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Monday, 29 February 2016

What's behind the global stock market selloff?



Global stock markets are on their shakiest footing in years.

Investors are fleeing stocks and running to safe-havens like bonds and gold, driven by concerns about economic growth and the effectiveness of central banks' policies.

At the same time, tumbling energy prices are upending the economies of oil-producing countries, further slicing into global economic growth.

Only six weeks ago cheap oil prices were still expected to cushion the global economy, and the Federal Reserve's decision in December to raise interest rates for the first time since the end of the financial crisis in 2008 was widely seen as a vote of confidence in the world's largest economy.

In addition to the fall in U.S. stock markets, major stock indexes worldwide have also been hit hard, despite efforts by the Bank of Japan and the European Central Bank to spur growth through lower interest rates.

Large institutions and sovereign wealth funds, who borrowed in euro and yen, have been selling riskier assets, and are now buying back those currencies, undermining central bank efforts.

With Thursday's decline, the S&P 500 stock index has lost 10.5 percent so far in 2016, its worst start to a year in history, according to Bespoke Investment Group, an investment advisory in Harrison, New York. The 10-year note's yield has fallen to 1.63 percent, its lowest closing level since May 2013.

Here are some of the chief issues weighing on the market now.

WHAT IS THE BIGGEST REASON FOR THE SELLOFF?

The slump in equity prices which began late last year has deepened as banks grapple with negative interest rates in parts of Europe and Japan and the flattening of the U.S. Treasury yield curve.

"One of the new themes in markets is that (quantitative easing) has damaged the banks and that therefore it exacerbates the risk-off environment," said Steve Englander, managing director and global head of G10 FX strategy at Citigroup in New York.  

Negative interest rates on central bank deposits and on government bond yields undermine the traditional ability of banks to profit from the difference between borrowing costs and lending returns.

With a decline of 18 percent on the year, S&P 500 financials are by far the worst performing sector in 2016.

While the Federal Reserve has avoided introducing negative rates on reserves, in Congressional testimony on Thursday, Fed Chair Janet Yellen told lawmakers that the Fed would look into negative interest rates if needed.

"I wouldn't take those off the table," she said.

WASN'T ENERGY THE PROBLEM?

Higher levels of U.S. oil output, thanks to fracking technology, along with over-production by Saudi Arabia, contributed to a world-wide oil glut, sparking a steep fall in energy and other commodity prices at the start of last year.

At $27 a barrel, oil prices are now near 13-year lows and some analysts say they expect to see prices drop further.

Tumbling oil prices resulted in sharp contractions in the economies of oil-producing countries, and pushed up yields on corporate debt, leading to defaults in the energy sector.

“Investors whose livelihood revolve around oil and gas and commodities are liquidating because they need the cash," said Stephen Massocca, chief investment officer at Wedbush Equity Management in San Francisco.

WHAT'S NEXT FOR THE FED?

Markets now do not expect the Fed to go ahead with its planned interest rate rises this year. The federal funds futures market now shows traders are not expecting the Fed to raise rates until at least February of next year. At one point on Thursday, futures contracts were even pricing in a slight chance of a rate cut this year, and investors said some of the rally in gold prices resulted from the possibility of a rate cut.

The move in fed funds futures has been accompanied by a rapid decline in the spread between short-dated and long-dated U.S. Treasury securities. The difference between the 2-year Treasury note yield and 10-year note yield has narrowed to 0.95 percentage points, the tightest it has been since December 2007. The flattening of the yield curve has often preceded recessions in the past.

The narrowing yield curve spread shows investors are less confident of economic growth, even though Yellen told Congress on Wednesday that U.S. economy looks strong enough that Fed may stick to its plan to gradually raise interest rates.

"Part of the problem is that the Fed is in a no-man's land right now: not dovish enough for the doves and not hawkish enough for the hawks, so it's not satisfying any point of view in the investment markets," said Terri Spath, chief investment officer at Santa Monica-based Sierra Investment Management.

WHEN WILL THE FALL IN STOCKS END ?

There are few signs yet that investors are dumping their holdings wholesale, typically a mark of a market bottom, said Alan Gayle, director of asset allocation at RidgeWorth Investments in Atlanta.

"It still seems to be focused on specific issues, whether it’s credit or it’s oil. But clearly there is a more defensive tone that the market is taking and we’re watching for signs of capitulation," he said.

Similarly, Credit Suisse noted that hedge funds have been selling in February, but the scope of that selling "lacks the much anticipated capitulation trade that would signal a bottom."

Credit Suisse also noted that macro-focused hedge funds have built up large U.S. equity short positions which have been a decent indicator of market direction in the past.

Even if the severity of the selling tapers off, 2016 will likely continue to be a bad year for stocks, said Mohannad Aama, managing director at Beam Capital Management in New York. The S&P 500 stock index is down approximately 10.3 percent for the year to date, while the Nasdaq Composite is down more than 15 percent over the same time.

"Although we’ve being seeing good job numbers, the general feeling is that the U.S. economy is nearing a peak and there is not much left as far as trends to be talked about," Aama said.

Reference: DAVID RANDALL

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New market storm could catch euro zone unprepared

European Central Bank (ECB) President Mario Draghi testifies before the European Parliament's Economic and Monetary Affairs Committee in Brussels, Belgium, February 15, 2016.  REUTERS/Yves Herman

Distracted by an unresolved migration crisis and negotiations on keeping Britain in the European Union, euro zone leaders could be caught unprepared by a new storm on financial markets.

Global market turmoil since the start of the year has helped set warning lights flashing in euro zone sovereign bond markets. In early February, the premium that investors charge to hold Portuguese, Spanish and Italian government debt rather than German bonds hit some of the highest levels since the euro zone crisis that peaked in 2011-2012.

European bank shares have been badly hit by concerns over their high stock of non-performing loans, new regulatory burdens and a squeeze on profits due to sub-zero official interest rates. New EU banking regulations that force shareholders and bondholders to take first losses if a bank needs rescuing are further spooking the market, notably in Italy.

All this comes at a time when public resistance to further austerity measures has surged all over southern Europe, producing unstable results at the ballot box.

Furthermore, the storm clouds are gathering above a tenuous and slow euro zone economic recovery - growth is officially forecast to reach 1.9 percent this year versus around 1.6 percent in 2015. Southern periphery countries all face budget problems that are fuelling political tension with Brussels.

Inflation is also refusing to perk up despite the European Central Bank's bond-buying programme and negative interest rates, making it harder for heavily indebted euro zone countries to pay down debt.

Yet euro zone governments transfixed by differences over sharing out refugees, managing Europe's porous borders and accommodating British demands for concessions on EU membership terms have a huge amount on their hands already.

One French government adviser said the EU had never faced such an accumulation of crises in the last 50 years.

NO PANIC

At their most recent meeting, euro zone finance ministers said the latest market turmoil was no reason for concern at this stage.

They insisted that the euro zone is very different now from its situation in 2010 in terms of institutions and instruments available to handle another outbreak of the crisis.

Among them are the European Stability Mechanism (ESM) rescue fund, better capitalised banks, a partial banking union with a single supervisory authority under the ECB, a mechanism for winding down failing banks, and an embryonic bank resolution fund.

The ECB has also come a long way since 2010, widening its policy scope to so-called quantitative easing, creating money to buy euro zone government bonds in a bid to revive inflation and boost recovery.

Markets expect the ECB to loosen monetary policy still further next month, but it's not clear that such a move would bolster confidence in the banks.

And nothing that has happened so far is close to the problems seen in 2011-2012. The spread between Portuguese and German 10 year bond yields hit more than 1550 basis points then; the February 2016 high was just shy of 380 bps.

But worries about banks have been spreading to sovereign bonds in more vulnerable countries in a revival of the so-called "doom loop" that EU reforms were meant to remove.

Pressure from euro zone hawks such as Germany and the Netherlands to either limit the amount of home-country debt that a bank may hold, or give national sovereign debt differential risk weightings on banks' books have added to uncertainty.

POLITICAL RISK

Political risk is a significant factor in the new market anxiety. Portugal has a shaky three-party leftist government that has gone back on some of the austerity measures adopted by its centre-right predecessor since a 2011 bailout.

Only one ratings agency still rated Lisbon's debt at investment grade - a condition for remaining in the ECB's asset purchase programme. Euro zone officials, however, play down the risk of Portugal going off the rails, saying that if it were to risk losing market access, the ESM could offer it a precautionary credit line on strict reform conditions.

Spain is being run by a caretaker centre-right minority government following an inconclusive election in December, and its budget deficit has ballooned off course in the meantime. But the Spanish economy is still growing and its banks have been thoroughly overhauled.

