Trading with point and figure

ftse has a decent supp area from 6632 upwards to 6700
could go anywhere in that zone
if dax gets support..??
 
- US labour data dominate schedule, UK Construction PMI and Canada
Unemployment as markets continue to focus on oil gyrations post OPEC,
as focus then turns to Italian referendum

- US Payrolls: post ADP whisper estimate higher than consensus;
downside miss would have to be of order of May to derail Dec rate
hike consensus

- US Unemployment Rate seen steady, labour force participation rate
key

- US Average Hourly Earnings: expected to revert to 'average' m/m rise,
but 3-mth annualized rate would be well above y/y rate

- Italy referendum: Yes would be the 'shock' result; Mattarella key
assuming Renzi sticks to his word and resigns if No wins

..........................................................................

********************
** EVENTS PREVIEW **
********************

While the day's focus is indubitably on the US monthly labour report, there will be as much, if not more interest in the outcome of the Italian referendum and to a lesser extent the Austrian presidential election on Sunday. Outside of these items there are the overnight Australian Retail Sales to digest ahead of the UK Construction PMI and Canadian labour data, with a smattering of Fed speak, and testimony from Russian central bank governor Nabiullina. In terms of the votes in Europe, it is the symbolism of Austria electing the first far-right 'leader' in Europe since World War II (the position of president having little power of itself), which puts that vote in focus (though those with longer memories will recall that Kurt Waldheim, who served as President from 1986 to 1992, courted a great deal of controversy about his wartime record as an officer in the Wehrmacht in the Balkans). Be that as it may, it is the Italian referendum which allegedly threatens another political 'shock', even 'calamity' according to the ministry of hyperbole that stalks the financial world. While there was very clearly a lot of 'wishful seeing' and 'wilful blindness' going into the Brexit referendum and the US presidential election, the same cannot be said of this referendum. Italian BTP spreads over Bunds are at close to their widest levels since Q4 2013, while German 2-yr yields have been plunging to fresh lows on flight to safety flows. While the Italian banking crisis has been a key contributor, the underperformance of the FTSE MIB relative to the already abject performance of most Eurozone peers underlines that a 'No' vote is "priced in". Eminently the concern is less about the referendum outcome, and rather more about PM Renzi's stated intention to resign if No wins, and how this might plunge Italy back into political crisis. If Renzi is true to his word, then the question will be how quickly can an interim government (technocratic or other) be established, and this will be a first big test to see if Sergio Matterella is up to the job of following in the footsteps of Giorgio Napolitano and the late Carlo Ciampi, who were all too frequently called on and did break previous political deadlocks. There is perhaps some irony that a Yes vote would in fact favour the chances of the 5* Movement achieving a majority in the event of a general election, than the current bicameralism. There is also little doubt that while there are flaws to the 'Italicum' reforms, they would still represent a clear improvement on the current constitution, which is in effect a massive roadblock of instituting any type of reform, which Italy sorely needs. Rather more complex is how this all plays out for the ECB's key decisions next week, with some clear divisions emerging (via the usual 'sources') about how an extension of the current QE programme might be extended. Outside of the very important issue of bond availability for the PSPP component of QE, there is a) a lot of very justifiable ECB council concern about market reaction (above the impact on all peripheral govt yields) to any form of taper announcement, which needs to be balanced against the more hawkish wing of the council being unwilling to sanction a simple extension, say to September 2017, at the current overall EUR 80 Bn/month pace. On oil, it is also worth noting the spectacular shifts in the forward oil curve, as but one example see the attached chart of the Dec 2017/Dec 2018 WTI future spread, which underline that there has been a good deal of pain inflicted and that prices are likely to remain very choppy, as positions and hedges are realigned in double quick time.

