Forex research

Weekly market preview from Alpari UK – 10 November 2014

The data heavy start to the month comes to an abrupt end this week, with the start of the week in particular offering very little from the US, UK or the euro area. Fortunately, China takes up some of the slack on Monday with the latest inflation figures being released, but overall it’s looking a little quiet.

The biggest event of this week comes on Wednesday, as the Bank of England releases its latest inflation report, which is shortly followed by the press conference with Governor Mark Carney. Disinflation has been a common theme in many countries this year and the UK, despite its best efforts, is also falling victim to it. Not much has been done to counter it at this stage, which is something that Carney and his colleagues may well be questioned on, come Thursday.

US

The start of the week is going to be very quiet for the US, with no major economic releases or events scheduled for Monday or Tuesday. The latter will be especially quiet due to the Veterans Day bank holiday, which tends to result in significantly lower trading volumes, although I expect Monday volumes won’t be much better as many Americans will probably choose to turn it into a long weekend.

While most traders will be back at their desks on Wednesday, there’s very little scheduled that will provide much direction for the markets. The only notable events are the speeches of Charles Plosser and Narayana Kocherlakota, both of which are voting members of the FOMC with very different views. Plosser is one of the dissenting voice among the group and has been pushing for the commitment to keep rates low for a considerable time removed from the statement. Kocherlakota on the other hand is very dovish and only recently highlighted the fact that there’s no evidence that inflation is moving towards the 2% target. Based on such strong recent views, I don’t anticipate a change in tone this week.

Things will pick up towards the end of the week but not too significantly. On the bright side, what is being released is extremely important and could cause a stir in the markets so it’s certainly worth following them. The Octoberretail sales figure stands out as the biggest of the releases, due to the importance of consumer spending in the economy, and for the same reason, so does the preliminary November release of the UoM consumer sentimentreading, also due on Friday. Aside from this we also have the latest jobless claims figure, due on Thursday, with the US searching for its ninth consecutive sub-300,000 reading.

UK

It’s going to be a very quiet week in the UK, with only Wednesday offering anything of note, starting with the latest jobs data for the three months to the end of September. This is expected to offer more good news for the UK, with the unemployment rate seen falling to 5.9%, from 6% previously. This will be the first time it’s breached 6% since November 2008, which shows just how far the country has come in the last 12 months. Focus will also be on the average earnings figures, with the Bank of England, like its US counterpart, paying close attention to this as a key barometer of a real economic recovery. Once slack in the economy disappears, competition for places should appear and real wage growth will return. As soon as we get that, the BoE will be far more inclined to raise rates, inflation permitting of course.

We’ll get a better idea of inflation expectations shortly after this, when the BoE releases its latest quarterly inflation report. This is always accompanied by a press conference involving the Governor of the Bank of England, Mark Carney, and some other policy makers. During this we can see an increase in market volatility, although not as much as we may get from Fed or ECB press conferences as people don’t cling to his words quite as much as they do Janet Yellens and he doesn’t speak in tongues like his ECB equivalent Mario Draghi.

Eurozone

As with the rest of the major economies, it’s a very quiet week in the eurozone. Aside from the eurozone industrial production release on Wednesday, the first day that we have any notable data, all we have is GDP and final CPIreadings on Friday. Of course, these are very important, but we will have to wait until Friday for them.

The GDP readings for the eurozone, Germany, France and Italy are all preliminary readings and therefore tend to have the greatest impact on the markets. It’s going to be a nervy week for a few of them, with Germany and Italy at risk of falling back into recession, having contracted by 0.2% and 0.1%, respectively in the second quarter. The eurozone and France aren’t out of the woods either as the initial readings showed these stagnating in the second quarter but these could be revised lower on Friday and if this is accompanied by another negative reading for the third quarter, they would also be in recession. This would be the perfect end to what has been a dismal six months for the eurozone.