Greece's leftist government is wrangling with creditors once again on implementation of its third bailout since 2010 amid strikes and protests against a planned pension reform and tax increases for farmers.

Yet no one in Athens, Brussels or Berlin wants another Greek crisis after last year's near exit from the euro zone, so the chances of a compromise that keeps the third Greek bailout programme on the road in the coming weeks is high.

    In Rome, Socialist Prime Minister Matteo Renzi is waging a war or words against the European Union's budget discipline rules which he says are constraining his efforts to stimulate long moribund economic growth.

    Italy, which has the highest public debt ratio to economic output of any euro zone country except Greece, is required by EU rules to make a big debt reduction in 2017, a pre-election year, which may explain Renzi's outbursts against Brussels and Berlin.

    "The European Commission is going to have to apply its flexibility rules with particular flexibility," said a former euro zone policymaker, who struggled to enforce fiscal discipline during the crisis. But EU officials say Italy has already benefited from plenty of flexibility.

Italian banks have seen their stocks hammered because of persistent concerns about their profitability in an era of low growth and near-zero inflation, and their ability to work down non-performing loans without state aid.

"There are investors who are waking up and becoming aware of the risks. Some are panicking," a euro zone central banker said, speaking on condition of anonymity. But he added that the euro zone was more "robust" than at the peak of the crisis.

Reference: YVES CLARISSE

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Friday, 26 February 2016

10 Ways To Protect Your Forex Account


Basic Trading Concepts Defined


The global forex market boasts over $4 trillion in average daily trading volume, making it the largest financial market in the world. Forex's popularity entices traders of all levels, from greenhorns just learning about the financial markets to well-seasoned professionals. Because it is so easy to trade forex - with round-the-clock sessions, access to significant leverage and relatively low costs - it is also very easy to lose money trading forex. This article will take a look at 10 ways to protect one’s forex account.

1 Do Your Homework – Learn Before You Burn

Just because forex is easy to get into doesn't mean that due diligence can be avoided. Learning about forex is integral to a trader's success in the forex markets. While the majority of learning comes from live trading and experience, a trader should learn everything possible about the forex markets, including the geopolitical and economic factors that affect a trader's preferred currencies. Homework is an ongoing effort as traders need to be prepared to adapt to changing market conditions, regulations and world events. Part of this research process involves developing a trading plan.

2. Take the Time to Find a Reputable Broker

The forex industry has much less oversight than other markets, so it is possible to end up doing business with a less-than-reputable forex broker. Due to concerns about the safety of deposits and the overall integrity of a broker, for the U.S. forex traders should only open an account with a firm that is a member of the National Futures Association (NFA) and that is registered with the U.S. Commodity Futures Trading Commission (CFTC) as a futures commission merchant. Each country outside of the United States has its own regulatory body with which legitimate forex brokers should be registered.

Traders should also research each broker's account offerings, including leverage amounts, commissions and spreads, initial deposits, and account funding and withdrawal policies. A helpful customer service representative should have all this information and be able to answer any questions regarding the firm's services and policies.

3 Use a Practice Account

Nearly all trading platforms come with a practice account, sometimes called a simulated account or demo account. These accounts allow traders to place hypothetical trades without a funded account. Perhaps the most important benefit of a practice account is that it allows a trader to become adept at order entry techniques.

Few things are as damaging to a trading account (and a trader's confidence) as pushing the wrong button when opening or exiting a position. It is not uncommon, for example, for a new trader to accidentally add to a losing position instead of closing the trade. Multiple errors in order entry can lead to large, unprotected losing trades. Aside from the devastating financial implications, this situation is incredibly stressful. Practice makes perfect: experiment with order entries before placing real money on the line.

4 Keep Charts Clean 

Once a forex trader has opened an account, it may be tempting to take advantage of all the technical analysis tools offered by the trading platform. While many of these indicators are well-suited to the forex markets, it is important to remember to keep analysis techniques to a minimum in order for them to be effective. Using the same types of indicators – such as two volatility indicators or two oscillators, for example – can become redundant and can even give opposing signals. This should be avoided.

Any analysis technique that is not regularly used to enhance trading performance should be removed from the chart. In addition to the tools that are applied to the chart, the overall look of the work-space should be considered. The chosen colours, fonts and types of price bars (line, candle bar, range bar, etc) should create an easy-to-read and interpret chart, allowing the trader to more effectively respond to changing market conditions.

5 Protect Your Trading Account

While there is much focus on making money in forex trading, it is important to learn how to avoid losing money. Proper money management techniques are an integral part of successful trading. Many veteran traders would agree that one can enter a position at any price and still make money – it is how one gets out of the trade that matters.

Part of this is knowing when to accept your losses and move on. Always using a protective stop loss is an effective way to make sure that losses remain reasonable. Traders can also consider using a maximum daily loss amount beyond which all positions would be closed and no new trades initiated until the next trading session. While traders should have plans to limit losses, it is equally essential to protect profits. Money management techniques, such as utilizing trailing stops, can help preserve winnings while still giving a trade room to grow.

6 Start Small When Going Live 

Once a trader has done his or her homework, spent time with a practice account and has a trading plan in place, it may be time to go live – that is, start trading with real money at stake. No amount of practice trading can exactly simulate real trading, and as such it is vital to start small when going live.

Factors like emotions and slippage cannot be fully understood and accounted for until trading live. Additionally, a trading plan that performed like champ in back testing results or practice trading could, in reality, fail miserably when applied to a live market. By starting small, a trader can evaluate his or her trading plan and emotions, and gain more practice in executing precise order entries – without risking the entire trading account in the process.

7 Use Reasonable Leverage

Forex trading is unique in the amount of leverage that is afforded to its participants. One of the reasons forex is so attractive is that traders have the opportunity to make potentially large profits with a very small investment – sometimes as little as $50. Properly used, leverage does provide potential for growth; however, leverage can just as easily amplify losses. A trader can control the amount of leverage used by basing position size on the account balance. For example, if a trader has $10,000 in a forex account, a $100,000 position (one standard lot) would utilize 10:1 leverage. While the trader could open a much larger position if he or she were to maximize leverage, a smaller position will limit risk.

8 Keep Good Records

A trading journal is an effective way to learn from both losses and successes in forex trading. Keeping a record of trading activity containing dates, instruments, profits, losses, and, perhaps most importantly, the trader's own performance and emotions can be incredibly beneficial to growing as a successful trader. When periodically reviewed, a trading journal provides important feedback that makes learning possible. Einstein once said that "insanity is doing the same thing over and over and expecting different results." Without a trading journal and good record keeping, traders are likely to continue making the same mistakes, minimizing their chances of become profitable and successful traders.

9 Understand Tax Implications and Treatment

It is important to understand the tax implications and treatment of forex trading activity in order to be prepared at tax time. Consulting with a qualified accountant or tax specialist can help avoid any surprises at tax time, and can help individuals take advantage of various tax laws, such as the marked-to-market accounting. Since tax laws change regularly, it is prudent to develop a relationship with a trusted and reliable professional that can guide and manage all tax-related matters.

10 Treat Trading As a Business

It is essential to treat forex trading as a business, and to remember that individual wins and losses don't matter in the short run; it is how the trading business performs over time that is important. As such, traders should try to avoid becoming overly emotional with either wins or losses, and treat each as just another day at the office. As with any business, forex trading incurs expenses, losses, taxes, risk and uncertainty. Also, just as small businesses rarely become successful overnight, neither do most forex traders. Planning, setting realistic goals, staying organized and learning from both successes and failures will help ensure a long, successful career as a forex trader.

Reference: Jean Folger

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Asia shares nudge up as G20 talks, oil holds gains

A man (3rd L) looks at an electronic stock quotation board as passers-by walk past, outside a brokerage in Tokyo, Japan January 20, 2016. REUTERS/Toru Hanai

Asian shares made guarded gains on Friday as a gathering of world finance leaders provided a welter of reassuring comments, but little in the way of actual policy stimulus.

Spreadbetters expect the positive momentum to extend to Europe, forecasting a higher open for Britain's FTSE .FTSE, Germany's DAX .GDAXI and France's CAC .FCHI.

Setting the tone for the Shanghai meeting of the Group of 20, China's central bank chief, Zhou Xiaochuan, said Beijing still had the room and tools to support the world's second largest economy.

Yet, German Finance Minister Wolfgang Schaeuble was quick to declare that the scope for monetary and fiscal policy was exhausted globally and called for more structural reform.

The reaction in share markets was cautious. Shanghai stocks .SSEC added 0.5 percent, but the bounce looked unconvincing against Thursday's 6-percent slump.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS gained 0.8 percent, while South Korea .KS11 rose 0.2 percent. Japan's Nikkei .N225 gained 1 percent but could not quite sustain a two-week top.

