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Thursday, 31 March 2016

FTSE sets 2016's highest closing level, miners boost



Britain's top share index recorded its highest closing level of 2016 on Wednesday, boosted by the mining sector after Federal Reserve Chair Janet Yellen called for caution on raising interest rates, lifting riskier assets.

The FTSE 100 index .FTSE ended 1.6 percent higher at 6,203.17 points, its highest closing level of 2016. The index remained just a shade below this year's intra-day high of 6,242.32 points, touched in January.

The UK mining index .FTNMX1770 surged 5.6 percent, bouncing back from a one-month low reached in the previous session. Before Wednesday's rally, it had fallen 16 percent since a 4-1/2 month high in March, pressured by a firmer dollar.

Miners rallied following Yellen's comments that the U.S. central bank should proceed only cautiously as it looks to raise rates. That hit the dollar, boosting the value of dollar-earning firms that report profits in sterling.

Anglo American (AAL.L), Glencore (GLEN.L), Rio Tinto (RIO.L) and BHP Billiton (BLT.L) jumped between 5.4 and 11.8 percent.

"Global economic growth is spluttering and the idea that we'll see another rate hike from the Fed in the short term is being kicked into the long grass," Tony Cross, market analyst at Trustnet Direct, said in a note.

"This is also driving the dollar lower so commodity stocks are finding widespread support with the natural resource plays scattered across the top of the board."

Energy stocks were also in demand, with the UK oil and gas index .FTNMX0530 rising 3 percent following a rally in crude oil prices. Shares in Royal Dutch Shell (RDSa.L), BP (BP.L) and Tullow Oil (TLW.L) rose 2.8 to 3.9 percent.

Outside the blue chips, Premier Foods (PFD.L) was up 4.4 percent after U.S. firm McCormick raised its offer for the firm.

The new bid proposal of 65 pence per share was above the previous, rejected offer of 60 pence per share. Shares in Premier Foods traded at around 60 pence after the new bid was made.

"We see 65p as a good compromise price, allowing Premier's management to highlight the extra value it has extracted from McCormick, whilst also offering shareholder’s the opportunity of a cash exit today at a reasonably full ... valuation," analysts at Shore Capital said in a note.

Reference:   ATUL PRAKASH

Investors tiptoe back into emerging markets as storm clouds linger





Emerging markets may well appear cheap again after years of attrition, but there's considerable trepidation about venturing back out to the developing world until the financial and political storms have finally lifted.

Global investors have tiptoed back into emerging assets over the past six weeks at least partly on hopes that the gut-wrenching New Year shakeout may have been a final capitulation after three years of downdrafts and disappointments.

According to the Institute for International Finance, foreigners ploughed some $36.8 billion back into emerging stocks and bonds in March - the highest inflow in nearly two years and well above monthly averages of the past four years.

And yet these are baby steps. To put it in context, that portfolio pop compares with a total net capital outflow from emerging economies in 2015 of some $730 billion.

For the coast to clear, three clouds have to evaporate.

First is a lingering fear of higher U.S. interest rates and dollar appreciation that squeezes hard-currency borrowers in emerging economies, stresses local currencies and forces credit to be far tighter than needed to buoy weakening economies.

The second is China's economic slowdown and its slipstream effect on commodity prices and emerging markets at large.

And third is a spike in political risks in many countries such as Brazil, Turkey and South Africa - pressures magnified by recessions and rising joblessless but which, in turn, compound the economic malaise and policy paralysis on the ground.

Neither of the first two global issues have been resolved.

The world markets fillip of the past month has been rooted in the U.S. Federal Reserve's hesitation in adding to December's first interest rate rise in almost a decade and the resultant dollar recoil.

But rekindled Fed hawkishness as the quarter ends puts a potential relapse on the dashboard - particularly if the rebound in emerging assets is little more than a re-balancing of portfolios from extreme aversion and if you believe that cycles of dollar appreciation historically last far longer than this.

JPMorgan strategists remain optimistic about emerging markets outperforming over the next three months - not least because funds are starved of income in developed economies. But they acknowledge that there's no outright improvement in the economic picture and that price moves are built solely on re-positioning.

"Given the almost five years of emerging markets equity and FX underperformance - and recent conversations with investors - it could take at least a few months before the average investor is again neutral," they told clients.

STAYING WELL AWAY

So the move may have some legs, but it's highly vulnerable if the global climate turns inclement again.

For a start, JPMorgan's rosier view hinges somewhat on the fading of 'China tail risk' involving messy yuan devaluation.

And while Beijing has been forceful on the issue, few investors can muster much conviction about China's markets.

Christophe Donay, head of asset allocation at Swiss firm Pictet's Wealth Managementunit, said that China may hold the line for now but that there was a high risk over the next three years of a 'Minsky moment' - a sudden collapse of asset prices due to credit and currency pressure named after economist Hyman Minsky.

"We are staying well away from emerging market assets because of that and hold very limited EM exposure," he said.

With such scepticism about the international environment, the return to markets riven by a host of disparate but highly disruptive domestic political risks seems brave at least.

Mired in a deep recession, Brazil's political strife has yet to reach a crescendo. Dilma Rousseff is struggling to save her presidency and fighting an impeachment process amid a widening graft investigation into state oil firm Petrobras.

While markets have rallied on the prospect of a new government, it could still take several more weeks or even months for a clear outcome.

Turkey's economy and government too are under strain given the war in neighboring Syria, the resultant refugee crisis, internal conflict with Kurdish separatists, a clampdown on local media and a diplomatic showdown with Russia.

The struggling South African economy and its buckling infrastructure are compounded by pressure on President Jacob Zuma, his finance minister Pravin Gordhan and the ruling African National Congress amid a variety of accusations and probes about undue political interference and graft.

More authoritarian governments in China and Russia may seem less vulnerable than their democratic counterparts, but slowdown and recession heighten the political risks there, too. An oil hit and foreign sanctions continue to hamper oversees refinancing by Moscow and its major companies.

While the picture in Brazil may mask a brighter hue in Mexico or the slowdown in China hide the resilience in India, a still sizeable slice of the emerging universe remains in foment.

China, Brazil, Russia, South Africa and Turkey together make up more than 42 percent of the market capitalization of MSCI's benchmark emerging market equities index.

Asset manager Blackrock's sovereign risk indices measuring the likelihood of defaults across the world contain a political risk sub-set called 'willingness to pay'. This remained the biggest negative for the countries recording the biggest overall index declines in 2015 - Brazil, Russia, Peru and Colombia.

"Politics and institutional capabilities will play a big role in EM going forward," said Kamakshya Trivedi, Goldman Sachs managing director for emerging market research. "Those factors become more important in a world of sluggish growth and tightening credit, they are easier to overlook when growth is accelerating and credit is plentiful."