Finally we’ll have the final CPI reading for the eurozone. The preliminary reading showed inflation rising slightly to 0.4%, which will have taken some of the heat off the monetary policy committee at the ECB. If this is revised lower, the pressure will be back on in the coming months as it would suggest that the measures taken are not working and even the weaker euro doesn’t appear to be doing much.

Asia & Oceania

There is a lot more on offer here on the data front but to be perfectly honest, the majority of the data being released is unlikely to have much of an impact on the markets. Some of the Chinese data is going to be followed very closely, such as the CPI and PPI releases on Monday, the new loans data on Tuesday and industrial production and fixed asset investment on Thursday.

Fears of a rapid decline in Chinese output are growing and have been doing so for some time. The stimulus efforts from the government and People’s Bank of China have done a good job at patching up the leak for now but many people think it’s only a matter of time until it all gives way under the pressure. If this happens, the ramifications could be catastrophic and not just for China. This is why people are following the Chinese data so closely, looking for any signs of weakness. This tends to impact all markets and weak figures can dictate sentiment at the European open, not to mention commodity prices, particularly oil. The inflation figures are also notable as the country is currently well below its target. Should this start to creep towards the 3.5% target, the PBOC may become more limited in what it can do.

Much of the other data from Japan and Australia may have some small impact on the respective currencies and stock markets, but even this is unlikely to be very significant.
 
UK Opening Call from Alpari UK on 10 November 2014

European futures flat followed mixed Chinese data

• Chinese imports weak again while export numbers remain unreliable;
• Chinese inflation unchanged in October but producer prices continue to plummet;
• Regulators give starting date of 17 November for Hong-Kong-Shanghai Stock Connect;
• Quiet session expected on Monday with economic calendar providing nothing.

European futures are pointing to a relatively mixed open at the start of the week, taking little direction from the New York close on Friday or the Asian session overnight.

The Chinese data released over the weekend and during the trading session on Monday appears to have had little impact on the markets, which is quite unusual, especially when there's so little on offer elsewhere. The trade balance figures for October don't appear to have altered anyone's view on the state of the economy, although given renewed speculation recently regarding false invoicing in China, this may just reflect a lack of trust in the numbers.

Exports fell to 11.6% last month from 15.3% in October, which may ordinarily have been a cause for concern, but given the inconsistencies in the data recently, it's very difficult to determine whether the exports figures are actually accurate or not and without that, how can we make an assessment of them. The fall in imports to 4.6% is a little concerning, although weaker commodity prices are likely to once again be the biggest driver of this.

This feeds in to the inflation readings we had overnight, as the latest CPI figures showed no change in prices in October, compared to a month earlier, leading to an unchanged reading of 1.6% on the year. With the producer price index falling 2.2% on the year, again due to weaker prices in commodity imports, this is both positive for corporate profitability while the CPI reading is well below the People's Bank of China's 3.5% target, opening the door to further targeted stimulus, It's win win from the markets perspective.

China was very much the focal point in the Asian session overnight, as securities regulators announced that Hong-Kong-Shanghai Stock Connect will start on 17 November, which is earlier than the markets were expecting, despite being delayed from the initial start date last month. The program allows outside investment in Shanghai-listed stocks for the first time ever, which is a massive deal. This was largely responsible for the rally in Chinese and Hong Kong stocks overnight, rather than any of the Chinese data released over the last couple of days.

Unfortunately, this hasn't really driven markets higher anywhere else, with markets overall in Asia being quite mixed, along with European futures ahead of the open. The latter may continue to struggle for direction as the start of the week is looking extremely quiet from an economic data perspective. In fact, on Monday there is no notable economic releases from either Europe or the US, with the European session only offering a few minor pieces of data which usually have almost no impact on the markets.

The FTSE is expected to open 12 points higher, the CAC 4 points higher and the DAX 7 points lower.
 
US Opening Call from Alpari UK on 10 November 2014

Chinese data fails to inspire, Gold remains in focus

• Mixed Chinese data provides little direction ahead of US start to the week;
• No major economic announcements expected today;
• Gold remains bullish despite hovering around major resistance level.

