ECB 19th January (continued thread from December 2016)

[donaldprice]

The next 2 weeks are going to be very crucial to the markets. We have ECB where Super Mario will discuss the ECB's current bond buying and possible future tapering and of course Madam Chairman Yellen highly likely to raise rates due to very good positive economic data coming from the US.

The ECB will be expected to  announce a six-month extension, extending the duration of its QE operations from March to September 2017. Any downside from this announcement has already been priced-in to the Euro, by our estimates; the formal recognition of this policy adjustment itself should have little impact on the Euro. 

Morgan Stanley’s base case scenario is that the ECB will extend its QE programme by 6 months.

However, this implies the Bank will have to relax the buying criteria for the programme, since there is unlikely to be adequate inventory for it carry on with purchases under the current strict criteria.

One thing the ECB could do is to relax the “Capital Key” which dictates the share of bonds bought from each country based on the size of that country’s economy.

This means the majority of bonds bought under the current Capital Key are German since it has the largest economy.

This has led to a lack of inventory as it has pushed up German bond prices and pushed down many of their yields into negative territory.

If the ECB chooses to do away with the Capital Key it would be bullish for the Euro, if it chose to allow purchases below the deposit rate it would be bearish for the Euro, according to Shah.

However, analyst Tomasz Wieladek at Barclays believes, "a removal of the capital key is highly unlikely, in our view, given the moral hazard implications".

Another rule is that bonds must not yield below the ECB deposit rate of -0.4%, however, many German bonds now yield lower due to the Capital Key, thus a lack of inventory dogs the smooth running of the system.

A potential way of addressing the scarcity of German bunds, especially of short-duration bonds, would be by ‘enhancing the Bundesbank’s repo facilities’. "Any rise in short end rates as a result of reduced worries about bond availability would strengthen the EUR but we wouldn't expect more than a 1% rise," says Shah.

Another way to increase bond inventory for the scheme would be to remove the cap on issuers which currently stands at 50%.

This means the ECB can only buy a maximum of 50% of the issuance of a bond.

Shah says that an increase in the percentage available to the ECB would take the pressure of German bonds leading to a rise in the whole German Yield Curve:

“This approach would generally be bullish for the whole German bund curve. For EURUSD to fall we would need to see a larger decline in bund yields than US treasury yields, pushing down the yield differential. EURUSD is generally more sensitive to front end rates (2y) than long end rates (10y).

Morgan Stanley sees an increase in the share of corporate bonds in the buying mix as highly unlikely. Equally as unlikely is a cut in rates of 10 basis points.

An extension of the Bond programme beyond 6 months is also unlikely.

Cut in monthly purchases suggested

Morgan Stanley does not address the possibility of the monthly limit of 80bn bond purchases in the programme being cut alongside an extension of 6 months, as analyst Clara Leonard of BNP Paribas suggests:

“Our economists expect the December ECB to announce that it will prolong quantitative easing by six to nine months and scale back its asset purchases from EUR 80bn to EUR 60bn per month.

“We think this announcement will be moderately bullish for the EUR and do not expect a very large market reaction, as our rates team does not expect a significant rise in rates."

 

With regards to the FED's rates, if we do see a rate hike, the question after is how many for rate hikes can expect to see and of course what criteria she requires in order to meet them. If Trump maintains his rhetoric and implements is fiscal stimulus measures then this would further boost inflation, but also would keep the bullish momentum on the DX, which can potentially become a problem not only for exports in the US, but also for EM currencies and any country who has taken out loans in dollars.

Perhaps more interesting than the dollar rally itself is what it actually means for companies and consumers going forward, since a stronger dollar can come with negative side-effects for US companies, especially those with heavy international exposure.

ECB treads carefully to avoid taper tantrum

Strong economic case to slow asset purchases is undermined by political uncertainty:

 

An economic recovery in Europe was supposed to make life easier for the European Central Bank. Instead, it has given officials in Frankfurt a problem as they prepare to decide whether to scale back the bank’s monthly bond purchases under its landmark quantitative easing programme.

 

The ECB is set for its most important meeting in months on Thursday when its governing council will finally put an end to a saga that has dragged on since the summer: outlining the shape of the third phase of QE. Mario Draghi, ECB president, believes the economy is now strong enough for the bank to at least consider cutting back on the amount of bonds it stockpiles each month, from the €80bn it has bought since the spring. The programme runs until March.

Mr Draghi told Spanish newspaper El País last week that his bank could tinker with “the amount of monthly purchases or the length of time over which they take place”. Analysts have interpreted those remarks to mean the bank’s governing council will be presented with a choice between continuing to buy €80bn of bonds monthly until September, or purchasing €60bn a month for longer, until December 2017.

Both options will mean the ECB eventually ends up owning between €2.2tn and €2.4tn worth of mostly government debt. But, with investors’ nerves frayed by political uncertainty, it is not only the size of the stockpile that matters.

Any suggestion that the ECB is heading for the exit and tapering its purchases could worsen the recent sell-off in government bond markets, reversing what the ECB has achieved since the eurozone’s central bankers began bond buying in March 2015. Borrowing costs have already been rising since Donald’s Trump’s US election win. A further jump in yields for the bonds of riskier governments such as Italy’s would undo the success that the QE programme has had in lowering borrowing costs throughout the region, not just in the eurozone’s most prosperous corners.

It would have echoes of the “taper tantrum” when rates spiked after the US Federal Reserve signalled it would begin to wind down the bond purchases it was making as part of its QE programme. The Fed was eventually forced to prolong its buying.

 

Favourable news on the eurozone’s economic recovery, which has withstood the immediate aftermath of both the UK Brexit vote shock and Mr Trump’s election, has allowed the ECB to take its time to decide what comes next.

Eurozone unemployment has finally inched into single figures; inflation, while still way below the ECB’s target of just under 2 per cent, has risen slightly; and surveys suggest growth is now at its strongest level this year.

Officials here also know that withdrawing some of the support will win the bank favour in Berlin, where QE is notoriously unpopular.

If the bank chooses to ignore German antipathy, it may risk a credit bubble by pumping too much easy money into the financial system when the economy no longer needs so much support. If it begins to unwind QE, it takes the chance that investors react badly and growth is stunted.

