Friday, 29 January 2016
Germany's Bundesbank took more than 200 tonnes of its gold back to Frankfurt from overseas last year, the central bank said on Wednesday, as it moves towards hoarding half of the world's second-largest reserve at home.
In the wake of the euro zone crisis, many ordinary Germans want to see more of the 3,381 tonnes of gold in vaults at home and some have even questioned whether it still exists, prompting the Bundesbank to recently publish a long list of gold bars.
Just over 40 percent of the reserve, which Germany started building in the post-war boom years, is now held underground at the Bundesbank in Frankfurt, while almost the same amount is stored at the Federal Reserve in the United States.
Holding gold reserves abroad is a legacy of the Bretton Woods system of currency management established after World War Two. Much of the precious metal stayed there during the Cold War, when the former Soviet Union occupied eastern Germany.
As well as the reserves in the United States another 400 tonnes of German gold are held by the Bank of England. London and New York are centres for gold trading as well as home to two global currencies and - in an emergency - gold stored at those centres could be converted into sterling or dollars.
France, Germany's closest political ally in the euro zone, keeps less than half the amount stored in London and will have none at all by 2020 when half of the overall reserve will be guarded in Germany's financial centre.
The impact of the global financial crisis has been mild in Germany compared with other European countries but many Germans are suspicious of the euro project after an economic crisis almost fractured the currency, used by 19 European countries.
In uncertain times, gold is considered a safe asset, even though its value has recently fallen.
Proof that it is still in safe hands is important for many Germans. The Bundesbank said all gold bars are "thoroughly and exhaustively inspected and verified" on arrival.
Germany's gold holding, which is valued at roughly $130 billion, is the second biggest in the world, after the United States. The German reserve is roughly twice that of China, according to the World Gold Council, an industry body.
Reference: JOHN O'DONNELL
TOKYO - The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to revive the economy as volatile markets and slowing global growth threaten its efforts to beat deflation.
Asian shares jumped, the yen tumbled and sovereign bonds rallied after the BOJ said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB). [MKTS/GLOB]
"The BOJ will cut the interest rate further into negative territory if judged as necessary," the bank said in a statement announcing the decision.
In adopting negative interest rates Japan is reaching for a new weapon in its long battle against deflation or widespread falling prices, which since the 1990s have discouraged consumers from buying big or frequently because prices tend to fall. Deflation is seen as the root of two decades of economic malaise.
BOJ Governor Haruhiko Kuroda said the world's third-biggest economy is recovering moderately and the underlying price trend is rising steadily, "but there's a risk recent further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset."
"The Bank of Japan decided to adopt negative interest rates ... to forestall such risks from materialising," he told a news conference after the decision.
Kuroda had said as recently as last week that the bank was not thinking of adopting a negative interest rate policy for now, telling the Japanese parliament that further easing would likely take the form of an expansion of its massive asset-buying programme.
But in a narrow 5-4 vote, the BOJ's policy board decided to charge a 0.1 percent interest on selected current account deposits that financial institutions hold with it.
The central bank said the move was aimed at forestalling the risk of global financial turbulence hurting business confidence and reviving the "deflationary mindset" it has been striving to banish with aggressive money printing.
"Kuroda had been saying that he didn't think something like this would help so it is a bit surprising and it's clear the market has been surprised by it," said Nicholas Smith, a strategist at CLSA based in Tokyo.
Several European central banks have cut key rates below zero, and the European Central Bank became the first major central bank to venture into negative territory in June 2014.
By adopting a negative interest rate, the central bank hopes banks will step up lending to support activity in the real economy, rather than pay a penalty to deposit excess cash at the BOJ.
There is little sign of any pent-up demand from Japanese banks or cash-rich companies for fresh funds, and any money released into the system may merely be hoarded or steered into speculative activity such as betting on stocks.
"This is an aggressive all-stick-no-carrot approach to spurring investment, as depositors are essentially penalized for holding cash," said Martin King, co-managing director at Tyton Capital Advisors in Tokyo.
The BOJ maintained its pledge to expand base money at an annual pace of 80 trillion yen ($675 billion) via aggressive purchases of Japanese government bonds (JGBs) and risky assets conducted under its quantitative and qualitative easing (QQE) programme.
Markets have been split on whether the central bank would ease policy as slumping oil costs and soft consumer spending have ground inflation to a halt, knocking price growth further away from the BOJ's ambitious 2 percent target.
This is the fourth time the BOJ has pushed back its timeframe for hitting its inflation target - from an initial goal of around March 2015.
Friday's surprise interest rate decision came in the wake of data that showed household spending and output slumped in December, underscoring the fragile nature of Japan's recovery.
Analysts point out that the bank's room for further manoeuvre with its QQE programme was limited because it was quite simply running out of assets to buy.
"I think this is a regime change and the BOJ's main policy tool is now negative interest rates," said Daiju Aoki, an economist at UBS Securities in Tokyo. "This shows that the ability to buy more JGBs is limited." Many BOJ policymakers have been wary of using their diminishing policy tools to counter what they see as factors beyond their control, such as volatile financial markets and China's economic slowdown.
But pessimists on the BOJ board have worried that slumping Tokyo stocks may discourage firms from boosting capital expenditure, threatening the positive momentum the BOJ is trying to create with its heavy money printing.
Reference: LEIKA KIHARA
Thursday, 28 January 2016
Basic Trading Concepts Defined
Finding good trades requires a daily routine that filters the vast universe of stocks, currencies and other market venues, seeking securities with favorable risk/reward profiles and easily observed entry points. A well-constructed scanning program helps this process, targeting specific volume, volatility, trend and momentum characteristics that offer a starting point in the hunt for winners.
The next step removes instruments that aren’t well-suited to short term strategies. These change over time but roughly include American Depository Receipts (ADRs), thinly traded issues, closed-end funds, and most real estate investment funds (REITs). Add an additional filter when focused on short sale opportunities, removing the majority of dividend plays because you’re on the hook for those payouts when holding a short position through the ex-dividend date.
Culling Down Scan Lists
Trading requires quick entries and exits at specific price levels, increasing the desirability of highly liquid issues that trade in excess of 1 million shares on a daily basis.. However, many issues carry relatively narrow bid-ask spreads all the way down to 250,000 to 300,000 daily shares, expanding the database where you’ll find the majority of opportunities. Take exposure in a more thinly traded issue and you’ll introduce high transaction costs that will undermine profitability.
The culling process reduces the pool of acceptable securities to under 3000 issues, with 95% lacking the range and pattern structure to support a profitable entry in a given session. Your task is to find the remaining 5% and look for the most favorable opportunities within this elite group. This works best through quick visual examination, flipping through charts while allocating no more than a second or two to each observation, which is enough time for the skilled eye to see well-organized setup.
Third Party Calls
There are just two ways to find good trades: locate them yourself or have someone else do it for you. The scanning process works well for independent traders wary of chat rooms, trading services and other third party venues because it only takes a little effort to find promising setups, as well as other securities that deserve a place on your trading screen and watch list. But don’t rule out potential winners uncovered by other sources.
Just be prepared to do your own analysis, to see if the call makes sense and whether or into it fits into your risk tolerance and trading plan. Twitter and financial news sites offer the easiest ways to find these securities while many traders also choose to pay for nightly or real-time subscription services. Just don’t assume that paying for your market calls will get you better opportunities than following a few smart folks making free calls on social media.
Final Reality Check
The hunt for fresh opportunities relaxes the mind and puts the brain into game theory mode while hindsight notes how past setups would have yielded fabulous gains. Now add the mind’s capacity to form fit a mix of price bars into perfectly organized patterns that promise flawless outcomes and understand how easy it is to get excited about a prospect that will fail objective technical testing. In other words, avoid the tendency to see something that isn’t there.
As a general rule, if you have to look too hard, there’s nothing to see. Supplement this mental discipline with a final set of filters and rules that ensure the opportunity matches the exposure you’re looking to take. Be ruthless with this last barrier to entry, tossing out the vast majority and keeping just a handful of the most potent patterns and setups.
Use scanning filters and third party services to find potential winners, while performing secondary analysis to ensure they fit the way you trade.
Reference: Alan Farley
Want to stay updated? See our Free Weekly Reports.
European stocks succumbed to another slide in oil prices on Wednesday as markets waited cautiously to see what the Federal Reserve's reaction will be to what has been a brutal start to the year for world markets.
Asian and particularly Chinese bourses ended stronger than they started but that could not prevent the pan-European FTSEurofirst 300 .FTEU3 falling just over 0.7 percent ahead of what were expected to be similar falls on Wall Street.
There was still some grogginess after gadget giant Apple forecast its first revenue drop in 13 years on Tuesday, but the main pressure was once again from oil which sank back toward $30 a barrel following its latest attempt at a bounce.
Brent was down 2 percent at $31.12 per barrel with U.S. crude CLc1 3.3 percent lower at $30.40. Currencies followed a now familiar dance, with the dollar down against the yen JPY=, although it gained less than usual against oil-linked peers like the rouble.
