Mario Draghi’s Legacy and the Challenges Awaiting Christine Lagarde

The decisiveness of Mr. Draghi, when he stated, in 2012, that the ECB would do whatever it took to save the single currency, prevented the worsening of a situation that could have had even more serious consequences, perhaps threatening the survival of the Euro.

We can, therefore, to some extent, credit the outgoing ECB chief as responsible for the salvation of the single European currency and the subsequent economic recovery. This is what he will be remembered for. However, there was a cost, which required the extensive use of all available tools; historically low-interest rates and a quantitative easing programme based on epic asset purchases.

Currently, the average growth of the Eurozone economies is at anaemic levels, just above 1%, while inflation remains below the 2% target; the trade dispute between the US and China threatens to escalate, in what would be a serious threat to the growth of the global economy, potentially triggering a new recession.

Another challenge comes from the growth of populist movements in several countries of the union. This movement is fuelled in large part by the disillusionment felt by many towards the elites, especially politicians, because of the growing inequality in the distribution of wealth and the loss of social benefits, driven by austerity, that followed the great recession of 08/09.

Next ECB President Challenges

This is the challenging scenario that Christine Lagarde, the next ECB President, will find. The current managing director of the International Monetary Fund will leave a legacy of innovation when she departs Washington. Today’s IMF has an aura that distinguishes itself from the previous trademark image, of harsh austerity plans and strict fiscal discipline, which had painful social costs in several countries.

Mrs. Lagarde contributed to the change of image; remarking that austerity and fiscal discipline may not always make sense, especially when interest rates and inflation remain at lower than ideal levels. Mrs. Lagarde also suggested that, in special circumstances, higher deficits and measures to reduce inequality may have a positive impact.

Christine Lagarde is not an economist, she is primarily a politician; finance minister under Nicholas Sarkozy’s government, in France; known for her ability to communicate, influence and think outside the box. These attributes will be precious to manage the complexity of the situation awaiting her; European interest rates are in negative territory and the bank’s balance sheet holds 4.7 trillion worth of assets, meaning the conventional array of monetary policy tools is exhausted.

In the face of rising populism, an ending expansion cycle and the impact of very low-interest rates in the credit market, it is imperative for the new leadership of the European Central Bank to be strong. Most observers expect, in terms of monetary policy, that Lagarde will maintain the dovish stance of her predecessor. But, above all, there is hope that the nominee for ECB leadership will be able to extend the central bank’s field of intervention, through her political prowess and capacity for dialogue.

Policies to stimulate consumption and greater fiscal harmonisation and solidarity, between the member states, will be fundamental to the survival of the euro and perhaps the European project itself.

Written by Ricardo Evangelista, Senior Analyst, ActivTrades

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Is The Debt Crisis About To Be Reborn In 2020? – Part II

The Transportation Index has not recovered to levels from the September 2018 peak.  This lower price rotation in the Transportation Index suggests the global economy is not expecting growth in the near future.

Other than Precious Metals, the Commodities sector has rebounded off of recent lows but has yet to see any real price advancement – suggesting that demand for raw commodities is rather weak.

The Real Estate sector in the US is starting to falter near a current high price level.  We are seeing price decreases hit the markets as sellers are desperate to attract buyers.  This could be a warning that a price revaluation event is about to unfold in the US.

Super-Cycles suggest a moderately sized price rotation between now and early 2020 (likely greater than 20% in size).  This rotation, should it happen, will become a price revaluation event that could attempt to “shake loose” some of the sector pricing and forward expectations we’ve mentioned (above).

Our bigger concern is the localized state and federal pension and retirement issues that continue to respond with higher levels of financial commitments and greater levels of annual budgets as related to ongoing capacity and operational activities in the US.

If an unwinding event was to unfold in or near 2020, it is our belief that a pricing revaluation event related to any of the core economic factors above (particularly with Real Estate, Economic Cycles, the US Presidential Elections, and a soft/weakening US economy) could result in a much larger price revaluation event taking place.  This would create extended pressures on local State and Federal expenses and highlight debt issues that can often be hidden behind “creative accounting” tricks.

State and Local Government Debt Securities and Loan Liability levels have stayed elevated, yet somewhat flat over the past 10+ years.  It is very likely that these debt levels have been contained because of the US easy money policies of the past 10+ years.  When the US Dollar is cheap and easy to repay, these debt levels don’t look so difficult.

Pension and retirement systems/fund are a completely different story for State and Local government agencies.  Asset flows have dramatically increased in volatility after 2000.  Additionally, the depth and magnitude of asset outflows have become quite dangerous while price revaluation events were unfolding (2000 to 2004 and 2008 to 2015).  Outflows in state and federal pension and retirement funds create large forward operational pressures and shortfalls in expected funding levels.  These decreases in funding should be made whole by the State or City – but they are rarely ever repaid in full.

As these “wholes” in the pension and retirement systems continue to fester (resulting in decreased funds for pensioners and decrease fund to be deployed as investment assets), the problems begin to compound over time.  More and more retirees and pensioners start drawing benefits while the system continues to take in less and less – never actually catching up in total value.

One big revaluation event, or possibly two, from now and we believe the entire system will create a multiple Trillion Dollar debt crisis within the US and possibly throughout the modern world.  We believe the under-estimated state and federal pension/retirement funding issue is the next shoe to drop and that it will take a price revaluation event to expose the risks that are evident within this failed “Ponzi” scheme.  Read the recent news about Chicago and Illinois to learn just how dangerous these entitlement contraptions really are.

Let’s assume that a revaluation event does take place within the next 5 to 10+ years – this would be something like a Real Estate price correction or some type of stock market, asset market price correction related to local or global economic issues.  Could these massive asset funds handle an extended DRAWDOWN from their funds while Cities, States, and Federal agencies attempt to deal with declining revenues?  How much time would it take for these pension and retirement funds to fall into crisis or insolvency?

By our estimates, the current asset levels in the US retirement/pension system have just started to breach the lower asset level channel originating from 1970 to 1999 attribution levels.  It has taken 20+ years of  US Fed and global Central Bank market manipulation, as well as President Trump’s incredible US economic and stock market rally, to recover to these levels.

Overall, skilled technical traders must be aware of the risks that are ever-present for another crisis event or what we are calling a “price revaluation event” that could create havoc on anyone’s retirement accounts, trading portfolios and/or simple family life/future.  We’re trying to help to highlight what we believe will be the future 16 to 24 months of pricing activity within the US Stock market based on our research tools and our experience/knowledge.

I can tell you that huge moves are about to start unfolding not only in metals, or stocks but globally and some of these supercycles are going to last years. A gentleman by the name of Brad Matheny goes into great detail with his simple to understand charts and guide about this. His financial market research is one of a kind and a real eye-opener. PDF guide: 2020 Cycles – The Greatest Opportunity Of Your Lifetime

As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for both short-term swing trading and long-term investment capital. The opportunities are massive/life-changing if handled properly.

Chris Vermeulen

Can New ECB Head Christine Lagarde Help the EUR?

She’s more of a politician than an economist, but that might be just what the ECB needs at this juncture as the ECB hits up against the limits of what monetary policy can do. On the other hand, her candidacy is likely to mean a somewhat weaker euro than would’ve been the case under a different ECB head.

First of, is Lagarde’s Appointment Even Legal?

Article 283(2) of the Treaty on the Functioning of the European Union says that the President shall be selected “from among persons of recognized standing and professional experience in monetary or banking matters…” Ms. Lagarde is a lawyer by training and was the Finance Minister of France before becoming head of the IMF.

She has no direct experience in monetary policy or for that matter in commercial or central banking – you can argue about whether the IMF is a bank (it does make loans, although not on commercial terms – neither does the ECB, for that matter). But I expect everyone to simply gloss over this question. She may not be a PhD economist like Draghi, but she’s not Ivanka Trump, either.