The S&P 500 had already scored its highest close since early January after oil staged a turnaround to end Thursday 3 percent higher on speculation a March meeting of major producers might stabilize prices.

U.S. crude CLc1 was trying to hold those gains on Friday, dipping just 3 cents to $33.04 a barrel. Brent LCOc1 was 16 cents lower at $35.13.

On Wall Street, the Dow .DJI rose 1.29 percent, while the S&P 500 .SPX added 1.14 percent and the Nasdaq .IXIC 0.87 percent. Data showing a 4.9 percent rebound in U.S. durable goods orders underpinned the better mood.

FORLORN HOPE

With the recent market turbulence front and center, the G20 is under pressure to agree a coordinated stimulus program that could stop a global slowdown from turning into something worse.

Yet, G20 meetings have a long history of disappointing and analysts see little reason why this one should end differently.

"Amidst market turbulence there is a call to arms for the G20 to get the global economy back on track," said David Cannington, a senior economist at ANZ.

"While we can hope for a substantive policy prescription, it's a forlorn one. There is simply too much self-interest globally and that dominates group interest."

Europe would seem to need the help as long-term inflation expectations fell to record lows, piling pressure on the European Central Bank for more aggressive easing.

The closely-watched measure of inflation  slid to 1.38 percent, having dived 35 basis points in just three months even as the ECB expanded its asset buying campaign.

As a result, yields on German 10-year paper closed at their lowest since last April and contributed to a drop in U.S. yields

That kept the euro pinned at $1.1060 EUR= and far from the February top of $1.1375. The dollar was steady on the yen at 112.865 JPY=, almost two yen higher from this week's trough.

Sterling was still nursing its wounds near a seven-year low against the dollar GBP= and on track for its heaviest weekly fall since 2009 on worries about a possible British exit from the European Union.

Reference: WAYNE COLE

Pound tumbles to the centre of Britain's EU battle



For campaigners battling over Britain's European Union membership, the pound's sharpest fall since the depths of the 2008 financial crisis creates political gold dust.

The pound has tumbled 5 cents to a seven-year low against the U.S. dollar in the four days since London Mayor Boris Johnson defied Prime Minister David Cameron and threw his weight behind a British exit.

The fall of the symbol of British economic strength goes to the heart of what anecdotal Reuters reporting, some opinion polls and past elections show could be the most important question for voters: Am I richer or poorer out?

Cameron says dropping out would be a leap in the dark, while Goldman Sachs and HSBC - which have both backed EU membership - cautioned that the world's fourth-most traded currency could lose as much as a fifth of its value if Britain left the club.

Pro-Europeans cast sterling's hiccup as an omen of the chaos that would follow a divorce. Opponents said voters would be unimpressed by scaremongering from elitist banks which in the 1990s warned of dire consequences if Britain opted out of the euro.

"It suits multinational banks to create volatility from which they can profit," Richard Tice, a property entrepreneur who is helping to fund the Leave.EU campaign, told Reuters.

"A lower sterling is good for exports, which is good for jobs, and there is no inflation to worry about from imports, since deflation is the greater issue."

Sterling hovered at $1.3910 GBP=D4 near seven-year lows against the dollar on Thursday and was on course for its worst weekly performance since 2009.

The currency's fall prompted a rare comment on economic matters from Foreign Secretary Philip Hammond, who said it was a warning of the impact of leaving the EU.

"A vote to leave is a vote for an uncertain future, that's a simple fact, and that uncertainty would generate immediate and negative reactions in financial markets ... We've already had a foretaste of that this week in the currency markets," he told parliament.

The "Stronger In" campaign said the pound could be worth 20 percent less if Britain leaves Europe.

"That means petrol, home gadgets, weekly shopping, holidays COST MORE," it said in campaign material.

DEFENDING THE POUND

The fate of sterling, and London's dominance of the $5.3 trillion-a-day global foreign exchange markets, have long been central to Britain's perception of its tumultuous relationship with its European neighbours.

One of the world's oldest currencies continually in use, sterling was once a symbol of Britain's imperial might and has been used by both Cameron and eurosceptics as a symbol of British exceptionalism.

Nigel Farage's UK Independence Party even uses the "£" sign as part of its emblem while Cameron lauded his European deal as giving protection to the currency.

"We have not just permanently protected the pound and our right to keep it, but ensured that we can’t be discriminated against," Cameron said. He has not commented publicly on the fall in sterling.

Cameron had a front-row view of a currency crisis as a 25-year-old Treasury adviser in 1992, when then Prime Minister John Major was forced to pull sterling out of the European Exchange Rate Mechanism (ERM), a system intended to reduce exchange rate fluctuations ahead of monetary union.

TOURISM BOOST

"Black Wednesday", on Sept. 16 of that year was Britain's biggest financial humiliation since the sterling crisis of 1976 and helped turn British opinion against the monetary union.

Britain under Tony Blair later decided not to join the euro and thus locked itself out of the EU's inner 19-member euro zone core. The pound has fallen against the euro this year.

With the pound just 4 cents above levels last seen when it sank towards parity with the dollar in the mid-1980s, the "in" campaign said the fall in sterling showed the risks of leaving the world's biggest economic bloc.

"This starkly underlines the dangers of Britain leaving Europe. Our economic security would be put at risk and family finances would be hit as a result," Lucy Thomas, Deputy Director of Britain Stronger In Europe, told Reuters.

"It is essential that Britain retains access to Europe’s free trade single market of 500 million consumers," Thomas said. "Indeed, the mere possibility that Britain might leave the EU has now resulted in the value of the pound falling."

Some businesses are not so sure.

“The truth is a weaker pound is good for British industry, it’s good for exports, it’s good for tourism," said Nick Varney, CEO of Merlin Entertainments, the world's second-biggest visitor attractions group behind Walt Disney.

"If Brexit happened and the pound went down I don't think that would be too much of a disaster, I think it could be quite good," Varney said.

Reference: GUY FAULCONBRIDGE

Thursday, 25 February 2016

What is Front Running Forex Orders


Basic Trading Concepts Defined


A common form of currency market manipulation, and perhaps the closest activity to insider trading in the forex market, would be front running large currency orders.

Front running is a rather questionable market manipulation strategy often used by brokerage companies or banks with large individual and corporate customers.

These clients sometimes leave substantial orders in the market at target rates, rather than taking the time to watch the market and then ask for a price when it approaches their desired action level.

As an example of front running, the party holding an order for an especially large commercial transaction might trade ahead of or "front run" the order in the way described in the following sections.

Receiving the Order

First, a bank's customer desk might receive a request to work an order on a large transaction. For example, consider the situation if this involved selling 500,000,000 U.S. Dollars versus the Japanese Yen at a USD/JPY exchange rate of 100.00 when the market in USD/JPY is currently trading at 99.95.

Such a large commercial order might come from a Japanese automobile exporter when the market is approaching their target price for converting profits from U.S. car sales, for instance.

Communicating it to the Bank's Market Maker 

The person on the dealing desk that takes the order immediately communicates the currency pair, size and direction of the huge commercial transaction to the USD/JPY market maker on the bank's currency trading desk.

Since the market is close to the order level, the market maker immediately begins selling USD/JPY for the bank's trading account. They effectively front run or trade ahead of the huge order that is waiting to be executed at slightly higher rates.

Outcomes of Front Running

If the market then trades lower as a result of their front running activities, then the market maker can close their accumulated short position at a profit. They can then just start selling again if the market rises toward the order level.

Nevertheless, if the market does manage to trade higher to the order level at 100.00, then they can use the order to stop themselves out for just a 5 pip loss. Also, the execution of the large order at that level will eventually tend to drive the market down as players realize that a large amount is waiting to be sold.

Also, if the market lacks sufficient upward momentum for the entire order to be filled, then the bank trader might just close out any executed amount for yet another profit. If asked, they would then simply inform the customer that market buying interest was insufficient to execute their entire huge amount at that level.

Reference: Forextraders

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Global political risks push investors to bulk up cash defences

A British Union flag flutters in front of one of the clock faces of the 'Big Ben' clocktower of The Houses of Parliament in central London, Britain, February 22 , 2016.   REUTERS/Toby Melville

With the threat of a UK exit from the European Union no longer just a distant prospect, already battered investors are shoring up defensive positions against a host of intensifying geopolitical risks, including a "Brexit".

Investors typically dismiss political gyrations as sideshows that might cause temporary market turmoil but with little long-term impact.

However, with markets volatile and assets from developed market equities to emerging market bonds a sea of red, the unusually high number of geopolitical risks stalking investors this year could expose already bruised portfolios to further losses.