Reference: MIKE DOLAN

Interest rate optimism pushes Wall Street higher


U.S. stocks pushed further into positive territory for 2016 on Wednesday, helped for a second session by comments from Federal Reserve Chair Janet Yellen that eased anxiety about potential interest rate hikes.

MetLife and other financial stocks led the market higher while the S&P energy sector .SPLRCU was down marginally after crude prices retreated from their day's highs after a report showed a weekly build in U.S. crude inventories.

Yellen said on Tuesday the U.S. central bank should proceed cautiously as it looks to raise interest rates. On Wednesday, her comments were echoed by Chicago Fed PresidentCharles Evans, who said there was a high hurdle to raising rates in April, given low inflation.

Those comments soothed investors worried about a slow global economy, a strong dollar, volatile oil prices and lackluster top-line growth at U.S. companies.

"The market's best friend continues to be the Fed and central banks around the world," said Jeff Carbone, co-founder of Cornerstone Financial Partners in Charlotte, North Carolina. "Investor appetite for risk has increased."


Central banks 'running out of time' to reflate economies: Bill Gross.

Higher interest rates are generally bad for stocks because they reduce lending and investment and make it harder for companies to expand. A sputtering global economy and strong dollar have already been causing earnings of U.S. companies to shrink and many investors want the Fed to hold off raising rates until after its meetings in April and June.

The S&P 500 .SPX gained 0.44 percent to 2,063.97 points, bringing its gain for 2016 to about 1 percent.

The Dow Jones industrial average .DJI was up 0.42 percent at 17,707.76 points and the Nasdaq Composite .IXIC added 0.49 percent to 4,870.15.

MetLife's shares rose 4.7 percent after a court ruled that the life insurer was not systemically important to the country's financial system. The tag "too big to fail" requires more stringent regulations.

Fellow insurers AIG (AIG.N) and Prudential Financial (PRU.N) added more than 1 percent.

Apple (AAPL.O) rose 1.9 percent after Cowen & Co raised its rating on the stock to "outperform". The stock gave the biggest boost to the S&P 500 and the Nasdaq.

Advancing issues outnumbered decliners on the NYSE by 2,033 to 956. On the Nasdaq, 1,858 issues rose and 928 fell.

The S&P 500 index showed 54 new 52-week highs and no new lows, while the Nasdaq recorded 69 new high and 19 new lows.

Reference: NOEL RANDEWICH

Wednesday, 30 March 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 workspace 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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Yellen says Fed should proceed 'cautiously' given global risks

U.S. Federal Reserve Chair Janet Yellen holds a press conference following the two-day Federal Open Market Committee (FOMC) policy meeting in Washington in this March 16, 2016, file photo.  REUTERS/Kevin Lamarque/Files

Federal Reserve Chair Janet Yellen said on Tuesday that global risks were not expected to have a deep impact on the United States but that it was still appropriate for the Fed to proceed "cautiously" in hiking interest rates.

"Developments abroad imply that meeting our objectives for employment and inflation will likely require a somewhat lower path for the federal funds rate than was anticipated in December," when the Fed raised rates for the first time in a decade, Yellen said at the Economic Club of New York.

"Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy," Yellen said.

In her first remarks since a press conference after the Fed left rates steady at its most recent meeting earlier this month, Yellen said she still expected headwinds from weak growth abroad, low oil prices and uncertainty over China would abate and allow the recovery to continue.

"The overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited," Yellen said. "Developments have not materially altered the Committee’s baseline - or most likely - outlook for economic activity and inflation."

Related coverage:
Oil prices fell more than 3 percent on Tuesday, reflecting growing concern that a two-month rally could fade as demand fails to keep up with swelling global supply including new output from Kuwait and Saudi Arabia.

Kuwait and Saudi Arabia's decision to resume oil production at the jointly operated 300,000-barrels-per-day Khafji field, at a time when production is supposed to be frozen, triggered the heavy selloff in the oil markets, traders said.

"The capacity of that field in the Neutral Zone is more than what Ecuador produces. If they do freeze it will not be at the January levels but at a lot higher figure," one trader said, referring to the Kuwait-Saudi border area where Khafji is located.

Oil prices have risen more than 30 percent since mid-February, ahead of an April 17 meeting in Doha where the Organization of Petroleum Exporting Countries (OPEC) and other major suppliers including Russia will discuss an output freeze aimed at bolstering prices.

But with global inventories swelling and signs some OPEC members are losing market share, the meeting is unlikely to do much to prop up prices, analysts and traders said. Rising demand for gasoline in the United States is not seen as keeping pace with the increased worldwide supplies.

Reference: Reuters

Tuesday, 29 March 2016

Bank of England warns on Brexit

A taxi and buses queue outside the Bank of England in London, Britain December 10, 2015. REUTERS/Luke MacGregor

Britain's European Union referendum could push up credit costs and weaken sterling more, the Bank of England warned on Tuesday, as it moved to bolster banks' risk buffers and slow a boom in lending to landlords.

The central bank said the outlook for financial stability had worsened since its last report in November, saying a rebound in Chinese lending was "concerning" and that June 23's vote on leaving the EU was now the biggest domestic risk.

BoE Governor Mark Carney came under fire from some pro-Brexit lawmakers earlier this month for exaggerating the dangers of leaving the EU, though the central bank does not have an official position on whether Britain should remain.

The BoE's Financial Policy Committee, which Carney chairs, said on Tuesday that "heightened and prolonged uncertainty ... could lead to a further depreciation of sterling and affect the cost ... of financing for a broad range of UK borrowers."

Sterling has fallen to a seven-year low against the dollar since the start of the year and markets price in extra volatility for around the date of the referendum.

While much of the BoE's concern about Brexit was familiar, less expected was its decision to tighten credit checks on landlords and move ahead with a disputed plan to vary the size of banks' risk buffers over the economic cycle.

The immediate impact of both measures is likely to be modest, but they indicate a policy direction and may have a greater effect over time if the Bank expands them.

Buy-to-let lending has boomed in Britain in recent years, and is now worth 200 billion pounds ($286 billion).

However, Prime Minister David Cameron's government has been keen to boost individual home ownership and is raising taxes on the sector, leading the BoE to fear that banks' plans to raise gross lending to landlords by 20 percent a year might come at the cost of credit standards.

TOUGHER RULES MAY COME

As a result, the BoE has recommended banks ensure they take new tax rules into account when assessing loan applications, check landlords' incomes properly and ensure rental income will be enough to cover a mortgage rate of at least 5.5 percent.

The BoE said most lenders already had similar rules, but that it expected enforcing the rules universally would reduce the number of mortgage approvals in three years' time by 10-20 percent compared with doing nothing.

"It's timid," Capital Economics's Paul Hollingsworth said, adding much of the gross lending growth was existing landlords switching mortgages rather than new lending. "They are doing a lot of red flag waving rather than taking some serious action."