Her appointment is even more unusual given that the new #2 at the ECB, Luis de Guindos Jurado, has only a BA in economics and was also a politician – he was most recently the Economy Minister for Spain. But he was Economy Minister for Spain during the Eurozone’s financial crisis and managed the bailout of the country’s banks and overhaul of its banking sector, so that experience certainly qualified him.

The qualifications of these two contrast with the outgoing team –Draghi did his PhD in economics at MIT under some of the most famous economists in the world, while de Guindos’ predecessor, Vitor Constâncio, has an MA in economics and served twice as the Governor of the Banco de Portugal.

New ECB Chief Economist

Having these two less-well-versed people at the top of the ECB board will shift a lot of the power to the new ECB Chief Economist, Philip Lane, who recently took over from Peter Praet. No one argues about Lane’s qualifications. He’s a PhD economist rated among the “Top 5% of Economists in the World” and the former Governor of the Bank of Ireland. Lagarde and de Guindos will probably rely on him for the more technical aspects of policy.

Lane made clear his views just this week in an extensive speech entitled “Monetary Policy and Below-Target Inflation.” He said: “In the context of the euro area, the ECB has been active and creative in deploying non-standard measures, in addition to extending the range for the policy rate into negative territory. Our assessment is that this policy package has been effective and further easing can be provided if required to deliver our mandate.

At the same time, an extended phase of below-target inflation poses a communication challenge in maintaining focus on the medium-term inflation goal…”

The policy under Lane

This assessment suggests to me that, first off, Lane agrees with Draghi both on past ECB policy and the need to ease further. Thus we are likely to see ECB policy continue much as it has under Draghi, with an emphasis on getting inflation back up and supporting growth. And secondly, that Lane sees the need for a strong spokesperson for the Council who can explain ECB policy and win the support of the various constituents who are affected by it.

It looks to me like a well-thought-out team: a monetary expert to devise policy, and a seasoned politician to act as spokesperson and take the flack for the what’s bound to be the continued failure to meet their targets.

Furthermore, with the ECB approaching the limits of what monetary policy can do, much of its work from now on will be political rather than monetary: working towards a banking union and capital markets union and persuading EU politicians to do their part with structural reforms.

Draghi’s statement after every ECB Council meeting ends with a plaintive cry for help from other parts of the EU governance machinery: “In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities,” he says each time, but to what effect? Perhaps Lagarde won’t have the same authority as Draghi does when it comes to explaining the implications of M3 growth, but on the other hand, maybe her relations with the politicians will win her a hearing on other matters that he was less successful at.

The ECB Governing Council

Lagarde’s appointment is in some ways a return to the time when former Bank of France Gov. Jean-Claude Trichet was President (2003-2011). Although an economist by training, Trichet functioned largely as the spokesman for the Governing Council.

Draghi, by contrast, has definitely led the group, often seeming to take bold decisions by himself – his “whatever it takes” statement of support for the euro was not the result of late-night haggling and compromise, like most EU decisions.

The ECB Governing Council may be shaping up to be more like the FOMC, which is also led by a lawyer nowadays – but obviously with a good number of economists and a large staff to present options and ideas. That comparison isn’t so reassuring though, considering that Fed Chair Powell has had some problems getting the hang of the communications side of his new job.

And Powell had two advantages over Lagarde: he was on the FOMC for several years before taking over the top job, and the Fed’s policy is less complicated than the ECB’s, which has a bewildering array of programs with their accompanying acronyms (TLTRO, APP, NIRP, FG, etc).

The ECB will also lose one of its other main thinkers when Benoit Coeure leaves at the end of this year. Draghi, Coeure and the previous Chief Economist, Peter Praet, were the trio really running monetary policy. It’s not yet clear who will replace Coeure – if the person doesn’t have a strong monetary background, then basically it will be Peter Lane running the technical side of the show.

The Bottom Line

The euro is a political project, not an economic project, and it makes some sense to have someone who can handle the politics in charge of it.

What are Lagarde’s preferences? That’s the key for the euro. We don’t know for sure yet, but in April 2016 she said that negative interest rates in the Eurozone and Japan were “net positives” for the global economy.

At the IMF she urged help for Greece and took the lead in apologizing for the IMF’s pushing of counter-productive austerity programs – showing she is more pro-growth than anti-inflation, and also that she is not doctrinaire.

I would expect her to continue with the ECB’s search for new and creative ways to get inflation back up to their target of “below but close to 2%” – although the experience of Japan shows how hard it’s likely to be, absent structural reforms.

The market certainly expects her to continue in the vein that she was working at the IMF – the plunge in Italian bond yields today demonstrates that they consider her a “dove,” perhaps in contrast to the person who was thought to be the front-runner for the position, the uber-hawk Jens Weidmann. In that respect, I think her appointment should be seen as a small negative for the price of the euro, but a positive for its long-term future.

BDSwiss Special Market Analysis was written by Renowned Fundamental Analyst Marshall Gittler

Globalism and The Economy

Is the US still the world’s leading superpower?

While the strong global economic growth of the late 19th and early 20th centuries was driven in part by the two first phases of industrialization and the transport revolution in Western Europe, successive wars on the old continent have weakened growth and European countries. Since then, globalization has given a boost to global growth, while propelling the United States to global superpower status.


What is globalization?

Globalization is all about commercial interaction between different parts of the world. These flows can be exchanges of goods, capital, services, people or information. This was all made possible by the improvement of the means of communication (NICT), the containerization revolution, the very low cost of maritime transport, the increasing liberalization of trade (GATT and then WTO in 1995) and the deregulation of financial flows between countries.

Since the 1990s, globalization has accelerated, with the fall of the USSR, the rise of the Internet, the creation of the World Trade Organization (WTO, 1995) and regional free trade agreements such as NAFTA all contributing to this acceleration.

With the First World War, the United States quickly became the world’s leading economic centre

In 1945, the US held ⅔ of the world’s gold stock and accounted for 50% of global production. The new world economic order was organized by the US (IMF and IBRD in Bretton Woods in 1944, GATT in 1947), and their currency – the American dollar, or USD – became the currency of international trade. Wall Street in New York became the economic and financial heart of the world.

What made the United States a unique superpower?

The American democratic, capitalist and liberal model, as well as the American way of life, spread to the non-communist world, with the Marshall Plan (1947) and the development of multinational companies.

By the end of the 20th century, the emergence of mass media and the Internet revolution gave Americans the opportunity to influence the entire world even more.

With the development of mass consumption that began in the 1950s, many American products arrived on other markets. Some products are now an integral part of the lives of many Europeans, Asians and South Americans, such as the Visa card, sportswear such as Nike, soft drinks such as Coca-Cola, fast food such as McDonald’s, as well as American music, cinema, universities, etc.

This undeniable cultural influence, called “soft power”, is a huge source of influence for the US across the world. This “soft power” indirectly influences and positively shapes the view of the USA in the eyes of other countries. This power makes adoption of the American point of view much more palatable to other countries, all without the need for force or threat.

In addition to “soft power”, there is also “hard power”, characterized by economic hegemony, technological progress (information technology, nuclear, space conquest) and first-rate military and diplomatic power, which make it possible to impose the will and power of the United States on the rest of the world by force or intimidation.Earth from space

The US – the powerful (and criticized) nation at the heart of globalization

The American system arouses as much wonder as questions/criticism in regards to their management of the social crisis and poverty, political extremism, weak environmental protection measures, etc. It could be argued that American influence has declined in recent years, although the country remains a first-rate power that dominates many sectors of activity.

First of all, we can see heightened criticism of the American hegemony, even if anti-Americanism is not exactly a new phenomenon. Several countries (Russia and China foremost among them) and political currents reject the American model, while US involvement in foreign wars are subject to the harshest criticism.

The United States is also experiencing an increasing number of economic competitors, such as from the European Union and the BRICS countries (Brazil, Russia, India, China and South Africa). The subprime crisis in 2007 also eroded the power of the US, both immediately following the crisis, and in the years since.