Bond markets were firmly focused on the Fed's post-meeting statement, due at 1900 GMT (2 p.m. ET). After the rocky start to 2016 Fed followers are now expecting only one more rate hike this year rather than the four Janet Yellen and her colleagues were suggesting in December.
"(Markets are) pretty much treading water ahead of the FOMC (Federal Reserve)," said Societe Generale strategist Alvin Tan. "We are expecting a somewhat more dovish tone considering the turbulence in global markets since the start of the year."
U.S. Treasury yields nudged up, with the benchmark 10-year Treasury note yield US10YT=RR tip-toeing back above 2 percent as the more interest-rate-sensitive two-year yield hovered at 0.8567 percent.
Yields were also a touch firmer in Germany, but lower in southern Europe as small rises in French consumer and industry confidence and Italian retail sales did little to alter expectations that the European Central Bank is readying to cut its interest rates again.
Italian bonds were given an extra boost by an accord between the country and the European Commission to help Italian lenders shed some of their 200 billion euros of bad loans.
Monte dei Paschi, the world's oldest bank, saw its shares, which have lost more than half their value since the end of 2015, jump as much as 5 percent .
"Now we have this agreement, the risk of an Italian banking crisis has eased," said DZ Bank strategist Daniel Lenz.
There was little in the way of U.S. data on the slate ahead of the Fed later, although there was a slew of fresh company results to digest.
No. 2 U.S. wireless carrier AT&T (T.N) was down 2.4 percent in pre-market deals after below estimate revenues, while TripAdvisor took a 5.5 percent flight south after Goldman Sachs cut its rating on the stock to "sell".
Overnight, a late rally in China reversed an early 3 percent drop and helped MSCI's broadest index of Asia-Pacific shares outside Japan finish 0.5 percent higher.
Tokyo's Nikkei .N225 closed up 2.7 percent and the Australian dollar AUD= rose after one measure of inflation came in slightly above forecasts.
Valuations have taken a beating in Asia this year.
The benchmark Hong Kong stock market index is now trading at a price-to-earnings multiple of 7.4 times, its lowest since the 2008 crisis, while the China enterprises index is at a multiple of less than 6 times, its cheapest since December 2001.
"The Hang Seng China Enterprises index is currently priced for a credit event, which we think is slightly extreme," said Michelle Leung, CEO of Xingtai Capital Management, a hedge fund focused on Chinese consumer stocks.
The retreat in oil prices in Europe also began to weigh on other commodity markets. Copper, which is seen as highly attuned to global growth, sagged to $4,525 tonne CMCU3 by 0704 GMT, after a 2.7 percent gain in the previous session.
Traditional safe-haven gold meanwhile hovered near a 12-week high at 1,117 an ounce XAU=.
"The world's economic condition doesn't seem to give the Fed reason to hike rates soon given the growth risks," said Barnabas Gan, analyst at OCBC Bank in Singapore.
Reference: MARC JONES
Wednesday, 27 January 2016
Basic Trading Concepts Defined
Achieving success in futures trading requires avoiding numerous pitfalls as much, or more, than it does seeking out and executing winning trades. In fact, most professional traders will tell you that it's not any specific trading methodologies that make traders successful, but instead it's the overall rules to which those traders strictly adhere that keep them "in the game" long enough to achieve success.
Following are 10 of the more prevalent mistakes I believe traders make in trading. This list is in no particular order of importance.
1. Failure to have a trading plan in place before a trade is executed. A trader with no specific plan of action in place upon entry into a futures trade does not know, among other things, when or where he or she will exit the trade, or about how much money may be made or lost. Traders with no pre-determined trading plan are flying by the seat of their pants, and that's usually a recipe for a "crash and burn."
2. Inadequate trading assets or improper money management. It does not take a fortune to trade futures markets with success. Traders with less than $5,000 in their trading accounts can and do trade futures successfully. And, traders with $50,000 or more in their trading accounts can and do lose it all in a heartbeat. Part of trading success boils down to proper money management and not gunning for those highly risky "home-run" type trades that involve too much trading capital at one time.
3. Expectations that are too high, too soon. Beginning futures traders that expect to quit their "day job" and make a good living trading futures in their first few years of trading are usually disappointed. You don't become a successful doctor or lawyer or business owner in the first couple years of the practice. It takes hard work and perseverance to achieve success in any field of endeavor--and trading futures is no different. Futures trading is not the easy, "get-rich-quick" scheme that a few unsavoury characters make it out to be.
4. Failure to use protective stops. Using protective buy stops or sell stops upon entering a trade provide a trader with a good idea of about how much money he or she is risking on that particular trade, should it turn out to be a loser. Protective stops are a good money-management tool, but are not perfect. There are no perfect money-management tools in futures trading.
5. Lack of "patience" and "discipline." While these two virtues are over-worked and very often mentioned when determining what unsuccessful trader’s lack, not many will argue with their merits. Indeed. Don't trade just for the sake of trading or just because you haven't traded for a while. Let those very good trading "set-ups" come to you, and then act upon them in a prudent way. The market will do what the market wants to do--and nobody can force the market's hand.
6. Trading against the trend--or trying to pick tops and bottoms in markets. It's human nature to want to buy low and sell high (or sell high and buy low for short-side traders). Unfortunately, that's not at all a proven means of making profits in futures trading. Top pickers and bottom-pickers usually are trading against the trend, which is a major mistake.
7. Letting losing positions ride too long. Most successful traders will not sit on a losing position very long at all. They'll set a tight protective stop, and if it's hit they'll take their losses (usually minimal) and then move on to the next potential trading set up. Traders who sit on a losing trade, "hoping" that the market will soon turn around in their favor, are usually doomed.
8. "Over-trading." Trading too many markets at one time is a mistake--especially if you are racking up losses. If trading losses are piling up, it's time to cut back on trading, even though there is the temptation to make more trades to recover the recently lost trading assets. It takes keen focus and concentration to be a successful futures trader. Having "too many irons in the fire" at one time is a mistake.
9. Failure to accept complete responsibility for your own actions. When you have a losing trade or are in a losing streak, don't blame your broker or someone else. You are the one who is responsible for your own success or failure in trading. You make the trading decisions. If you feel you are not in firm control of your own trading, then why do you feel that way? You should make immediate changes that put you in firm control of your own trading destiny.
10. Not getting a bigger-picture perspective on a market. One can look at a daily bar chart and get a shorter-term perspective on a market trend. But a look at the longer-term weekly or monthly chart for that same market can reveal a completely different perspective. It is prudent to examine longer-term charts, for that bigger-picture perspective, when contemplating a trade.
Reference: Jim Wyckoff
Want to stay updated? See our Free Weekly Reports.
The Federal Reserve is expected to leave interest rates unchanged on Wednesday and acknowledge that turmoil in financial markets threatens its upbeat view of the U.S. economy, leaving the chances of a March hike diminished but alive.
All 69 analysts in a Reuters poll see the central bank keeping its key overnight lending rate in a range of 0.25 percent to 0.50 percent when it issues its policy statement following a two-day meeting. The decision is due at 2 p.m. EST (1900 GMT).
A month-long plunge in U.S. and world equities has raised concerns that an abrupt global slowdown could act as a drag on the U.S. economy, with investors now betting on only one quarter-point rate hike in 2016 instead of the four signaled in Fed policymakers' economic forecasts last month.
The Fed probably does not want to appear too worried by market and economic volatility that could prove temporary, and its rate-setting committee may soften concerns by pointing to solid U.S. job growth.
Many economists expect the central bank to say in its policy statement it is closely following global economic and financial events, as it did following a bout of market turbulence last summer. That language did not appear in its December statement.
"This would constitute a moderate acknowledgement of risks that avoids shutting the door to a March hike," Goldman Sachs economist David Mericle said.
U.S. economic growth will accelerate this year to 2.4 percent from 2.1 percent last year, according to the median forecast of Fed policymakers last month. New forecasts are not due until March.
Prices for Fed funds futures imply that investors currently see about a 30 percent chance of a rate increase in March, a move that would make the likelihood of four hikes over the year more plausible.
The Fed raised rates by a quarter point on Dec. 16 in a sign the economy had largely recovered from the 2007-2009 financial crisis and recession and was shrugging off weakness in China, Japan and Europe.
U.S. exports took a hit last year, in part due to the impact of a strong dollar .DXY, but consumer spending accelerated and overall employment surged by 292,000 jobs in December.
Investors saw almost no chance of a January rate hike and expected only two hikes for the whole year even before the Standard & Poor's 500 index .SPX fell 8 percent in the first three weeks of the year.
Oil prices have also plummeted this year, which could keep U.S. inflation below the Fed's 2 percent target for longer, but a recent uptick in the consumer price index outside of food and energy could point to a stronger medium-term inflation outlook.
