The yen is the only gainer versus the US dollar as indices drop back into the red on a combination of disappointing retail sales and industrial production figures from China and stronger than expected retail sales from the US. Interestingly, The Wednesday and Thursday sessions in US indices showed the smallest 2-day change in more than 3 months, highlighting the magnitude of the volatility since the Oct peak. The ECB managed to find some middle ground that signaled disappointment in the economy without hinting at any changes in policy, placing renewed pressure on the euro to hug the major 200-WMA. Ashraf sent me some charts to focus on ahead of Wednesday's Fed decision. More on this below.
We were watching for three things from the ECB: 1) An extension of forward guidance 2) a dovish tilt to the balance of risk 3) lower forecasts. Policymakers would have considered all three but they were in the tough spot because the optics of ending QE while shifting to a dovish stance were tough. In the end, Draghi left unchanged guidance about keeping rates on hold 'at least through the summer' for "an extended period" and opted to say the balance of risks was still balanced but that they were 'shifting to the downside'. Growth and inflation forecasts were shifted modestly lower.
Going forward this leaves Draghi the option of playing those cards if growth continues to disappoint. He emphasized that external factors -- namely trade -- were key drags.
The ChartsThe charts above highlight a few things: i) the deterioration in economic data surprises for the Eurozone has been in place since August, while the peak for US positive surprises emerged in mid November, which is about the time the 3-month Eurodollar interest rate contract (upper right chart) peaked and started its decline -- falling chart denotes falling expectations of interest rate hikes.
ii) The spread between the Dec 2018 and 2019 Eurodollar interest rate contract continues to suggest no rate hike for next year, raising the question on whether "interest rate futures have gone from pricing too many rate hikes for 2019 to pricing too few". This contrasts with the Fed funds futures, which continue to price a 72% chance for a rate hike next week.
iii) The 10-2 yield spread chart is a reminder that US recessions have occured at the start of the Fed rate cut campaigns since 1980s. The only exception was in autum 1998, when the Fed had to cut rates in the midst of the LTCM collapse and emerging markets crisis. Today, the equivalent of an emergency rate cut would be a surprise dissent against a December Fed hike, a dovish dot plot or a clear change in the FOMC policy statement. Ashraf is telling me that the real dovish surprise will come at Powell's Congressional testimony in February.
iv) The US dollar index has especially risen on broad weakness in GBP and CAD, while EUR has managed to hold on above the key 1.1290. The declining RSI in daily USDX is worth noting, but most importantly the USD/CNY and gold remain crucial signs of USD resistance.
|Core Retail Sales (m/m)|
|0.2%||0.2%||1.0%||Dec 14 13:30|
Just a few more words on PM Theresa May before we move on to the ECB below. May might have won a pyrrhic victory in fending off a leadership challenge. That could be the same for the pound as it rose more than 120 pips on Wednesday to lead the way. Month-to-Date, silver leads all major currencies, followed by gold, CHF and EUR. The ECB decision is up next.
إستغلال إشارة المؤشرات مع اليورو فيديو المشتركين قبل لقاء المركزي الحاسم
Theresa May easily won her leadership challenge in a 200-117 vote but it came at a cost. She promised colleagues that she wouldn't run in the next general election as leader and that she would bring back a better Brexit deal.
The problem is that she may not be able to deliver. The EU has signaled scant room for negation on the thorny Irish backstop and a vote of no-confidence in the government could bring an election any time. At the moment, the DUP says it will continue to support the Conservatives and it's unlikely that dissenting party members would want to trigger an election.
So what's next? May said she will bring a vote back to Commons before Jan 21 on the Brexit deal. If she loses that, there's likely a new impasse. Most still believe a no-deal Brexit is extremely unlikely but a deal around the current parameters is also a longshot. Delaying Article 50 is a possibility but to what ends?
إستغلال إشارة المؤشرات مع اليورو فيديو المشتركين قبل لقاء المركزي الحاسم
Ultimately, this vote only underscored that 117 of 317 Conservative MPs don't support May and with only a narrow majority (with the DUP); there is no margin for safety.That means there is no margin for safety for GBP either. It will remain vulnerable to headlines and Brexit uncertainty.