China became the world’s leading economic power ahead of the United States in 2014, after 142 years of “American rule” according to IMF figures. The increased debt burden and evidence of the United States’ dependence on foreign capital (particularly Chinese capital) is also a factor that challenges US supremacy.

How has the election of Trump altered the future of globalization?

The surprise election of Donald Trump as the 45th American president invites a re-evaluation of the future of the global economic order. Movement of goods, money, and people across international borders have all certainly changed since Trump’s election, as “resistance to globalization” was one of his prominent policy themes during his election campaign, with particular emphasis on the US-China relationship.

China and the United States have an extensive – but tense – economic partnership, often triggering periods of conflict, such as the current situation. Trade tensions have significantly increased since 2018, when Trump first sought to limit Chinese economic influence with tariffs.

Trump’s plan to reduce his country’s dependence on China focuses on increasing taxes on their imported products, so American products are favored locally and purchased instead. Of course, China reacted by increasing taxes on American imported products. These trade tensions and tariffs could cut global output by 0.5% in 2020, according to the IMF. Consequently, the organization cut its global growth forecast.

”There are growing concerns over the impact of the current trade tensions. The risk is that the most recent US-China tariffs could further reduce investment, productivity, and growth,” said IMF chair Christine Lagarde.

Trump’s wish to implement US protectionist policies will have one important consequence for the country: as the USA turns inward on worldwide economic integration, this will certainly have an impact on global stocks and flows. Knock-on effects to this policy, such as retaliation from countries like China, canceled contracts with American companies and suppliers, and countries that seek to imitate Trump’s anti-globalization agenda (like Greece and Hungary), may also all lead to significant consequences for the global economy.

What consequences on the global economy can be expected if the trade war escalates?

As noted by the European Central Bank in its analysis on Implications of rising trade tensions for the global economy, the impact of an escalation of trade tensions could be felt in different ways.

”In the case of a generalized global increase in tariffs, higher import prices could increase firms’ production costs and reduce households’ purchasing power, particularly if domestic and imported goods cannot be substituted for each other easily. This could affect consumption, investment and employment. Moreover, an escalation of trade tensions would fuel economic uncertainty, leading consumers to delay expenditure and businesses to postpone investment,” declared the ECB.

How to take advantage of the changes in our interconnected global economy? 

”In response to higher uncertainty, financial investors could also reduce their exposure to equities, reduce credit supply and require higher compensation for risk,” added the European organization.

It’s worth mentioning that ”through close financial linkages, heightened uncertainty could spill over more broadly, adding to volatility in global financial markets”, which can create great trading opportunities for investors.

Thankfully, there are plenty of available instruments that can turn a profit in any market condition. You can short an Index, diversify into a new, more promising, geography or just bet on volatility. The main things to watch for when seeking such exposure is that your broker is regulated and the scope of instruments it can provide. It doesn’t hurt when a broker has a robust, efficient and reliable trading platform, such as Multibank Group.

Times of great uncertainty breed great opportunities, investors and traders can make the most of the potential changes in the world order by focusing on the most promising region, or business sector.


The United States remains one of the world’s largest economies. It is a major power that excels in many areas, with an influence that is exercised both with hard power (economic, military and diplomatic power) and soft power (cultural influence).

However, the country faces many challenges, challenges that threaten to erode its role as a superpower, such as the emergence of significant economic competition from other countries, and their recent policy shift to economic isolationism.

Highly integrated into globalization, the recent decisions of the United States regarding greater protectionism, and the hard retreat from globalization wanted by Trump, affect the world economic order and global trade flows.

The current global climate is well encapsulated by Harvard Business Review – ”the myth of a borderless world has come crashing down. Traditional pillars of open markets – the United States and the UK – are wobbling, and China is positioning itself as globalization’s staunchest defender”…

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Traders unwinding G20 hedges, but can the good-will last?

Now, while the bulk of what we’ve seen was in-line with expectations, and aligned with what was reported in the Chinese press last week. However, risk assets have warmed to what they’ve heard, and traders are clearly unwinding their G20 hedges today.

Looking around the markets, we can see the S&P 500 and Nasdaq 100 futures are up 0.9% and 1.2% respectively. Asian equity markets are firmer, notably in China, which is over 2%. In FX land, USDCNH (offshore yuan) is 0.3% lower, although it has come firmly off it’s earlier low and perhaps reacting to the contraction in the Caixin and NBS manufacturing report. USDJPY has followed S&P 500 futures higher and is tracking at 108.24.

Interestingly AUDUSD is a touch lower on the day, as is EURUSD, resulting in the USDX up smalls. The NOK is the best performer in G10 FX, largely as a result of a strong move in crude on the open, while the TRY is finding buyers as volatility sellers encourage carry to outperform.

G20 review

In my mind, there are too many questions that remain, and there’s been no real progress on the key sticking points to feel this is in any way a game changer, at this stage. Certainly, the US and Chinese corporate sector, or the Federal Reserve, will have not heard anything that gives them real confidence that the G20 Summit changes the script. However, the highlights that spring out:

• Trade truce – there will be no new tariffs, for now, on the remaining $300b of Chinese exports (to the US)

• Trade truce – A commitment to resume talks that recently fell apart – when do these formally start?

• Political landmine – the US will loosen restrictions on US tech company sales to Huawei and the wider China tech space. There is a credibility angle here, and we have already seen huge condemnation from cross-parties from the likes of Chuck Schumer and Marco Rubio.

• In return, the Chinese will commit to buying increased amounts of ag products from US farmers

• Improved visa treatment for Chinese students in the US

We are most focused on the schedule and future meetings between the two respective trade teams, in the search for real substance and the leaders to agree. Like many, I am cautious, as it feels these policies are cosmetic and designed to keep financial markets in check. We are watching domestic pushback, notably on the political fallout from Trump’s easing of pressure on Huawei – it has already been met by angry protests from the Democrats (specifically Chuck Schumer) and on Trump’s Republican side, namely Marco Rubio, who is threatening to put the restrictions (on Huawei) back to Congress.

Fed speakers to watch

The question we need to ask is whether these outcomes give the Fed any clarity and I’d argue not really. It will, therefore, be interesting to hear the thoughts, direct from the source, with Fed vice-chair Richard Clarida due to speak shortly at 16:10aest, and then NY Fed president John Williams speaks tomorrow at 20:35aest. It feels too early to believe the G20 fully removes the threat of a 50bp cut, especially when we get the US ISM manufacturing (00:00 aest) and non-farm payrolls (Friday (22:30aest) this week. So, expect the USD, gold and equities to be sensitive to this narrative.

We can also add the fact that we’ve heard agreement between Russia and OPEC to extend the production output curbs into 2020, and we’re currently seeing Brent and WTI crude gaining 2% apiece.

I focus on the Fed here, but consider tomorrow’s RBA meeting (14:30aest), as this is a genuine risk event for traders holding an AUD or AUS200 exposure over the announcement. The AUDUSD set-up looks constructive, although the risk of a failed break above the neckline of the double-bottom is increasing. As far as the playbook and the key considerations that I feel should be assessed, it feels as though the AUD upside should be greater than that of any downside move. Although the case for a cut or for rates to be held for this month is finely balanced, and I wouldn’t like to be too exposed to this meeting.

AUD playbook:

• Looking at Aussie cash rate futures pricing, a cut tomorrow is priced at 69%. We can make a strong case for the RBA to cut or to hold. But this pricing suggests we could get a decent spike higher or lower at 14:30aest, and it poses a risk to traders holding AUD exposures over the announcement.

• AUDUSD overnight implied volatility sits at 13.03%%, residing at its 57th percentile, but the period in May masks the reality of its current elevation. Through options pricing, we can see this equates to a 42-pip move (with a 68% degree of confidence) in either direction, with the one standard deviation range at 0.7042 to 0.6958. I have charted this, as well as increasing the level of confidence to 80% of how far price may move (from spot) and see price contained in a 0.6930 to 0.7066 range.