Fed policymakers will be able to sift through the January and February employment reports before their March 17-18 policy meeting.
"The Fed has the luxury of waiting to see what happens," economists at Cornerstone Macro wrote in a note to clients last week, saying the central bank's challenge will be to balance financial market concerns with "the encouraging news on both the employment and inflation fronts."
Reference: JASON LANGE
Tuesday, 26 January 2016
Expectations for the first hike in interest rates from the Bank of England have receded to the fourth quarter, the second time in three weeks that analysts have pushed back their forecasts, a Reuters poll found on Tuesday.
The poll of nearly 60 economists comes a week after Governor Mark Carney, who last summer suggested a decision on when to start raising rates would probably become clear by early 2016, said now was not the right time.
"The year has turned, and, in my view, the decision proved straightforward: Now is not yet the time to raise interest rates," Carney said in his first speech of the year.
Bank Rate has sat at a record low of 0.5 percent for nearly seven years. Tuesday's poll said the first rise of 25 basis points would come sometime after September, most likely in November.
None of the 59 economists polled in the past week - before testimony from Carney to lawmakers on Tuesday - expected any move when the Monetary Policy Committee meets on Feb 4.
"An absence of inflation and global turmoil suggest that the BoE is wise to suggest that it will not be raising rates any time soon," said Peter Dixon at Commerzbank.
A poll published on Jan 4 said the first increase since mid-2007 would come in the second quarter, while one on Jan 14 had the third quarter pencilled in. Since early 2014, the median expectation has shifted seven times.
But even the latest call for the fourth quarter is doubtful.
Economists assigned only a 55 percent probability of a move by end-year. There is a more confident 65 percent chance of an increase by the end of March 2017 and a solid 75 percent likelihood by the middle of next year.
As in all recent polls, any increases will be gradual. Bank Rate is expected to be just 1.25 percent at the end of next year and 2.00 percent at the end of 2018, lower than predicted last week.
Interest rate futures markets, driven in part by turmoil on world stock markets since the start of the year on worries over China's slowing growth, are not pricing in the first increase for another two years.
But over three-quarters of the economists polled said the markets have gone too far.
Oil has tumbled more than 70 percent since mid-2014 and British inflation is close to zero, nowhere near the Bank's 2 percent target. According to a Reuters poll it won't get there until 2017 at the earliest.
With expectations for the first hike moving further out, sterling has fallen over 3 percent so far this year.
If the Bank does wait until November it would be almost a year behind the U.S. Federal Reserve which made its first hike in almost a decade at the end of 2015 and is expected to make three more moves this year.
In contrast, the European Central Bank will push its deposit rate further into negative territory in March and there is a 50-50 chance it tops up its asset purchase programme as it fights to drag up meagre inflation.
Reference: JONATHAN CABLE
The dollar edged down on Monday as renewed selling on oil markets drove investors into their safe havens of choice, the euro and yen, and weakened the currencies of major crude exporters.
After an upbeat session in Asia, stock markets quickly turned negative in Europe and oil fell almost 3 percent, driving roughly half-percent falls in the Canadian dollar and Norwegian crown.
The oil price fall turned investors' focus back onto the broadly negative view of the outlook for the world economy that has dominated since the start of 2016.
That has tended to benefit the euro, yen and Swiss franc at the expense of the dollar.
"We cannot sound the all clear, there is clearly a lot of uncertainty out there," Commerzbank strategist, Thu Lan Nguyen, said.
"The main theme this morning is of commodity currencies being under pressure. A lot depends on the oil price. If we see a sharp drop back to the levels we saw last week, we can see another round of the market nerves we have been seeing."
The dollar fell about a third of a percent against the yen to 118.40 JPY=, well off last week's one-year low of 115.97. The euro was also up about 0.25 percent at $1.0816
Norway's prime minister and central bank governor were set to meet at short notice on Monday and expectations for the outcome of the meeting helped the crown steady at 9.47 crowns per euro by 1221 GMT (7:21 a.m. EST), down 0.3 percent.
"Extra spending would be temporarily supportive for the crown but would not change the longer-term bearish currency story against the dollar unless there is a quick pick-up in non-oil sectors," Morgan Stanley analysts said in a morning note.
Bullish bets on the dollar fell for a fourth straight week through Jan. 19, according to Reuters calculations and the latest data from the Commodity Futures Trading Commission, released on Friday.
Focus is on the pace of Federal Reserve tightening as risk aversion and volatile markets push investors to pare bets on any U.S. near-term hikes, with rates widely expected to be held on Wednesday.
The Bank of Japan (BoJ) will conclude a two-day policy meeting on Friday, at which sources familiar with its thinking say it is likely to cut its core consumer inflation forecast for the coming fiscal year to possibly below 1 percent.
Downbeat data has raised speculation of more BoJ easing by April.
Reference: PATRICK GRAHAM
Monday, 25 January 2016
Financial markets need more clarity on how Chinese authorities are managing their currency, particularly the relationship of the yuan to the U.S. dollar, IMF Managing Director Christine Lagarde said on Saturday.
Sharp swings in the yuan have contributed, along with a dramatic fall in the price of oil, to global market volatility since the beginning of 2016.
Bank of Japan Governor Haruhiko Kuroda, speaking on the same panel at the World Economic Forum in Davos, said he believed China should use capital controls to stabilize its currency while keeping domestic monetary policy loose.
Asked whether she would back capital controls by China for a period, Lagarde avoided a direct reply but said: "Certainly a massive use of reserves would not be a particularly good idea ... Some of it was already used."
She said that the market needed "clarity and certainty" about China's exchange rate basket "in particular with reference to the dollar, which has always been the reference".
"That would be the right move to make," she added.
Kuroda said China was right to keep monetary policy accommodative to help cushion the country's transition from a export-led industrial economy to a demand-driven consumer economy without excessive depreciation of the yuan.
"This is my personal view and may not be shared by Chinese authorities, but in this kind of contradictory situation, capital control could be useful to manage exchange rate as well as domestic monetary policy in a consistent, appropriate way."
He said Beijing was struggling to avoid either an excessive depreciation or an excessive appreciation of its currency.
Chinese economic data signaling slowing growth in the world's second-largest economy have sent investors into a panic globally in the first three weeks of 2016, with oil prices also plunging as a result of oversupply in the market.
Credit Suisse CEO Tidjane Thiam told the Davos panel that many people in the markets did not necessarily believe China's official growth figure of 6.9 percent for 2015 and feared the Chinese economy was facing a "hard landing".
"We believe China will have a soft landing, not a hard landing. A lot in people in the market believe demand in China is decreasing. We don't agree," he said.
Part of the market slide was due to a massive distressed sales of assets by sovereign wealth funds and asset managers prompted by falling oil prices, Thiam added.
Both Lagarde and Kuroda suggested investors could trust China's official growth data.
The Chinese central bank has been generous with liquidity, pumping a net 315 billion yuan ($48 billion) into the banking system ahead of the Lunar New Year holiday in early February.
It was the biggest weekly injection since January 2014 and analysts suspected it was larger than that warranted to avoid any hint of a cash crunch during the long holiday.
According to sources, Zhang Xiaohui, an assistant governor of the central bank, said it would not rush to cut the amount of cash banks must hold in reserves, as doing so could send a strong signal on policy easing.
Yi Gang, a vice governor of the central bank, also said it would keep the yuan basically stable against a basket of currencies.
Italian Economy Minister Pier Carlo Padoan told Reuters the IMF board's decision to include China's yuan in the basket of major currencies used to calculate the Special Drawing Right in which the Fund lends to members was "an additional positive constraint" on China's management of its currency.
The oil market's roller-coaster ride this year is not over yet, technical analysts warned on Friday, with new lows likely to come after traders catch their breath.
U.S. oil futures for March surged 13.5 percent on Thursday and Friday, erasing nearly half the losses racked up since the start of the year as bearish traders cashed out.
While almost no one expects this to mark the start of an extended recovery amid a persistent global supply glut and worries over the Chinese economy, many are asking whether this is finally the end of an 18-month slide.
For some of the analysts it had the hallmarks of a classic dead-cat bounce, a natural pause in the tailspin that had sucked prices below $30 a barrel for the first time since 2003 - with still lower lows lurking in the weeks ahead.
"I don't think we've found a bottom yet," said Fawad Razaqzada, technical analyst for Forex.com and City Index in London. He does not expect prices to extend their recovery to above $35 a barrel, the level needed to prevent a further slide. U.S. crude closed at $32.19 on Friday, up 9 percent.
"For me, there's been no clear technical or fundamental signal that prices have not bottomed out. This is a mere oversold recovery, therefore I think prices will fall back again."
Walter Zimmermann, vice president and chief technical analyst at brokerage ICAP in Jersey City, also expected prices to fall to new lows although he noted that the charts were not decisively bearish.
"It may be a dying cat bounce but it has a little too much vim and vigor to be a dead cat bounce," Zimmermann said. He put key resistance at $34.65 a barrel.