** U.S.A. - November Labour report **
- The consensus for today's Payrolls has been gradually edging higher, but at 180K is almost exactly at the 6-month average, though the 'whisper' estimate is probably closer to 200K, thanks in the main to the higher than expected ADP estimate of 216K, notwithstanding the counterintuitive downward revision to the October ADP estimate. Incoming data, surveys and indeed the latest Beige Book offer little reason to anticipate any major downside risks, outside of the inherent volatility of the series, above all the well documented risks of often hefty revisions. In the detail, the election should have given a modest boost to govt hiring, with Private Payrolls seen up 170K, while Manufacturing is expected to have remained a marginal drag at -3K, which follows drop of 9K, 8K and 16K in preceding months. The Unemployment Rate is seen unchanged at 4.9%, where it has been for much of the year, though as ever the key aspect will be whether this remains against a backdrop of an expanding labour, with October's -195K more likely to have been 'reactive correction', following a run of substantial gains (Sep +444K, Aug +176K and July +407K). Average Hourly Earnings were the stand-out item in October's labour report at 0.4% m/m 2.8% y/y, which meant that the 3-mth annualized rate stood at a rather 'lumpy' 3.2%; forecasts for November see a more 'normal' 0.2% m/m for an unchanged 2.8% y/y, which would jump the 3-mth annualized rate to 3.6% (assuming no revisions). It is safe to observe that Payrolls would have to repeat something close to May's outlier outcome to seriously derail expectations of a Fed rate hike this month. However the more material issue is how long risks assets, both equities and credit, can continue to defy their seemingly relentless rise in longer-term yields (see 5-yr US Treasury yield chart) given that the current 'book valuations' of many assets are contingent on ultra-low interest and discount rates.

from Marc Ostwald
 
DOW
2 weeks of data
19188-19200 is a rez


sorfo9.gif
 
Ftse Sp 6670 rez 6710.

Looking at cable/oil.... froth should/may/could come off both. Thinking cable will head 1.255, currently holding1.260 and oil (WTI) 50. Of the two cable might have the biggest effect on ftse.

Possible pump back to 6740-50. lets see.
 
US November 2016 Labour report: 'U-6 Underemployment Rate fall the key element'

a) Payrolls / Establishment survey - Payrolls were distinctly the dull element of today's labour data, effectively bang in line with the consensus, even if below the 'whisper' of ca 200K; Private Payrolls at +156K were a slightly larger miss vs. a forecast of 170K. However the breakeven rate for Payrolls is 80K-100k, so the miss is a case of splitting hairs. In the detail, Services payrolls solid at +149K, Manufacturing still weak -4K, but effectively flat given a small upward revision to October to-5K from -9K, Construction solid at +19K/

b) Unemployment Rate / Household Report - Eminently the stand-out item in today's report, but in contrast to most of the outlier drops in the Unemployment Rate, today's fall was far less about the drop in the size of the labour force. On balance the 421K drop in the labour force in October/November is no more than a correction to nearly 1.0 Mln of labour force joiners in the prior 3 months. HOWEVER a large 387K fall in Unemployment and a 160K gain in Employment, and another sharp fall in the key U-6 Underemployment Rate to 9.3% from 9.5% in October and 9.7% in September underline that the labour market is now getting very tight.

c) Average Hourly Earnings - clearly in m/m terms the 'disappointment' at -0.1% m/m, but this follows above (sustainable) trend readings of 0.4% and 0.3% m/m readings in prior months, and comes with the warning that negative readings are either a) revised away, or b) see a sharp payback in the following. At 2.5% y/y these were hardly 'sluggish'.

d) Average Weekly Hours - Overall average weekly hours at 0.1% m/m for an unchanged and as expected 34.4 were unremarkable, but a steep 0.6% m/m fall in Manufacturing Hours (Oct +0.2%), matching a steep fall in August were disappointing and implies a sharp fall in Manufacturing Output, with a -2.0% m/m in Mining hours implying headline Industrial Production may well be even weaker. The problematic remains in identifying how much of this is due to greater efficiency paced by technological advances combining with costs cutting, and how much is demand related.

e) Market reaction - The report always seemed likely to be a cue for market participants to reduce exposure ahead of this weekend and next week's risk events, and thus prompt some short-covering US Treasuries, while FX markets look to be very much non-plussed. Attention now turns to the Italian referendum and the ECB meeting, some thoughts on markets and politics can be found here: http://tiptv.co.uk/2016/12/2557/ .


..........................................................................