It’s been a quiet start to the European session on Monday, as a lack of economic data combined with little direction from the Asian session overnight leave the markets lacking any significant catalysts.

We’ve actually had some quite significant data releases from China over the last couple of days, however we actually learned very little from them. The trade balance figures showed a significant decline in export growth, falling to 11.6% which was actually ahead of expectations, while imports fell to 4.6%, leaving an overall trade surplus of $45.41 billion. Ordinarily this would be very positive for the markets. However, questions have been raised again recently about the reliability of the export figures, with accusations of false invoicing being raised after inconsistencies appeared between the export numbers the country reported to Honk Kong and the import figures reported from mainland China.

With this all going on in the background, it’s difficult to trust the figures being released by China. On top of that, the decline in imports has a lot to do with the decline in commodity prices so again, this flatters the headline figure quite a bit. On the bright side, the decline in commodity prices is leading to falling producer prices in China, while overall CPI remains at 1.6%, well below the country’s 3.5% target. This means more profitability for companies, with some of this being passed on to Chinese workers as wages continue to grow despite the cooling economic environment.

Much like we’re expecting for most of the coming week, the day ahead is looking pretty quiet, with no economic data scheduled for release in the US and no major economic announcements expected. Things will pick up on Wednesday with the latest jobs report from the UK, followed shortly after by the quarterly inflation report from the Bank of England. The US then comes back into focus on Thursday and Friday with jobless claims, JOLTS job openings and finally retail sales data all due. This is accompanied by GDP figures from the eurozone so the end of the week should be much more interesting.

In the commodities space, Gold is wavering just below the $1,180 resistance level following Friday’s strong rally. Many are viewing this level as a ceiling for the precious metal, due to its previous role as a massive support level, but I’m not sure the technical necessarily support this. The strong end to the week has left us with quite a bullish looking weekly hammer candle, while Friday’s candle is very bullish looking and completed an even more bullish morning star formation. None of this points to further weakness in the yellow metal in the short term. On top of that, today’s price action is not showing any support to the downside, which leaves me thinking the only way is up here. With so many viewing $1,180 – $1,185 as such a major resistance level, any break above could be quiet aggressive as a large number of stops gets taken out along the way. In the long run, I still expect a strengthening dollar to continue to weigh on commodity prices, but with the US data not coming until later this week, there’s no reason why we can’t see some upside in the meantime.

The S&P is expected to open unchanged at 2,031, the Dow up 5 points at 17,578 and the Nasdaq unchanged at 4,160.
 
Webinar - 11 November 2014 - Alpari UK


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UK Opening Call from Alpari UK on 11 November 2014

European markets could well be set for a quiet session today as yet again data from the economic calendar looks fairly light. After last weeks data and volatility it seems that this week will struggle for the entire week in the US, however data from Asia as well as the BoE quarterly inflation report is likely to get markets moving. Yesterday’s gains in Europe showed that the mixed Chinese data was not going to dampen the mood of the resurgent equity markets, but also showed that gold is still the hot bed for activity as the precious metal remained the number one trading focus.

Yet again Asian markets will be in focus today as the majority of economic data is due out of Asian overnight tonight. We will not get any data from the US or Europe today, however this will ramp up from tomorrow’s session. Tomorrow sees the release of the BoE inflation report where the fall in inflation and the growth forecasts for the UK will be the major focus. The inflation issue is not just a problem in the UK as we know but the continued fall in the headline CPI figure will be a cause for concern for Mark Carney and the BoE. Then there will also be the stagnant average earnings number, this is the figure interest rate decisions are now based on and it seems very much like this stubbornly low number will stop a rate hike for at least another 9 months.

Mark Carney is also likely to be questioned over the new “too big to fail” rules that have been bought in when he holds his press conference tomorrow. Mark Carney who is also chairman of the gobal regulator the Financial Stability Board (FSB) has worked with other members too set up rules that mean a situation like the 2008 credit crunch can never happen again and taxpayers will never have to foot the bill for banks that are deemed “too big to fail”. Mark Carney has called previous systems put in place grossly unfair so this plan is likely to come into focus during tomorrows inflation report.