"That doesn't mean it's not a bear market correction."
He pointed to weekly candlestick charts that show a potentially bullish signal called a "hammer bottom," with the latest week opening and closing near its highs following a week that closed well below its starting point.
If the market falls below $26.19, however, the next critical support level will be critical support ranging from $25-$21, he said.
Some recalled similar price action in August, when bearish traders piled on short positions for weeks before abruptly reversing course, sending oil up more than 25 percent in three days. Prices then traded sideways for several months before resuming their decline to new lows.
"This is basically an oversold bounce and typically when those happen, we retrace back to the midpoint of the previous area," said Peter Ruud, technical analyst at Informa Global Markets in New York, referring to the $33.54 level.
"It's not a bear market rally. It's more a potential set-up for basing. I think we're going to form some sort of double bottom base."
Reference: MARCY NICHOLSON
Friday, 22 January 2016
Asian stocks bounced at the end of a tumultuous week, recovering from four-year lows thanks to hints of more monetary policy support by the European Central Bank and a rally in crude oil from 12-year lows.
European markets could follow, with financial spreadbetters expecting Britain's FTSE 100 .FTSE to open up about 0.4 percent, Germany's DAX .GDAXI to start the day as much as 0.9 percent higher, and France's CAC 40 .FCHI to be up as much as 0.8 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 2.6 percent, the most since Sept. 9, after probing a four-year low on Thursday.
That puts the index on track for a 0.2 percent gain for a week in which oil prices plunged and China-led global growth concerns pummelled risk assets globally.
Japan's Nikkei .N225 surged 5.9 percent at the close, the most in more than four months, moving away from a 15-month low struck Thursday. It was boosted by speculation that the Bank of Japan would opt for additional stimulus at its Jan. 28-29 policy meeting. The rally shrank losses for the week to 1.1 percent.
"We're seeing a really nice bounce today as lots of people close their short positions but that doesn't necessarily mean we've seen the bottom," said Nicholas Smith, a strategist at CLSA.
"It's tough to know when a panic is going to subside but it does look like we're starting to get there."
Australian shares closed up 1.1 percent, gaining 0.5 percent for the week. South Korea's KOSPI .KS11 climbed 2.1 percent, ending the week little changed. Volatile Shanghai shares .SSEC added 1.6 percent, on track for a weekly gain of 1 percent.
The ECB managed to contain some of the pessimism for the time being after ECB President Mario Draghi hinted strongly on Thursday that more easing could be coming within months. Fading growth and inflation prospects will force the central bank to review its policy stance in March, Draghi said.
"With little new information on China, the rebound in sentiment looks to be more closely tied to actions among major central banks," wrote Todd Elmer, Citi's Asian head of G10 FX strategy.
"However, the apparent improvement in sentiment poses risks. If central banks fail to deliver it could drive a negative turn in market thinking," he added.
The euro slipped 0.4 percent to $1.0832 EUR=. The common currency fell to an eight-month low of $1.0523 in December but has appreciated significantly because the ECB's easing decision that month fell far short of expectations.
The dollar was up 0.3 percent at 118.03 yen JPY=, pulling away from a one-year trough of 115.97 struck earlier this week against the safe-haven Japanese currency.
The Chinese yuan remained relatively steady against the dollar as efforts by local authorities to quell speculation of a sharp depreciation appeared to work for now.
Onshore spot yuan stood little changed at 6.5794 to the dollar, corralled in a narrow 6.5837-6.5768 band so far this week.
After guiding the yuan sharply lower and pushing onshore spot rates to a five-year low earlier this month, the People's Bank of China (PBOC) has helped the currency steady by setting a succession of midpoints within a tight range.
Authorities have also introduced steps to discourage speculators from shorting the yuan.
U.S. crude oil CLc1 extended an overnight rally made after data showed stockpiles at some U.S. sites did not grow as much as forecast, providing participants in the battered market with an incentive to cover short positions.
The contracts were up 1.2 percent at $30.71 a barrel. U.S. crude fell to its lowest levels since 2003 earlier this week as the prospect of Iranian oil - following the lifting of international sanctions on Tehran - flooding a heavily saturated market dragged down prices.
Other commodities also benefited as a sense of calm prevailed. Three-month copper on the London Metal Exchange was rose 0.4 percent to 4,450 a tonne, poised for a 2.7 percent weekly rise.
Reference: SHINICHI SAOSHIRO
Oil prices and global stocks rebounded on Thursday, buoyed by comments from European Central Bank President Mario Draghi that raised hopes of further monetary stimulus, following a turbulent few days that wiped trillions of dollars off asset values.
U.S. stocks were up in late morning trading, led by gains in telecommunications, energy and consumer discretionary shares, but trading was again choppy in most asset classes.
The euro fell to a two-week low against the dollar after Draghi hinted of additional stimulus measures as early as March as economic risks had grown. He cited concerns over China and emerging markets, volatility in financial and commodity markets and geopolitical risks, and said the tumult would prompt a March review of monetary policy. The euro EUR= fell below $1.08 for the first time in two weeks during his speech.
Oil rebounded after falling to a more-than-12-year low the previous day. U.S. crude futures were up nearly 1 percent at $28.60 per barrel. On Wednesday, U.S. crude futures fell to their lowest since September 2003.
Crude oil prices, which have dropped more than 25 percent since the start of the year, have been a key driver of a recent cross-asset rout.
"The underlying focus is still on oil because people are looking at the transmission mechanism to the real economy of lower oil prices," said Gennadiy Goldberg, interest rate strategist, at TD Securities in New York.
"Lower oil prices are maybe great for the consumer, but not unilaterally good for the U.S economy."
U.S. Treasury debt yields edged lower in choppy trading, weighed by concerns over volatility in oil and global stock markets.
In the equity market, MSCI's all-country world stock index rose 0.5 percent. Europe's pan-regional FTSEurofirst 300 index .FTEU3 jumped 1.9 percent.
The Dow Jones industrial average .DJI was up 131.35 points, or 0.83 percent, to 15,898.09, the S&P 500 .SPX gained 14.29 points, or 0.77 percent, to 1,873.62 and the Nasdaq Composite .IXIC added 28.56 points, or 0.64 percent, to 4,500.25.
A 3-percent slump in Chinese stocks gave Asia another bruising.
MSCI's 23-country emerging market index notched a 6-1/2 year low and Russia's rouble RUB= tanked almost 5 percent at one point as it set a record low against the dollar for a second day running.
Reference: CAROLINE VALETKEVITCH
Thursday, 21 January 2016
Central banks still have more firepower they can use to counter a slowdown in global growth, which does not change the outlook for recovery in the euro zone, European Economics Commissioner Pierre Moscovici said on Wednesday.
In an interview with Reuters Television at the World Economic Forum in Davos, Moscovici said he did not believe there would be any return to an international financial crisis, despite turmoil in world markets during the first few weeks of 2016 triggered by China's slowdown and low oil prices.
Asked whether the world's main central banks had run out of ammunition to revive the global economy after years of record low interest rates and quantitative easing, he said: "They have got guns and they can act."
While declining to recommend policy to the independent European Central Bank, the French Socialist said the ECB had taken the right action since 2012 to preserve the unity of the euro zone and show it could resist any shock.
ECB action had also addressed policy issues linked to weak growth "and we need to go on with that", he said.
Moscovici said he did not expect any major change in the euro zone's growth outlook when the European Commission issues an updated forecast in early February, despite the sharp slowdown in China and tumbling stock and commodity markets.
The EU executive last forecast in November that the euro zone would grow by 1.8 percent this year and 1.9 percent in 2017 after an estimated 1.6 percent last year.
"As I see it today I see no change, no major change in our forecast... for Europe. But of course we’ve got to take into account those downside risks. We don’t need to change our policy stance but to reinforce it," he said.
The International Monetary Fund cut its global growth forecasts for the third time in less than a year on Tuesday, as new figures from Beijing showed that the Chinese economy grew at its slowest rate in a quarter of a century in 2015.
However, the IMF said lower oil prices will help support private consumption in Europe and therefore added 0.1 percentage point to its 2016 euro area growth forecast, bringing it to 1.7 percent, where it will remain for 2017.
On global market turbulence and falling commodity prices, Moscovici said: "I don’t feel that the financial crisis is coming back. We don’t feel that we are facing the risk of a breakdown in world growth, but there are downsides that we need to address.
"There are worries and we have to take that into account, especially about China which is undergoing a transition which is difficult and uncertain. Overall the anticipated impact on growth, what we see is there could be an impact, limited, on growth. I think even more limited on European growth which is protected and less dependent on those movements."
Moscovici acknowledged risks to the European outlook from a possible breakdown of the 26-nation Schengen open-border passport-free travel area due to the crisis over migrants, and from a possible British vote to leave the European Union.
But he said he was sure there would be a good agreement with Britain in February and a deal to reform Schengen that would avert those hypothetical risks.