Frederik Ducrozet, economist at Pictet, said: “There is a strong economic case to reduce the pace of asset purchases. But I don’t know if they can do it at this stage. Markets are nervous because of the political environment, and if the ECB signals anything that looks like tapering it will result in tighter monetary conditions.”

Mr Ducrozet added: “When in doubt, the ECB should play it safe. QE is finally working in almost all of the directions and on all the transmission channels from markets to the rest of the economy. Do you want to jeopardise this now?”

Richard Barwell, economist at BNP Paribas Investment Partners, believes a decision to slow the pace would also reflect the political climate.

Challenges to central banks’ independence have accompanied the rise of nationalism. While the threat is more serious in the US and the UK, Germany’s economic and political establishment has repeatedly claimed that the bond purchases have stopped countries such as Italy fixing their economies.

“Markets are questioning whether the wings of the world’s two most powerful central banks will be clipped, their independence compromised by political forces but in opposite directions,” Mr Barwell said. “The Federal Reserve may be obliged to look the other way and let the economy run hot despite rising inflation. Irrational fears that low interest rates are delaying structural reforms may lead the ECB to pull back and let the eurozone slide into a disinflationary deep freeze.”

Both Mr Ducrozet and Mr Barwell expect the ECB to continue buying €80bn of bonds monthly for another six months, though Mr Barwell added: “I hope they will do more than that. I fear they’ll do less.”

 

[donaldprice]

Seems the DX is taking this whole referendum very seriously!!! A break below 10062 would imply to me that this bearish trend has some continuation. I hope Yellen does not use this excuse now.



[donaldprice]

How ECB chiefs will be reading markets ahead of QE vote

Key indicators will influence policymakers on whether to slow pace of asset purchases.

 

he eurozone’s monetary policymakers will meet this week to unveil the third leg of their landmark quantitative easing programme and face a tough decision on whether to slow the pace of their asset purchases.

 

So far, the European Central Bank has promised to buy €80bn of mostly government bonds each month until March 2017. Thursday’s meeting will come down to a choice between extending its bond-buying spree at the current pace for another six months or cutting the purchases down to €60bn a month, but for a period of nine months, according to analysts.

Neither option will make much of a difference to the stock of debt the ECB will end up holding, which will be between €2.2tn to €2.4tn — a massive chunk of the region’s sovereign debt markets. However, what economists refer to as “the flow” of purchases — how much it buys each month — also matters.

Better news on the eurozone’s economy and the risk of running out of assets to buy under the QE plan are factors in favour of going slow. However, while the recovery has withstood the initial shock of the Brexit vote and the US election, it is still fragile. The climate of political uncertainty risks derailing the steady progress the region has made in recent years.

Ahead of the vote, here is a guide to how central bankers will parse movements in currency, bond and derivatives markets ahead of their decision.

 

The euro

Since the governing council’s late-October vote, the single currency has fallen against the dollar.

A weaker euro helps in two ways. First, it makes eurozone exports more competitive. Second, it lifts the cost of imports, making them less desirable and raising inflation, which in the eurozone remains much too low. The currency movements are likely to help raise projections by the ECB’s staff for inflation and growth, which in normal circumstances would help shift the balance in favour of doing less now.

But these are not normal times. Doves, or those disposed to more stimulus, on the council may argue that exporters will net little of the benefit of the weaker currency in a climate where already falling levels of world trade are at risk from rising protectionism. Disappointing markets’ expectations of another six months of €80bn-worth of purchases also risks a spike in the single currency.

 

Spread between yields on Italian and German debt

The ECB views the fall in the cost of borrowing in some of the eurozone’s most troubled states as one of the most important successes of QE.

In this respect, the widening of the spread between yields on Italian and German government debt in the aftermath of Donald Trump’s win in the US election is worrisome. It indicates that borrowing costs for businesses and households in poorer parts of the region could soon rise. The ECB is more likely to stick to the current pace of asset purchases if it fears that a slowdown in monthly purchases will lead to a further spike in borrowing costs in weaker sovereigns.

While the rise in Italian debt financing costs can be explained by the country’s referendum, Vítor Constâncio, the ECB’s vice-president, warned that higher borrowing rates here were infecting other vulnerable sovereigns such as Portugal.

 

Markets’ inflation expectations

ECB officials have just one target to hit: inflation in the single currency area must be below, but close to, 2 per cent in the “medium term”.

There is ambiguity about what length of time the “medium term” covers, but central bankers have made clear it matters a great deal that markets and other economic players believe they have the credibility to hit their target.

The ECB has in the past paid a lot of attention to a technical measure of inflation expectations known as the five-year eurozone inflation swap rate. The rate suggests that markets do not think inflation will hit 2 per cent five years from now.

This rate, made up of what the prices of certain swaps say about what markets expect inflation to be five years from now, is no longer as influential as it once was. And, if it does come up in the governing council’s deliberations on Thursday morning, it is likely to be weighed alongside other indicators. Some of which suggest ECB watchers think the central bank can — eventually — hit its target.

Still, the weakness of the swap rates could make some at the bank nervous about rowing back on QE.

 

 

[donaldprice]

Morgan Stanley's potential scenarios & EUR/USD response for trading the ECB meeting.

 

rom Global FX Strategy Morgan Stanley, via eFX

We believe the reaction of the EUR over the ECB meeting will ultimately depend on the probability of tapering in the next 12m. In particular, EURUSD will depend on the short end rate differential between EMU and the US.  Our economist's assumption is that the ECB will keep rates on hold at next week's meeting but add a 6m extension to its QE purchase programme.

What is the market expecting?

Rates - no cut is priced for the December meeting and only 3.5bp by the end of 2017. The first hike is now 38 months away in 2020 instead of 60 months away as was priced at the end of October.

QE - the level of a bond yield is unable to give us an accurate measure of what the market is "pricing" in terms of further government bond purchases. Our only estimate is via speaking to our clients. Recent discussions suggest the majority of macro investors are not assuming the ECB will taper in 2017, indicating another extension would come in September.

Potential Scenarios and EUR response

1) Extends QE purchases for 6 months beyond March at current pace of 80bn/month. Expected by many market participants, already hinted at by ECB members speaking to MNI news, wouldn't be surprising for markets. Limited EURUSD impact. To extend purchases and leave an expectation in the market that they could extend again, the ECB would need to make some tweaks to its current programme that limits the scope for purchases. Here are some tweaks that the ECB could make and the potential EUR impact.