The Council for Mortgage Lenders said the measures did not appear to curtail existing market practices.

Tougher rules may come later, however, if finance minister George Osborne follows through with plans to give the BoE more fine-grained powers over buy-to-let mortgage terms, similar to powers it has already used on residential mortgages.

The BoE also said it would start to raise the new cyclical element of its capital framework, which rises and falls as the risk of imprudent lending changes over the business cycle, after policymakers failed to reach agreement in December.

This new buffer sits on top of the minimum and is built up in good times to stop credit supply becoming too frothy, and tapped when the economy weakens and some loans turn sour.

Banks will have to hold a 0.5 percent counter-cyclical buffer by the end of March 2017. That is equivalent to a relatively modest 5 billion pounds for the banking system as a whole and halfway towards its neutral level of 1 percent.

Moreover, for larger banks the bulk of the increase to 0.5 percent will be cancelled out by a cut in another capital requirement.

"While a big symbolic step, there is unlikely to be a large impact," HSBC economist Simon Wells said.

($1 = 0.7005 pounds)

Reference: DAVID MILLIKEN

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Asian shares slump as Yellen awaited

A man looks at an electronic board showing the graphs of the recent fluctuations of the exchange rate between Japanese yen against the U.S. dollar (R) and the graphs of the Japan's Nikkei average outside a brokerage in Tokyo, Japan, February 29, 2016. REUTERS/Yuya Shino

Asian shares struggled to find their footing on Tuesday and the dollar clawed back ground lost after downbeat U.S. economic data contributed to an uninspiring session on Wall Street.

Investors awaited Federal Reserve Chair Janet Yellen's speech at 1620 GMT for fresh signals on the outlook for U.S. interest rate hikes, after a chorus of hawkish comments from other Fed officials.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS slipped about 0.4 percent after wavering for most of the early session.

Australian shares shed 1.4 percent, in their first day of trade following the long Easter weekend that also closed markets in many European countries.

Japan's Nikkei .N225 skidded 0.5 percent as the Japanese fiscal year draws to a close at the end of this month, with the mood not helped by mixed economic data released before the market opened.

"The selling that we're seeing this morning has been pretty tepid," said Nicholas Smith, a strategist at CLSA.

Japanese household spending rose 1.2 percent in February from a year earlier in price-adjusted real terms, in contrast with the median forecast for a 1.5 percent fall, partly because of the extra Leap Year day. But the country's jobless rate inched up to 3.3 percent, and retail sales fell short.

U.S. data released on Monday also showed signs of weakness, with consumer spending barely rising last month and inflation retreating. That suggested the Federal Reserve could remain cautious about raising interest rates this year even as the labour market rapidly tightens.

Against the yen, the dollar was steady at 113.49 yen JPY=, though below its overnight high of 113.69. The euro was also steady at $1.1197 EUR=.

The dollar index, which tracks the U.S. currency against a basket of rivals, was nearly flat at 95.976 .DXY, below Monday's nearly two-week high of 96.399.

Speculation of more monetary stimulus and talk that Japanese Prime Minister Shinzo Abe might delay an unpopular sales tax hike and call a snap election kept the yen under pressure, though Abe insisted on Tuesday that neither option was planned.

Despite the divergence in monetary policy expectations, with the Fed still seen on track to hike rates this year and the Bank of Japan expected to take additional stimulus steps, the yen remained hamstrung by uncertainty over whether the BOJ will cut interest rates deeper into negative territory.

"We're still experiencing the hangover from the BOJ's negative interest rate policy, which is driving a lot of safe-haven flows," said Jennifer Vail, head of fixed-income research at U.S. Bank Wealth Management in Portland, Oregon.

"The market is waiting to see if a further move into negative territory is going to be part of policymakers' toolbox," she said.

Crude oil extended overnight losses. Brent LCOc1 was down 0.7 percent at $40.01 a barrel, while U.S. crude CLc1 fell 0.6 percent to $39.16.

Gold dipped slightly on Tuesday, but held above a one-month low on a softer dollar and weak U.S. economic data that dented expectations of an immediate hike in U.S. interest rates.

Spot gold XAU= was down 0.2 percent at $1,218.70 an ounce, holding above a one-month low as the weak U.S. data dented expectations of an immediate hike to U.S. interest rates.

Reference: LISA TWARONITE

Monday, 28 March 2016

Cost of hedging pound soars to near six-year highs on Brexit worries

An employee is seen walking over a mosaic of pound sterling symbols set in the floor of the front hall of the Bank of England in London, in this March 25, 2008 file photograph.  REUTERS/Luke Macgregor/files

The cost of hedging against sharp swings in sterling surged to its highest in almost six years on Wednesday, three months before a June referendum on Britain's European Union membership, and coinciding with narrowing bookmaker odds on a vote to leave.

Sentiment towards the pound has soured this week after the resignation of a senior pro-"Brexit" minister and criticism of Chancellor George Osborne and his 2016/17 budget.

Sterling came under more selling pressure on Tuesday on a view that the deadly attacks in Brussels would boost the campaign to take Britain out of the EU.

Implied volatility on three-month sterling/dollar options, covering the period that includes the "Brexit" referendum on June 23, soared to 14.50, the highest level since mid-2010.

Three-month euro/sterling equivalents rose to 13.70, the highest since April 2009, according to Reuters data.

Options give holders the right to buy a currency at a pre-set exchange rate at a specific future date and are used either as protection against big swings in the rate or as a way to speculate on such moves taking place.

The three-month sterling/dollar risk reversals, a gauge of demand for options on a currency rising or falling, showed an increasing bias for sterling weakness against the dollar, trading at 4.5 vols - a measure of volatility - compared with 2.4 vols in favor of sterling weakness on Tuesday.

According to Reuters charts, these were levels last seen in the wake of the May 2010 general election, which resulted in a coalition government, and show a bigger skew in favor of sterling weakness than seen during the global financial crisis in 2008.

"Implied volatility on three-month options now captures the June 23 date. These are clean instruments to express concerns regarding the vote," said Ned Rumpeltin, European head of currency strategy at TD Securities.

"Brexit is a very big deal for the UK economy and if Britain leaves the EU, it could lead to a significant devaluation of the pound."

In the spot market, sterling fell below $1.42 to trade at $1.4160, down 0.3 percent on the day, as a new opinion poll showed that those wanting to leave the EU edging ahead in a tight race.

The ICM opinion poll of 2,000 people, carried out on March 18-20, showed support for the "in" campaign on 41 percent while that for the "out" camp stood at 43 percent.

Bookmakers' odds on Britain choosing to leave the EU have tightened in the past few days, having started to narrow after the resignation of Work and Pensions Secretary Iain Duncan Smith on Friday which he said was over welfare cuts proposed in last week's budget. The government said on Monday the planned cuts would not go ahead.