• 18 of 26 economists are calling for the cut, with all of the ‘Big-4’ forecasting easing.

• A quick glance at the weekly futures trader’s report (CFTC data), and we can see ‘non-commercial’ traders (predominantly those who use FX futures to speculate) hold a net short position of 66,320 contracts

The bottom line is this is a genuine risk event for traders. Some love this backdrop and will trade around the announcement. Others will see the implied vol and binary nature of the event risk and reduce exposures. But this is the crux of event risk management.

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Chris Weston, Head of Research at Pepperstone (Read Our Review)

Traders Managing Exposures Ahead of The G20 Summit

That dynamic is in play right now, and it is why we should follow and react to price moves above all else.

Take, for example, the barrage of headlines that are brewing in the lead-up to the G20 meeting, which plays out this Friday and Saturday. With the real focus falls on the Xi-Trump meeting, which looks to be taking place at 12:30 AEST on Saturday. Small focus also falls on the Putin-Trump meeting, which takes place at 3 pm (AEST).

Expectations for progress set sufficiently low enough

Over the past 15 hours or so we’ve heard from US Treasury secretary, Steven Mnuchin, suggesting (and referring to a US/China trade deal) “we were about 90% of the way there” and “that’s there’s a path to complete this”. There was some buying of equities and risk on the back of these headlines, although, the market didn’t get overly excited as it was seen in the past tense, and recall, Mnuchin said they were 90% there in April shortly before Trump slapped fresh tariffs on China on 5 May.

Hu Xijin, the now widely-followed editor of the China Global Times (state-owned), then responded to Mnuchin’s comments on Twitter, detailing “no Chinese official now speaks with such optimism. With dozens of hours left before Xi-Trump summit, Chinese state media has been keeping criticizing the US harshly, a situation that never happened in the previous China-US summits.” This doesn’t sound like China are coming to the party with ideas of making a deal.

We also heard from Trump, himself, stating that “my Plan B is that if we don’t make a deal, I will tariff and maybe not at 25%, but maybe at 10%, but I will tariff the rest of the $600 billion that we’re talking about”. “My attitude is I’m very happy either way”. This is expectation management 101 and the bar for a clear resolution at this G20 Summit is now set accordingly.

The bottom line is the market has been hit by a barrage of noise that gives us less clarity than before.

Indecision seen in market moves

With such conflicting headlines it’s no real surprise to see US equity indices doing very little, and if we look at the S&P500 (US500) through the cash session, the tape showed a slow bleed lower. If it weren’t for a 2.7% rally in crude, driven by a monster 12.7m barrel draw in the weekly DoE inventory report, which was over a two standard deviation event from the five-year average, then US equity indices would have been far lower on the session. I touch on the set-up (see below) in WTI crude in ‘chart of the day’, as we have hit the double-bottom target and horizontal resistance, so it would not surprise to see consolidation here.

We’ve seen reasonable selling in the US bond market overnight, but let’s not forget the world is very long bonds, and after James Bullard comments yesterday (which I covered in yesterday’s note), there is a slight paring back of expectations for a 50bp cut in the July FOMC meeting. And this remains a huge question for markets – will we see a 50bp or 25bp cut from the Fed in July FOMC meeting?

USDJPY has pushed into 107.70 following the move in US Treasury yields, but it feels like traders are lining up to sell rallies in this pair, although a look across the Asian markets we can see far more optimistic moves, which I will touch on in my daily trading wrap (video).

Keeping the USD firmly on the radar

It’s the USD; specifically, that is of interest as we head into and post the G20 Summit, as it feels as though the market is looking for a sustained move lower.

USDCHF testing the 5-day EMA

Trump seemingly agrees, having again disclosed that the USD is too strong and that the EUR is too weak, and while I’ve not really heard any scuttlebutt for any bilateral or multilateral agreement to weaken the USD, the outcome of the Summit could influence expectations for a 50bp cut from the Fed. We know the Fed are looking at what is said or not said, and while the most likely situation is we simply hear a lot of bravadoes that the two sides plan to work closely together and agree to find a solution that is amicable, we still need to consider if the event poses a gapping risk for markets. Could we hear something that gives us genuine encouragement and we see price open significantly from Fridays close?

It certainly feels as though the probability is we will see traders manage exposures, refraining from adding too much additional risk just in case.

So, if the G20 proves to be a non-event, aside from broad financial conditions and inflation expectations, these data points should go some way to answering the 25/50bp debate:

• US ISM manufacturing – 2 July

• US Services ISM 4 July

• US non-farm payrolls – 5 July

• US CPI – 11 July

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Chris Weston, Head of Research at Pepperstone (Read Our Review)

The Race to the Bottom is On

The ‘dots plot’, or its fed fund projections on where each Fed member sees the fed funds rate by a set date have been a market mover when so many had said they were redundant. With seven Fed members now forecasting a 50bp cut this year, a movement has started. Powell even went one further, detailing that those members whose ‘dot’ call was unchanged for this year, felt “added accommodation may be necessary”. They just need a bit more convincing.

The removal of “patient” was mostly in the price, where we see new guidance, where “in light of these uncertainties and muted inflation pressures, the committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion”. Another highlight of Powell’s speech was the line, “in a world where you are closer to the zero-lower bound. It is wise to react to prevent a weakening from turning into a prolonged weakening. An ounce of prevention is worth a pound of cure.” Aside from the theatrics in his choice of words (my emphasis), it gives us a belief that when they ease, they could try and get ahead of the curve, and this appeals to the magnitude of easing.

The triggers for a 50bp cut 

The reaction in rates markets couldn’t be any clearer, and now we see a 100% probability of a cut at the July meeting and over 100bp (four cuts) over 12-months. The question of a 50bp cut in July has come up, and I guess that will be determined by the outcome of the G20 meeting later this month. But we have to consider the data too, and between now and 31 July, we look for core PCE (28 June)ISM manufacturing (2 July) and non-farm payrolls (5 July) as our guide. Specifically, if US non-farms come anywhere near the numbers, we saw in May then 50bp in a thing. In the market’s eyes, it’s on, it’s a race to the bottom, and this notion of currency wars is kicking fully into gear, and It feels like this week is genuinely significant, with powerful insight to what could lie ahead.

While we’ve seen Asian equity indices finding buyers, it’s the flow in our ASX 200 index that has been noticeable. Interestingly, the ASX 200 is just 2.8% from a test of the 1 November 2007 all-time high. Valuations are punchy here, and the forward price-to-book is at an all-time high, with the 12-month price-to-earnings ratio at 16.22x – the highest since December 2017. I am not sure valuations matter too much when we look at subdued realised and implied volatility and Aussie bonds yields, which are negative if we adjust for inflation expectations and the ‘real’ return. The market will generally be interested to pay up for those earnings in this dynamic, especially as the current earnings yield in the index is now some 427bp (or 4.27ppt) above what Aussie 10-year bonds yield.

And, it’s the moves in bonds that have reverberated, they are in beast mode right now. We can see when US 2-year Treasury’s smashed through 1.80% it just heightened the need to buy more, and the 50-week average at 1.59% beckons. US 10s have sailed through 2% through today, trading a further 5bp on the day to 1.97%, and while there is just so much love for bonds, this is a juggernaut that few sellers are going to get in the way of. If we adjust these bonds for inflation expectations, and look at 5- and 10-year Treasury’s on a ‘real’ basis, then at 17bp and 28bp, they are not too far from turning negative. In Aussie fixed income markets, we see the inflation-adjusted yields in Aussie 10-year bonds now -9.9bp – a record low.

Gold is the best house on a progressively awful neighborhood

If the loser from the moves in rates and bond yields is USDJPY, which we see at 0.3% lower at 107.73, the beneficiary of these moves in bond yields is gold, and our flow has lit up today. Mostly, we’ve seen the two-way flow in USD-denominated gold (XAUUSD), but we have seen good buying of AUD-denominated gold (XAUAUD), which has smashed through A$2000 and into new highs. The FX translation effect isn’t a huge issue at this point, as gold is rallying in every G10 currency, including NZD, which is the best-performing currency today after a slight hotter-than-forecast Q1 GDP (2.5%). And, when gold is rallying in every currency you know it’s hot, as traders see gold as a currency in its own right and the best house in an ever-deteriorating neighborhood. As long as real rates are headed lower, the pool of negative yielding bonds increases (currently $12.3t) then gold is only going one way.