Marc Ostwald
Strategist
ADM Investor Services International
 
- Digesting Renzi's defeat and surprise Austria presidential vote; Services
PMI dominate the statistical agenda, with Fed speak providing the other
key highlight; UK Supreme Court hearing on Article 50 appeal begins

- Italy referendum: President Mattarella now the key actor; snap elections
a tall order given absence of a voting mechanism following referendum 'No'

- Italy referendum: primarily a rejection of reform, sadly symptomatic of
the cancer at the heart of Italian politics since WWII

- US Non-manufacturing ISM: modest gain expected, array of recent surveys
suggests upside risks

- Week Ahead: modest weak for US data, German Orders, Europe Production
and Trade data, China CPI, PPI, Trade, Japan Wages, Oz GDP top data run

- Week Ahead: ECB in focus, council clearly very divided, 3-mth QE extension
a dirty compromise? RBI seen cutting rates to cushion demonetization shock

- Charts: 10-yr Bund/BTP spread, EUR/GBP and EUR/USD, WTI Oil future
..........................................................................

********************
** EVENTS PREVIEW **
********************

As was to be expected, the Italian referendum delivered a resounding 'No' to Mr Renzi's Italicum constitutional reforms, and Mr Renzi will today tender his resignation to President Sergio Mattarella, on whose shoulders it now falls to explore what form of government can be formed. It should be underlined that Mr Renzi's defeat was due to an alliance of some of the most 'establishment' political actors, such as former PM and ex-European Commissioner Mario Monti, Italy's very own economic terminator Silvio Berlusconi along with the empty handed populism of Beppe Grillo's 5* Movement (the chaos in the Rome and Turin municipalities that 5* runs is adequate testimony) and the separatist nihilism of the Lega Nord. This group in effect wish to preserve the bicameralism of Italy's current constitution, which makes meaningful reform nigh on impossible. Their argument that the Italicum would concentrate too much power in the hands of the PM, and thus heightens the risk of the emergence of a Mussolini type figure, while technically undeniable, is still a smokescreen for the preservation of Machiavellian modus operandi that has seen have 64 governments since World War II - it has therefore precisely nothing to do with either the Brexit referendum or Trump's presidential victory. The question is therefore what can Mattarella deliver, and what unholy set of demands will the hard-left of Renzi's PD and Berlusconi's Forza Italia (perhaps the most inappropriate name for any political party ever) to support a new government. In terms of new elections, it is a) unclear what the voting system would be, in so far as Parliament approved the constitutional changes to the voting system which this referendum has roundly rejected, though b) Mr Grillo's 5* Movement want the elections to be held under the new system that it so vehemently campaigned against - this is sadly Italian politics at its very worst. Eminently the other key immediate concern is that MPS capital raising exercise looks to be impossible to complete in the short-term, and given a long queue of banks lined up behind MPS in the capital raising queue. Thus far the widening in BTP spreads and the rise in 10-yr BTP yields merely takes them back to recent "wides", underlining that this outcome was largely factored into the BTP market.

* Statistically the week kicks off with Services PMIs, which are broadly expected to underline a modestly improved picture for global growth prospects, outside of the unsurprising slide in the Indian Services PMI that was 'hit for six' by the demonetization shock, though as with surveys immediately post the Brexit referendum, the key aspect is what, if any, rebound is seen over what time period. China's Caixin Services PMI encouragingly mirrored the improvement in the NBS version, while readings in Italy and Spain are also expected to tick higher, while the UK reading is forecast to slip to 54.0 from October's 9-month high of 54.0. As for the US Non-manufacturing ISM, the consensus looks for a modest improvement to 55.3 from October's 54.8, which would leave it below the recent highs of 55.5 in July and 56.5 in June; the risks look to be firmly skewed to the upside if the broad based improvement in recent surveys is anything to go by. BTP spreads have unsurprisingly widened in reaction to the referendum result, and will doubtless attempt to breach the recent "wide", but the primary point of focus will inevitably be what happens to Italian bank shares and bonds.


RECAP: The Week Ahead - highlights: 5 to 9 December 2016

* Europe takes centre stage in the week ahead as markets initially focus on the fall-out from the result of Italy's constitutional referendum, before turning their focus to the ECB council meeting.

- A light week for US data is expected to see a wider US Trade deficit on the back of a rebound in consumer goods imports, with Consumer Credit, Factory Orders and preliminary Michigan Sentiment the other items of note. China publishes inflation and Trade data, which are anticipated to show another sharp acceleration in PPI to 2.1%, while Exports are expected to have fallen at a slower pace, while Imports are seen slipping in USD terms, but rising on the CNY denominated measure thanks to the drop in the CNY vs USD.