The resignation highlighted a deepening rift within the ruling Conservative Party.

"We see the pound staying under pressure ahead of the 23 June Brexit referendum," Hans Redekar, head of currency strategy at Morgan Stanley said.

"The terrorist attack in Brussels and the Conservative Party looking more divided than in recent years do not bode well ahead of the vote."

Reference: ANIRBAN NAG

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Economic data could put stocks back on higher path

A Wall Street sign is seen in Lower Manhattan in New York, January 20, 2016. REUTERS/Mike Segar

The March U.S. employment report and other key economic numbers next week could help U.S. stocks resume their recent winning path as long as that data hits the sweet spot: Not strong enough to add to worries about further interest rate hikes, yet not weak enough to cause concern about a recession.

Data on Friday, a market holiday, showed the U.S. economic growth slowdown in the fourth quarter was not as sharp as previously estimated.

Reports on the housing market could also draw investors' attention given recent sharp gains in homebuilder stocks.

Major indexes remain well above their 2016 lows, thanks to evidence of a reviving U.S. economy and a sharp rebound in oil prices, even as stocks broke a five-week streak of gains on Thursday, their last trading day before a long holiday weekend.

While the volatility that marked the start of the year has diminished and many strategists have adopted a cautiously optimistic outlook, the market seems to have paused.

The Friday U.S. data showed that even as gross domestic product increased at a 1.4 percent annual rate instead of the previously reported 1.0 percent pace, corporate profits from current production fell $159.6 billion in the fourth quarter.

A catalyst for stocks could come from a rebound in corporate earnings.

"What we've seen over the past couple of weeks is really just a return to normal," said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts.

Stocks' next big move will largely depend on earnings, he said. "We're kind of in a show-me phase, and it's got to be earnings."

First-quarter earnings estimates have collapsed since the start of the year, and in some cases may have fallen too far, possibly setting the stage for an upbeat profit season, McMillan and other market watchers said.

U.S. earnings are expected to be down for a third consecutive reporting period, Thomson Reuters data show. Analysts now expect a first-quarter earnings decline of 6.9 percent - which would be the biggest drop since the third quarter of 2009 - sharply below the 2.3 percent gain they had been projecting as recently as Jan. 1.

Stabilizing oil prices could at least slow the rate at which future earnings estimates fall, McMillan said.

Recent weakness in the U.S. dollar could help, as well. U.S. multinationals were hit hard by sharp gains in the U.S. dollar last year but the dollar index .DXY is down 2.6 percent so far in the first quarter.

"We're seeing the strong dollar trade unwinding a bit, and that has helped those beaten-down areas really take off," said Adam Sarhan, chief executive of Sarhan Capital in New York, referring to commodity-related shares.

Some early results are trickling in, but the earnings season is still weeks away for the bulk of S&P 500 .SPX companies.

Next week's economic data could also bolster or hurt the market, depending on how it signals the next step for Federal Reserve policy.

Comments from Fed officials this week, hinting at a slightly more aggressive rate hike path than investors have been expecting, dampened some enthusiasm for stocks. Strong economic data could signal a more aggressive Fed - considered a negative for stocks.

For next Friday's jobs report, a Reuters poll shows non-farm payrolls expected to have increased by 200,000 jobs in March, which would be below February's gain of 242,000 jobs.

Housing data will include pending home sales as well as the S&P/Case-Shiller price index.

Next week also marks the end of the quarter, one of the most turbulent in the market's history. The S&P 500 is down just 0.7 percent for the quarter now, having recovered much of the first few weeks' steep losses.

Reference: CAROLINE VALETKEVITCH

Friday, 25 March 2016

How to Trade Bonds and Bank Bills


Basic Trading Concepts Defined


Bank Bill Rates and Government Bonds

As well as stock trading, it can be useful to consider trading fixed income securities such as bank bills, government notes and government bonds (e.g. US Treasury notes and bonds). The difference is that bank bills have a maturity of less than one year, government notes are between one and ten years, and government bonds are greater than ten years. The definitions of each can be found externally, but when trading a futures contract over them, their coupons etc become less relevant.

Bank Bill Rate

The first important thing is understanding why the price that you see in your trading screen is what it is. Bank bills are quoted as 0.95 (or 9550), and this is because the expected interest rate when that futures contract expires is 5% (one minus the price quoted in the screen equals that expected rate). So if rates are currently 4%, and the futures expiring next month are priced at 0.9575, traders expect interest rates to rise to 4.25% upon the next announcement (rates are normally increased or decreased 0.25% at a time). An overview of bank bill futures may look like this:

Expiry month
Price
Implied rate
Explanation
February
0.961
3.9%
Slight chance of cut from 4% to 3.75% in Feb
March
0.965
3.5%
Two rate cuts expected by March
June
0.96
4%
Rates to be back to 4% by June
September
0.958
4.2%
Good chance of rate rise to 4.25% by September
December
0.955
4.5%
Two rate rises by December

Government Bonds
Government notes and bonds are also traded through futures contracts, and their price is dependent on their current yield to maturity (rather than current interest rates). To some extent, the yield reflects the average interest rate over the life of the bond. The futures contracts still expire periodically, but these can be rolled over (replaced with a new contract), unlike bank bills where the price does not change in between the interest rate announcement and the expiry of the contract later that month. With the bank bill, you would simply purchase a new contract expiring in a future month, and trade based on how you think interest rate expectations will change in between now and the next announcement.

The prices of all of these contracts rise when interest rate expectations fall, i.e. during recessions with low inflation, and the prices fall when expectations rise, i.e. during periods of strong economic growth and higher inflation. This inverse relationship between prices and yields is the most important thing to remember when trading them. Additionally, the longer the note/bond has until maturity (e.g. 20 or 30 year bond), the greater the change in interest rate expectations will change the price. This means that 30 year bonds change the most when economic data changes rate views, and one year notes change the least. This is known as duration, which is a topic that can be explored in-depth at another time.

Trading these interest rate securities can be based on whether interest rates will be held/cut/raised, economic data will be good/bad or whether a sudden surge of demand will force prices to increase. They offer, as their name suggests, far better exposure to rate changes and expectations that stocks do, and should therefore be considered in most trading portfolios.

Reference: David Pimm

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Dollar gains weigh on oil, stocks

Traders work on the floor of the New York Stock Exchange (NYSE) March 16, 2016. REUTERS/Brendan McDermid

Global equity markets and commodities were under pressure on Thursday as the dollar continued its recent string of gains and yet another Federal Reserve official talked up the chance of more than one hike in U.S interest rates this year.

The dollar .DXY was up 0.22 percent at 96.257 against a basket of major currencies, its fifth straight day of gains. The streak would be the longest run for the dollar in nearly a year and give the greenback its first weekly rise in a month.