-a) No longer using the capital key to allocate purchases. As this approach could be bearish for the German bund but bullish for the periphery, we think the EUR could react positively. Note that the ECB doesn't necessarily need to explicitly express it is moving away from the capital key, they could indicate that they plan to be more flexible, in which case the EUR reaction should be limited. The market impact would be more volatile if they are explicit.

--b) Buy bonds below the deposit rate. Would generally be bearish for the EUR on the day given that this measure should put downward pressure on front-end German yields in particular.

---c) Change the maximum limit on buying per issuer/ISIN. This approach would generally be bullish for the whole German bund curve. For EURUSD to fall we would need to see a larger decline in bund yields than US treasury yields, pushing down the yield differential. EURUSD is generally more sensitive to front end rates (2y) than long end rates (10y).

----d) Scarcity to be addressed (Bundesbank repo facilities enhanced) We have to assume that the ECB will either discuss or be asked about scarcity of bonds, specifically in relation to short end bonds being used for repo purposes. Any rise in short end rates as a result of reduced worries about bond availability would strengthen the EUR but we wouldn't expect more than a 1% rise.

 

2) Cuts rates by10bp Extremely unexpected. Markets price in no probability of a cutnext week and only a 3bp by the end of 2017. EURUSD would fall by 2-3%, driven lower by front end rates (Exhibit 15).

3) Extends QE purchases by more than 6 months. This would be unusual for the ECB to extend for more than 6 months as they haven't done that before so this measure would surprise markets. We would expect EURUSD to weaken.

4) No change in policy. EUR would rise as markets are expecting some form of easing. The magnitude of the rise will depend on the explanation given by the ECB and how it intends to scale back QE purchases. This would see German yields rise substantially, while Italian spreads likely widen out, pulling the EUR in opposite direction.

5) Extend corporate bond purchases but not government bond. 10% of the current monthly purchases are in corporate bonds. Extending this sector and not government bonds would imply a tapering of bond purchases. This scenario is highly unlikely and would be the most bullish of the scenarios considered here.

[donaldprice]

The Federal Reserve prepares to raise interest rates again (The economist).

 

AMERICA’S central bank tries to be predictable. When in December 2015 it raised interest rates for the first time since 2006, nobody was much surprised. The central bank had telegraphed its intentions to a tee. Similarly, if the overwhelming consensus in financial markets is to be believed, on December 14th—almost exactly a year later—rates will rise again, to a target range of 0.5-0.75%. Donald Trump’s tweets and phone calls may upend trade, fiscal and foreign policy in a matter of minutes, but Janet Yellen, the Federal Reserve’s chairwoman (pictured), is tweaking monetary policy at only a cautious annual pace. 

Yet in another sense, the Fed has confounded predictions—at least, those it made itself. A year ago the median rate-setter foresaw four rate rises in 2016. None has happened yet. This might seem like a straightforward reaction to events. At the start of the year, stockmarkets sagged on worries about Chinese growth. Then, in June, Britain voted to leave the European Union, sending markets spinning again for a while. But the delay also resulted from a gradual acceptance by Fed officials that low rates have become a longer-lasting feature of the economy. In September most rate-setters expected rates eventually to settle below 3%. This is down from 3.5% at the time of “lift-off” a year ago. Since June Ms Yellen has been saying that low rates are only “modestly” juicing the economy.

 

 

has climbed only a third of the way back to its pre-recession level. Even among those in work, there are still an unusually high number of part-timers who want full-time work.

The ultimate arbiter of this debate is wage and price inflation. If the economy is running hot, both should pick up. As it is, hourly wages are only about 2.5% higher than a year ago. But researchers at the San Francisco Fed have suggested that a slew of retirements by baby-boomers on fat salaries is dragging this average down. Measures purged of this problem show the median hourly pay rise running at fully 3.9%, almost as generous as in 2007

 

As for inflation, it is not yet back at the Fed’s 2% target. But it is getting closer. Excluding food and energy, prices are 1.7% higher than a year ago, according to the Fed’s preferred measure, up from 1.4% at the end of last year. Doves console themselves that even after rates rise, monetary policy will remain unusually loose for this point in the economic cycle. That partly reflects the asymmetry of risks before the Fed. Should an some unforeseen shock rattle the economy, there will be little room to cut rates to offset it. This, as Ms Yellen often acknowledges, justifies keeping rates lower than they otherwise would be.

Inflation risk, though, is starting to tilt upwards. Congress will probably cut taxes next year. Higher rates may be needed to stop any fiscal stimulus becoming inflationary. Since the election, markets’ inflation expectations have continued on an upward trend that began in September. But Treasury-bond yields, which in large part reflect traders’ expectations for Fed policy, have risen dramatically (see chart 2). Rising oil prices and the prospect of Mr Trump’s imposing import tariffs also play a role. Both would crimp growth, but would do so in part by pushing prices up.

 

Surging bond yields and a stronger dollar are already squeezing the economy. So carefully has Ms Yellen managed expectations that a rate rise now will not exacerbate those trends. What would do so would be any hint that the Fed may bring subsequent rate rises forward, not push them back. For the first time in years, that does not look out of the question.

 

[donaldprice]

US interest rate rises set to expose China’s frailties

The world’s most leveraged corporate sector adds to the country’s vulnerabilities.

 

As Washington steels itself for the arrival of Donald Trump and a rise in interest rates, China could be forgiven for feeling itself besieged.

 

The country is home to the world’s most leveraged corporate sector, a notoriously volatile property sector and a swath of banks that depend on borrowing on the money markets to fund loans.

That makes the Chinese economy particularly sensitive to expectations of increasing interest rates, which together with the strong US dollar since Mr Trump’s election, have already sparked a rush to sell emerging market bonds and stocks.

“I think the Trump factor [will result in] more aggressive hiking of US interest rates, not just the one expected in December but also several times next year,” said Shen Jianguang, chief economist at Mizuho Securities in Hong Kong, speaking ahead of the Federal Reserve meeting which is widely expected to raise rates next week.

“A stronger US dollar will complicate the Chinese government’s efforts to stabilise the renminbi exchange rate and Beijing may have to tighten monetary policy,” he added.