He did not see any need for a further loosening of fiscal policy in Europe to counter the global slowdown but said EU countries must press ahead with a public investment program known as the "Juncker Plan" and with structural economic reforms to increase their potential growth.
Reference: PAUL TAYLOR
LONDON - Britain's blue-chip equity index entered "bear market" territory on Wednesday after falling more than 20 percent from its record highs in April, with concerns about China triggering a sharp decline in commodities-related stocks.
The benchmark FTSE 100 index .FTSE ended 3.5 percent lower at 5,673.58 points after touching 5,639.88, its lowest level in more than three years.
"The FTSE is now in a bear market," said Brenda Kelly, an analyst at London Capital Group. "It's not a pretty sight with every single sector in the red."
Technical analysts define a "bear market" as one in which the index falls more than 20 percent from its previous peak.
The UK mining .FTNMX1770 and energy .FTNMX0530 indexes both slumped 5.6 percent to their lowest levels in about 12 years, with a sharp decline in oil and metals prices scaring investors away from commodities stocks.
Shares in commodities-related companies such as BHP Billiton (BLT.L), Anglo American (AAL.L), Glencore (GLEN.L) and Royal Dutch Shell (RDSa.L) plummeted by between 7.2 percent and 9.9 percent.
Mining and energy stocks have been hit by a slowdown in China, the world's second-biggest economy and a major global consumer of metals and oil.
"We do not see any lasting potential for these sectors to outperform and believe any recovery might be short-lived," said Christian Stocker, equity strategist at UniCredit.
"The trend of earnings estimates is declining strongly, relative valuation versus the overall market is still very high and a lasting trend reversal in commodity prices is not in sight. We recommend remaining underweight on commodity stocks."
BHP Billiton came under further pressure after saying it expected no recovery in iron ore or coal prices in the next few years, with global markets suffering from oversupply and a slowdown in China, the world's biggest metals consumer.
Among mid-caps, pub chain operator J D Wetherspoon (JDW.L) slumped 9.7 percent after warning that 2016 profits would be at the lower end of analysts' expectations.
Reference: ATUL PRAKASH AND KIT REES
Wednesday, 20 January 2016
Basic Trading Concepts Defined
Technical traders often compute and plot mathematical quantities based on market observables like price and volume in order to indicate the past or present state of the market. They can often also use certain specific recognizable behaviours of the so-called technical indicators to predict the future behaviour of the market and to generate buy and sell signals.
As useful as technical indicators can be to the forex trader, their effective use often requires keeping the number of indicators consulted down to a manageable level in order to facilitate quick trading decisions.
The following sections will cover some of the more popular technical indicators that many forex traders have found efficient and effective to use in practice when trading.
Popular Technical Indicators
A set of the most commonly followed technical indicators that can be used as a basic group to get started analysing forex price action with, might include the following:
Traders might compute an average of the exchange rate for a certain period of time. This average is then superimposed on the price action so that it moves along as time progresses. The effect is to help smooth out the price data so that trends can better be identified.
Moving averages might be computed as simple, exponential or weighted averages, and they tend to be a lagging indicator of future price action with relatively little predictive power.
Nevertheless, some traders use crossovers between a short moving average and a longer term moving average as a trading signal, with the short term average crossing above the longer term average being a bullish signal and a crossover below being a bearish signal.
The Moving Average Convergence Divergence or MACD indicator is also based on this general idea which it enhances considerably.
Oscillators usually give the trader an indication of price momentum and/or an oversold or overbought condition in the market, and when they are measured on a scale of 0 to 100% they are known as banded oscillators.
Divergence of many oscillator indicators relative to the corresponding price action has important implications for possible market reversals.
The Relative Strength Index or RSI
The RSI is a very popular and useful indicator of overbought or oversold market conditions, and since it fluctuates in value between 0 and 100, it is considered a banded momentum oscillator. If the index is showing a number higher than 70, then the market is thought to be overbought, but if the number is below 30, then the market is oversold.
Forex traders can also use the RSI to watch for regular and hidden divergence versus the price action that might indicate pending market reversals.
The Stochastics Oscillator
The Stochastics are a popular example of a momentum indicator. Its basic premise is that in an uptrend, prices tend to close in the higher part of the day's range to signal upward momentum. Conversely, while in a downtrend, closing prices tend to close in the lower part of the day's range, indicating downward momentum.
Forex traders, and especially those trading currency options, often compute historical volatility for some specific time period. They generally do so by determining the annualized standard deviation of price movements during the chosen time frame.
When used as an indicator, historical volatility is related to standard deviation of exchange rate movements, and it is usually expressed on an annualized basis as a percentage.
Forex traders can use historical volatility to assess risk levels prevailing in the market for the particular current pair. This information can then be useful in appropriately sizing positions for risk management purposes.
Another useful technical indicator related to market volatility is the Bollinger Bands that are typically depicted superimposed over the price action on a chart.
The central line of the indicator is a simple moving average, while the upper and lower lines of the indicators represent a certain number of standard deviations around the central line.
Forex traders tend to use this indicator to generate a signal to initiate a short position when the market exceeds the upper line or a long position when the market falls below the lower line.
The On Balance Volume or OBV Indicator
Many technical analysts look at the trading volume statistics or the On Balance Volume indicator for a particular currency pair to confirm price breakouts for chart patterns and to support or negate other technical indicator trade signals.
The OBV indicator analyses the performance of the exchange rate and then uses that information to place a positive or negative sign on trading volume data. A simple trading signal using the OBV indicator would be to watch for a switch in its sign to indicate a possible directional reversal in the exchange rate.
Keeping it Simple
One of the keys to using technical indicators effectively is to keep the number of indicators you watch to generate trading signals down to a minimum that will still show consistent profitability.
Basically, the risk of falling into the trading trap of "analysis paralysis" increases the more technical indicators you need to consult before making a trading decision.
Remember, the forex market often moves quickly, especially when key technical indicators or chart patterns forecast important exchange rate movements. As a result, any unnecessary delay in entering the market can be quite costly and may even turn what would initially have been a winning position into a losing one.
Bank of England Governor Mark Carney said on Tuesday he had no set timetable for raising interest rates and avoided giving his trademark steer on what was likely to happen to borrowing costs against a volatile global economic backdrop.
Carney, making his first speech of 2016 as growth hit a quarter-century low in China while wages rise more slowly at home, said he would only commit to keeping the bank focused on its inflation target.
"That means we'll do the right thing, at the right time, on rates," he said.
Britain's economy has grown strongly over the past two years and last summer Carney said a decision on when to start raising interest rates would probably become clear by about now.
But over the past six months the mood at the BoE has become markedly more cautious and plunging oil prices have kept inflation close to zero, way below the Bank's 2 percent target.
"The year has turned, and, in my view, the decision proved straightforward - now is not yet the time to raise interest rates," Carney said, referring to his forecast of July.
Investors expect no hike until 2017 while economists think one will happen in the second half of this year.
Shortly after taking over the BoE nearly three years ago, Carney gave a specific milestone -- a fall in Britain's unemployment rate below 7 percent -- that might swing his thinking towards moving on rates, part of his efforts to make bank policy more transparent.
› Sterling hits seven-year low as Carney warns of more China weakness
But unemployment took only a few months to hit that level rather than the three years the BoE had forecast, and far too soon for the Bank to consider a rate hike.
Then, in 2014, he said rates could go up sooner than markets expected, only for oil prices to start their slide, generating global fears about deflation and tying the BoE's hands.
GROWTH AND INFLATION
On Tuesday, he mentioned three factors he would be looking for but avoided giving any specific threshold levels.
Britain's economy would need to grow faster than average for a move on rates, he said, in contrast to signs that growth slowed to below its long-run average in the second half of 2015.
Second, underlying price pressures - chiefly wage growth - would need to pick up, and third, core inflation would need to be "moving notably towards the target".
British inflation data on Tuesday showed prices were flat in 2015, the lowest reading since comparable records began in 1950.
Core inflation - which strips out most of the effect of the past year's slump in oil prices - rose more than expected however to 1.4 percent in December. This was its highest since January 2015, though still well below the BoE's 2 percent target for headline inflation.
› BoE's Carney hints at economic uncertainty ahead of Brexit vote
"The journey to monetary policy normalisation is still young," he told an audience of students at the University of London. "(It) doesn't have a set timetable, only an expected direction of travel."
Earlier on Tuesday, the International Monetary Fund's chief economist said he expected the BoE to wait for strong evidence of faster wage growth before raising rates.
Only one of the BoE's nine policymakers has voted for a rate hike in recent months. On Monday, Gertjan Vlieghe, its newest rate-setter, said he might vote for a cut if bad news piled up.
Carney said British demand would probably remain strong but China and other emerging economies posed risks.
British wage growth has also been weaker than he expected -- and below the 3 percent level Carney had previously identified as propitious for a rate hike.