With the US markets very light of any economic day at all it may be that markets will have to make their own fun, however after a very busy week last week it would be no surprise for this week to see a lull and markets take a well earned breather after a number of weeks that have seen volumes bounce back and volatility return to what had become stagnant markets.

Ahead of the open we expect to see the FTSE 100 open higher by 9 points while the German DAX is higher by 20 points.
 
UK Opening Call from Alpari UK on 12 November 2014

BoE inflation report takes centre stage

European markets will get their first look at some meaningful data on Wednesday as the quiet start to the week makes way for one of the busier session. It will be the UK that takes the centre stage as we get unemployment numbers as well as the press conference for the quarterly inflation report from the BoE. Today also sees the return of meaningful data to come out of the US with mortgage applications readings and Fed members speaking a little later in the day but there is no doubt we will be looking to the UK for the headlines this morning.


Inflation predictions and growth forecasts for the UK will be the major focus when Mark Carney sits down to deliver the quarterly inflation report today. The inflation issue is of course a huge one and is not just a problem in the Eurozone. The UK as we know has seen a continued fall in the headline CPI figure over recent months and this will of course be a will be a cause for concern for Mark Carney and the BoE. We must always look at both the headline reading and the core CPI figure however. The headline figure is likely to see more falls in the near term as it includes things like energy and food prices. Oil has seen a steady decline over recent weeks, so the subsequent fall in petrol prices is likely to hit the headline figure. However the core reading that strips out energy price fluctuations and instead focusses on more domestic prices should be a little more resilient. This is what Mark Carney will be hoping to show later today.

Then there will also be the stagnant average earnings number, this is the figure interest rate decisions are now based on and it seems very much like this stubbornly low number will stop a rate hike for at least another 9 months. A prediction on when we might see a rate hike is another focus the markets will have on today’s press conference and anything that hints on an earlier than expected hike will be met with negativity across equity markets and would see strength in the sterling. However the banks mandate has always been to keep inflation around the 2% target and rate and while we continue to move away from that benchmark there will always be comparisons to the Eurozone and the ultra-low inflation seen by the ECB. While things are nowhere near that bad for the UK from a CPI and growth point of view Mark Carney will still want to see the rate of decline in the headline CPI reading slow and for the core CPI number to start to hold firm.

Mark Carney is also likely to be questioned over the new “too big to fail” rules that have been bought in when he holds his press conference tomorrow. Mark Carney who is also chairman of the global regulator the Financial Stability Board (FSB) has worked with other members too set up rules that mean a situation like the 2008 credit crunch can never happen again and taxpayers will never have to foot the bill for banks that are deemed “too big to fail”. Mark Carney has called previous systems put in place grossly unfair so this plan is likely to come into focus during tomorrows inflation report.

Market movement today will all depend however on whether we see the tone from the BoE as dovish or hawkish. With expectations that the governor will signal that rates will stay on hold until at least mid 2015 then this dovish tone is likely to buoy equity markets and leave the pound at risk of a fall. Ahead of the open this morning we are expecting to see the FTSE100 open lower by 6 points and the German DAX lower by 20 points.
 
US Opening Call from Alpari UK on 12 November 2014

Real wage growth returns as Carney warns of low inflation

• UK wage growth above inflation for the first time in five years;
• BoE sees inflation falling below 1% before returning to 2% in three years;
• Carney comments point to low rates for longer but no further easing;
• Kocherlakota speech the only notable US event today.

There was some good news for the UK this morning, as data showed wage growth exceeding inflation for the first time in five years. For so long, the economic recovery in the UK seems to have eluded people’s pay packets, leaving peoples worse off in real terms. With unemployment falling faster than many expected and now being at the lowest level since October 2008, it seems employers are now being forced to pay people more as opportunities increase and the number of people qualified to fill them falls.