"When you look into 2016, the one thing very clear is there are more fat tail risks out there than we've seen for a long time," said Paul O'Connor, co-head of multi-asset at Henderson Global Investors in London. Across most Henderson funds, cash levels as a percentage of total assets are in the mid-teens, he said.

A fat tail risk refers to the higher-than-normal likelihood of an otherwise unusual event that would lead to extreme movements in returns, technically more than three standard deviations from the mean.

Current key risks include the UK leaving the euro zone, South China Sea tensions, Middle East conflicts, falling oil prices, the European refugee crisis and a highly uncertain U.S. Presidential race.

Crucially, tail risks are growing at a time when global growth concerns and recent market dislocation have made investors crowd into a small number of trades, notably long U.S. dollar, short oil and emerging market positions.

That means tail risk events could spark a dramatic unwinding of these positions as large numbers of investors seek to sell at the same time.

"The fact that trades are correlated, trades are crowded, and we have a lot of fat tail risks leaves us owning a lot more cash than we typically would," O'Connor said.

Henderson is not alone in increasing cash. A Bank of America Merrill Lynch survey of 198 fund managers with combined assets of nearly $600 billion released last week found average cash balances are up to 5.6 percent – the highest level since November 2001 with a U.S recession displacing a slowdown in China as the biggest tail risk for global investors.

The prospect that one of these tail risks could further damage the fragile global economy is what makes them so worrying.

CRUDE REALITY

For Neil Dwayne, global strategist at Allianz Global Investors, which manages 427 billion euros in assets globally, a sharp spike in oil prices caused by an outbreak of conflict in the Middle East could tip the world into recession.

Equally, it would spark a rush to the exits by hedge funds who have crowded into trades betting oil prices would remain low for the foreseeable future, causing a massive wave of selling.

For example, net short positions in crude oil - a proxy for hedge fund positioning - remain near record highs, according to Thomson Reuters data, indicating how vulnerable the market is to the prospect of a reversal.

"A spike in oil prices to $100 per barrel is the number one geopolitical risk that the markets are not pricing for," said Dwayne.

Reference: SAIKAT CHATTERJEE

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Wednesday, 24 February 2016

Central Europe, a new safe haven amid global market jitters

The Hungarian Parliament building is seen in  Budapest, Hungary February 9, 2016. REUTERS/Laszlo Balogh

Central Europe's fast-growing economies have become an island of stability for investors in turbulent global markets this year, and more European Central Bank policy loosening could add to the region's appeal.

The economies of the European Union's eastern wing grew at rates of 3 percent or even faster in 2015 on strong exports and rising domestic demand, drawing in investors despite fears of a Chinese slowdown and falling oil prices.

Those investors have also had to deal with local, home-grown risks. Policies brought in by Poland's eurosceptic new government have worried banks, weighed on the zloty and angered the European Union. Millions of workers have headed west, in a drain of brains and skilled labour.

But inflows of EU development funds have boosted investment, while low oil prices have cut import costs. Labour costs remain relatively cheap, making these former communist countries attractive to big car makers and other foreign firms.

Hungary's forint and Romania's leu have been the best-performing emerging currencies globally this year versus the dollar. And they could appreciate more if the ECB pumps up its stimulus and rate hike fears in the United States recede.

"It's been visible in the past one and a half months that amid the waves of risk-aversion, the CEE region has been a kind of safe haven," said Gergely Forian-Szabo, fund manager at Pioneer Investments in Budapest.

Forian-Szabo said the region's assets could be especially attractive to those euro zone investors who want to diversify their portfolio from some euro zone peripheries like Spain or Italy and are too scared to buy risky Russian or Turkish assets.

While 10-year Italian or Spanish bonds carry yields of around 1.60-1.74 percent, Hungary's 10-year yield trades at 3.37 percent while Poland's corresponding bond at 3 percent and Romania's 10-year bond at 3.28 percent - a nice upside in a world where negative rates are becoming common.

Even in Poland, where the new government's bank tax, stronger controls on public institutions and other policies helped trigger a ratings downgrade, yields have declined in the past weeks.

STRONG RECOVERY

Central Europe's main economies are in better shape now than the euro zone's weaker members after their recovery from the 2008 crisis.

Growth is solid, budget deficits are under control, and Hungary and the Czech Republic posted record high trade surpluses last year. The Czech economy grew at its fastest pace since 2007 last year at 4.3 percent, Poland grew 3.6 percent, Romania 3.7, while Hungary at 2.9 percent.

"Despite external headwinds, Central Europe continues to perform well, powered by healthy domestic demand," JP Morgan said in a note. "Sentiment remains upbeat, job growth is solid, and headline inflation is low."

With inflation low and the ECB expected to ease policy further, many Central European central banks are also mulling loosening. They may have to act to counter an appreciation of their currencies if that starts hurting the economy and drives inflation even lower.

The Czech National Bank could be the first in the region to take rates into negative territory. It has been intervening to keep the crown on the weak side of 27 to the euro.

Serbia unexpectedly trimmed rates to 4.25 percent last week, while rate cut expectations are lingering in Poland.

Hungary's central bank has already signalled it might implement further loosening "primarily using its unconventional toolkit." Hungary's debt is expected to be raised to investment grade from "junk" this year.

OUTFLOW OF SKILLED LABOUR

Some of this expected monetary easing has been priced into markets, but global risks could affect the region negatively.

"The largest risk for the group (of main CEE currencies) relates to tail events specific to Europe – i.e. Brexit, quite significant for open economies such as Czech, also Hungary," said Roxana Hulea at Societe Generale.

On the home front, the outflow of workers is unlikely to be reversed any time soon, while wage demands at home are growing. Hungarian railway workers and bus drivers are planning strikes.

Eniko Szijj-Wieland, owner of Hungarian firm Optimum Trend, has been hiring skilled workers such as welders and electricians for jobs in southern Germany in the past two years.

"Skilled workers mostly say they don't earn enough here, even if they work in several shifts, to be able to get by," she said, adding that an electrician earns a net 150,000 forints ($536.98) a month in Hungary, while in Germany he can get 2,100 euros.

Reference: KRISZTINA THAN

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Fed's Fischer says market turmoil may pass with little economic impact

Federal Reserve Vice Chairman Stanley Fischer attends a televised interview during the Federal Reserve Bank of Kansas City's annual Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming August 28, 2015. REUTERS/Jonathan Crosby

It is still unclear whether the recent downturn in global financial markets will have any substantial impact on the U.S. economy, Federal Reserve Vice Chairman Stanley Fischer said on Tuesday, suggesting the episode may still pass without much effect on the Fed's plans.

"If the recent financial market developments lead to a sustained tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States," Fischer said at an energy industry gathering in Houston.

"But we have seen similar periods of volatility in recent years ... that have left little visible imprint on the economy, and it is still early to judge the ramifications."


Fischer says no Fed plan to move to negative interest rates
The volatility in global markets since the Fed began tightening rates in December has led many investors to discount the likelihood of a second Fed move anytime soon, with the upcoming March meeting all but ruled out.

Fischer did not speak directly to the point. But he did indicate that there was no rush, and in particular repeated that he feels it would be "appropriate" if the economy ran at more than full employment for a period of time.

Pushing beyond what is considered a "natural" rate of employment could theoretically risk a spike in inflation that would force the Fed to react quickly. But the U.S. central bank is still struggling to understand the effect of low oil prices on global inflation rates, a recent decline in U.S. inflation expectations, and other forces that may be causing the economy to act differently than it has in the past.

The unemployment rate is currently 4.9 percent but is expected to fall lower. Estimates of the unemployment rate that would put pressure on inflation range close to 4 percent at the low end.

"A modest overshoot," of full employment would ensure people who want to rejoin the labor force or work more hours get a chance to do so, Fischer said, and could also help ensure the Fed reaches its 2 percent inflation goal.

Reference: HOWARD SCHNEIDER

Asian shares, oil retreat as Saudi plays down output cuts

A woman takes pictures of a display showing market indices outside a brokerage in Tokyo, Japan,  February 10, 2016. REUTERS/Thomas Peter

Asian shares fell on Wednesday as oil prices skidded after Saudi Arabia effectively ruled out production cuts by major producers anytime soon, sending investors into safe-havens such as the yen.

MSCI's broadest index of Asia-Pacific shares outside Japan  extended earlier losses to fall 1.1 percent as of 0246 GMT, slipping further from Monday's six-week high.

Japan's Nikkei .N225 shed 0.7 percent on the drop in oil prices and as the stronger yen weighed on exporters.

Chinese shares opened higher but surrendered the gains, with the CSI 300 index .CSI300 down 0.1 percent and the Shanghai Composite .SSEC little changed.

The U.S. S&P 500 Index .SPX fell 1.25 percent on Tuesday to 1,921.27, having failed to rise above its peak hit on Feb. 1, with energy and material sectors being a major drag as oil prices quickly gave up Monday's hefty gains.