The gains were extended after St. Louis Fed President James Bullard joined a chorus of officials on Wednesday in highlighting the chance of at least two rate rises this year, with the first perhaps as soon as April.

"I was surprised to hear all this chatter from other Fed directors, claiming that the current policy is too dovish," said Stephen Massocca, chief investment officer at Wedbush Equity Management LLC in San Francisco.

The gains in the dollar continued to weigh on oil prices, with both Brent LCOc1 and U.S. crude CLc1 back under $40 a barrel, with Brent on track for its biggest weekly drop in two months. Record crude stockpiles in the U.S. also dragged oil lower.

The Dow Jones industrial average .DJI fell 43.9 points, or 0.25 percent, to 17,458.69, the S&P 500 .SPX lost 6.48 points, or 0.32 percent, to 2,030.23 and the Nasdaq Composite .IXIC dropped 1.20 points, or 0.03 percent, to 4,767.66.

U.S. crude CLc1 slumped 2.4 percent at $38.84 a barrel, after sliding 4 percent on Wednesday. Brent LCOc1 was last down 1.6 percent at $39.84.

The rally in crude prices had been a big factor in the equity run higher in recent weeks, helping the S&P 500 .SPX climb more than 12 percent off its Feb. 11 low.

The oil pullback has pressured U.S. and European equities this week, with both the pan-European FTSEurofirst 300 index .FTEU3 and S&P 500 on pace for the worst weekly drop in six.

MSCI's index of world shares down 0.75 percent on the session, was down 1.6 percent for the week.

"It is amazing how correlated everything is to oil. That sort of becomes a self-fulfilling prophecy, that oil is going down so people sell stocks," said Massocca.

The stronger dollar and softer oil prices were reflected in U.S. durable goods orders, which fell in February, while weekly jobless claims continued to point to a solid labor market.

Gold XAU= edged up to $1,220.95 an ounce, after hitting its lowest since late February at $1,212.20 but remained on track for its biggest weekly drop since November.

Copper, down more than 2 percent for the week, was off 0.38 percent at $4,9312 a tonne.

Benchmark U.S. 10-year notes US10YT=RR were last down 3/32 in price to yield 1.8842 percent, up from 1.875 percent Wednesday.

Reference: CHUCK MIKOLAJCZAK

Thursday, 24 March 2016

How to Place a Stop Loss & Profit Target


Basic Trading Concepts Defined

The most logical and safest place to put your stop loss on a pin bar setup is just beyond the high or low of the pin bar tail. So, in a downtrend like we see below, the stop loss would be just above the tail of the pin bar, when I say “just above” that can mean about 1 to 10 pips above the high of the pin bar tail. The stop loss placement below is considered the ‘classic’ stop loss placement for a pin bar setup.



Inside bar trading strategy stop placement:

The most logical and safest place to put your stop loss on an inside bar trade setup is just beyond the mother bar high or low.





Counter-trend price action trade setup stop placement:

For a counter-trend trade setup, we want to place our stop just beyond the high or low made by the setup that signals a potential trend change. Look at the image below, we can see a downtrend was in place when we got a large bullish pin bar reversal signal. Naturally, we would want to place our stop loss just below the tail of that pin bar to make the market show us that we were wrong about a bottom being in place. This is the safest and most logical stop placement for this type of ‘bottom picking’ price action trade setup. For an uptrend reversal the stop would be placed just beyond the high of the counter-trend signal.




Trading range stop placement:

We often see high-probability price action setups forming at the boundary of a trading range. In situations like these, we always want to place our stop loss just above the trading range boundary or the high or low of the setup being traded…whichever is further out. For example, if we had a pin bar setup at the top of a trading range that was just slightly under the trading range resistance we would want to place our stop a little higher, just outside the resistance of the trading range, rather than just above the pin bar high. In the chart below, we didn’t have this issue; we had a nice large bearish pin bar protruding from the trading range resistance, so the best placement for the stop loss on that setup is obviously just above the pin bar.



Stop placement in a trending market:

When a trending market pulls back or retraces to a level within the trend, we usually have two options. One is that we can place the stop loss just above the high or low of the pattern, as we have seen, or we can use the level and place our stop just beyond the level. We can see an example of this in the chart below with the fake trading strategy protruding up past the resistance level in the downtrend. The most logical places for the stop would be just above the false-break high or just above the resistance level.



Note on placing stops:
So, let’s say we have a price action trading strategy that’s very close to key level in the market. Ordinarily, the ideal stop placement for the price action setup is just above the high of the setup’s tail or the low of the setup’s tail, as we discussed above. However, since the price action setup tail high or low is very close to a key level in the market, logic would dictate that we make our stop loss a little bit larger and place it just beyond that key level, rather than at the high or low of the setup’s tail. This way, we make the market violate that key level before stopping us out, thus showing us that market sentiment has changed and that we should perhaps be looking for trades in the other direction. This is how you place your stops according to the market structure and logic, rather than from emotions.


Reference: Nial Fuller

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As ECB ramps up QE, its stake in government bond markets may double

The head quarter of the European Central Bank is illuminated with a giant euro sign at the start of the ''Luminale, light and building'' event in Frankfurt, Germany, March 12, 2016. REUTERS/Kai Pfaffenbach

Expanding QE could see the European Central Bank owning up to 25 percent of the 7 trillion euro government bond market, analysts estimate, exacerbating worries about bond scarcity and thin market conditions.

It could also hold as much as 10 percent of top-rated corporate debt in the euro area after announcing this month it will include bonds of investment-grade non-financial firms in its asset purchase scheme from the second quarter. The ECB has said it will increase its bond-buying by 20 billion euros to 80 billion euros per month from April.

These measures, aimed at boosting growth and inflation in the euro zone, look set to squeeze already tight bond market liquidity and push yields lower.

"If you assume that the ECB will own 22-25 percent of the (government) bond market, then the free float of bonds available goes down," said Nicolas Forest, global head of fixed income management at Candriam Investors Group. "The fact is that quantitative easing has deteriorated bond market liquidity."

Analysts estimate the bulk of the additional purchases will be in the larger sovereign market, just as budget deficits and debt issuance have fallen from post-crisis peaks.

The central bank owns roughly 10 percent of the euro zone government bond market and that will probably rise to 20 percent next year, according to JPMorgan Asset Management.

Commerzbank strategist Rainer Guntermann said the ECB currently spends about 44 billion euros a month on government and agency debt and that this will rise to about 60 billion when total monthly purchases rise to 80 billion euros.

Since the ECB is only expected to start buying corporate bonds by the end of June, the interim period is expected to see purchases focused on government bonds.

BNP Paribas expects net government bond issuance, once ECB buying is taken into account, to fall a further 132 billion euros to minus 387 billion this year, pressuring yields lower.