On Tuesday he said the level of unemployment which would trigger higher inflation might be lower than the BoE's current 5 percent estimate. The BoE would also be vigilant for signs that low inflation was getting entrenched through less generous wage deals.
Reference: DAVID MILLIKEN
Tuesday, 19 January 2016
European companies' earnings are expected to grow at their fastest rate in four years, significantly outpacing their U.S. peers as a weaker euro and signs of economic recovery swell profit margins.
Companies in the STOXX Europe 600 index are predicted to record growth of more than 30 percent in the fourth quarter, according to Thomson Reuters I/B/E/S data.
That would be the best performance since the same period of 2011, Datastream shows, and mark a sharp recovery from a third quarter slide of 4.7 percent.
Earnings for companies on the benchmark U.S. S&P 500 index, meanwhile, are expected to fall some 4 percent.
In Europe, where companies also outperformed their U.S. counterparts in the first two quarters of 2015, a recovering economy could help to offset concerns about a slowdown in China, a major market for some European firms.
The Organisation for Economic Co-Operation & Development (OECD) said this week that the euro zone should have steady economic growth while the U.S. economy was losing steam.
A rise in the dollar against the euro, driven by expectations of more U.S. rate rises, could also benefit the earnings of European companies.
"Margins are now more comfortable in Europe than in the United States and the benefits of a higher dollar should continue to be a tailwind for European earnings," said Didier Duret, global chief investment officer at ABN-AMRO Private Banking, which manages about $500 billion.
Domestic demand in European countries was outperforming expectations and the industrial sector was also in a better shape than in the U.S., he added.
THE OIL FACTOR
Analysts said profit margins of European companies were expected to be strong due to lower energy and commodity prices and still anaemic wage growth in Europe. U.S. companies' profit margins have been declining.
Copper and crude oil prices slumped 25 percent and 35 percent respectively in 2015, and have come under further pressure this year, mainly on rising concerns about global demand for raw materials, particularly in China.
"Growth indicators are looking pretty good, funding costs are at a very low level and we see very little in the way of cost pressure coming through in Europe," Robert Parkes, equity strategist at HSBC Global Research, said, adding that positive earnings newsflow would help calm a nervous market.
But the slump in oil and metals prices may well hit Europe's energy and mining companies, with Thomson Reuters data showing earnings of the former expected to fall more than 30 percent.
British oil and gas company BP announced plans on Tuesday to cut 5 percent of its global workforce under a $3.5 billion restructuring programme.
"A majority of companies will beat expectations in the fourth quarter, but there could be major disappointments and prudent outlooks in energy and materials," Patrick Casselman, senior equity specialist at BNP Paribas Fortis, said.
Overall, corporate earnings still look to have more room to grow more in Europe than in the United States, with analysts pointing to U.S. profit margins starting to peak and level out.
"Europe is still at an early stage given the weak earnings developments in the past few years, whereas the earnings cycle in the U.S. is much more mature," Gerhard Schwarz, head of equity strategy at Baader Bank in Munich, said.
Reference: ATUL PRAKASH
Financial markets have priced in little chance the European Central Bank will cut interest rates this week, even with oil prices at just over half what the ECB had forecast for 2016 and long-term inflation expectations at their lowest in more than three months.
Euro zone bond yields edged higher on Monday and short-term interest rates held steady, signs of caution after ECB President Mario Draghi failed to meet the market's expectations in December.
Draghi delivered a cut of 10 basis points in the deposit rate, to -0.30 percent, and extended the programme of 60 billion euros a month in asset purchases by six months, until March 2017. Before the meeting, the ECB had seemed to signal deeper rate cuts, an increase in monthly purchases and other measures.
Draghi had built a reputation for surprising financial markets with the force of his actions ever since a 2012 pledge to do "whatever it takes to preserve the euro". Markets have seen unprecedented monetary stimulus since the global financial crisis erupted in 2008.
"I do not recall other policy meetings where Draghi surprised the market in such a negative way," said Rabobank senior market economist Elwin de Groot. "That signalled to me reluctance to do more."
Reuters exclusively reported last week that many ECB policymakers are sceptical that further policy action is needed for now, after conversations with five of them.
German 10-year Bund yields, the benchmark for euro zone borrowing costs, were steady at 0.47 percent, having fallen around 25 bps from the highs hit after the December meeting. Yields have been pushed lower by oil's freefall and concerns over an economic slowdown in China.
"The ECB is not expected to make any decision to ease monetary policy further this week," said Alexander Aldinger, senior analyst at Bayerische Landesbank. "The tone should, however, be somewhat more dovish after the disappointing December meeting."
Oil prices hit $27.67 a barrel on Monday, their lowest since 2003. The ECB's 2016 staff forecasts - which see economic growth at 1.7 percent and inflation at 1.0 percent - assume oil prices of $52.20 a barrel.
Sensitive to moves in oil, long-term inflation expectations as measured by five-year, five-year breakeven forwards, reached their lowest levels since early October, below 1.60 percent.
The measure, which shows where markets see 2026 inflation forecasts in 2021, has fallen more than 20 bps since the December highs. It is now less than 10 bps above troughs hit in January 2015, a week before the ECB announced quantitative easing.
One-year inflation swaps at just below zero show the market expects inflation in the short term to fall from current levels of 0.2 percent rather than head towards the ECB's target of just below 2.0 percent.
Two-year inflation swaps are a tad below 0.3 percent. Thirty-year inflation swaps are just above 1.6 percent.
A weaker euro would help lift inflation and boost exports, but at $1.09 it is almost 4 percent stronger than it was the day before the December meeting.
Judging from the difference between spot overnight interbank lending rates and forward rates dated according to the ECB meeting calendar, money markets price in a less than a 10 percent chance rates will be cut a further 10 basis points in January.
The probability rises to 50 percent in March, when the ECB staff forecasts are updated, and 100 percent by mid-year.
"The probability of new stimulus will ultimately depend to a large extent on future oil price moves," said Marco Valli, chief euro zone economist at UniCredit Research. It will be hard for the ECB to resist further easing if oil prices remain in the $30-35 a barrel range, he said.
"New easing measures could be announced between March and June, depending on developments in growth indicators and financial markets," he said.
Reference: MARIUS ZAHARIA
Monday, 18 January 2016
The global gloom over China's yuan has deepened swiftly, with investment banks slashing forecasts and some analysts and money managers arguing it should fall by 15 percent or more to respond to Beijing's financial imbalances.
It is still a daring bet, and not just because of China's more than $3 trillion in currency reserves. Beijing demonstrated the tools it has at its disposal to fight a currency rout this week by jacking up interest rates for yuan held off shore.
Nevertheless, with some global banks forecasting the yuan moving above 7 per dollar, hedge funds are contemplating the prospect of a far bigger shift.
It no longer even seems ridiculous to imagine the renminbi passing the other notable Chinese currency - the Hong Kong dollar - on its way down. The dollar, which trades in a tightly-controlled band at around 7.8 to its U.S. counterpart, has itself been caught in the yuan's downdraft, falling its fastest in 12 years on Wednesday, though still within its band.
"Maybe China goes to where the dollar-Hong Kong is. That's your first port of call – 7.78," said Chris Morrison, Head of Strategy and a portfolio manager at London-based Omni Partners' Macro Fund.
Morrison, who has been betting against the yuan since the start of 2014, argues that the world's second biggest economy has already left the era of controlled, minimal moves in its currency.
"Dollar-China had always been a very low volatility currency pair that has moved in very tight ranges. That is clearly changing. We're forecasting dollar China going from 6.50 to above 7, but you can get a more severe outcome."
Though few were willing to go public with firm predictions of such a sharp fall, more than 30 major market players Reuters spoke to in the past week in Europe and the United States said they would not rule out a further 15 percent depreciation of the yuan this year.
"Chinese investors are voting with their feet. Money is moving out on an individual, corporate and institutional basis," said Mike Newton, Chief Investment Officer for Equities at another hedge fund, The Cambridge Strategy, in New York.
"If they want to stabilise the currency the only way they can do it is to jack up rates or close the current account."
COMPARISONS TO EUROPE
Still, there are strong reasons not to bet against Beijing. This week's move to crush the availability of the yuan in Hong Kong saw overnight market interest rates pushed as high as 94 percent.
Such drastic measures remind some of the older heads in the market of the pre-euro battles between George Soros-led financial speculators and several major European countries, when investors humiliated governments and walked away rich.
Steven Englander, global head of FX strategy at the currency market's biggest banking player Citi, says China is in a much stronger position than European authorities were then, because it can differentiate between offshore and onshore interest rates.
"Intervention (then) failed because the ERM countries could not keep rates high enough for long enough to discourage speculation," he said in a note comparing the two this week.
"Provided that they can keep onshore rates much lower than offshore rates, they can intimidate speculators without doing the kind of damage the UK and Sweden were doing to their economies in 1993."