Saudi Oil Minister Ali Al-Naimi told oil executives on Tuesday that markets should not view the agreement by four major oil producers to freeze output at January levels as a prelude to production cuts.

While Naimi said he was confident more nations would join the pact, Iran was seen as unlikely to agree to the output cap, which does not allow Iran to regain the market share it lost during sanctions.

Oil prices slid in early Asia trade, extending losses of more than 5 percent overnight. U.S. crude futures CLc1 were down 1.8 percent at $31.29 per barrel, while international benchmark Brent futures were down 1 percent at $32.94.

"I suspect few people were expecting a deal to cut production so his comments are hardly a surprise. Yet, the latest development seems to suggest that for oil producers to get more united they will have to feel more pain," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.

The toll from low oil prices is also spreading to banks that have exposure to the energy sector, as roughly a third of U.S. shale oil producers are at high risk of slipping into bankruptcy this year, according to a study by Deloitte.

JP Morgan , the largest U.S. bank by assets, said it will increase provisions for expected losses on energy loans by $500 million, or more than 60 percent of its existing reserves.

JPMorgan shares fell 4.2 percent on the announcement.

Investors instead favoured safer assets such as U.S. Treasuries, with the 10-year notes yield falling to a two-week low of 1.714 percent  overnight.

The increased risk aversion led gold XAU= to erase all its losses from earlier this week to trade at $1,227.30 per ounce, coming near its one-year high of $1,262.90 touched about two weeks ago.

In the currency market, traditional safe-haven currencies such as the yen and the Swiss franc outperformed.

The yen firmed to 111.77 to the dollar on Tuesday, edging near its 15-month high of 110.985 hit on Feb. 11. It last stood at 111.90.

The Swiss franc gained broadly, hitting a one-month high on the euro at 1.09165 franc per euro EURCHF=R on Tuesday. It has since weakened to 1.0929 franc per euro.

The franc got a lift also as the head of its central bank warned it could not "endlessly" take further steps to ease monetary conditions.

The euro in contrast was hit by a key index on German business climate showing sentiment among German manufacturers plunged by its largest amount since the bankruptcy of Lehman Brothers in 2008.

Against the dollar, the euro fell to three-week low of $1.0990 on Tuesday and last stood at $1.10160.

The British pound remained on defensive, hitting a seven-year low below $1.40 in early Asian trade on Wednesday on worries Britons would vote to leave the European Union in a June referendum.

Reference: HIDEYUKI SANO

Tuesday, 23 February 2016

Global stocks retreat as oil gains dissipate



Global equity markets lost ground on Tuesday, slowing the recent recovery in riskier assets as oil prices reversed some of their recent bounce and benefited safe-haven assets like the Japanese yen and gold.

After gains of more than 5 percent on Monday, which helped push a gauge of world equities up more than 1 percent, both Brent and U.S. crude were down more than 1 percent.

The decline in crude weighed on both the energy .SPNY and financial .SPSY sectors on Wall Street. Concerns about bank exposure to the energy sector were highlighted by JP Morgan's announcement that it will put aside an additional $500 million to cover potentially bad loans to energy companies.

"It is looking for its direction from oil, there has to at some point be a disconnect between what oil does and what the broader market does," said Ken Polcari, Director of the NYSE floor division at O’Neil Securities in New York.

"But at the moment it is too connected right now."

U.S. crude futures were last down 3.4 percent at $32.26 a barrel and Brent LCOc1 lost 2.4 percent to $33.85 a barrel. The commodity had shown signs of stabilization above $30 a barrel on plans for a production freeze by major producers, but lost ground on Tuesday amid doubts about the impact a freeze could have on oversupply.

The Dow Jones industrial average .DJI fell 109.3 points, or 0.66 percent, to 16,511.36, the S&P 500 .SPX lost 14.64 points, or 0.75 percent, to 1,930.86 and the Nasdaq Composite  dropped 41.65 points, or 0.91 percent, to 4,528.96.

European shares also moved lower on the crude weakness, along with and disappointing updates from Standard Chartered (STAN.L), down 5.8 percent, and BHP Billiton  down 4.9 percent. A weak sentiment reading of German manufacturers also raised concerns about the health of the region's largest economy.

Resources stocks, down 2.7 percent, weighed heavily on European equity indices after the world's largest miner, BHP Billiton, posted its first loss in 16 years.

The pan-European FTSEurofirst 300 .FTEU3 index of leading shares was off 0.9 percent. MSCI's index of world shares was down 0.7 percent.

In currency markets, the British pound GBP= remained vulnerable, a day after falling nearly 2 percent, its biggest one-day percentage drop in almost six years, on worries Britain may leave the European Union. Sterling was last down 0.4 percent at 1.4087.

The euro EUR= also fell to $1.0987 on Monday, its lowest in almost three weeks, on fears Brexit could undermine the European Union. It was last down 0.15 percent at $1.1009.

Investors' shift toward safer ground on Tuesday pushed the dollar lower against the yen, down 0.7 percent to 112.09 yen JPY= after hitting a low of 111.75. The risk-aversion helped lift gold 1.2 percent to $1,223.06 an ounce XAU=.

The dollar's index against a basket of six major currencies .DXY was little changed, up 0.05 percent at 97.424.

Benchmark 10-year U.S. Treasuries pared earlier losses and were last down slightly, off 1/32 in price at 1.7691 percent

Reference: CHUCK MIKOLAJCZAK

Asian shares surrender gains as oil prices retreat

A man riding on a bicycle looks at an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo, Japan, February 4, 2016. REUTERS/Yuya Shino

Asian shares retreated from a seven-week high on Tuesday as the oil price rally that had boosted global equity markets reversed, while the euro and sterling were hit by uncertainty over Britain's membership of the European Union.

European stocks are also poised for a bleak start, with financial spreadbetters expecting Britain's FTSE 100 .FTSE and France's CAC 40 .FCHI to start the day about 0.6 percent lower, and Germany's DAX .GDAXI to open down about 0.5 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.2 percent, after earlier rising 0.4 percent to its highest level since Jan. 8. Japan's Nikkei .N225 erased morning gains to close down 0.4 percent.

Korea's Kospi .KS11, which started the day higher, and Australia's ASX 200 , which opened little changed from Monday's three-week high close, both ended the day with losses.

Chinese stocks which opened little changed, were last trading down 1.7 percent.

Oil markets jumped as much as 7 percent on Monday as speculation about falling U.S. shale output fed the notion that crude prices may be bottoming after their 20-month collapse.

But they retreated on Tuesday on concern that any cuts to U.S. production may be countered by rising output from Iran.

U.S. crude futures fell 1.9 percent, and the international benchmark Brent slid 1.6 percent on Tuesday.

Short-covering in oil began last week after Saudi Arabia and fellow OPEC members Qatar and Venezuela agreed with non-OPEC member Russia to freeze output at January's highs.

"The oil market seems to have become firmer recently," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

But while the market seems to like the fact that top producers are starting to take action to rein in supply, it "remains questionable" whether such moves will have a real impact, he said.

Monday's strong oil prices drove the S&P 500 Index .SPX up 1.45 percent to 1,945.50 overnight, close to this month's high of 1947.20, led by a 2.2 percent increase in the energy sector.

The volatility index, which measures implied volatility of stock options and is often seen as a gauge of investor fear, fell below 20 percent to the lowest closing level since early January.

Spot iron ore for immediate delivery to China's Tianjin port jumped seven percent on Monday to hit its highest level since late October.

Copper also gained 1.6 percent to $4,694 a tonne on Monday, near its one month high of $4,720 touched in early February. But it declined 1.3 percent to $4,636 on Tuesday.

The strength in resources on Monday helped commodity-linked currencies such as the Australian dollar scale a seven-week high of $0.7248 AUD=D4. It pulled back a little and was last at $0.7231 on Tuesday.

The British pound remained vulnerable a day after falling nearly 2 percent, its biggest one-day drop in almost six years, on worries Britain may leave the European Union.

The pound hit a seven-year low of $1.4057 on Monday, after London Mayor Boris Johnson, one of the country's most popular ruling party politicians, announced his support for Britain to leave the EU in a June referendum.

The British unit last stood at $1.4113.

The euro EUR= also fell to $1.10035 on Monday, its lowest in almost three weeks, on fears "Brexit" could undermine the European project.

The common currency recovered to $1.1033 on Tuesday.

"Fears of Brexit have relegated the GBP to the bottom of the leader board," said Rodrigo Catril, FX strategist at National Australia Bank.

"The euro was also an underperformer against the USD, suggesting the market is expressing some concerns for the euro if the UK chooses to leave the European Union."