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Chris Weston, Head of Research at Pepperstone

1990s vs. 2010s. Which Expansion Will be Better for Gold?

In the previous edition of the Market Overview, we suggested that the current expansion still has room to run. After all, the ongoing boom is very long, but this is because it is very weak. If the US economy is to replay the robust recovery of the 1990s in terms of GDP growth and not merely in terms of number of months, it could grow for additional couple of years.

Now, let’s compare our growth leaders in a more detailed way and draw valuable conclusions for the economic outlook and the gold market.

Chart 1: Current vs. economic expansion in the 1990s compared in terms of real GDP (green bars), industrial production (blue bars) and real incomes (red bars)

As one can see in the chart above, although both expansions lasted the same time – 120 months – the boom of the 1990s was much stronger. Indeed, the real GDP and real income soared more than 40 percent, while industrial production surged more than 50 percent over the decade. In contrast, all three measures increased just about 25 percent in the 2010s. It means that the current expansion is much weaker. In part this is completely understandable, because as time goes by and economy advances it is harder for maintaining a fast growth rate. But still the sluggish growth is disturbing, with the exception of the gold bulls who should welcome it.

Let’s move on now to discuss the US labor market. As one can see in the chart below, the unemployment rate at 3.6 percent is currently below the bottom of the 1990s (3.8 percent), although the current expansion started which higher unemployment rate than the former expansion.

Chart 2: US unemployment rate (red line, left axis, U3, in %) and the labor force participation rate (blue line, right axis, in %) from March 1991 to April 2019.

However, the labor participation rate is significantly lower than in the 1990s, as it declined from about 67 to 63 percent. It indicates that the labor market slack is greater than the unemployment rate suggests. Indeed, the U-6 unemployment rate, which includes also all marginally attached workers plus total employed part time for economic reasons, is at 7.3 percent, a 0.5 percentage point above the through of 6.8 percent in October 2000. If indeed the labor market slack is greater than commonly believed (which would explain the sluggish wage growth), than economic expansion can last longer without overheating.

Let’s compare now inflation in the 1990s and currently. As the chart below shows, inflation rate has been recently significantly lower – more than 1 percentage point, on average – than in the 1990s. Then, there was a disinflation, so gold struggled. Since the Great Recession, inflation rate stabilized, but at stubbornly low level.

Chart 3: US CPI rate (as % from a year ago) from March 1991 to April 2019.

Gold, which is considered to be inflation hedge, does not like low inflation. Although low inflation also means more dovish Fed and lower nominal interest rates, it allows the Goldilocks economy to last.

Indeed, the chart below shows that the nominal long-term yields are significantly lower than in the 1990s. Similarly, the greenback’s strength is weaker than 20-30 years ago. It suggests that the current expansion has still more room to run.

Chart 4: US Long-Term Nominal Interest Rates (red line, right axis, 10-year Treasury yields, in %) and the Trade Weighted US Dollar Index (green line, left axis, against major currencies) from March 1991 to April 2019.

What does it all mean for the gold market? Well, the macroeconomic environment in the 1990s was much worse for the yellow metal. The GDP was rising quickly, while the labor market was strengthening. Inflation was decreasing, while the US dollar was strong and appreciating in the second half of the 1990s. The US fiscal policy was tightening, while the Fed was lifting the federal funds rate in 1993-95, as one can see in the chart below.

Chart 5: Federal deficit (green line, as % of GDP) and the effective federal funds rate (red line, annual average, %) from 1991 to 2018.

Not surprisingly, gold struggled in the 1990s. The current expansion – despite the fact that gold has been recently in a sideways trend – has been much better for the price of the yellow metal, as the chart below clearly shows.

Chart 6: Gold prices (London P.M. Fix, in $) from March 1991 to April 2019.

But what does it imply for the future? First of all, our analysis confirms the view that – given the level of slack in the labor market and low inflation – the current expansion could continue for a while. This is bad news for gold. But we have also good news. In the 1990s, the economy grew strongly despite Clinton’s fiscal surpluses and Fed’s tightening in 1993-95. Now, the economy expands slowly even when supported by Trump’s fiscal deficits and the Fed’s ZIRP that lasted until December 2015. It doesn’t bode well for the future for the economy in the long term, but it fills the gold bulls with optimism. After all, gold remains in the sideways trend not without a reason: the Goldilocks economy feels good right now, but it might jump out the window later.

Arkadiusz Sieron

Sunshine ProfitsGold News Monitor and Market Overview Editor

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Monthly Macro Outlook: The gloom deepens

Developed markets have been more resilient and often served as safe havens, especially the US market, while emerging markets suffered from low volumes, risk aversion and a strong USD. Over the past month, the MSCI Emerging Market Index lost 9%, with a drop of 14% for the SK stock market and, also, 14% for the South Africa’s JSE. Investors are adjusting their growth expectations which will likely increase pressure on central banks to balance their monetary stance in a more accommodative direction.

Downwards adjustment in new credit in China

Looking at the latest Chinese data, we still expect pickup in growth. April new lending numbers were a bit soft, but we know that monthly credit flow data have always been volatile, even in a period of stronger stimulus policy. In addition, it is not surprising to have a downwards adjustment after so much new credit went through in Q1 (representing about 9% of GDP).

As was the case during the 2016 slowdown, the state sector has also recently started to serve as a shock absorber, with state investment growth moving higher to offset deceleration in private investment. This trend is likely to become clearer as the trade war intensifies. Overall, the ongoing US-China conflict will probably be bullish for China’s growth, as the government is forced to open wide the credit tap and to step in in the economy to stimulate sectors that are the most exposed to US tariffs, such as the communication service sector.

Rest of the world: No V-shaped recovery

Contrary to expectations expressed at the beginning of the year, China’s stimulus hasn’t so far had noticeable positive ripple effects on either neighbouring economies or at a global level. Basically, exports are in contraction in most Asian economies, except for Vietnam due to a jump in exports to the US of 28% YoY in the first five months of 2019.

In April, China’s exports were down 2.7% YoY, Japan’s exports came out at minus 2.4% YoY and Thai exports were doomed for a second straight month of decline at minus 2.6% YoY. Deterioration will continue at least in the short term. In May, South Korean exports over the first 20 days of the month were out at minus 11.7% and Taiwan’s Ministry of Economic Affairs warned that YoY exports could be out between minus 7.6% and minus 10% in May.

In the United States, the outlook is more negative than in Q1. There are still several economic data indicating the economy is strong, but red signals are popping up here and there and start to raise the concern of investors. Recent Q2 US data were weak: manufacturing activity dropped to more than 9-year low, durable goods orders keep falling, suggesting deceleration of industry activity and one of our favourite indicators tracking the general state of the broad economy, the Chicago Fed National Activity Index, is back to where it was in Spring 2016, at minus 0.32.

On the top of that, the Atlanta Fed’s GDP Now tracker has GDP growth for Q2 at 1.2%, way off the 3.2% reported in Q1. As we see the negative impact of trade war and the economy is not fuelled by massive tax cuts anymore, growth in the second quarter is likely to disappoint and be out close to 1%, which reinforces our view that the Fed’s next move will be an interest rate cut. Only based on the breakdown of US-China talks, there is a strong case for at least one rate cut in H2 and further cuts will depend on how much of a deterioration we see in economic data in coming months, looking especially at financial conditions and evolution of consumption and inflation.

G20, political risk and central banks on the agenda in June

Looking ahead, the month of June will be very busy for investors. Elections are back on the agenda in Europe, with snap elections by the end of June in Greece, in September in Austria and the start of the Leadership Campaign in the UK on June 10 following PM May’s effective resignation on June 7.