Even those predicting another sharp slide say the odds are that China's enormous reserve pile - $3.3 trillion at last count although that has almost certainly fallen sharply in January - will allow it to keep things relatively orderly.
"I do believe China will be able to stabilise this, the market is big but they are one of the biggest," said the head of global FX trading with another of the global currency market's big six banks, asking not to be named.
"If you look at where the currency was a decade ago, it was up around the 7 to 8 handle, before the era of 10 percent growth set in. We could go a lot further, there's a lot of pressure. It's going to be a buy on the dip sort of scenario for the next 3, 6, 9 months."
He and a number of other senior market makers and holders of corporate books on the yuan also say that underlying fund and corporate interest in the yuan has not been significantly squeezed by the PBOC's efforts since last week.
Several say big European exporters who receive yuan from Chinese customers have not even begun to sell their currency in the current move.
"They do need to be careful that the yuan does not move from being an investment currency to being a traded one, that it does not become a hedge fund's dream," said a senior trader with one Asian bank in London.
"Everyone I read now says 6.90, 7 but the world can do what it wants. This is not some small emerging economy, it's China. And they are going to have a tough battle."
Reference: PATRICK GRAHAM
Asian stocks won a temporary reprieve on Friday after oil prices snapped their eight-day rout, helping to lift battered energy shares even as investors remained on edge as they looked for signs of stability in China's economy and its volatile markets.
MSCI's broadest index of Asia-Pacific shares outside Japan, which hit a four-year low on Thursday, rose 0.5 percent while Japan's Nikkei jumped 1.8 percent.
Oil prices rebounded on Thursday, with international benchmark Brent futures rising 2.4 percent to $31.03 a barrel, recovering from its 12-year low of $29.73 hit earlier in the day.
U.S. retail sales data due later on Friday will be on investors' radar as they try to gauge the likelihood of the Fed raising rates in March.
In Asia, fears that Chinese authorities may not be able to manage a decelerating economy are also ebbing as efforts by China's central bank to stabilize the yuan has paid off for now - albeit via heavy intervention.
Worries that a depreciating yuan could spark competitive currency devaluation across the region had hit global shares earlier this month.
"There are some hopes that a series of Chinese economic data due early next week will give investors relief." said Hirokazu Kabeya, chief global strategist at Daiwa Securities.
China will publish a host of data on Monday and Tuesday, including GDP for Oct-Dec.
"Traditionally Chinese shares perform relatively well around the time of lunar new year and Shanghai shares also appear to be supported around the 3,000 mark even as they briefly fell below that level yesterday," he added.
The Shanghai composite index ended 2.0 percent higher on Thursday, reversing earlier fall to a 4 1/2-month low.
In the currency market, the yen slipped back near this week's low as it gave up earlier gains made on safe-haven buying.
The dollar rose to 118.28 yen, up 0.2 percent in early Asian trade, extending its rebound from a 4 1/2-month low of 116.70 yen hit on Monday.
The euro moved little within its well-worn range, fetching $1.0855.
The European Central Bank said it saw scope for further cuts in its deposit rate in minutes of its December meeting, but many ECB policymakers appeared sceptical about the need for further action in the near term.
Commodity-linked currencies also recovered from lows, with the Australian dollar gaining 0.2 percent to $0.6995, keeping some distance from Thursday's four-month low of $0.6910.
Still, investors remain cautious on the commodity-linked assets as oil prices are expected to stay under pressure due to fear of oversupply.
Saudi Arabian shares, one of the worst performing market along with China so far this year, hit five-year lows on Thursday.
Low oil prices not only hurt many oil-producing countries but also prompt their sovereign wealth funds to sell assets to finance budget gaps, putting pressure on many assets.
Reference: HIDEYUKI SANO
Friday, 15 January 2016
A year on from "Frankenschock", when Switzerland's central bank sent global foreign exchange markets into a frenzy by abruptly ending its cap on the Swiss franc, the currency is one of the most stable in the world.
Sharply negative Swiss interest rates - three month rates are around minus 0.75 percent - and subtle market interventions by the Swiss National Bank have stabilised the franc at around 1.08 per euro.
Whether it lasts is an open question - there have been political and economic costs - but the situation is nonetheless a far cry from Jan. 15, 2015 when the cap's removal prompted the biggest currency market swing since the 1970s.
"Nobody who was involved in the franc on Jan. 15 will ever forget that one, what the move was like," said Tim Mueller, a senior foreign exchange trader at Zuercher Kantonalbank. "I've been doing this for nearly 28 years and that was a unique move."
Global markets had complete confidence the SNB would stick to its three-year-old pledge to keep the euro above 1.20 Swiss francs, a tool it had described as the cornerstone of monetary policy as recently as Jan. 12.
So when it published a brief statement in early European trading hours bluntly saying it had lifted the cap, investors were caught cold.
As the franc soared past parity against the euro, economists fretted Switzerland's export-reliant economy would plunge into recession while some foreign exchange brokers were pushed out of business.
A year later, the picture has brightened.
The SNB still describes the franc as "significantly overvalued" but the currency is at a tolerable price for Swiss exporters to the euro zone, Switzerland's biggest trading partner, and has not thrown the country into an anticipated recession.
"The SNB looks to have regained control over the franc and a lot of investors believe that," said Joachim Corbach, head of currencies and commodities at asset manager GAM in Zurich.
Wariness about what the SNB could do next, along with the negative rates, has deterred speculators and kept franc in a narrow range since August.
Reflecting this, the share of the franc in daily spot deals in London, the biggest trading centre for currencies, has slipped, according to the Bank of England.
Investors have instead plumped for more liquid currencies like the Japanese yen, another safe-haven currency, and the dollar in the latest bout of turmoil hitting global markets.
The latest trends in the derivative markets indicate investors are certain about the franc's stability in the coming weeks given concerns about China and the pull of the franc as a safe haven.
"If things get nastier, then we could see them (investors) coming into the franc, but at the current moment they seem to prefer the U.S. dollar and the yen," Corbach said.
Meanwhile, the political and economic fallout from the cap's removal still grips Switzerland and the SNB.
Unemployment hit 3.7 percent last month, the highest in nearly six years, as Swiss companies that rely on selling goods abroad cut jobs to save costs. Consumer prices have fallen every month in year-on-year terms since November 2014.
The SNB posted a record 23 billion franc ($23 billion) loss last year largely due to enormous losses on its foreign currency positions.
It has also faced pressure from politicians and business leaders who argue the SNB should do more to protect industry from the strong franc and question the central bank's set-up.
But a year on, "Frankenshock" has not turned into "Frankageddon".
($1 = 1 Swiss francs)
Reference: OSHUA FRANKLIN AND ANIRBAN NAG
The Federal Reserve will raise interest rates only three times this year as it faces a more subdued outlook for both the U.S. and world economies, a Reuters poll of economists found.
The world's largest economy is a bulwark for an increasingly shaky global one, and has the most immediate positive prospects for generating inflation with a very low unemployment rate and a solid pace of private hiring.
But a storm has blown through global markets since the start of this year, hitting stock markets, commodities and oil prices based on renewed worries that China, the world's second largest economy, is struggling.
That has already led some to tone down their optimism over U.S. prospects, underscoring the view that the Fed will be forced to follow up last month's interest rate rise, its first in nearly a decade, at an even more gradual pace.
The poll of over 90 economists found the U.S. economy will grow 2.5 percent in 2016, the same as predicted for 2015 and down from the 2.8 percent they were expecting a year ago - a decent pace but not enough to generate a strong rebound in inflation.
"U.S. economic growth appears to have shifted to a lower gear in the final months of 2015," noted Northern Trust economists Carl Tannenbaum and Asha Bangalore.
"It has left many concerned about the well-being of the economy and raised questions about the Federal Reserve's recent hike of the policy rate," they wrote, stressing that this does not reflect "a widespread deceleration of economic activity."
While growth this year is unlikely to be spectacular, respondents only saw a 15 percent chance of the economy sliding into a recession. A majority of those who answered an additional question said they expect the current business cycle to come to an end in the next two to three years.
When it raised rates last month, the Fed expressed confidence that inflation would pick up before long. But most analysts, even the ones more optimistic about growth, remain skeptical that will happen.
Core PCE inflation, the key inflation indicator monitored by the Federal Open Market Committee, is likely to be just 1.6 percent in 2016. It is expected to pick up to 1.8 percent in 2017, under the Fed's goal of 2.0 percent.
Economists polled by Reuters were more cautious than the Fed, forecasting only three hikes this year and a federal funds rate between 1.00 and 1.25 percent by end-2016, similar to what they were expecting last month.
With financial markets having been in turmoil so far this year, several Fed officials have spoken out in recent days to express their concerns over how much they may be able to raise rates.
"The current expansion is already long by historical standards and risks of a global recession should be on the rise throughout the year," said Eric Corbeil, a senior economist with Laurentian Bank of Canada.