The vast size of China’s debt mountain — which stands at over 250 per cent of gross domestic product, up from 125 per cent in 2008 — means that even minor increases in short-term interest rates may squeeze corporate activity and precipitate defaults, thereby hampering economic growth.

Alex Wolf, emerging markets economist at Standard Life Investments, argues that default risks are rising because more and more corporations are relying on the short-term money market to raise the finance they need to repay existing debts.

“Rising rates, especially short-term, increases the stress on weaker companies and raises the risk of defaults, he said. The six-month Shanghai interbank offered rate, a benchmark short-term interest rate, has surged in recent weeks as monetary conditions have tightened.



Estimates by Fitch, the rating agency, reveal a level of pain in corporate China that is not hinted at by official statistics. Some 15 per cent to 21 per cent of loans in the Chinese banking system are already non-performing, Fitch estimates, compared with official numbers of less than 2 per cent.

Against this backdrop, an upsurge in Chinese capital outflows, which reduced foreign exchange reserves by nearly $70bn in November, intensifies the challenges facing Beijing. With money pouring out of China, Beijing has little choice but to tighten domestic monetary conditions in spite of the difficulties for companies already unable to service their debt.

The Institute of International Finance, a global association of financial institutions, calculates that in the first 10 months of this year net capital outflows from China totalled $530bn, with October marking the 33rd straight month in which more money left the country than flowed in.

A strong dollar makes US assets more attractive relative to those held in a depreciating renminbi, prompting the Chinese to search for ways around recently-strengthened capital controls to send their money offshore.

The rise in short-term interest rates might also hit one of the weakest pillars in China’s financial architecture. Several midsized banks, such as the Bank of Jinzhou, find it hard to attract deposits and rely, therefore, on borrowing from the short-term money markets — but the cost of such borrowing is now rising.

Property companies — a mainstay of the wider economy — are also acutely vulnerable to the surge in short-term rates. Bond issuance by developers has plummeted since authorities tightened rules in October to rein in an overheated market, crimping their ability to invest in new projects.

In November, property developers issued only Rmb12bn ($1.7bn) in bonds, down from a monthly average of Rmb86bn from January to September, according to FT Confidential Research, a unit of the Financial Times.

 



Such economic stresses are complemented by the raft of political uncertainties that attend Mr Trump’s accession to the White House. He has threatened to slap tariffs on Chinese exports to the US and label Beijing a “currency manipulator” because of charges that the renminbi is undervalued.

“Is Donald Trump looking for a foreign enemy to redirect the attention of his supporters as he implements a plutocratic fiscal agenda with his plutocratic cabinet?” said Gary Greenberg, head of emerging markets at Hermes Investment Management, a fund.

A telephone call last week between Mr Trump and the leader of Taiwan, with which the US has no diplomatic relations, has also strained relations.

“The Taiwan call, along with undiplomatic tweets, gives [Mr Trump] a far away enemy who can be targeted as the source of US ills,” Mr Greenberg said. “China can react very angrily. Could this escalate? Possibly, but it is a little early to say.”

 

[donaldprice]

With such positive economic data coming from the US and of course Trumps promise of mass fiscal stimulus, the dollar can only go in one direction and that is up, because the Feds problem will no longer be deflation, but inflation instead which also adds to the problem of too strong of currency making exports less competitive, but will on the other hand make the Eurozone more competitive potentially with a very weak euro. 



[donaldprice]

Top Hedge Funds Predict How It All Will End (Zero hedge).

Little entertaining article.

http://www.zerohedge.com/news/2016-12-09/top-hedge-funds-predict-how-it-all-will-end

 

 

[donaldprice]

In terms of the Dow, looking at the mass Bull strength, clearly everyone is pilling their cash into stocks and why not, best take advantage of the tax Trump is promising. Which is why i can see this going beyond everyone expectations, but if you wish to be a brave soul and try take this trend on my the horns, notice the red ascending trend line which is now acting as resistance.

Overall a stunning chart, feels like 87, 00 and 08 all over again lol.





[donaldprice]

Because AUD USD is one of the most frequent pairs i trade, i thought i would discuss the possible analysis and therefore possible future trend.

 

The likelyhood is the fed will raise rates specially the way current Dot plot from Bloomberg and therefore like last time back in December 16 2015 we had a small depreciation, followed by a major that lasted until 3rd week of January 2016 before heading sharply higher and we may have a similar situation occurring again. Of course this is just based on probability, nothing is certain.

 

However one thing that is highly probable is what  looks to occur the week of the fed and that the AUD USD will head lower, if you check out the 4 hourly chart, which has failed to take out the higher highs 3-4 times which shows their is little buying interest, therefore it wont take much to break that support line as their is far to much weight being held on that supporting trend-line.

 

Economic fundamentals however also have to be included and currently GDP contracted since June from 1.1 to December -0.5. as-well as disappointing housing starts of which peak so far this year was 11.3 and now recently <12.3%.

 

In conclusion as outlined on the daily, their is a possibility that  we could go on to an uptrend around end of December or January as we see a recovery in precious metals such as gold, silver and platinum of which then you may see a recovery in stocks such as FRES, ANTOFOGAS, LON and many others.This therefore would complete your WXY pattern and begin heading lower from a technical view, especially if the dollar index keeps on surging.



[donaldprice]

A few interesting charts from HSBC (Source FT).

 



[donaldprice]

Hawkish Fed a potential speed bump for stock bulls (Reuters)

Next week's Federal Reserve meeting and possible signals on the pace of rate hikes for next year could pose the biggest risk yet to the rally the U.S. stock market has seen since last month's presidential election.

While investors have long anticipated the Fed will raise rates at the Dec. 13-14 meeting - in what would be its first such move in a year and second in nearly a decade - the worry for some stock investors is that the Fed takes a more aggressive stance on inflation and future hikes.

Stocks have set a string of record highs since the Nov. 8 election on hopes of a pickup in U.S. economic growth, thanks to President-elect Donald Trump's promises of increased infrastructure spending, lower taxes and easier regulations.

 

U.S. investors seem optimistic about prospects of future growth, but the question remains if the Fed does as well.

The U.S. central bank should announce new economic forecasts next week, along with a rate hike. If inflation is expected to pick up quickly, the Fed may need to raise rates faster than investors expect, and that could be a negative for U.S. stocks.