This was always going to be the process, it’s just a relief that we’re finally seeing real wage growth. In a consumer driven economy, this was always going to be essential if the strong economic recovery was going to be sustainable. Unemployment may have not fallen to 5.9% as expected, instead remaining at 6%, and the claimant count change may have fallen a little less than was forecast, but people are clearly more concerned with wage growth right now which is why the response in the markets was positive.

What’s more, during the BoE inflation report press conference, Governor Mark Carney claimed that inflation will remain subdued for some time yet and even fall below 1% for a while, meaning he’ll have to write a letter to Chancellor George Osborne to explain why it is below target. Despite this, he did claim that it is expected to return to 2% by the end of the forecast period which would suggest that, while the BoE is likely to leave rates low for longer, they’re unlikely to ease more to fight the low inflation. This is still quite dovish which is why we’ve seen so much weakness in the pound since the start of the press conference.

He further claimed that rate rises will be gradual and remain below the long term average for some time, although he did caveat this by claiming that this was not a promise, just a forecast. Clearly Carney has become accustomed to the irrational moves that we can see in the markets when investors incorrectly perceive an opinion to be a commitment, which is something we’ve seen over and over again in recent years. This highlights the very cautious exit strategy being taken from the BoE as it enters uncharted territory in its attempts to return to normality following years of ultra-accommodative monetary policy, the likes of which have never been tried before.

A few other important points from the press conference included the revision to growth forecasts for next year to 2.9%, from 3.1% in August, which is clearly being driven largely by the stagnation in the UK’s largest trading partner, the eurozone. Carney also confirmed that productivity growth has remained subdued, despite the central banks best efforts and he didn’t look optimistic on this going forward. This is even more reason for the MPC to keep rates low until the end of next year, at least.

The rest of the day is looking a little quieter with no major economic releases coming from the US, although we will hear from Narayana Kocherlakota, a dovish voting member of the FOMC. Last time out, Kocherlakota claimed that there’s no evidence of inflation returning to 2% and I very much doubt today’s comments will differ too much from this. Especially when we’re seeing falling inflation in many of the major economies across the globe.

The S&P is expected to open 8 points lower, the Dow 57 points lower and the Nasdaq 16 points lower.
 
UK Opening Call from Alpari UK - 13 November 2014

European CPI figures to dominate quiet session

• Japanese machine orders post fourth month of growth
• Chinese data highlights deterioration across firms and consumer spending
• European CPI figures set to dominate quiet European session

European markets are looking at a lot more of a rosy picture today, as markets finally digest yesterday’s dovish BoE and look forward to Eurozone CPI figures. This is following a strong overnight session in Asia, where the Nikkei yet again outshone its competitors following a strong machine orders number. As such, the European markets are looking to open higher, with the FTSE100 +20, CAC +22 and DAX +40 points.

Overnight trading has been dominated by Japanese and Chinese data, with Japan in particular taking the headlines as a machines order figure came in above expectations by posting a positive figure of 2.9%. This represents the fourth consecutive positive month on month figure, a feat that hasn’t been managed for over 15 years. With the impact of the sales tax having had an impact upon investment back earlier in the year, there is no doubt that the economy is back firing on all cylinders which could provide Shinzo Abe with the indication that another sales tax could be implemented without any long lasting ill effects to the economy. Perhaps it is this strength which has given Shinzo Abe the confidence to call a snap election for December which appears to be increasingly likely. The risky move comes halfway into his current term and would provide Abe with the opportunity to gain a broader mandate to push through somewhat unpopular security legislation later next year. Markets are increasingly expecting Abe to delay the next sales tax hike as a resolute, just to gain political leverage for Decembers vote.

Chinese data painted a different picture overnight, with industrial production, retail sales and fixed asset investment all falling in October. Unfortunately this is not a one off instance, but more a long term trend which has been in place since the Chinese economy seemed to peak out in 2010. With a heightened awareness that the Chinese economy is seeking to move away from investment and towards consumption, it could be argued that that shift could explain the fall of investment and production, yet with retail sales also falling the picture is one of lowered economic activity across both individuals and firms alike.