Reference: AARADHANA RAMESH
Thursday, 14 January 2016
Basic Trading Concepts Defined
In this brief guide we will try to provide you with a step-by-step plan for analysing the global economic environment and deciding on which currency to buy or sell.
Fundamental and Technical Analysis (FA and TA) go hand-in-hand in guiding the forex trader to potential opportunities under ever changing market conditions. Both beginner and veteran traders can benefit from the material that follows, but veterans have learned to make one important distinction. They do not spend an inordinate amount of time on the FA side of the equation, primarily because they do not have the resources, access to key information, or the ability to read and assimilate the mountains of data that are made public on a daily basis.
Large banks, hedge funds, and institutional investors have those resources, but even they have a difficult time arriving at correct predictions on how market forces will evolve. The advice is simply to use FA to determine a general feel for market directions, the interplay of key variables, and existing monetary policy differences to suggest which currency pairs offer the greatest opportunities at a point in time. The objective of every trader is to assess market conditions daily, and then to modify his strategy accordingly. FA and TA are your tools for achieving this goal each and every trading day.
1st Step: Study the macroeconomic arena
To build our wealth, we must create an analytical structure. To create the structure, we must first establish its basis. The basis of our analysis will involve the study of macroeconomics at the global scale. We must establish the background at the highest level to be able to filter the data and reach at the dynamics of currency pairs at the lowest level. In doing so, we will examine cyclical dynamics, the monetary policies of major central banks and a few other indicators. Past behaviour of monetary institutions has great relevance to their future choices, which is why we must keep historical data in mind while analysing the future direction of the markets. The first phase is relatively straightforward, since during a boom volatility falls, and liquidity becomes abundant on a global scale; during a bust the opposite happens. Nonetheless, it’s very important that the trader know how to isolate the noise from the data, otherwise he will be a victim of political or media spin, and his analysis will fail.
Decide on the phase of the cycle.
We must first determine the phase of the economic cycle on a global scale. By examining global default rates, international reserve accumulation and bank loan surveys of major economic powers it is possible to notice the changing phase of the global economic cycle, even though these are second-tier indicators, and are a bit late in signalling the phase of the cycle. But they are still safe, because market actors often refuse to acknowledge the importance of these data until they are confirmed by falling industrial production and rising unemployment — developments that come quite late in the phase of the cycle.
Examine technological innovations, political environment, emerging market fundamentals
Upon deciding the phase of the cycle, we will try to determine the dynamics that can enhance productivity and create a period of non-inflationary economic expansion on a global scale. When emerging economies adopt the new technologies of the developed world, and create a new basis of industrial production, productivity will increase, and will sustain growth without creating inflation.
The global political environment also has a great influence on international currency fluctuations for obvious reasons. The high inflation era of the 1970s, for instance, was caused by a number of political events influencing economic fundamentals.
Conclude the first Step: Productivity gains will ensure a growing global environment (a boom phase) until the technological innovations are fully absorbed; but they are greatly prone to creating bubbles. If the cycle is going through the bust phase, all speculative activity must be curbed. Carry trades and aggressive emerging market plays must be reduced, leverage must come down and long-term positions must be established as currency pairs reach bottom. If the cycle is going through the boom phase, it is time to build our risk portfolio and manage our risk allocations through correlation studies and money management methods.
2nd Step: Study global monetary environment
In the second step, we move from the generalized studies of the first step to a more specific discussion of the developed world economies. In the first step we examined the factors that influence the economic state of all nations. Now we will take a closer look at the monetary policy, and attempt to determine the length and depth of the current phase of the cycle.
Study the interest rate policies of major global powers
In light of their past behaviour we will examine the policy biases of major central banks, such as the Bank of Japan, the Federal Reserve, and the ECB. Our study will take into account the policy biases and legal mandates of these institutions, along with their independence. By studying and clarifying their policy biases, we can have an idea on money supply growth, which will help us decide such variables as emerging market growth potentials, stock market volatility, and the interest rate expectations in a local market, which can translate into critical rate differentials when compared to other countries.
Compare money supply expansion and credit standards with the previous period.
Once we understand the policies of global central banks, we must compare these policies with their precursors, and decide on their possible impact on the global economy. Easy money coming out of a recession is normal, and if credit channels are functioning, it should alert us to increase the risk tolerance of our portfolio. Conversely, tight monetary policy, following a period of economic boom, would mean that the global economy will go through a period of reorganization, which would lead us to reduce the risk tolerance of our portfolio. A continued period of lax monetary policy (low rates) would imply that the forex market will develop risk bubbles, that is, currencies of nations with weak fundamentals will appreciate way beyond their equilibrium value, which is a contrarian trade opportunity for shorting them. A continued period of tight monetary policy by a majority of the developed world’s central banks will force speculators to reduce leverage, and hence reduce the impact on the currency markets. So, as currencies of nations with strong fundamentals appreciate way beyond their equilibrium value, we will have another contrarian trade opportunity for shorting their currencies.
Exploding bubbles, commodity shocks and major political events can create exceptions to the above scenario. Analyse the VIX, developed market loan default rates of corporate and private sectors
We are aware of the phase of the cycle, but we must also find a way for determining the volatility tolerance of our portfolio. Stock market volatility and the loan default statistics of corporations have an important role in determining forex market volatility, as low risk perception in the economy at large allows all actors to increase leverage and liquidity, which leads to a generally safer environment for forex traders. Of course, like everything else in the markets, low or high volatility are temporary phenomena. The trader must not only analyse present volatility but also its causes, the actors that help reduce it, and the factors that can neutralize their impact on the markets. Knowledge of these will allow us to react quickly to market shocks, and help us reduce our losses when they inevitably occur eventually.
Conclude the second step: This step will allow us to understand where in the cycle we are. Toward the peak of the boom phase, VIX, default rates and interest rates will all be quite low, allowing us maximal profit from the risky positions we had assumed (for example by longing the AUD, while shorting the yen.) Conversely, towards the peak of the bust phase, all those value will register extremes; and by expressing a negative view of risk in our portfolio, we will be able to protect our capital; and while pocketing good profits as other financial actors reach the same conclusions with us.
Finally, in the third step we will decide on the actual currencies we will buy or sell, and on how long we’ll maintain our positions. We will simplify the process here, but the most important indicators that must be studied are:
Examine the interest rate differentials of nations
In light of unemployment statistics, capital expenditure and output gap, since most of the time markets attach the greatest importance to interest rate differentials between currencies; we must form an opinion on the direction of central bank interest rates. This can be done by studying unemployment statistics and the output gap. As capacity constraints in an economy increase and unemployment falls, labour market shortages create wage pressures which are eventually translated into higher prices and inflation in an economy. To combat this development, the central bank will raise rates, and will keep it high until there are visible signs of cooling in the economy, as demonstrated by rising unemployment and fewer capacity constraints. Similarly, by following these values the trader can form an opinion on where the interest rates will go.
Compare the balance of payments of the currencies
The balance of payments of a nation is like the balance sheet of a company. The healthier the balance of payments, the stronger the nation’s currency will be in times of economic turmoil. We will study the balance sheets of nations in terms of current and capital account situation. Is the nation’s external position maintained by bank deposits and asset sales (which can be revised easily), or by long term developments such as foreign direct investment or reserve accumulation?
Trade the third step: During the growth phase of the cycle, economic actors favour risks, thus currencies with stronger fundamentals are prone to be sold in favour of those who choose to attract capital through higher interest rates. Thus, during the boom phase or at the beginning of it, we will sell currencies with strong fundamentals offering low interest rates, and buy the currencies offering high interest rates to compensate for weaker fundamentals. During the bust phase, we will buy currencies offering low interest rates with a strong balance of payments, and sell currencies that offer high interest rates but are built on a weak balance of payments situation.
Thus, we will choose currency pairs which offer the greatest imbalances to the trader, and will either enter long-term counter trend positions with low leverage, or we will await the market to confirm our analysis with its actions.
Fundamental Analysis can be very complex and time consuming. It is truly an academic exercise, but a general understanding of its principles in a given situation will help point you to where you may have your greatest potential for gain. 2014 gave us two prime examples of how this process can work to your benefit. First, the UK economy seemed to be recovering more quickly than the U.S. at the start. The belief was that austerity measures were working, and the consensus was that the U.K would raise interest rates ahead of other nations. As the frontrunner from an FA perspective, the Pound soon appreciated markedly versus its rivals. When economic data failed to support these expectations, the Pound fell like a rock.
Secondly, the U.S. economy now seemed primed to be the first to raise interest rates. Europe, however, suffered from low growth, low inflation, recessionary tendencies, and a quantitative easing necessity. The Euro, as a result, also fell like a rock. In both cases, a general knowledge of Fundamental Analysis would have guided the trader to currency pairs that offered the highest potential for gain. Your goal is to understand how the market is changing, and fundamental information drives those changes. Spend your time wisely, however, in order to reserve as much time as you can for trading.