And while pressure on the market has eased as short-dated bonds have rejoined the eligible pool of assets after the ECB cut its deposit rate to minus 0.40 percent, bonds are likely to remain scarce for both the ECB and investors.

"The focus of this debate has been Germany, and how long the ECB can keep buying German government bonds according to the ECB capital key," BNP Paribas said in a note, referring to limits on the share of a country's bonds the ECB can buy.

NEW KID ON CORPORATE BLOCK

The prospect of the ECB buying corporate debt, meanwhile, has pushed yields down sharply and unleashed a wave of issuance.

With details of the corporate bond-buying scheme still unclear, analysts' estimates on the market impact are based on assumptions such as the exclusion of euro-denominated bonds issued by U.S. firms and whether the financial arms of multi-nationals will be included.

Analysts expect the ECB to buy 3-10 billion euros a month of corporate debt.

"Assuming they'll stop the QE programme in March 2017, our guess is that they might end up owning 8-10 percent of outstanding corporate bonds," said Martin Van Vliet, senior rates strategist at ING.

ING estimates outstanding investment-grade corporate debt, excluding euro-denominated bonds from non-euro zone corporates, will be worth around 1.2 trillion euros in January 2018.

RBC expects the ECB to buy around 5 billion euros a month of corporate debt, amounting to about 50 billion euros by March 2017.

"With the ECB in the market and liquidity still elusive, we reckon that the landscape will be one of a constant grind tighter in spreads," RBC chief European macro strategist Peter Schaffrik said.

Reference: DHARA RANASINGHE

Wednesday, 23 March 2016

Dollar rises on Fed talk, energy weighs on stocks

A trader works on the floor of the New York Stock Exchange (NYSE) March 22, 2016. REUTERS/Brendan McDermid

Global equity markets fell and the dollar advanced on Wednesday as investors attempted to gauge the path of interest rates by the U.S. Federal Reserve after a series of hawkish comments by Fed officials this week.

The dollar .DXY was up 0.48 percent to 96.104 against a basket of major currencies as it moved towards its first weekly gain in four.

Last week, the Fed cut in half the number of rate hikes it predicts for the rest of this year to two, weakening expectations for a move in either April or June.

But in the past two days, several officials have expressed views for more hikes regardless of the volatility that has been the hallmark of financial markets this year.

"The focus has been on all these Fed guys coming out, really in defiance of (Fed Chair) Janet Yellen," said Ken Polcari, Director of the NYSE floor division at O’Neil Securities in New York.

"The dollar is reacting because, if these guys are calling for a rate hike in April, then the dollar is going to move higher. If the dollar is going to move higher it is going to put pressure on everything else."

Philadelphia Fed President Patrick Harker, who said on Tuesday the Fed should consider another rate hike as early as next month, is scheduled to speak again at 1730 EDT.

St. Louis Fed President James Bullard, a voter on U.S. monetary policy this year, said on Bloomberg TV on Wednesday he would like to see further stabilization in inflation expectations.

The stronger dollar helped dampen demand for oil while a preliminary report from an industry group showed a higher-than-expected stock build rekindled worries of a glut.

The weakness in energy names also pushed helped push stocks lower in the U.S. and Europe. The STOXX Europe 600 oil and gas index .SXEP and the S&P energy index .SPNY were both off 1.2 percent, with the latter the worst performing of the 10 major S&P sectors.

The FTSEuroFirst 300 index .FTEU3 of leading shares was down 0.18 percent at 1,335.76. MSCI's index of world shares lost 0.57 percent.

The Dow Jones industrial average .DJI fell 26.26 points, or 0.15 percent, to 17,556.31, the S&P 500 .SPX lost 5.32 points, or 0.26 percent, to 2,044.48 and the Nasdaq Composite .IXIC dropped 31.22 points, or 0.65 percent, to 4,790.44.

Gold XAU= also weakened in the face of the stronger dollar, down 2.4 percent to $1,217.90 after hitting a low of $1,215.10, its lowest level since Feb. 26.

Britain's pound slumped 0.56 percent to $1.4126, with rising concerns that the attacks in Brussels would bolster the campaign for a vote to leave the European Union in June's "Brexit" referendum.

It was back on the defensive against the dollar on Wednesday. Derivatives allowing investors to insure themselves against sharp moves in sterling exchange rates ahead of that vote reached their highest since 2010 elections.

Benchmark U.S. 10-year notes US10YT=RR were last up 4/32 in price to yield 1.921 percent, down from 1.94 percent on Tuesday.

Reference: CHUCK MIKOLAJCZAK

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Stocks dip, safe-haven assets climb after Brussels attacks

Traders work on the floor of the New York Stock Exchange (NYSE) March 22, 2016. REUTERS/Brendan McDermid

Global equity markets fell on Tuesday while safe-haven gold and government bonds were in demand after attacks on the airport and a rush-hour metro train in Brussels triggered security alerts across western Europe.

At least 30 people were killed in attacks on Brussels airport and the train in the Belgian capital on Tuesday.

Travel sector stocks including airlines and hotels were among the hardest-hit, although stocks had managed to recover from sharper losses and bonds and gold eased back from their earlier highs.

On Wall Street, the NYSEArca airline index .XAL lost 1.2 percent and was on track for its first decline in five sessions. Cruise ship operators Royal Caribbean (RCL.N) and Carnival Corp (CCL.N) were among the worst performers on the S&P 500, down more than 3 percent each.

"So far we are holding up pretty well with some emphasis on safe haven," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.

"It looks like the market impact will pass pretty quickly, depending on follow-up obviously. If we see additional attacks in coming days, that changes the equation."

› Ride to the Bottom: U.S. energy workers hit hard by company stock bets
The Dow Jones industrial average .DJI fell 23.35 points, or 0.13 percent, to 17,600.52, the S&P 500 .SPX lost 0.48 points, or 0.02 percent, to 2,051.12 and the Nasdaq Composite .IXIC added 7.79 points, or 0.16 percent, to 4,816.66.

The FTSEuroFirst 300 index .FTEU3 of leading shares was down 0.43 percent at 1,334.02. Belgian stocks .BEL20 were flat after having been down as much as 1.4 percent. MSCI's index of world shares .MIWD00000PUS was 0.24 percent lower.

In Europe, the STOXX Europe 600 Travel & Leisure index .SXTP was down 1.9 percent. Shares in major European airlines like Ryanair (RYA.I) and Air France-KLM (AIRF.PA) also fell.

Gold XAU= rose 0.75 percent to $1,252.56 an ounce having been up around twice that earlier.

Benchmark U.S. 10-year notes US10YT=RR were last up 7/32 in price to yield 1.8962 percent, down from 1.921 percent on Monday. The yields earlier fell as low as 1.879 percent.