"If they believe that inflation is going to march higher and more rapidly ... That would give the market reason to pause," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

"I don't think investors want to hear that this is going to be an aggressive Fed."

Fed Chair Janet Yellen will more likely want to reassure investors that the transition to higher rates will be gradual, she said.

Last December, the Fed raised rates for the first time in nearly a decade, and later signaled four more hikes would come in 2016. But the outlook quickly changed as the economy did not pick up speed, oil prices fell further and the stock market plunged at the start of 2016.

Next week, "the market is going to try to key off of whether we are going to fall into the one-to-two (hikes), or the three-to-four for 2017," said Jason Ware, chief investment officer at Albion Financial Group in Salt Lake City.

"If in the statement and the discussion afterwards it appears that the Fed is getting more concerned that they are behind the curve and they have to tighten more aggressively than the market currently expects, that could knock stocks back."

Given the sharp run-up in equities since the election, some strategists are already advising caution. The S&P 500 .SPX has had its best five-week run since March and the Dow is up 7.8 percent since the election.

"The market is now overbought in the short and long terms," said Brad Lamensdorf, a manager for the Ranger Equity Bear exchange-traded fund (HDGE.P), which bets stocks will fall.

 

Financials could see the biggest impact if there's a shift in the outlook for rates. The group has outperformed the broader market in the recent rally, partly on the view that Trump will ease regulations for the sector but also on expectations of rising rates, which benefit banks.

Stock investors also worry about the impact of rising rates on the U.S. dollar.

Strategists in a Reuters poll this week cited the dollar, which has strengthened sharply since the election, as among the biggest possible risks for stocks next year because of its negative impact on U.S. multinationals' earnings.

[donaldprice]

Citibank Weekly FX Insight (source CITI Group).

Nice interesting article and insight to some of the G10 FX pairs.

Note is last weeks publishing only (5 december to 9th).

 

https://www.citibank.com.hk/global_docs/mobile/investment/pdf/fx_insight_e.pdf

 

 

[donaldprice]

 

How high can US rates go in the Trump era?

Some say scope for rises underestimated, but productivity problems overshadow economy

 

After eight years in which interest rates in rich countries have kept close to all-time lows, a change of weather is in the air.

 

Donald Trump’s election as US president and widespread expectations that the Federal Reserve will nudge rates higher this week have made their mark on the markets.

The big question is whether short-term pressures for higher US interest rates are strong enough to overturn long-term global forces that push borrowing costs ever lower — such as an older population, rising inequality and falling productivity growth.

Financial markets expect the Federal Reserve to raise rates slower than its own projections. But an increasing number of economists argue that circumstances have changed so much that not just the markets but even Fed policymakers are underestimating the potential for interest rates to rise next year.

The two-year US Treasury bond yield rose on Monday to its highest level since 2010 at 1.15 per cent. Some analysts declare that after a three-decade long slide, interest rates have reversed course. Ian Shepherdson, chief economist at Pantheon Macroeconomics, says the Fed will find it harder to downplay low unemployment and rising wage growth after Congress has passed some of the fiscal stimulus favoured by Mr Trump.

“We are worried that inflationary pressure, which is already building in the labour market, will become a serious problem, forcing the Fed to raise rates quite rapidly,” he says.

But despite the broad consensus that Mr Trump’s stimulus plans will lead to higher interest rates — a prospect the president-elect welcomes — many economists and market participants think the additional stimulus will not be sufficient to alter the outlook significantly.

 



Some, such as Larry Summers, Treasury secretary under Bill Clinton, argue that Mr Trump’s tax cuts are skewed to the rich and will “do little if anything to spur growth”.

While the size of the fiscal stimulus package is shrouded in mystery, the OECD has estimated it will raise US growth 0.4 percentage points to the still modest level of 2.3 per cent in 2017. Because underlying conditions have deteriorated, that rate is only 0.1 percentage points higher than the OECD’s US growth forecast in June.

 



The OECD expects 2018 growth of 3 per cent, boosted by 0.8 percentage points from fiscal stimulus — but that falls short of the ambitions of Steven Mnuchin, Mr Trump’s pick for Treasury secretary, who has talked about 3 to 4 per cent growth becoming normal again.

Meanwhile central bankers stress that interest rates are likely to settle at much lower levels than in the past. They say low rates stem from an increase in the global desire to save, which forces down rates to discourage excessive saving, so that there is enough spending to keep unemployment down and inflation stable.

 



Mark Carney, governor of the Bank of England, talks about an “unprecedented desire for safety”.

Economists have put forward various explanations for the underlying fall in interest rates. An ageing population tends to lead to a higher desire to save for a longer life. Greater inequality has concentrated more income in the hands of groups that save more and spend less. High levels of debt also require interest rates to stay low since borrowers — including governments, companies and consumers — are often unable to withstand higher interest rates.

Perhaps the most worrying trend has been a fall in the annual growth rate of productivity in all regions of the world. According to Stanley Fischer, vice-chairman of the Fed, “weak productivity growth has likely pushed down interest rates both by lowering investment . . . and by increasing saving”. In both instances, lower productivity growth leads to lower expectations of future income, leading both companies and consumers to save rather than spend.

 

Mr Trump’s fiscal stimulus may indeed lead to productivity gains. But most economists see the relationship between growth and productivity as the other way around, with productivity gains ushering in greater growth rather than vice versa.

“These kind of measures would probably not be sufficient to strengthen US trend growth by resolving low productivity and the decline in the working population,” says George Magnus, an independent economist.

He argues that, since the likely stimulus would come at a time of close to full employment, short-term interest rates may rise faster than expected. But long-term natural interest rates are a different matter — a Fed rate rise this week may be an important step in its own right, but not necessarily a break with the past

 

 

[donaldprice]

As stated before i do think their is a significant probability that parity in relation the Euro Dollar is not going to come easy, even if Yellen states that repeated rate hikes are to follow soon after. We dont know what Trump really ends up doing and he could disappoint if he does not carry out his fiscal policy measures. If euro dollar does not break the resistance below 10520 then i think its safe to say that it will take an extreme event or bullish momentum on the dollar to this. Most if not all the price of a rate hike is already in, therefore once the FOMC is done, i do think you will see dollar crosses come of some of their gains. Having a stronger dollar is not in their best interests, especially in Trump wants to make America great again. 