In our view, the ongoing political process in the UK makes its exit from the EU scheduled for the end of October very improbable. The new Tory leader will be elected at the end of June and might call for snap elections in September/October as he or she will be looking for popular legitimacy. It is getting clear that a new exit deadline will need to be negotiated with the EU.

In other part of Europe, following its strong performance at the EU elections, the Italian Northern League could seize this opportunity to call for early elections in order to get rid of its bulky coalition partner, the Five-Star Movement. Tensions about the Stability Pact between Brussels and Roma are also likely to increase as the European Commission will probably start disciplinary steps against the country on June 5. We see Italy-Germany 10-year bond spread to further move towards 3% in the near term.

Another consequence of the EU elections is that EU leaders will announce in coming weeks the name of the successor of Mario Draghi as president of the European Central Bank. In a perfect world, the best candidate based on monetary policy knowledge, academia and government experience and charisma would be Benoit Coeuré but he lacks the support of his home country, France.

A more realistic and consensual option would be Finland’s Olli Rehn who is quite aligned with Mario Draghi’s dovish stance. However, experience and knowledge will not be the first and main criteria and still other options are on the table, including Jens Weidmann and Klaus Regling. It is not certain that Draghi’s successor name will already be unveiled when the ECB next meets on June 6.

There is little doubt about the outcome of the meeting in terms of monetary policy: the ECB has no other choice than to adopt a dovish stance as the economy is slowing down, fears of lower activity are spreading to Germany’s services (as pointed out by Markit: “the surveys highlight that fears of a slowdown may have started to spread to services, where confidence is now at its joint-lowest since 2014”) and market-based inflation expectations are uncomfortably low. The 5y5y euro inflation swap is running slightly below 1.30%, for the first time since September 2016, and core inflation that will be released on June 4 is set to collapse to 0.8% according to consensus.

The only direction for the ECB is to be more dovish and, no matter who will be the next ECB president, he will need to stick to economic reality and the need for central bank life support.

Finally, on the trade war front, we still expect there will be ultimately an agreement but, as of now, there are too many pending issues on both sides to reach it. The upcoming G20 in Osaka, where presidents Trump and Xi should discuss ongoing tensions, should not lead to any significant steps towards resolution.

Contrary to what has been written here and there, the probability that China will massively sell T-bonds is close to zero as this nuclear option would hurt China as much as the US, as bringing down the value of China’s existing holdings of T-bonds. However, retaliation on rare earths exports (such as a ban to export to the US) or further depreciation of the CNY are still possible options if things get nastier between Beijing and Washington.

Christopher Dembik, Head of Macro Analysis at Saxo Bank.

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Three Reasons Frankfurt will not Overtake London as the Finance Capital after Brexit

This nervousness has started to show through in attitude surveys. Only this week, the latest Duff & Phelps Global Regulatory Outlook report found that New York has knocked London off the top spot.

But global finance operates in very long cycles; seismic shifts are rare and by its nature, finance thinks and plans in terms of many decades, not years. What might seem to be an unstoppable industry realignment is often little more than a minor strategic adjustment to retain the status quo.

Frankfurt is being touted as the next global hub, set to seize the European crown and overtake London in the next few years. There’s no doubt that Frankfurt is, and will continue to be, a key finance hub. But for many international players, it will never be anything more than a London satellite.

London has the financial history and the expertise

London has been a trade centre since Roman times but the UK’s current financial rise started in the mid-1980s when the Prime Minister of the day, Margaret Thatcher, relaxed a whole raft of regulations in what became known as the Big Bang. This kicked off an explosion in financial services and helped create the heavyweight London finance sector we see today.

The 21st Century UK economy is built on financial services. Its regulatory environment and the legal system is designed to make doing business in finance easy, and perceived low corruption levels combine to make it a safe bet for big institutions.

In fact, many have argued that the UK has gone too far when it comes to rotating its economy towards services and away from manufacturing. That’s hard to dispute when, today, the UK’s financial sector is worth more than £100bn to the UK economy and accounts for over two million jobs.

This history is important because it has enabled London to put down roots that stretch globally into every financial network and hub. Generations of expert financiers have been drawn to London; institutions have built their businesses here and angled their operations with London at the centre.

Language and culture are important factors

Not only does London have the history and expertise, but it also has the language and international culture; two things that are often overlooked and are holding many banks and their employees back from mass relocation.

And they’re a significant factor. Martin Armstrong, a partner at headhunting firm Armstrong International, said recently:

“Culturally, Paris is French, Frankfurt is German but London is international. The Americans, who own this industry, want to operate in an English speaking environment. No one wants to go.”

That’s not to say that banks aren’t looking to create a new space in Europe to hedge against a no-deal and loss of passporting. But figures from January this year from Reuters show that London jobs are still being advertised with JP Morgan, Goldman Sachs, Citigroup, UBS, Credit Suisse and even Deutsche Bank amongst others all looking to fill more than 1500 new UK roles.

In fact, in January just 300 jobs had been listed for the whole of Germany and France – not the mass exodus predicted. Plus, while all eyes are on Frankfurt, other Eurozone countries are coming up on the rails: next to the UK, the fastest growing finance jobs market is not in Germany but in cities across Poland, where almost 900 roles are currently advertised.

The UK will always be a desirable place to live and work

Finance is a sector that often hides its human face. But just like every other industry, it needs to attract the very best talent to remain competitive and successful. That is proving difficult right now when it comes to tempting staff to relocate out of London, and is probably reducing take-up of positions by the next generation coming into the sector.

London is, rightly or wrongly, deemed by workers to be a more appealing place than Frankfurt to work. Younger workers from across the world are tempted by London for its cosmopolitan vibrancy, innovation culture and social scene. For those with families, commuting is easy and the UK is renowned for its top high schools, universities and business schools.

While Frankfurt might well be on the rise, and will doubtless be a competitor in the future, London is likely to stay ahead for these reasons plus one other: the UK is constantly evolving. It’s a nation of innovators and its finance sector is more agile and flexible than possibly any other.

British governments are well aware that they must keep the UK ahead in the global financial race and no matter who is in power they will know that long-term stability and success depends on the UK’s position as one of the leading global finance centres. They will do everything it takes to ensure London remains at the top.

Scott Johnson, Managing Director at Claydon Energy Partners

Don’t Forget the US-Iran Dispute, It’s not Gone Away…

Relations between the two countries have deteriorated sharply since April

On April 8t, the US administration labeled Iran’s elite Revolutionary Guard Corps as a foreign terrorist organization.
On April 22, the USA ended exemptions from sanctions for eight countries (China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey) still buying oil from Iran.

On May 8, the USA unveiled new sanctions against the Iranian mining and steel sectors. In retaliation, Iranian President Rohani announced the same day that Iran will no longer comply with two of its JCPOA obligations: the country will stop exporting its surplus of enriched uranium and heavy water, which means that at some point it will exceed the ceiling of stock authorized by this multilateral nuclear accord.

In addition, if other signatories of the agreement (notably Europe) do not help Iran economically, the country threatens not to respect other constraints related to its nuclear programme. In other words, Iran could enrich uranium for military purposes again, which could be interpreted as a casus belli, an event that justifies war, by Washington.

In recent days, the United States has announced the dispatch of military forces in the region, including the deploying of the USS Abraham Lincoln aircraft carrier and the USS Arlington assault ship.

How to explain this sudden increase of tensions?

As a reminder, new US sanctions against Iran were unveiled in November 2018, with targets including 50 banks and their subsidiaries and 200 members of the shipping industry and some restrictions against oil exports (excepting the eight countries mentioned above).