In currency markets the Japanese yen, regarded by investors as a shelter from turbulence, rose across the board, notably against the euro. The euro was last down 0.29 percent at 125.46 yen EURJPY= and the dollar was down 0.2 percent at 111.70 yen JPY=.

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The single currency euro EUR= fell 0.1 percent against the dollar to $1.1227. The dollar .DXY was up 0.2 percent to 95.493 against a basket of major currencies.

Volume is expected to continue to lessen ahead of the Easter holiday and investors were beginning to think about cashing in on a steep rally in stocks over the last few weeks.

The move toward safe-haven assets dented demand for oil, with U.S. crude futures off 0.1 percent to $41.46 a barrel while Brent rebounded from a low of $40.97 to last trade up 0.29 percent at $41.65.

Reference: CHUCK MIKOLAJCZAK

Tuesday, 22 March 2016

Exclusive: China central bank to Fed: A little help, please?

A man walks past the Federal Reserve in Washington, December 16, 2015. REUTERS/Kevin Lamarque

Confronted with a plunge in its stock markets last year, China's central bank swiftly reached out to the U.S. Federal Reserve, asking it to share its play book for dealing with Wall Street's "Black Monday" crash of 1987.

The request came in a July 27 email from a People's Bank of China official with a subject line: "Your urgent assistance is greatly appreciated!"

In a message to a senior Fed staffer, the PBOC's New York-based chief representative for the Americas, Song Xiangyan, pointed to the day's 8.5 percent drop in Chinese stocks and said "my Governor would like to draw from your good experience."

It is not known whether the PBOC had contacted the Fed to deal with previous incidents of market turmoil. The Chinese central bank and the Fed had no comment when reached by Reuters.

In a Reuters analysis last year, Fed insiders, former Fed employees and economists said that there was no official hotline between the PBOC and the Fed and that the Chinese were often reluctant to engage at international meetings.

The Chinese market crash triggered steep declines across global financial markets and within a few hours the Fed sent China's central bank a trove of publicly-available documents detailing the U.S. central bank's actions in 1987.

Fed policymakers started a two-day policy meeting the next day and took note of China’s stock sell-off, according the meeting’s minutes. Several said a Chinese economic slowdown could weigh on America.

Financial market contagion from China was one of the reasons cited by the Fed in September when it put off a rate hike that many analysts had expected, a sign of how important China has become both as an industrial powerhouse and as a financial market.

NO SECRETS

The messages, which Reuters obtained through an Freedom of Information Act request, show how alarmed Beijing has become over the deepening financial turmoil and offer a rare insight into one of the least understood major central banks.

The exchanges also show that while the two central banks have a collegial relationship, they might not share secrets even during a crisis.

"Could you please inform us ASAP about the major measures you took at the time," Song asked the director of the Fed's International Finance Division, Steven Kamin in the July 27 email.

The message registered in Kamin's account just after 11 a.m. in Washington. Kamin quickly replied from his Blackberry: "We'll try to get you something soon."

What followed five hours later was a 259-word summary of how the Fed worked to calm markets and prevent a recession after the S&P 500 stock index tumbled 20 percent on Oct. 19, 1987.

Kamin also sent notes to guide PBOC officials through the many dozens of pages of Fed transcripts, statements and reports that were attached to the email.

All of the attached documents had long been available on the Fed's website and it is unclear if they played a role in shaping Beijing's actions.

Kamin's documents detail how the Fed began issuing statements the day after the market crash, known as Black Monday, pledging to supply markets with plenty of cash so they could function.

By the time Song wrote to Kamin, China had spent a month fighting a stock market slide and many of the actions taken by the PBOC and other Chinese authorities shared the contours of the Fed's 1987 game plan.

DESPERATE MEASURES

The July 27 plunge in the Shanghai Composite Index was the biggest one-day fall since 2007 and by then the market had lost nearly a third of its value over six weeks.

China's central bank had already cut interest rates on June 27 in similar fashion to the Fed's swift move to ease short-term rates in 1987.

Song told Kamin the PBOC was particularly interested in the details of the Fed's use of repurchase agreements to temporarily inject cash into the U.S. banking system in 1987.

The PBOC had increased cash injections in June and ramped up repurchase agreements in August as stocks continued to slide. The PBOC also eased policy on Aug. 11 by allowing a 2 percent devaluation in the yuan currency. (Graphic: here)

As Song and Kamin exchanged messages on July 27 and 28, other Chinese authorities were busy trying to contain the crash.

China's securities regulator said on July 27 it was prepared to buy shares to stabilize the stock market and that authorities would deal severely with anyone making "malicious" bets that stocks would fall.

In 1987, the Fed contacted banks directly and encouraged them to meet "legitimate funding needs" of their customers, according to Kamin's email to Song.

In addition to its pledges and cajoling, the U.S. central bank in 1987 eased collateral restrictions on Wall Street and tried to calm markets by intervening in trading earlier than normal. The U.S. economy continued to grow, eventually entering recession in 1990.

The central bank in Beijing does not have as free a hand to conduct policy as does the Fed, which answers to the U.S. Congress but operates independently from the administration.

The PBOC governor Zhou Xiaochuan implements policies ultimately decided by political leaders in Beijing and lacks the authority to lead debate or shed light on decision-making.

China's vice finance minister told Reuters last year Chinese supervisors needed to learn from countries like the United States.

Premier Li Keqiang said last month China's regulators did not respond sufficiently but China had fended off systemic risks.

U.S. central bankers say their relative transparency helps their effectiveness and legitimacy, but open records laws also make Fed officials cautious.

Reference: JASON LANGE

Dollar perks up with Fed hike seen back in play

A U.S. one-hundred dollar bill (C) and Japanese 10,000 yen notes are spread in Tokyo, in this February 28, 2013 picture illustration. REUTERS/Shohei Miyano

The dollar held firm on Tuesday, having extended its rebound for a second session after two Federal Reserve officials supported the case for a hike in interest rates sooner rather than later.

The dollar index last traded at 95.352 .DXY, pulling further away from a five-month trough of 94.578 set on Friday.

Atlanta Fed President Dennis Lockhart said there was sufficient economic momentum to justify a further rate hike "possibly as early as the meeting scheduled for end of April".

San Francisco Federal Reserve Bank President John Williams told Market News International that April or June would be "potential times for a rate hike."

Their comments came a week after the Fed kept rates unchanged and cut in half the number of projected hikes to a mere two this year - a move seen by many as dovish.

While dollar bulls were heartened by the latest comments, the reaction in fed funds futures <0#FF:> was muted as some investors held back ahead of speeches by more dovish Fed officials including Chicago Fed President Charles Evans.

Against the yen, the greenback popped back above 112.00 yen JPY=, recovering from a 16-1/2 month trough of 110.67 plumbed last week.