- Europe sees Industrial Production and Trade readings in many countries, including France, Germany and the UK, with German Factory Orders projected to reverse an unexpected fall in September, but at the forecast 0.6% m/m 1.6% y/y, this would fall short of the pick-up that survey data have suggested for Q4. The UK also has the BRC's Shop Prices and Retail Sales measures, RICS House Price Balance and the ever erratic Construction Output.

- Japan looks to the latest Labor Cash Earnings, monthly Tankan, Q3 GDP (expected to be revised higher on slightly better CapEx), Current Account and the Economy Watchers (services) survey.

- In Australia, Q3 GDP is forecast to have eked out a small 0.2% q/q gain, though last week's larger than expected Q3 Capital Spending drop has a number of forecasters projecting a contraction for the first time since 2011, and for only the third time in the past 25 years.

* On the policy front, the key question is what the message from the ECB is going to be on the future of its QE programme, as well as where its initial projection for 2019 CPI will be, with the assumption being close to its target just below 2.0% y/y. The consensus looks for a 6-month extension of its QE programme at the current total pace of EUR 80 Bln, with a strong indication that the programme will start to be wound down. However ECB sources indicate that there has been a robust debate on the council, with the more hawkish faction favouring a slower pace of purchases (say EUR 50-60 Bln) as a quid pro quo for the extended timeline. The compromise may be a shorter extension, say for 3 months, at the existing EUR 80 Bln pace, though this would inevitably beg the question: at what pace will the programme then be tapered? The key risk is clear, current spreads in the peripheral govt bond markets (leaving aside the Italian political risk premium) are not sustainable if the ECB cuts the volume of its purchases, especially as little or no political progress has been made on fiscal and structural reforms. It will therefore be interesting to see how much wider spreads are driven as markets factor a smaller pace of ECB purchases.

- Both Australia's RBA nor Canada's BOC are expected to keep key policy rates on hold at 1.50% and 0.50% respectively, and signal a neutral policy stance in the near term. In respect of the RBA, the key issue is how it balances the housing bubble, mixed signals on the Chinese economy and demand for Australian exports against the obvious weakness in CapEx. The Bank of Canada has already signalled that it will require a sizable departure from its current projections for it to alter policy in the near-term, and it is expecting the domestic economy to get further traction from the govt's fiscal stimulus measures. The key point of interest will be its assessment of prospects for export demand, above all from the US in the wake of Trump's election victory, though also the prospects for the energy sector in the wake of the OPEC agreement. The last batch of Fed speak before the pre-FOMC meeting purdah period kicks off the week.

- But it may be India's RBI that attracts more attention, following the 'demonetization shock', with the RBI expected to cut its Repo Rate 25 bps to 6.0%, and its Reverse Repo rate by a similar amount to 5.75%, while keeping its Cash Reserve Ratio at 4.0%; some see a larger 50 bps cut. It is also expected to ease policy once more thereafter, but the key question is what sort of a drag on GDP it expects from the 'demonetization shock'. It also needs to weigh its policy options in light of the modest weakening of the INR and the rise in oil prices.
* Politics will continue to be the overarching theme, as markets await further details on Mr Trump's cabinet, and on what areas he and his team intend to address first in terms of policy initiatives; the unsurprising upset at his decision to establish direct contact with the Taiwan govt is a rather inauspicious start in terms of US/China relations. In the UK, the Supreme Court will start hearing the government's appeal against the High Court ruling on the parliamentary mechanics of triggering Article 50, just as it appears that there may be some shifts in the position of the 'hard Brexit' wing of the Conservative party, or at least the cabinet members. In the background, the legal fraternity is also talking up the possibility of a legal challenge relating to Article 127 (the clause about membership of the EEA and the Single market covered by a separate treaty).

* Govt bonds - Friday's modest recovery from the seemingly relentless rise in govt bond yields (outside of the front end of safe haven markets) owed everything to pre-weekend book squaring as well as the weekend's political event risk, the outcome of which will determine this week's price action, along with the ECB meeting. In terms of supply, the auction schedule will start to wind down as the pre-New Year lull sets in, but the week will see the UK sell £2.5 Bln of 10-yr and £2.25 Bln of 30-yr Gilts, Germany sells EUR 3.0 Bln of 2-yr and Japan sells 30-yr JGBs. The UK auctions will be aided by the hefty flow of coupon payments on December 7.


from Marc Ostwald
 
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