Iran has certainly been slow to react to these new US sanctions for two main reasons: (1) the Iranian regime believed that President Trump would not be re-elected next year, which is getting less and less certain, and (2) it believed that the other JCPOA signatories would help the country economically in order to offset the impact of the US withdrawal from the agreement and US new sanctions. Europe has launched INSTEX to bypass US sanctions but with little effect on trade and the Iranian economy so far. The two other signatories, Russia and China, do not seem eager to engage in a diplomatic standoff. China is even looking to reduce the amount of Iranian oil it is buying, likely in CNY, in order not to increase confrontation with the US.

In addition, in both camps, there are war hawks that push for conflict (in Iran, the Revolutionary Guard Corps are looking to extend their influence over the region, and in the US, neoconservatives like National Security Advisor J. Bolton are dreaming of regime change in Iran).

What could happen next?

It is likely that President Trump does not want to wage war. He even disavowed publicly J. Bolton on that option for Iran. At this stage, it would not make sense at all. The sanctions strategy was bearing fruit by weakening Iran economically leading to inflation at two digits (above 40%), depreciation of the IRR versus the USD at around 143,000 rials to the USD (vs fixed official rate of 42,000 IRR), contraction in GDP that could reach 6% this year according to the IMF and oil exports dropping to their lowest level in decades, at 0.5 million barrels vs 2.5 million barrels one year ago.

An escalation could also jeopardise the stability of the region and efforts to bring solution to the Palestinian-Israeli conflict. In addition, it is unlikely that the Trump administration wants to fight on two fronts (they have certainly learned the lesson from Napoleon’s defeat) as it mostly focuses its attention on China.

The risk of escalation or accident with military implications (eg: US navy ships boarding Iranian ships in the straits of Ormuz) should not be underestimated as it is reinforced by the lack of direct line of communication between Washington and Tehran. Contrary to the Cold War where the red phone connected Washington and Moscow (it was installed in 1963 after the world was on the bridge of nuclear war), such a system does not exist between the two countries to de-escalade tensions.

What could be the market impact?

So far, market impact has been limited. Investors were mostly focusing on the US-China trade war as their top risk and the oil market received welcome signals from other oil producers willing to step in to replace Iran’s barrels. This explains why oil prices have decreased 8.3% since the US announced in late April it would not grant waivers for sanctions on Iran’s oil exports.

However, as we have often said in relation to this and other situations, market complacency, including in relation to the US-Iran tensions, is worrying. Based on all the negative geopolitical surprises that have impacted the market since 2016, it is crucial for investors to also monitor the situation in the Middle East. Our central scenario is not an escalation of tension, but an accident can always happen with notable market implications, especially when there is no direct line of communication between the two camps.

Christopher Dembik, Head of Macro Analysis at Saxo Bank.

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Credit Impulse Flashes a Warning to Major Economies

At the start of the year, the consensus narrative was that growth was well-oriented and risks were limited despite the threat of trade war and sluggish global trade overall. Many analysts still consider growth to be solid, citing solid Q1 GDP growth in several key major economies. Looking at the US and Japan, however, growth is not as resilient as it seems. In both countries, the strong Q1 figures were mainly driven by an increase in stockpiling, which is not the sign of an incredibly dynamic economy.

There is more bad news, as well: it may get worse. We make this bold statement based on the recent fall in credit impulse. Economists used to refer to the stock of credit to understand the business cycle, but academic research since the great financial crisis (Biggs, Calvo, Ermisoglu) pointed out that the flow of new credit – what we call credit impulse – is a better method of assessing where the economy is heading. Credit impulse leads the real economy by nine to 12 months with a correlation of 60%.

Based on our latest estimates, global credit impulse is falling again and now stands at -1.8% of global GDP. The amplitude of the contraction is similar to that seen in Q4 ‘15. That year, the decrease in credit impulse led to the lowest global growth level seen in the current cycle, with global GDP growth reaching just 3.09% in 2016. We have not yet reached that point, but recent developments on the trade war front urge caution on growth forecasts.

So far, half of the countries in our sample are in contraction and the other half, excepting certain emerging market countries like India and Russia, are experiencing a deceleration in the flow of new credit in the economy. In developed countries, the trend is most concerning in the US. US credit impulse is running at -2.2% of GDP, the lowest level since 2009.

The US Composite Leading Indicator, watched by asset managers all around the world, is also confirming this negative signal with the index now at its lowest point since Autumn 2009; the year-on-year rate has fallen from 0.68% to -1.65% over the past 12 months. Such levels are usually consistent with the risk of recession. In addition, the three-month moving average of the Chicago Fed National Activity Index, which gives a broad overview of the state of the economy, is back to where it was in Spring 2016.

With the US economy no longer supported by massive tax cuts and facing the negative economic consequences of the trade war, particularly those felt by US consumers, the outlook may continue to deteriorate in the months to come. This reinforces our call that the current business cycle, especially in the US, is more fragile than most suspect.

We fear this is only the beginning. As you can see in the chart below, we have plotted the global credit impulse against the Chinese credit impulse. China’s credit impulse, which roughly represents 1/3 of the global growth pulse, tends to lead the global credit impulse by one year. As long as the Chinese credit impulse does not return to positive territory, we expect the global credit impulse to move downward in the coming quarters leading to lower-than-expected growth.

The policy response will be crucial in the near term. Due to trade war-related uncertainty, investor belief in a global V-shaped recovery in H2 is growing less certain. We think China is ready and able to further open its credit tap to mitigate the impact of trade war, but this is a challenging task that implies the implementation of very targeted support policy. The goal here would be to avoid fueling the debt bubble as much as is possible. The manufacturing goods sector, most notably the communications sub-sector, represents the largest share of Chinese exports and thus is the most vulnerable to ongoing tensions. It will certainly be subject to support measures very soon.

There is little doubt that China can stimulate its economy, but the same is less certain for the US and the euro area due to policy constraints. In the US, fiscal policy has already been deployed, ultimately fueling a massive federal deficit in a period of growth. The tax cuts had a very strong macroeconomic impact, but the effect could be completely erased if the Trump administration decides to impose a 25% tax on the remaining share of Chinese imports worth $300 billion. Investors expect a lot from the Federal Reserve – bets of a rate cut at December Federal Open Market Committee meeting stand around 60-70%, although it remains quite early to call such a move.

This is also simply not the way that policymaking works at the Fed. We have all noticed the red signals related to the trade war but based on the Fed’s track record, this is not sufficient for a rate cut. At best, we can only really expect a dovish adjustment of forward guidance at this point. For a rate cut to manifest, we would need a combination of lower inflation, a sharp decrease in consumption and tighter financial conditions, and this is not yet the case. The risk is therefore high that investors will be disappointed by the Fed’s answer to rising trade tensions.

My final word comment concerns the euro area. Potential growth here is lower than in the US, which explains why growth is not higher. Despite headwinds hitting the manufacturing sector, domestic demand is resilient. There is little margin for the European Central Bank to stimulate the economy in case of a pronounced downturn (a new round of TLTRO is clearly not enough) so the only leverage left is fiscal policy, but we have very strong doubts that EU policymakers will be able to reach a common ground on that topic.

Populist parties, particularly in Italy, are pushing for further fiscal stimulus. This could make sense if we are talking about coordinated productive investments, but they are constrained by the Stability and Growth Pact that should, but probably never will, be reformed. In other words, despite being the second global economic power, the EU is still one of the weakest points among developed markets due to its lack of any real policy response capacity.

Christopher Dembik, Head of Macro Analysis at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire.

Trading USD using Consumer Price Index (CPI)

To be a successful forex trader, it is essential to know the factors behind demand and supply of currency. The Central Banks control the entire world’s money supply. Traders will be better prepared when they are properly able to comprehend the effect of policy decisions made by Central Banks on the currency markets.

The Central Bank of any nation has 2 major functions – One controlling inflation and other controlling fluctuation in the currency value.

Central Banks use CPI as an indicator for measuring inflation. The Consumer Price Index (CPI) is one of the most significant economic indicators that have a major influence on forex trading. The currency of a nation is directly impacted by the policy of its own central bank’s interest rate decisions and indirectly by the decisions of central banks from other nations.