The European session looks set to be dominated by the release of final CPI readings across a range of Eurozone economies. For the most part, traders will gladly tell you exactly where the Eurozone headline CPI figure is, yet no one really cares about the level of inflation across each of the constituent countries. That is because monetary policy is set by the ECB who acts for the group as a whole. However, with Mario Draghi’s recent announcement of an ABS scheme, came opposition from the Bank of France Governor Cristian Noyer and Bundesbank President Jens Weidmann who represent two of the most important people when it comes to national monetary interests in the Eurozone. With both economies running a higher rate of CPI than the ECB at the time, it was clear that there is more room for them to make such calls, relying upon the idea that the threat of deflation is somehow less likely for their own countries. However, we have since seen a gradual deterioration across both countries and the continuation of this would likely mean a diminished degree of opposition to ECB easing in the future. Thus with French CPI now resting at 0.4% and the German number at 0.8%, any move lower would surely lead to a softening of their respective stance as the need for stimulus to gain traction in prices is increasingly needed.
 
US Opening Call from Alpari UK - 13 November 2014

US labour market in focus with jobless claims and openings

• Eurozone inflation readings remain dangerously close to deflation territory;
• ECB quarterly survey sees forecasters revising down growth and inflation for the next two years;
• Chinese data shows further downside in economy but opens the door to more stimulus;
• Oil prices continue decline on further deterioration in Chinese industrial production;
• US jobless claims and JOLTS job openings in focus today.

Markets are trading with a slightly more positive tone on Thursday despite economic data over night further highlighting the difficulties facing the world’s second largest economy and the latest CPI readings from eurozone countries continuing to linger around deflation territory.

The eurozone inflation readings were largely in line with market expectations which probably explains why people aren’t getting too down about them this morning. However, they were released alongside the latest ECB quarterly survey which showed professional forecasters revising down their growth and inflation expectations for the next two years, with falling oil prices and weak import prices being blamed for the lower inflation expectations.

Regardless of what is to blame, this surely suggests that the ECB must do a lot more to stem the decline in prices before they find themselves fighting this battle from the uncomfortable position of negative inflation rates. That said, governments must also do their part to support growth while continuing their efforts to get their fiscal house in order. A temporary relaxing of the fiscal deficit rules may be the answer to this in the short term, but this is unfortunately very unlikely. Stagnation is here to stay for a while yet which is not good news for the global economy.

Another disappointing batch of Chinese economic data is failing to weigh on sentiment this morning, which may be a little surprising given how important China is to the global economy. I guess when you consider that this data is in line with all the other figures we’ve had from China, then it doesn’t have the shock factor that it would previously have had. It’s also very much in line with the deterioration that we’ve seen in this Chinese data over the last few years. On top of that, with inflation so far below the 3.5% target, the data must also encourage the People’s Bank of China to undertake more targeted monetary stimulus in a bid to counter to downturn, which is actually good for the markets.

One area that we did see a reaction to the Chinese data was in oil prices. The decline in industrial production to 7.7%, from 8% previously, has once again brought into question the demand coming from an oil importing giant like China. If demand is falling here, as the figure would suggest, then this is going to continue to weigh on prices, which are already at three year lows. This is particularly true when oil supply remains so high, which is also driving prices to these multi-year lows.

The US session is looking a little quiet again today, although there are at least a couple of pieces of important data being released that could shake things up a little in the markets. The first is the latest initial jobless claims figure, which is expected to record its ninth consecutive sub-300,000 reading, a phenomenal feat that has not been achieved since the second quarter of 2000. Following this we’ll get the September JOLTS job openings figure, which is expected to fall slightly to 4.823 million.

The S&P is expected to open 7 points higher, the Dow 49 points higher and the Nasdaq 16 points higher.
 