[donaldprice]

USD Into FOMC: Sell The Fact – Barclays

 

https://www.forexcrunch.com/usd-fomc-sell-fact-barclays/

[donaldprice]

Fed Expected to Raise Interest Rates: What to Watch (WSJ) The central bank is expected to raise rates, and it also will release economic projections for the first time since the U.S. election

 

Federal Reserve officials are likely to raise short-term interest rates when their two-day meeting concludes Wednesday, the only increase this year and just the second since June 2006. But what will they signal for the path of rates in 2017 and beyond? This will be the Fed’s first policy meeting since the election of Donald Trump, who has pledged tax cuts and new government spending—policies that could affect the Fed’s outlook for inflation and interest rates over time. The central bank releases its policy statement and economic and interest-rate projections at 2 p.m. EST Wednesday, and Chairwoman Janet Yellenholds a press conference at 2:30 p.m. Here are five things to watch for.

Plotting the Dots

Officials’ projections for their benchmark federal-funds rate in the quarterly chart known as the “dot plot” will be scrutinized for clues about where rates could be heading next year. At their September meeting, officials implied they expected two quarter-percentage-point rate increases in 2017. But that was before Mr. Trump’s victory. Economists surveyed by The Wall Street Journal last week see the pace of Fed interest-rate increases picking up in the coming years for a variety of reasons. Several Fed officials, however, have said they won’t change their outlook until they see what fiscal policies are enacted, suggesting their dots won’t move much this week.

 

Another thing to watch in the dot plot is officials’ long-term expectation for the fed-funds rate. The median of that projection fell to 2.9% in September from 3.50% a year ago, reflecting the belief that the natural rate of interest—the inflation-adjusted overnight rate that is consistent with the economy operating at full potential without overheating—has fallen in the years since the financial crisis. If it keeps declining, that would be a sign of Fed pessimism about the potential for growth in productivity and economic output.

 

Full Employment

The summary of economic projections will be examined for details of Fed officials’ predictions for the unemployment rate at the end of 2017, which could be lower than their September prediction of 4.6%, since that rate was reached last month.

A question facing Fed officials now is: What is full employment—the lowest level the jobless rate can fall to without pushing inflation higher—and are we there yet? Unlike inflation, for which the Fed and several other global central banks have set a 2% target, there is no fixed goal for maximum employment. If officials judge the economy has reached full employment, that could suggest a quicker pace of rate increases ahead to keep inflation in check.

Ms. Yellen told Congress in November that the economy has had “more room to run” than officials had anticipated, indicating she wasn’t worried the economy was at risk of overheating.

Wording the Statement

If the Fed does raise rates, it might tweak its policy statement slightly, compared with the one released in November, including dropping language saying the case for a rate increase had “continued to strengthen.” Officials’ recent comments suggest they are likely to repeat their expectation of “gradual” rate increases. Fed officials often include a line in their statement assessing the risks to their economic outlook. They said in November that the near-term risks to the outlook were “roughly balanced,” and could repeat that Wednesday.

Fiscal Policy Implications

During her postmeeting press conference, Ms. Yellen is likely to field questions about the implications of expansionary tax and spending policies for the path of interest rates. In her comments to Congress in November, she said there is “a great deal of uncertainty” surrounding the fiscal outlook. One of her close allies, New York Fed President William Dudley, said last week that the tightening of financial conditions since the election in expectation of tighter Fed policy “seems broadly appropriate,” although he added that “it is premature to reach firm conclusions about what will likely occur.”

 

Watch for Dissents

Ms. Yellen faced dissent at five out of seven meetings this year, each time from officials who wanted to push rates higher. If the Fed raises rates, Ms. Yellen might get dissent from policy makers with the opposite concern—those who favor keeping rates low. If governorLael Brainard, an advocate of low rates, were to dissent, she would become the first governor to vote against a rate decision since Mark Olson in September 2005.

 

[donaldprice]

Fed policy for 2017 falls under market spotlight 

With a US rate increase already expected the focus is on plans for the year ahead.

 

The Federal Reserve on Wednesday will hold its final rate-setting meeting before Donald Trump is due to enter the Oval Office. A quarter-point increase in the federal funds rate target range to 0.5-0.75 per cent has already been priced in by the markets, so the focus will be firmly on what happens to policy in 2017 and beyond.

 

The key question will be whether the Republicans add fiscal fuel to an economy that is already near full employment, forcing the Fed to step up its ultra-sluggish pace of tightening. The message from the Fed on Wednesday is likely to be that it is too soon to know for sure.

What will the Fed say? 

Markets saw more than a 95 per cent chance of a quarter-point rate increase going into the meeting, according to analysis of futures pricing from CME Group, so anything other than an upward move would be a big shock. Accordingly the markets’ initial focus will be on the Fed’s post-meeting statement, and accompanying forecasts. 

The statement is likely to acknowledge the further decline in the unemployment rate to 4.6 per cent as well as the robust 3.2 per cent annual pace of gross domestic product growth seen in the third quarter. One measure of officials’ confidence is whether the Federal Open Market Committee changes its assessment of the risks to the outlook. The November statement found near-term risks were “roughly balanced”; if policymakers are becoming more confident they could extend that outlook beyond the short term, mirroring language in December 2015 when the Fed last lifted rates. 

What about the Fed forecasts? 

This is critical. The so-called dot plot of policymakers’ interest rate forecasts in September plugged in two increases for 2017 and three in 2018 and 2019. If there is an upward shift in the median dots in any of those years on Wednesday it could send a shiver through markets. 

 

For most policymakers the outlook may well not have changed sufficiently from September for them to lift their growth, inflation and interest rate forecasts. But some might want to seize on the prospects for more expansionary fiscal policy in the next Congress and boost their rate forecasts — even though no one knows what kind of tax package will emerge from Capitol Hill in 2017. 

President-elect Trump has mooted a set of tax cuts that would send the US national debt rocketing. Republican lawmakers are vowing to be more conservative, but they could also end up signing their names to a deficit-increasing package of tax reforms, which could add momentum to the recovery at a time of full employment. 

What will Janet Yellen’s message be? 

The Fed chair has stressed to Congress that she does not want to jump the gun and make premature assumptions about the post-election shape of economic policy. Accordingly, her message may be characteristically cautious, re-emphasising the Fed’s determination to keep the pace of rate increases gradual. 