The euro also made some gains on Wednesday amidst broad US dollar selling. It will remain in the spotlight today with the ECB decision at 12:45 London/GMT and press conference/forecasts at 13:30 London/GMT. The ECB will end QE and reinvestment details are unlikely to matter much to the euro. The ECB has the option of downgrading forecasts, tilting its risk assessment to the downside and pushing out forward guidance on no hikes through Autumn 2019 but there's a good chance Draghi punts on all three as they look for cover for ending QE and continue to hope the economy improves. If so, the headlines could boost the euro; at least in the short term. Do not forget the
GBP markets turn attention away from Brexit and onto PM Theresa May's popularity as the 48 letters required to trigger a vote of confidence on her leadership have been reached. The confidence vote shall take place around 6 pm GMT/London and is widely expected to result into a victory for PM May, shielding her from any more leadership challenges for at least 12 months. More below. Risk assets have rebounded after a significantly choppy session, partly due to more positive remarks from the US and China with regards to trade negotiations. In 24 hours from now, attention shifts to EUR trading as the ECB unveils its post-QE program and Draghi focuses on reinvesting QE proceeds. The latest Premium video below covers the 4 charts cases for the upcoming bounce in risk assets.
Cable has rebounded to 1.26 after having sunk more than a cent from the highs to 1.2490s for the first time in 20 months. It was the second day of heavy selling after the Brexit bill was pulled. GBP's bounce emerges ahead of tonight's confidence vote, which is widely anticipated to guarantee Theresa May staying for at least another year. Whether this will triggers a fresh dead-cat bounce in GBP until she goes back to Brussels tomorrow for fresh negotiations remains unknown. At the same time, it may not get her any closer to an EU-Brexit deal with the majority of parliamentarians still opposed.
If PM May loses the vote, it could be the start of a civil war within the Conservative party. Several MPs could challenge for the leadership in a contest that will eliminate them one-by-one in a vote of MPs until only two are remaining. Then the vote would go towards the broader members. A nightmare scenario would be a two deeply opposing candidates and a narrow vote.
With no simple path to any kind of clarity or stability, there is no scope for a rebound in the pound and the constant selling pressure is unlikely to abate. There's a real risk of scenario similar to October 2016 when pound selling became disorderly. Ashraf tells me he is increasingly certain we have seen the lows at $1.20 for cable. The next step is to worry about May's negotiations progress with the EU, the likelihood of a preliminary agreement in Westminster before setting the next date for a vote in Parliament.
Equities extend their Monday rebound into Tuesday amid a combination of reflexive buy-the-dip forces deployed around key support levels of 23800-20 in the DOW30 and 2588-92 on the S&P500 and constructive remarks on trade and tariffs from the both the US and China. Meanwhile, all eyes are on Google as its CEO testifies to Congress on data privacy and other matters. Currencies remain uup against the dollar, with the exception of CHF and EUR, which lost ground in the last hour as equities pullle back from their session highs. The ZEW survey is a data point to watch in the day ahead. The previous DOW30 Premium trade was stopped out and a new one has been entered, currently in the green over 140 pts.
The S&P 500 rebounded 2% from the lows of the day. The rebound came after a break of the all-important October low. The close higher is a small sign of optimism but there was a similar reversal last Thursday that amounted to nothing. Beware of the higher lows in the daily RSI for the DOW30 and S&P500.
A sign of resilience that was more impressive may have come in USD/JPY. On Monday there were strong risk-off and risk-on tones but the pair tracked 100 pips higher from the lows to finish at 113.32.
In the bigger picture, it's a similar story as the pair holds well-above the October lows. It's also shrugged off the dramatic drop in US Treasury yields in the past few weeks and fading hopes for Fed hikes in 2019. Technically, USD/JPY remains stuck in its recent range but it will bear close watching as sentiment stabilizes.
The 8-pt decline in the German November ZEW headline figure of -17.5 versus -25.0 was the final piece of the puzzle for the ECB. Data has surely disappointed but the central bank retains guarded optimism.