US Opening Call from Alpari UK - 14 November 2014

Focus on US consumer as Germany avoids recession

It’s been a mixed start to the European session on Friday, with growth and inflation figures for the eurozone confirming the dire state of affairs in the region, although there were a few upside surprises that have provided a small boost to investors.

All things considered, the data is pretty dire and the economic outlook for the euro area is no better. On a positive note, Germany avoided falling into recession after achieving measly growth of 0.1% in the third quarter, while the French economy grew by 0.3%, higher than the 0.2% we were expecting. We really are dealing with tiny margins here so I can’t help but think that we’re clutching at straws in trying to look for positives in this data.

The reality is that the growth rates we’re seeing in the eurozone right now are woeful and none of the data we’re seeing suggests there’s going to be any improvement. On top of that, the low level of inflation in the region is not going to support growth going forward and despite the ECBs best efforts, the latest CPI reading remained at 0.4% which is dangerously close to deflation territory. The ECB has a massive job on its hands and appears to still be in denial. At this stage, I’m not sure there’s much the ECB can do unless governments use fiscal policy to stimulate growth alongside it, rather than view ultra-loose monetary policy as a replacement for pro-growth policies. This is the point Jack Lew was trying to make this week when he criticised eurozone leaders for relying on the US consumer to drive global growth.

Fortunately for the eurozone, consumer sentiment in the US has been on the rise recently and is expected to hit the highest levels since the middle of 2007, when the latest preliminary UoM consumer sentiment reading is released today. The number is expected to jump to 87.5 in November, the highest level since July 2007, before the financial crisis began.

Retail sales for October should support this picture of growing consumer confidence, with sales seen increasing by 0.2%, the eighth month out of nine that we’ve had a positive monthly reading. Core retail sales are also expected to show growth of 0.2%, which is a positive sign as we head into the holiday season, a time of year when the consumer is extremely important to the economy.

The S&P is expected to open unchanged at 2,039, the Dow unchanged at 17,652 and the Nasdaq unchanged at 4,213.
 
UK Opening Call from Alpari UK on 17 November 2014

Week off to a woeful start as Japan falls into recession

- Japan falls into recession as sales tax weighs on consumer spending;
- Next October’s hike called into question, while further BoJ stimulus a possibility;
- Eurozone trade balance and US industrial production stand out on the economic calendar today;
- Draghi testimony on monetary policy could shake things up in the markets this afternoon.

The trading week got off to a woeful start in Asia overnight as news that Japan contracted by 0.4% in the third quarter, leaving the country in a technical recession, drove the Nikkei to near 3% losses and raised serious questions about the planned sales tax hike next year.
The sales tax hikes have been a key component of Abenomics – Japanese Prime Minister Shinzo Abe’s attempts to return inflation to 2% and increase growth in the country through fiscal and monetary stimulus and reforms – but it appears that the first hike from 5% to 8% has taken its toll on the economy more than expected.
A couple of things spring to mind now following the release of this data overnight. The first is the planned hike to 10% next October and whether that will now be pushed back, something that has already been rumoured in recent weeks. The second is the Bank of Japan’s surprise increase of its asset purchase program a few weeks ago, which now makes perfect sense if the central bank’s analysis anticipated the latest GDP figures, and whether we’ll see further monetary loosening in the coming months.
Clearly the country is not coping well with the 3% increase in the sales tax, which came into effect in April. With 60% of the economy being fuelled by the consumer, something needs to be done to drive consumption or the BoJ will have no chance of hitting its 2% inflation target. I also imagine that the next tax hike will have to be pushed back which may raise questions about Abe’s commitment to the “third arrow” of Abenomics. I personally think pushing it back is the correct thing to do, at the end of the day the economy can’t grow and inflation can’t rise to 2% if people refuse to open their wallets. People need time to adjust and Abe’s initial targets have proven to be too aggressive.
The start of the trading week in Europe will not be quite as exciting, with the data due out on Monday being few and far between. We have trade balance figures from the eurozone shortly after the open, while in the US later we’ll get the latest industrial production figures for October, as well as the Empire State manufacturing index for the same month.
We’ll also hear from ECB President Mario Draghi, who is scheduled to testify on monetary policy before the Committee on Economic and Monetary Affairs, in Brussels. This could be quite a big market event today as not only is Draghi likely to be heavily questioned on the ECBs efforts to avoid deflation thus far, which are showing little sign of working, he’s also likely to be pressed on further attempts to lift its balance sheet to two trillion euros. Clearly the markets want to see quantitative easing and while Draghi is happy for investors to believe this is a strong possibility, I don’t think some policy makers are keen on it in the slightest. The markets don’t really care about this though, they just want to be led on which is why market volatility could pick up around this testimony.
The FTSE is expected to open 17 points lower, the CAC 15 points lower and the DAX 46 points lower.
 