But assuming the Fed lifts rates on Wednesday, the markets’ focus will be on trying to extrapolate whether the next rate increase comes as soon as the first quarter of 2017 and whether bigger budget deficits could herald a quicker tightening than the glacial, once-a-year pace now. The tone Ms Yellen strikes in the press conference starting at 2:30pm, half an hour after the Fed decision emerges, will be key.

This has been the slowest rate-lifting cycle for the Fed in modern times. Having initially forecast around four rate increases in 2016, the Fed is likely to push through only one. If there is a significant turnround in fiscal policy next year, however, the central bank will have to be quicker on its feet.

 

 

[donaldprice]

Draghi Set for Inflation Boost That May Not Be All He Needs. (Bloomberg)

https://www.bloomberg.com/news/articles/2016-12-30/draghi-set-to-get-inflation-boost-that-might-not-be-all-he-needs?cmpid=socialflow-twitter-business&utm_content=business&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social

[donaldprice]

Euro Area Sees Price Gains as Manufacturing Picks Up Pace(BLOOMBERG)

 

https://www.bloomberg.com/news/articles/2017-01-02/euro-area-sees-price-gains-as-manufacturing-picks-up-pace?cmpid=socialflow-twitter-business&utm_content=business&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social

 

 

[Guest Andrew1]

Donald what's your outlook on Ftse 100 ?

[donaldprice]

Hi their Andrew, if i was to give a perspective on the direction of trend for the FTSE100 is that the trend could indeed continue. However if EU inflation proves to be better than previous i.e 1% up from 0.6 then market participants could panic and FTSE100 could come under pressure, this would be noted most likely days or weeks before. Watch the dollar index as this is also a good indicator since earnings of most companies are in dollars. From a technical perspective observe on the hourly time frame that we are being supported by a an ascending trend-line with multiple touches, but the bulls are aware of this and therefore you can see aggressive buying. But you can also distinguish between the angle elevation of momentum on the hourly time frame. Notice how one trend is 36° other only 14° therefore buyers really do have to step up their gain as the momentum could weaken. Also note that since 2011 4/5 FTSE100 does perform well after christmas, at least for the first few weeks. 

Also good idea to watch key benchmarks such as banks and mining stocks as they have significant weight (see technical analysis thread on Trade of the week). 

For now however due to low volumes i am standing aside for today, ftse has not got brilliant liquidity today.

 

[Guest Andrew1]

Thanks for the above. Seems the bulls are out today. Waiting for a big fall. Seems like I'm going to be waiting a while!

[donaldprice]

ECB has eroded the value of its forward guidance (FT)

High quality global journalism requires investment. 

Although the US Federal Reserve surprised markets in December, it continued to work along the grain of the forward guidance previously provided. The same cannot be said of the European Central Bank. The ECB also surprised in December, but it did so in a way that clashed with its previous forward guidance. The US and the euro area both face considerable political uncertainty in 2017. The Fed is not adding to that by creating confusion about its reaction function. In contrast, the ECB appears to be. As a result, the publication of the accounts of the December ECB meeting on Thursday is more important than usual in helping market participants understand what is going on. Given that central bank objectives are about the future — either returning economies to full employment and price stability, or sustaining them there if that destination has already been reached — the policy stance has to be set, and forward guidance has to be provided, on the basis of projections for growth and inflation. In this simple framework, changes in the policy stance, or in forward guidance, should occur when there is a shift in these projections that move the economy either closer to or further away from the central bank’s objectives. This is why market participants watch the data so closely: are the data surprising the central bank enough to prompt a shift in the policy stance or the forward guidance? This straightforward approach worked perfectly for the Fed in December. The central bank delivered on its previous forward guidance with a rate rise, and increased its interest rate expectations for 2017 in response to an upward revision to the growth projection and a downward revision to the unemployment rate projection.

 

However, this approach did not work at all for the ECB in December, where the central bank slowed the pace of asset purchases despite a set of revisions to the projections that showed a slower journey back to price stability. This contrast begs an explanation as to what is going on at the ECB. Last March, the ECB increased the pace of asset purchases from €60bn to €80bn. At the time, the central bank said the move was motivated by the need to reinforce the momentum of the euro area’s economic recovery and thus accelerate the return of inflation close to the 2 per cent target. This move in March was reinforced by explicit forward guidance, repeated in the press statement each month, which stated that “monthly asset purchases of €80bn are intended to run . . . until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim”. Given all this, one could be forgiven for assuming that the euro area economy is making progress towards price stability at least in line with the central bank’s projections as laid out in March; otherwise, why would the central bank announce a slowdown in the pace of asset purchases from €80bn back to €60bn at the December meeting. Not a bit of it. In fact, the very opposite has happened. Back in March, the ECB projections put growth and core inflation in 2018 at 1.8 per cent and 1.6 per cent, respectively. In December, these projections were at 1.6 per cent and 1.4 per cent, respectively. Thus, the ECB is further away from its policy objectives now than it was in March, yet it still slowed the pace of purchases. So what is really going on at the ECB? In our view, the best explanation of the ECB’s move in December is that it reflects a lack of comfort on the Governing Council with large-scale asset purchases, for political rather than economic reasons. Many central bankers at the ECB believe that extremely accommodative monetary policy takes the pressure off governments that should be undertaking structural reform. Slowing the pace of purchases re-establishes some of this pressure. Executive board member Benoît Cœuré noted after the December meeting that the slowdown in QE purchases was a “form of warning” that QE was not going to last for ever. We don’t know for sure how important this was. Thursday’s accounts of the December meeting will provide more information. If this is the correct interpretation of the ECB’s behaviour in December, then the central bank has added to the considerable uncertainty that already exists in the euro area in 2017. Since the global financial crisis, forward guidance has become a key monetary policy instrument. By surprising the markets the way they did in December, the ECB has eroded the value of its forward guidance. Ahead of the December meeting, the ECB’s forward guidance explicitly linked the purchase pace of €80bn to progress towards the inflation objective. By changing the pace without any such progress, the ECB has created considerable uncertainty about how its future guidance should be interpreted.

[donaldprice]

Above are 2 interesting charts inflation vs unemployment, but the second chart with brent and eu inflation shows an interesting correlation, (have not calculated, but relationship seems positively correlated). Therefore one could assume that if we see oil prices continue upwards, wage growth increase and a falling euro currency then tapering of the QE program will be on everyones radar. 