In a sign that market players are reducing wariness about the dollar's further fall beyond the low, implied volatilities on the dollar/yen options are falling, with three-month volatility JPY3MO= flirting with a six-week low around 9.5 percent.

"There are people out there who had thought the dollar could fall below 110 yen and are now being forced to cover their short positions," said Masatoshi Omata, senior client manager of market trading at Resona Bank.

The euro eased to $1.1246 EUR=, recoiling from Thursday's one-month high of $1.1342.

Investors are also keen to hear from Reserve Bank of Australia (RBA) Governor Glenn Stevens who will address a conference in Sydney later in the day.

"We suspect, however, the real focus for market participants will be on whether the governor takes the opportunity to jawbone the currency," said Rodrigo Catril, FX strategist at National Australia Bank.

The Australian dollar has been on a tear, putting on nearly 6 U.S. cents in a few short weeks to reach an 8-1/2 month high of $0.7681. It has since drifted off to $0.7571.

The RBA has repeatedly said a weaker Aussie dollar would help bolster economic growth. But with every central bank around the world wanting a lower exchange rate, the RBA is keenly aware that not everyone can win.

Reference: IAN CHUA

Monday, 21 March 2016

Stocks fall, dollar gains on Fed comments

Traders work on the floor of the New York Stock Exchange (NYSE) March 16, 2016. REUTERS/Brendan McDermid

Global equity markets slipped on Monday as the dollar moved higher and U.S. Treasury yields rose on bullish inflation projections from two Federal Reserve officials.

Richmond Fed President Jeffrey Lacker said U.S. inflation is likely to accelerate in coming years and move toward the Federal Reserve's 2 percent target while San Francisco Fed President John Williams told Market News International he would advocate for another interest rate hike as early as the April meeting.

"There were some hawkish comments from a couple of Fed officials, on the margin pointing to the potential for the Fed to continue with their new path of normalization," said Ian Lyngen, senior government bond strategist at CRT Capital in Stamford, Connecticut.

Atlanta Fed President Dennis Lockhart is set to speak on the economic outlook and monetary policy at 1240 EDT.

The dollar .DXY rose 0.16 percent to 95.234 against a basket of major currencies. The greenback had fallen for three straight weeks, a decline of 3.1 percent.

The dollar fell last week when U.S. Federal Reserve policymakers revised down the number of times they expect to raise interest rates this year to two from four.

Benchmark 10-year notes US10YT=RR were last down 10/32 in price to yield 1.9067 percent, up from 1.87 percent on Friday.

The stronger dollar weighed on European equities, with the pan-European FTSEurofirst stock index .FTEU3 down 0.5 percent at the start of a week shortened by the Easter break.

U.S. stocks also dipped slightly, with investors looking for fresh catalysts after a five-week rally that pushed the S&P 500 into positive territory for the year.

The Dow Jones industrial average .DJI fell 42.33 points, or 0.24 percent, to 17,559.97, the S&P 500 .SPX lost 5.52 points, or 0.27 percent, to 2,044.06 and the Nasdaq Composite .IXIC dropped 8.80 points, or 0.18 percent, to 4,786.84.

MSCI's index of world shares .MIWD00000PUS was 0.36 percent lower.

Crude oil prices were weaker, but off early lows, with Brent LCOc1 last down 0.1 percent to $41.16 and WTI CLc1 down 0.08 percent at $39.47 a barrel as the market digested news of a modest rise in U.S. drilling activity. Uncertainty lingered, however, over the outcome of a meeting of the world's major exporters next month to discuss freezing output.

Gold XAU= fell 0.78 percent at $1,244.96 an ounce as the dollar advanced, its third straight decline, but the metal was underpinned by expectations that the ultra-low interest rate environment will persist on a global level.

Copper CMCU3 edged up 0.19 percent to $5,051.50 a tonne on expectations of stronger demand in top consumer China after a jump in imports of refined copper by the world's second-largest economy.

Sterling GBP= fell 0.73 percent to $1.4373 as worries about Prime Minister David Cameron's ability to keep his Conservative party together and keep Britain in the European Union jumped after Iain Duncan Smith, a leading voice for the UK to exit the EU, resigned from the cabinet late on Friday.

Reference: CHUCK MIKOLAJCZAK

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Eyes on the dollar with stocks out of the hole

A Wall Street sign is seen in Lower Manhattan in New York, January 20, 2016. REUTERS/Mike Segar

U.S. stock market investors will be watching currency markets next week for signs that the recent, related trends of a weakening dollar and a strengthening stock market will continue.

After a historically bad start to the year, the Dow and S&P 500 both moved into positive territory this week, in part on expectations that a 3-week move down by the dollar could buoy corporate profits and share prices.

Many investors had been concerned over the dollar's strength, as it can crimp exports, earnings and economic growth. Between Sept. 17 and mid-February, the dollar had risen more than 2 percent against a basket of major currencies, as the U.S. Federal Reserve embarked on a tighter policy while other central banks were easing.

But the S&P 500 .SPX has rallied about 9 percent off its Feb. 11 low to pull the index into positive territory for the first time this year, fueled in part by a drop in the dollar .DXY, which has fallen more than 3 percent over the last three weeks.

The dollar's losses accelerated this week in the wake of the Fed's policy statement on Wednesday, which cut projections for the number of interest rate hikes this year in half. The dollar suffered its biggest two-day drop in six weeks following the announcement.

That drop helped propel sharp gains in oil prices, back above the $40 mark for the first time this year, in turn lifting energy shares .SPNY.

"After we get through this two-day hiccup, the knee-jerk to the policy move, I would expect the dollar to resume its rally," said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut, who highlighted the difference in U.S. interest rates versus the ECB and Bank of Japan.

"Our policy rate is going one way, theirs is going the other way, that spread is going to continue to widen, no matter what."

But Thomas Lee, managing partner at Fundstrat Global Advisors in New York, expects the dollar to continue to weaken as he believes it is more tied to inflation than central bank policies. With dollar strength and oil weakness a headwind for equities in 2015, Lee feels the reversal of those moves should be a benefit for stocks.

"We can build upon the gains from here," said Lee. "If inflation is getting stronger, the U.S. dollar should weaken even more and that is an even bigger support for stocks."

With a short trading week ahead of the Easter holiday, volume is expected to be light as markets move closer to the Good Friday holiday, when the final reading on fourth-quarter gross domestic product is released.

Other economic data scheduled for release include February durable goods and several manufacturing surveys. Investors will be looking for signs of improvement after regional manufacturing surveys for New York and Philadelphia this week came in above expectations.

While regional Fed surveys on their own can be considered minor, when taken as a whole they give investors a good idea of "whether we are off that bottom in terms of manufacturing," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

"We want to see if it continues across the country."

Reference: CHUCK MIKOLAJCZAK