the euro/dollar futures traded in Chicago rose to a record high, suggesting that profit-taking could be on the cards.

Stocks aim for fourth positive week on Wall Street

Global Stock Markets

The dollar fell Friday, reversing a rally that had followed comments from President Donald Trump, as traders dissected conflicting messages from U.S. officials.

The WSJ Dollar Index, which tracks the greenback against a basket of 16 currencies, was down 0.4% in midmorning trading Friday.

In equity markets, the Stoxx Europe 600 was up 0.4%, while Asian markets finished mixed. Futures pointed to an opening gain of 0.4% for the S&P 500.

The dollar’s U-turn capped a week of mixed messages from the Trump administration, with the currency’s gyrations roiling bourses from Frankfurt to Tokyo and commodities like oil and copper.

The dollar slipped to three-year lows earlier in the week after U.S. Treasury Secretary Steven

Now traders are bracing for a speech by Mr. Trump in Davos later Friday.

Market participants are also looking to the U.S. government’s release later Friday of its first estimate of gross domestic product for the fourth quarter of 2017.

Economists polled by The Wall Street Journal estimate output rose at a 2.9% annual rate from October through December, which would mark another solid showing.

A strong U.S. economy would add to signs that a global economic upswing, which has lifted stock markets in recent months, is set to continue.

Yields on 10-year U.S. Treasury notes rose to 2.643% from 2.628%. Yields move inversely to prices.

In Asia, most markets mostly marked time Friday, with Japan’s Nikkei Stock Average down 0.2%.

Hong Kong’s Hang Seng Index bucked the trend, rising to a record on strength in bank stocks.

The weaker dollar boosted oil prices, with Brent crude, which had hit three-year highs earlier in the week, rising 0.3% to $70.60 a barrel. Gold was down 0.7%.

Gold clings to gains, around $1355 ahead of key US economic releases

Global Stock Markets

Renewed USD selling helps regain positive momentum.

Reviving safe-haven demand further supports the up-move. Important US macro data eyed for fresh directional impetus.

Gold held on to its modest gains through the mid-European session and is currently trading around the $1355 region ahead of the US macro data.

A fresh wave of US Dollar selling pressure underpinned demand for dollar-denominated commodities and helped the precious metal to recover part of previous session's late reversal slide, led by "strong dollar" comments by the US President Donald Trump.

Adding to this, the prevalent cautious trading sentiment across European equity markets was also seen supporting traditional safe-haven assets and collaborated to the yellow metal's steady rise on the last trading day of the week.

Further gains, however, remained capped amid a goodish pickup in the US Treasury bond yields, which tends to drive flows away from the non-yielding commodity.

Moreover, traders also seemed to refrain from placing aggressive bets ahead of today's important US macroeconomic releases - advance Q4 GDP growth figures and durable goods orders data, which would be looked upon for some fresh directional impetus.

Technical levels to watch

Immediate resistance is pegged near $1358 level, above which the commodity is likely to head back towards $1366 area (yesterday's swing high) en-route August 2016 highs resistance near the $1374-75 region.

On the flip side, retracement back below $1350 level is likely to accelerate the slide towards $1340 horizontal zone with some intermediate support near the $1346 level.

Dollar regains after China dismisses U.S. bonds report

Global Stock Markets

The dollar recouped some of its recent losses on Thursday after China’s regulator dismissed a report that the country could halt its buying of U.S. treasuries, boosting the greenback following its biggest one-day fall in a month. 

The dollar has been struggling to gain traction in the opening days of 2018 after losing around 10 percent against a basket of currencies last year as economic growth elsewhere, notably Europe, overtook the U.S.

And while the U.S. Federal Reserve has been slowly tightening policy over the last two years, traders have been repricing market expectations of when Europe and Japan will follow suit.
Bloomberg News had reported on Wednesday that Chinese officials reviewing the country’s foreign exchange holdings had recommended slowing or halting purchases of U.S. Treasury bonds, pushing 10-year yields higher and the dollar lower.

China’s foreign exchange regulator said the report could be based on erroneous information, adding that the country was diversifying its forex to safeguard their value.

The dollar then rallied and was up 0.4 percent against the yen, although the U.S. currency is still down more than 1 percent against the yen this week after markets bet the Bank of Japan (BoJ) could start to tighten monetary policy faster than expected.

Against a basket of currencies the dollar was up 0.2 percent on Thursday, off the previous day’s near three-month lows.

Many analysts remain bearish.

The dollar was flat against the euro, holding below the key level of $1.20 before the publication of the minutes of the last European Central Bank meeting in December, when policymakers held monetary policy unchanged.

Market sentiment seems tilted toward the dollar’s downside, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

The Canadian dollar weakened to its lowest level this year, before recovering, as worries of a U.S. withdrawal from the North American Free Trade Agreement moderated bets that the Bank of Canada will raise interest rates next week.

The Australian dollar touched its highest levels in nearly three months at $0.7887 after data showed that Australian retail sales recorded the biggest monthly rise in four years in November.

Bitcoin tumbled another 10 percent after South Korea said it would move to ban cryptocurrency trading.