As shares retreated, the dollar also gave up its earlier gains against the yen. It slumped 0.4 percent to 112.45 yen JPY=, after opening at 112.87.

The dollar's index against a basket of six major currencies hit a three-week high of 97.60 on Monday but slipped back to 97.315.

Reference: NICHOLA SAMINATHER AND HIDEYUKI SANO

Monday, 22 February 2016

Focus sharpens on Fed after hot inflation data

Traders work inside a post on the floor of the New York Stock Exchange (NYSE) February 19, 2016. REUTERS/Brendan McDermid

With next week's calendar full of economic data releases and speeches by economic policymakers, investors have been poised to watch the Federal Reserve for clues about the U.S. central bank's next move, but an unexpectedly hot reading on inflation on Friday will further sharpen that focus.

After coming into 2016 with an expectation of three or four interest rate hikes through the year, market participants recently were viewing the Fed as likely raising interest rates once, if at all, in light of weak inflation and global volatility.

But Friday's data showed the core consumer price index (CPI), a measure of underlying U.S. inflation, rose in January by the most in nearly 4-1/2 years to a 2.2 percent annualized rate. It drew particular attention as the number was above the Fed's 2.0 percent target, though it is not the central bank's benchmark inflation measure.

The uptick in price pressures has already shifted the market's expectations on the Fed's next move.

"The inflation numbers definitely caught the markets off guard," said Joseph Lavorgna, senior economist at Deutsche Bank in New York.

"Last week at this time the market was pricing a 25 percent chance of a rate hike by year-end and now it’s over 40 percent and that’s largely because of today’s stronger than expected CPI."

The dollar rose alongside Treasury yields shortly after the data, as markets saw the higher inflation as nudging the Fed toward tightening policy. The euro hit its lowest since Feb. 3.

Equity markets have also closely followed expectations on Fed policy. Lower rates tend to support stocks in general, with high-paying dividend names like utilities gaining investors' favor. In an environment of rising rates, banks tend to take the lead.

The expectation of higher interest rates has been cited as one of the reasons for stocks having fallen as much as 11 percent this year. The S&P 500 .SPX is down 6 percent so far in 2016, and on track for its third positive week of the year.

The inflation numbers add to recent economic data, including a stronger job market and consumer spending, that will force the Fed to seriously reconsider more rate hikes, said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.

"I think what’s happening is that people are starting to put tightening back on the table," Paulsen said.

CHOCK-FULL OF FED SPEAKERS

Personal consumption expenditures, the Fed's favorite measure of price inflation, is out next Friday and could confirm or outweigh the trend in the CPI reading. Among other market-moving numbers next week are purchasing managers indexes (PMIs) for the manufacturing and services sectors and two gauges of consumer confidence.

Investors and the Fed could address a decline in earnings, now seen as down 3.7 percent for the S&P 500 in the fourth quarter of last year, and lower outlooks for 2016 as other reasons to keep rates lower for longer.

The incoming data gives more weight to next week's scheduled speeches from many Fed officials, including Vice Chair Stanley Fischer on Tuesday and Atlanta Fed President Dennis Lockhart on Thursday as markets look for a change in tone. Two Fed surveys of business conditions, Richmond and Kansas City, are also out next week.

"I don't think the Fed can help stocks, they can only hurt them," said Wayne Kaufman, chief market analyst at Phoenix Financial Services in New York.

"If they came out too hawkish that can hurt stocks; too dovish can help a little but not create sustainable investor demand."

In Fed-watcher parlance, hawks are seen quicker to push for rate hikes than doves.

In a U-turn late on Wednesday, Fed voting member and hawkish St. Louis Fed President James Bullard said it would be "unwise" to raise rates further given U.S. inflation data and global volatility. He speaks Wednesday in New York, followed by questions from the media.

The Fed's policy-setting committee next meets March 15 and 16 in Washington, with a statement followed by a news conference with Chair Janet Yellen.

Reference: RODRIGO CAMPOS

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Asia shares gain; pound slides on EU exit fear



Asian share markets rose on Monday, extending last week's gains, as investors awaited a rush of February industry surveys to take the pulse of the global economy, while sterling stumbled on concerns the UK might yet vote to leave the European Union.

Despite the fresh "Brexit" uncertainty, financial spreadbetters expected European stock markets to open higher also, with Britain's FTSE .FTSE seen up 0.50 percent, Germany's DAX .GDAXI 0.37 percent, and France's CAC 40 .FCHI 0.54 percent.

E-Mini futures for the S&P 500 ESc1 were up 0.6 percent.

But much of the day's action was in the currency markets, where sterling tumbled on worries that Britain may quit the European Union flared up after London Mayor Boris Johnson threw his weight behind the exit campaign.

It slid as far as $1.4235 GBP=D4 from around $1.4405 late on Friday, before stabilising around $1.4275, down 0.9 percent on the day.

Against the yen, it slumped to as low as 160.40 yen GBPJPY=R, its lowest since November 2013, from 162.10 late on Friday before partially rebounding.

"Political uncertainty generated by the UK referendum will weigh on GBP," said Elias Haddad, currency strategist at Commonwealth Bank.

As dealers expect choppy trading in coming months towards the referendum, implied volatilities on sterling options rose to near highest levels in more than four years.

Other major currencies were steadier. The dollar was a touch firmer at 112.90 yen JPY=, as was the euro at 125.45 EURJPY=R underpinned by recent data. Against the greenback, the common currency was also slightly weaker at $1.11120 EUR=.

The dollar was underpinned by data last Friday that showed underlying U.S. consumer price inflation accelerated in January by the most in nearly 4-1/2 years, supporting the view the Fed could gradually raise interest rates this year as forecast.

ASIA STOCKS UP, EYE G20, EARNINGS

Stock markets across Asia rose, with MSCI's broadest index of Asia-Pacific shares outside Japan up 0.8 percent, having rebounded more than 4 percent last week.

China's benchmark indexes rose 2 percent as investors welcomed Beijing's decision to replace the top securities regulator and on signs the government was stepping up its economic stimulus efforts.

The calmer mood was aided by oil as Brent crude added 1.6 percent to $33.54 and U.S. crude rose slightly to $30.24.

Japan's Nikkei .N225 recouped early losses to rise 1 percent, buoyed by a retreat in the yen even as an activity survey showed a drop in new export orders hurt manufacturing.

The Markit/Nikkei Flash Japan PMI fell to 50.2 in February, from 52.3 in January, a potentially bleak omen for the rest of the region, but investors focused on the market's recent rebound instead.

"Equity markets successfully stress-tested and bounced from key technical support last week," wrote analysts at RBC Capital Markets.

"While we cannot definitively say the cycle/2016 lows are in place yet, the technical evidence continues to suggest a more durable bottom may be forming."

A busy week for data will culminate with a Group of 20 finance ministers and central bankers meeting in Shanghai that will offer leaders a chance to soothe market concerns with talk of coordination.

There has been some chatter about a possible grand currency agreement that would allow for a depreciation in the U.S. dollar, which might relieve pressure on commodity prices and on emerging markets.

However, most analysts consider it very unlikely given so many of the G20 central banks are actively easing policy and need their own currencies to stay competitive.

Asian investors also will be keeping an eye on corporate earnings which kicked off this week.

Europe's biggest bank HSBC said it saw a 'bumpier' financial environment ahead after delivering flat 2015 profit growth. Insurer AIA  and sports giant Anta Sports declare results later this week.

Reference: SAIKAT CHATTERJEE

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Friday, 19 February 2016

Asia FX sentiment mostly better; yuan bearish bets near three-month low: Reuters poll

South Korean won, Chinese yuan and Japanese yen notes are seen on U.S. 100 dollar notes in this picture illustration taken in Seoul, South Korea, December 15, 2015. REUTERS/Kim Hong-Ji

Sentiment toward most emerging Asian currencies improved in the last two weeks helped by the prospect of more gradual U.S. rates rises and further European monetary policy easing, while a rebound in oil also boosted risk assets, a Reuters poll showed.

The Chinese yuan's bearish bets fell to their lowest since late November, according to a survey of 20 fund managers, currency traders and analysts conducted from Tuesday through Thursday.

The renminbi on Monday posted its largest daily gain since China's currency revaluation in July 2005 as the central bank set its daily guidance rate sharply firmer after the week-long Lunar New Year holiday.

In an interview carried in the Chinese financial magazine Caixin over the weekend, People's Bank of China Governor Zhou Xiaochuan said yuan exchange rate reforms would help the market be more flexible in dealing with speculative forces betting on yuan depreciation.

Zhou commented there was no basis for the yuan to keep falling, and China would keep it stable versus a basket of currencies while allowing greater volatility against the dollar.