[donaldprice]

ECB: Pressure to taper but Draghi won't waver – HSBC

 

Research Team at HSBC notes that the Eurozone inflation is rising sharply, and the hawks might start asking for an early tapering of QE but Mr Draghi made a shrewd move in December, announcing an extension of QE to at least end-2017 and with underlying inflation subdued, HSBC doubt the ECB will be bowing to pressure just yet.

Key Quotes

“In December, Eurozone inflation climbed to 1.1% y-o-y, the highest level in over three years. There is more to come, and we think Eurozone inflation could reach 1.8% by February (even higher in some countries, such as Germany). With growth picking up, some of the more hawkish members of the ECB Governing Council may start to call for tapering QE as early as the 19 January meeting.”

“However, the majority of the Governing Council remain worried about muted underlying price pressures, despite the rise in headline inflation. Core and services inflation remain around 1%. As noted recently by ECB board member Ives Mersch – typically at the more hawkish end of the spectrum within the ECB Governing Council – wage growth is still too weak in the Eurozone. The ECB will also be wary of tightening monetary policy too soon, repeating the mistake of 2011 when it hiked rates, helping to curb the fragile recovery.”

“Perhaps anticipating the hawkish calls, the ECB announced in December a nine-month extension of QE – albeit at a slower purchase pace – until the end of 2017. At that time, although the oil price had already increased significantly, it was not yet reflected in the ECB inflation forecast, meaning it still projected a meaningful undershoot of its "close to but below 2%" target.”

“All in all, we think that the ECB will be on hold in January, and indeed in the coming months, looking through the inflation peak in the first half of next year before having to make a decision on the possible future of QE. And given that we think underlying inflation will remain stubbornly low, in our view QE will continue at EUR60bn per month until the end of the year, and then at a slower pace (EUR40bn per month) from January 2018.”

[donaldprice]

What to look out for from the ECB

Bond buying, Brexit and Italian banks likely to be under scrutiny

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. 

The solid, albeit unspectacular, performance of the eurozone’s economy towards the end of 2016 all but rules out any monetary policy changes at Thursday’s meeting of the European Central Bank’s governing council. But there is a growing acceptance within the bank that it is running short of ammunition to counter any fresh political or financial shocks. Expect Mario Draghi, ECB president, to face questions on the limits of the bank’s quantitative easing process and economic risks when he faces journalists at 1.30pm London time. A statement due out at 12.45pm will almost certainly confirm that the bank has left its benchmark interest rate, the main refinancing rate, at zero. The levy charged on most of the deposits parked at the eurozone’s central bank is set to stay at 0.4 per cent. Here’s what to expect from his press conference. QE terms The ECB said in the accounts of its December vote that the decision to trim its monthly bond purchases from €80bn to €60bn was partly driven by concerns they could struggle to find enough assets to buy.

 

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Before then, Mr Draghi had suggested the ECB would carry on buying bonds until inflation was certain to hit its target of just under 2 per cent. Economists have criticised what they view as a big shift in the central bank’s stance, with some claiming the ECB is no longer as committed to its inflation target. The ECB president will face scrutiny on how long he thinks the central bank will be able to keep up its bond buying should underlying inflation remain weak. He could also say more about how the bank plans to buy some of the eurozone’s most expensive sovereign debt. Some bonds for the stronger eurozone economies, such as Germany, are so expensive that they are trading at yields lower than the ECB deposit rate of minus 0.4 per cent. Until December, the ECB had refused purchases of sovereign debt with yields below the deposit-rate floor. But a policy change allows the central bank more flexibility on what bonds it can buy. The Bundesbank, Germany’s central bank, bought bonds for yields below minus 0.4 per cent this week. Inflation If inflation were to carry on rising at the pace of past months, the ECB would be delighted: it would be on track for its inflation target and would be able to stop buying bonds by the spring.

 

Between November and December, annual inflation in the eurozone shot up from 0.6 per cent to 1.1 per cent. In Germany, motor of the eurozone, the shift was even more dramatic — prices rose 1.7 per cent in the year to December. The spurt will not last: it largely reflects the change in the oil price. Mr Draghi may point out that recent rises in the headline rate contrast with a lower reading for core inflation. Still, the scale of the rise in Germany has already led to a fresh round of calls from lawmakers in Berlin for the ECB to raise rates. Italian banks Italy may have averted a banking crisis late last year by approving a €20bn bailout fund for the country’s troubled financial sector, but the health of lenders remains of prime concern. Monte dei Paschi di Siena, the lender at the centre of the troubles, is set to receive €6.5bn in fresh capital from the state. Agreeing the terms of the bailout is set to take Italy and Brussels around a month, to ensure compliance with EU rules on state involvement in bank rescues. Before then, the ECB is set to issue an opinion on the €20bn fund. Mr Draghi could come under fire for the central bank’s decision to raise the figure for the amount of precautionary capital that it thinks MPS needs from €5bn to €8.8bn. Italian critics accused the ECB of a lack of transparency and failing to do enough to explain the decision (Banca d’Italia has since published this guidance). The US Donald Trump’s pledge to slap a 35 per cent tariff on BMW if it exports from plants in Mexico to the US have stirred concerns in Germany that the incoming US president will damage the country’s business model. Mr Trump has also started to question how helpful the stronger dollar is for the US, threatening to remove an advantage for eurozone manufacturers — though it may be difficult for Mr Trump to reverse the currency’s gains at a time when the US Federal Reserve is alone among the main central banks in raising rates. Brexit One big implication of the UK’s intention to quit the single market is on the clearing of payments denominated in euros, much of which takes place in London. The ECB has in the past pushed for oversight, calling for big clearing houses to decamp to the currency area, but lost a court case at the ECJ in 2015. Officials in Frankfurt and Brussels may make a fresh push for euro clearing to move to the eurozone, perhaps on the grounds that business in London will no longer fall under the scope of EU law. Mr Draghi may not want to say anything on the matter on Thursday — but the rules of where euro clearing takes place could form part of any post-Brexit deal.

 

[donaldprice]

best also keep an eye on T-bonds as if we see a decrease in the yield then this will be bearish for the dolllar and bullish for all dollar pairs notably AUD, NZD AND GBP against the dollar.