UK Opening Call from Alpari UK on 18 November 2014

European data in focus as markets ignore China weakness

- Another batch of disappointing Chinese data fails to weigh on sentiment;
Chinese markets fall for second day since Monday’s Hong Kong-Shanghai connect debut;
- RBA could cut rates next year as data deteriorates and concerns around Chinese property market rise;
- UK inflation seen stabilising in October but PPI still points to further disinflation going forward;
- Latest ZEW readings seen stemming the decline but current situation remains dire.
European futures are pointing to another positive start on Tuesday despite data overnight providing further evidence of China’s slowing economy, as investors continue to turn a blind eye to the weaker data coming from the world’s second largest economy.
Once upon a time, there would be turmoil in the markets at the sight of some less than appetising Chinese data but it appears that is no longer the case, at least for now. The markets appear to have accepted that China’s economy is cooling off a little and have fully priced it in. What’s more, with inflation so low at 1.6% and other indicators such as the PPI readings pointing to further disinflation going forward, the data actually increases the possibility of more monetary stimulus from the People’s Bank of China. So in fact, as long as the data continues to just disappoint, it could actually be seen as a positive for the markets.
Chinese markets appear far more downbeat at the data at first glance but I think Tuesday’s decline has more to do with the Hong Kong-Shanghai stock connect than the economic data. Yesterday’s debut was also met with declines on the session which is nothing to be concerned about. The markets have had months to price this in, it’s only natural that we’ll see some profit taking. It’s a similar idea to buying the rumour, selling the news but in this case I guess it’s buy the announcement, sell the debut.
The release of the Reserve Bank of Australia minutes from the previous meeting highlighted the fear among policy makers about the Chinese property market and its impact on the economy. With the property market likely to deteriorate further for the foreseeable future and other Australian economic data pointing to difficulties ahead, some are already speculating the rates could be cut next year, rather than rise which is what the consensus view currently is. Credit Suisse has highlighted falling inflation expectations, rising unemployment and deteriorating confidence as being some of the reasons why the RBA may be forced to consider a rate cut next year.
Disinflation is seen as a serious risk to a number of major economies at the moment, including that of the UK, where we’ll get the latest batch of figures this morning. The headline CPI reading for October is expected to show inflation actually rising marginally to 1.3%, which may have suggested that the decline is stabilising, had Bank of England Governor Mark Carney not warned last week that it’s likely to fall below 1% and remain there for some time. Assuming he is correct, that would suggest this is only a temporary lift and the decline will continue in the coming months. This is supported by the latest PPI readings, with the latest year on year output reading seen showing prices falling by 0.2%.
Also being released this morning is the latest ZEW economic sentiment surveys for the eurozone and Germany. In both cases, we’re expecting an end to the 10-month long decline, with both numbers seen creeping higher in what is hopefully a sign of a stabilising economy and more positive economic outlook, but more likely just a one time blip. The German current situation survey is still seen falling to 1.8, the lowest since June 2010.
The FTSE is expected to open 16 points higher, the CAC 8 points higher and the DAX 20 points higher.
 
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