Signs of the yuan's stabilization, along with expectations that major central banks may take easier monetary policy stances, improved sentiment on emerging Asian currencies.

Federal Reserve policymakers worried last month that a global slowdown and financial market sell-off could hurt the U.S. economy and considered changing the central bank's planned interest rate hike path for 2016. St. Louis Fed President James Bullard, one of the U.S. central bank's most prominent advocates of higher borrowing costs declared it "unwise" to move any further in light of weak inflation and global volatility.

European Central Bank President Mario Draghi repeatedly pledged to ease monetary policy in March.

Indonesia's rupiah IDR=ID reported bullish positions for the first time since November 2014 as investors hunted for one of the highest government bond yields in Asia.

Views on the Malaysian ringgit MYR=MY became the least bearish since late April 2015. The country has seen investors returning to local bonds amid a rebound in oil prices on hopes of a deal to freeze production. Higher crude prices eased concerns over the country's falling oil and gas revenues.

Malaysia's economy in the fourth quarter grew 4.5 percent from a year earlier, beating forecasts. Its current account surplus in the October-December period more than doubled from the previous three months.

Sentiment on the Thai baht THB=TH has became nearly neutral, the best since mid-April 2015 on inflows to short-term debt.

The baht hit a near four-month high last week, supported by demand from gold exporters. The precious metal last week rose to one-year highs and Thai gold investors cut holdings in the physical metal or in gold futures on its rallies.

Sentiment on the Singapore dollar and the Taiwan dollar became the least pessimistic since October, tracking improvement in the yuan's views.

The South Korean won's pessimistic positions barely moved with outlook on the currency the worst in the region on growing geopolitical tensions with the North and expectations for further interest rate cuts.

The won hit a 5-1/2-year low on Wednesday on bond outflows and increasing dollar demand among offshore funds to hedge against the falling Korean currency.

India's rupee INR=D2 reported slightly larger bearish bets as the currency touched a 2-1/2-year trough on concerns over capital outflows.

The poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso PHP=PDSP, Malaysian ringgit and the Thai baht.

The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long U.S. dollars.

The figures include positions held through non-deliverable forwards.

Reference: JONGWOO CHEON

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Asian shares retreat from three-week high as oil rally reverses

Visitors looks at an electronic board showing the Japan's Nikkei average at the Tokyo Stock Exchange (TSE) in Tokyo, Japan, February 9, 2016. REUTERS/Issei Kato

Asian shares slipped from near three-week highs on Friday as a rally in oil prices reversed and investors remained cautious about the outlook for the global economy.

Europe also looks set for a lackluster start, with financial spreadbetters predicting Britain's FTSE 100 .FTSE and Germany's DAX .GDAXI will open little changed.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.6 percent, but gains in previous sessions left it on track for a weekly gain of 4.1 percent.

Japan's Nikkei .N225 dropped 1.4 percent as the yen firmed, but ended the week up 6.8 percent.

"This week is the first sign of change I have seen in 2016," Evan Lucas, market strategist at trading services provider IG, wrote in a note, referring to some the upswing in equities.

But "most fund managers are nearing their maximum levels of cash under their respective mandates. This capital needs to be deployed to confirm the change is on."

MSCI's emerging market index .MSCIEF hit a six-week high overnight on hopes that oil prices were stabilizing, but the positive sentiment didn't flow through to U.S. shares.

The S&P 500 .SPX shed 0.5 percent, dragged down by lackluster earnings from Wal-Mart Stores

Oil prices reversed earlier gains on Thursday following a rise in U.S. stockpiles but look set to post their first weekly rise in three weeks after the battered market took heart from a tentative deal by major producers to freeze output at January's highs.

Still, doubts about how much other countries will cooperate have weighed on investors, with the focus squarely on Iran, which has pledged to increase output sharply to regain market share lost when sanctions were in place.

Brent crude LCOc1 extended losses on Friday, and was last trading down 0.9 percent at $33.99 per barrel, but is up 1.9 percent for the week.

U.S. crude was at $30.53 CLc1, off a two-week high of $31.98 hit on Thursday but up 3.7 percent so far this week.

"I would assume oil prices will face downward pressure and there will be selling into a rally," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

In a sign that investor fears over a global economic slowdown are far from being on the wane, traditional safe-haven assets held firm after a strong outperformance on Thursday.

Gold XAU= surged 1.8 percent on Thursday to $1,230.90 per ounce and last stood at $1,226.56.

Investors also flocked to the safety of top-rated government bonds, with the 10-year U.S. Treasuries yield US10YT=RR falling back to 1.7294 percent, compared with Wednesday's one-week high of 1.8470 percent.

In the currency market, the yen regained its edge, rising to 113.13 per dollar JPY= from this week's low of 114.875.

The euro fell to as low as 125.34 yen EURJPY= on Friday, a low last seen in June 2013, and last traded at 125.83 yen.

Against the dollar, the common currency EUR= traded at $1.1124, having slipped to a two-week low of $1.1071 on Thursday.

The minutes from the European Central Bank's January meeting showed some policymakers are advocating the need to act pre-emptively in the face of new threats on the economy.

A big focus is on the British pound and the EU summit in Brussels, where UK Prime Minister David Cameron is seeking more favorable terms for its EU membership.

A successful deal there is expected to lead to a referendum on EU membership as soon as in June.

"We expect a correction lower in EURGBP should an agreement be reached at the meeting, although an impasse, to which we assign a non-negligible probability, would likely weigh on the GBP," wrote Barclays analysts in a report.

The pound stood at $1.4333, having fallen to a near seven-year low of $1.4080 last month partly on worries about so-called "Brexit".

Against the euro, it stood at 77.625 pence per euro

Reference: HIDEYUKI SANO

Thursday, 18 February 2016

Asia shares gain as crude oil bounce boosts risk assets

Pedestrians walk past an electronic board showing the graphs of the recent fluctuations of Japan's Nikkei average outside a brokerage in Tokyo, Japan, February 9, 2016. REUTERS/Yuya Shino

TOKYO - Asian stocks rose across the board on Thursday as crude oil extended gains on hopes that big producers will cap output, improving investor sentiment for riskier assets.

Spreadbetters expected a mixed open for European shares, with Britain's FTSE .FTSE seen dipping on some nervousness as British Prime Minister David Cameron holds "now or never" talks to keep his country in the European Union.

Germany's DAX .GDAXI and France's CAC .FCHI were forecast to open a touch higher.

Crude oil remained the main market driver. U.S. crude CLc1 was up 2.1 percent at $31.34 a barrel following a 7 percent jump on Wednesday after Iran voiced support for a Russia-Saudi-led move to freeze production to deal with the market glut that had pushed prices to 12-year lows.

"While there has been some confusion as to whether 'support' equals action, oil traders are simply relieved that the world's fourth-largest holder of oil reserves is willing to cooperate," wrote Kathy Lien, managing director of FX strategy at BK Asset Management.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.8 percent, pulling further away from a three-week low struck last week when a widespread chill in risk appetite amid concern about the euro zone banking sector depressed equities globally.

Japan's Nikkei .N225 continued its recovery from last week's 16-month low and gained 3.0 percent, shrugging off the biggest drop in domestic exports since 2009.

Shanghai stocks .SSEC rose 0.6 percent, in muted reaction to data showing China's January consumer inflation quickening to 1.8 percent from the previous year.

Australian shares climbed 2.2 percent and South Korea's KOSPI .KS11 added 1.1 percent.

"Recovering oil prices have set the stage for an accelerated rebound in global stocks, while minutes from the FOMC supported the mood," said Rhoo Yong-seok, a stock analyst at Hyundai Securities.

Minutes of the January Federal Open Market Committee (FOMC) meeting released on Wednesday showed that policymakers worried about tighter global financial conditions hitting the U.S. economy and considered changing their planned path of interest rate hikes in 2016.

In currencies, the greenback dipped against the yen and euro on dovish comments from a top Fed official.

It would be "unwise" for the central bank to continue hiking rates given declining inflation expectations and recent equity market volatility, St. Louis Fed President James Bullard said late on Wednesday in comments that mark a stark change of direction for one of the Fed's more hawkish inflation foes.

The dollar slipped 0.1 percent to 113.98 yen JPY=, putting further distance between a peak of 114.875 touched earlier this week. The euro nudged up 0.1 percent to $1.1137 EUR=.

The Canadian dollar touched a two-week high of C$1.3655 CAD=D4.

The Australian dollar, another commodity-linked currency, was down 0.4 percent at $0.7153 AUD=D4 with weaker-than-expected local employment data slicing off a chunk of its overnight gains made on rallying oil.

Spot gold XAU= was nearly flat at $1,2089.00 an ounce. The precious metal had managed to snap a three-day losing streak on Wednesday after the Fed's meeting minutes showed policymakers had considered altering their rate hike path.

As the Fed embarked on its first rate hike in a decade late last year, the prospect of higher interest rates weighed on non-yielding gold and pushed prices to near six-year lows. But the metal rebounded to a one-year high of $1,260.60 an ounce last week in the wake of the turmoil in global markets.

In debt markets, higher equities and encouraging U.S. housing and industrial output data pushed the benchmark 10-year Treasury yield to a 9-day high of 1.8470 percent US10YT=RR on Wednesday. The 10-year note yielded 1.8104 percent in Asia.

Reference: SHINICHI SAOSHIRO

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Wall St. up as energy stocks gain from oil price rally

Traders work on the floor of the New York Stock Exchange (NYSE) February 12, 2016. REUTERS/Brendan McDermid

Wall Street was on track for a third straight day of gains on Wednesday after a surge in oil prices fired up energy stocks.

The S&P energy sector jumped 3.24 percent, leading the nine gainers among the 10 major sectors.

The benchmark S&P 500 index staged its best two-day gain since late August as investors picked up beaten-down shares.

Still, the index is down 7.3 percent this year due to slumping oil prices, fears of a China-led slowdown in global growth and uncertainty about central bank policies.

Brent crude was up more than 7.5 percent after Iran voiced support for a move to freeze production by major oil producers such as Saudi Arabia and Russia. [O/R]

Sentiment surrounding the repercussions of the fall in crude oil and its impact on debt-laden energy companies is likely to ease with oil prices stabilizing, said John Burke, chief executive of Burke Financial Strategies in New York.

At 12:42 a.m. ET, the Dow Jones industrial average was up 243.87 points, or 1.51 percent, at 16,440.28.

The S&P 500 was up 31.38 points, or 1.66 percent, at 1,926.96 and the Nasdaq Composite index was up 93.76 points, or 2.11 percent, at 4,529.71.

Kinder Morgan shares were up 11 percent at $17.33 after Berkshire Hathaway disclosed a stake in the pipeline operator.

Fossil surged 26.7 percent at $43.65 after the watchmaker's quarterly results beat estimates.

Priceline was 10.7 percent higher at $1,229.65 after the travel websites operator's profit beat expectations.

Data released on Wednesday showed that U.S. housing starts unexpectedly fell in January. But, a separate report showed producer prices rose last month and there were signs of an uptick in underlying producer inflation.

Inflation is being watched closely for signs of whether the U.S. Federal Reserve will raise interest rates this year.

Investors will get an insight on the Fed's thinking when the minutes of the central bank's January meeting are released at 2 p.m. ET (1800 GMT).

Fed Chair Janet Yellen has maintained that the central bank is still likely to raise rates in 2016. However, Fed funds futures suggest traders do not expect any increases this year.

Advancing issues outnumbered decliners on the NYSE by 2,640 to 389. On the Nasdaq, 2,110 issues rose and 595 fell.

The S&P 500 index showed 13 new 52-week highs and two new lows, while the Nasdaq recorded 19 new highs and 34 new lows.

Reference: Reuters

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Wednesday, 17 February 2016

Oil rebounds on investor optimism over producers' deal

Pump jacks are seen at the Lukoil company owned Imilorskoye oil field, as the sun sets, outside the West Siberian city of Kogalym, Russia, January 25, 2016. REUTERS/Sergei Karpukhin

Crude oil futures rebounded on Wednesday on investor hopes that a deal between Saudi Arabia and Russia to freeze oil output at January levels would lead to a wider pact among producers that could eventually see production cuts to support prices.

Brent crude LCOc1 had climbed 34 cents to $32.52 a barrel by 0455 GMT, after settling down $1.21 in the previous session. It had surged to $35.55 a barrel in early trade on Tuesday.

U.S. crude CLc1 was up 19 cents at $29.23 a barrel, having ended the last session down 40 cents.

Top oil producers Russia and Saudi Arabia on Tuesday agreed to limit oil production at January levels, provided other oil exporters joined in, but stopped short of agreeing cuts in oil output.

Iraq, Qatar and Venezuela said they would freeze output at January levels provided a deal could be agreed, while OPEC member Iran could be offered special terms to freeze oil production levels, sources said.

Oil prices initially surged on Tuesday on news of the deal but early gains were wiped out by the realization that there would be no immediate supply cuts to tackle global oversupply.

› Iran says urging Tehran to freeze oil output raise 'illogical': Shargh daily
"It was a 'buy the rumor, sell the fact' event," said Ben Le Brun, market analyst at Sydney's OptionsXpress.

"The market is coming around to the idea that it is not bad news, but not as good news as it was anticipating," he said, adding that investors were hoping for production cuts.

Moves to freeze output at January levels will make little difference to the overall supply-demand balance this year and won't be enough to clear the 600,000 barrels per day surplus projected for the year, analysts FGE said in a note on Wednesday.

"It could pave the wave for further action to be taken should the likes of Saudi Arabia, other OPEC members and Russia deem it necessary," FGE said.

April crude futures will remain range-bound, Singapore's Phillip Futures said in a note on Wednesday.

Saudi Arabia's oil production has stagnated at slightly more than 10 million bpd throughout 2015, meaning that "all that was achieved was an agreement to continue what they were doing", Phillip Futures said.

Investors are also eyeing U.S. oil inventory data later on Wednesday for further direction on oil prices.

U.S. crude stocks rose by 3.9 million barrels to 505.9 million barrels in the week to Feb. 12, according to a Reuters poll of analysts on Tuesday.

Weekly inventory reports from industry group the American Petroleum Institute (API) and the U.S. Department of Energy's Energy Information Administration (EIA) will be released on Wednesday and Thursday respectively, a day later than usual because of a public holiday on Monday.

Reference: Reuters

Asia shares consolidate, oil swings higher

Visitors looks at an electronic board showing the Japan's Nikkei average (top R) at the Tokyo Stock Exchange (TSE) in Tokyo, Japan, February 9, 2016. REUTERS/Issei Kato

Asian shares were taking a breather on Wednesday after two sessions of solid gains, while oil prices swung higher as the market reconsidered the chances of a meaningful deal to restrict supply later in the year.

The mood was still skittish - when China set a slightly lower guidance rate for its yuan, the yen and safe-haven bonds got an instant boost. As investors realized this was not some message from Beijing on devaluation, the moves quickly reversed.

Yet nerves had settled enough for stocks to make some modest gains. MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.2 percent, having climbed 3 percent over the previous two sessions.

The Shanghai Composite Index .SSEC gained 0.6 percent and South Korea .KS11 0.2 percent. Japan's Nikkei .N225 eased 0.2 percent, but is still up more than 7 percent on the week.

E-Mini futures for the S&P 500 ESc1 firmed 0.2 percent after Wall Street broke its negative feedback loop with oil.

The Dow .DJI ended Tuesday with gains of 1.39 percent, while the S&P 500 .SPX added 1.65 percent and the Nasdaq .IXIC 2.27 percent.

A survey of global fund managers found they had become so cautious they were holding more cash than at any time since late 2001, an "unambiguous buy" signal according to Bank of America Merrill Lynch.

MOOD SWINGS

In commodity markets, oil was whipsawed after top exporters, Russia and Saudi Arabia, agreed to freeze output levels but said the deal was contingent on other producers joining in.

After falling sharply at first, prices recouped some ground early on Wednesday. Brent added 40 cents to $32.58, while U.S. crude was up 19 cents at $29.23 a barrel.

"Albeit mostly symbolic, it is one of the first clear acknowledgments by the oil heavyweights that all is not entirely well in the current price environment," wrote Helima Croft, global head of commodity strategy at RBC Capital Markets.

"Additionally it signals a potential willingness to be more proactive later in the year. It puts the ball back in the court of those who would not or could not comply."

Markets now await minutes of the Federal Reserve's last meeting to judge the balance of opinion among policymakers on the prospect of further rate hikes.

Boston Fed President Eric Rosengren certainly sounded in no hurry to tighten. Speaking late on Tuesday, Rosengren said the Fed would need to ratchet down economic forecasts it made in December because of the uncertain global outlook.

Doubts about the pace of any further hikes kept the U.S. dollar restrained at 96.871 .DXY against a basket of currencies. It was steady on the yen at 114.05 JPY=, after finding support around 113.60.

The big loser was sterling, which has struggled so far in 2016 because of worries the UK might leave the euro zone.

Traders said UK markets face a pivotal week ahead of a two-day summit starting on Thursday at which Prime Minister David Cameron will try to persuade other leaders to support a deal to keep Britain in the European Union.

Sterling GBP= was stuck at $1.4300, having shed 1 percent against the dollar on Tuesday.

Reference: Wayne Cole

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