Forex traders are advised to keep track of the CPI of most major trading nations like the US, EU, Japan, and Australia.  Below section provides comprehensive information on the same.

What is CPI?

The Consumer Price Index is one of the most important economic indicators when determining currency value. It calculates the average change in prices of goods and services for a given period. These prices are on which the consumer buy any item from the given basket of products and services.

The CPI is usually computed monthly, quarterly or yearly but can be more often. CPI is also called as the Cost of Living Index. The CPI gives information about consumer level inflation, one of the central banks biggest concerns, and further help to provide data about the overall consumption expenditure.

When the prices of goods and services rise the economic situation turns into inflation. The CPI will then tend to increase with a rise in the price rates and further, the economy weakens. On the other hand, the lowering of CPI leads to a reduction in the overall inflation and hence strengthens the economy.

The basket of goods used to compute the CPI for most nations has more than 200 categories of items. These are divided into eight major groups, as follows:

  • Housing
  • Apparels
  • Transportation
  • Education and Communication
  • Recreation
  • Medical Care
  • Food and Beverages
  • Other Goods and Services

The major uses of the Consumer Price Index are:

  • CPI is an essential Economic Indicator: It is used for determination of Inflation and prominently useful in the government’s economic and fiscal policies.
  • The Deflator of other economic statistics: CPI data supports in the computation of other commercial series for deriving an inflation-free Dollar value. Examples of other economic series are Income and Wages, Retail Sales, National Income and Product Account.
  • Customizing of Dollar Values: The CPI assist in the calculation of Income payments, Social security payments, Retirement benefits, and Income-tax structure. The CPI prevents these economic components from any impact due to inflation. So the Labor Bureau refer this CPI and make further valid adjustment in these economic factors. Hence any inflation-induced Dollar value is avoided from hampering the benefits of financial services given to US citizens.

Calculation of the Consumer Price Index

The US Bureau of Labor Statistics, under its Department of Labor, provides the CPI for the United States. The Bureau computes the CPI for 30 days and releases this index during the middle of the month. The U.S. BLS collects data from Consumer Expenditure (CE) survey which primarily records the expenditure weights.

Consumer Price Index (CPI) for a single item is measured as follows:

CPI = (Cost of the market basket in the given year / Cost of the market basket in a Base year) x 100

Types of CPI

  1. Urban Consumer Group:  This group constitutes over 93 percent of the total urban population in the US. The Consumer Price Index for all the Urban Consumers (CPI-U), computes consumption expenditure of all urban dwellers. The people under the category of Professionals, Self-employed, Retired, Unemployed and living below the poverty line will come in the CPI-U.
  2. Urban Wage Earners Group: The group constitutes 29 percent of the total US population. The CPI for the Urban Wage Earners and Clerical Workers (CPI-W) will compute the income of the clerical and wage earners only. The group considers only those households which earn one-third monthly income from wages or clerical jobs. The group must have at least one of the household member is employed for a minimum of 37 weeks consecutively. The CPI-W consider the cost of social security benefits of these wage group.

The CPI does not include that portion of the population who are rural families, agricultural households, defense personnel, convicted people and mentally disabled.

Importance of the Consumer Price Index

The CPI is a crucial economic indicator for all market watchers. The index helps to provide information about consumer prices. Further, based on this index, the market can get awareness about what may happen in the Financial Market.

  • First, The CPI measures the cost of out-of-pocket expenditure made by the consumer. CPI records the change in prices and data about expenditure-based weights. The expenditure based weight is attached to each good or service. Therefore these weight assesses the price change impacts on the whole index.
  • Second, the GDP CPI index is broader. It includes prices spend by the consumer as well as the government, businesses peers and foreigners.
  • Third, the Personal Consumption Expenditure (PCE) is narrow in focus. The PCE index is focused only on the individual’s consumption expenditure, unlike CPI, which measures the average household’s purchasing power.
  • Fourth, the CPI follows the Laspeyres formula while PCE obeys the Fisher-Ideal equation. The GDP CPI index also depends on the PCE index, unlike the CPI which is an independently calculated index.

Why is CPI considered as the main driver for interest rate policy?

Let’s take a look with the following scenarios:

When inflation is rising it means that the prices for goods and services are rising, making it more expensive for consumers to buy things. In the US, the Fed will take steps to decrease inflation by raising interest rates. Higher interest rates makes it more difficult for businesses to do business, and that slows the economy and reduces inflation.

In the case of low inflation, the prices of goods and services are cooling down. Hence the Reserve Bank will lower the core Interest Rates in order to stimulate economic activity. When the Bank gives an easy loan at lesser Interest Rates its easier to buy things and do business. When economic activity expands inflation rises.

  • There is an inverse relationship exists between the CPI and the Interest Rates.

The Central Banks tend to increase Interest Rates when there is high inflation and decrease them when there is low inflation. Therefore, when Interest Rates fall, the CPI rises, and when Interest Rates Increases, the CPI decreases.

Effect of CPI on US Dollar Index

Some proficient Forex Brokers like Tickmill provide the opportunity to trade 62 currency pairs, including majors, minors, and exotics. However, among the currencies, the major one remains the US Dollar Index.

The US Dollar Index is computed against six major rival currencies. Among them, the Euro constitutes almost half of the overall weight. When the US Dollar Index gets impacted it extends the effect onto the other related currency pairs. Theoretically, the CPI and USD Index relationship is straightforward. If the CPI goes up, then the US Dollar also soars. 

If the Consumer Price Index is rising then it means costlier goods. The Federal Reserve addresses the inflation problem by boosting interest rates. Higher interest rates provide the opportunity for banks to charge more for loans, and other financial institutions to go long on US denominated assets. The overall effect translates into higher demand for USD, hence its appreciation against other currency pairs.

Let’s get straight to the point. The US Dollar Index is a geometrically-averaged computation against its six major rival currencies. The index was created to maintain an external bilateral trade-weighted average value against the greenback. The rivals are the Euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. It may seem like only “six” countries are taken for the calculation but the actual numbers remain different.

The weight for the currencies remain in this manner:

weight of currencies
Source: theice

The Euro itself contains 19 members of the European consortium of countries who follow the Euro currency. As a result, there are overall “24” countries considered for greenback formula, adding the other five rivals. Along with these 24 nations, most of the world countries closely follow the US Dollar. Hence, the greenback becomes a great indicator of its global position and the current world economic situation.

The ICE Futures US compiles and regulates the formula for the US Dollar Index.

The formula is as follows: USDX = 50.14348112 × EURUSD-0.576 × USDJPY0.136 × GBPUSD-0.119 × USDCAD0.091 × USDSEK0.042 × USDCHF0.036

The inverse correlation between the CPI and US Dollar Index

There is, of course, a direct relationship between CPI and USD from the theoretical front. However, things appear more evident in real life. The graph plotted below is of US Dollar Index and the Inverted CPI for some stipulated period.

CPI & USD Index Correlation
Source: Finance Magnates

Global Business Impact

The Global economies are integrated like never before. The US Federal Reserve is one of the strongest Central Banks in the world, it’s policy decisions spill over into the world economies. Strengthening or weakening in the USD has a direct and substantial impact over the world businesses.

Any increase in the interest rates provides appreciation in the dollar and that offsets all other currency.  It means other currencies are now depreciated versus the USD, if their economies are weaker. This means that Import, Export and other cross border transactions of those local economies directly get affected because of fluctuation and the change in USD levels and that is what forex traders try to capitalize on – the changes in value of the currency. Hence a trader must always know the USD Index and its effect on the Global Businesses.


Forex Traders look forward to the CPI numbers. The most precise one is Core CPI as it excludes high volatile consumer goods but it is not the only number to watch. Under the current Federal Reserve Chair Jerome Powell, the central bank has set a target of 2.0 percent for inflation.

In conjunction with the Core CPI, traders also keep a watch on the unemployment figures over the period. Both numbers are significant from the overall economic growth perspective, therefore, considering them together is the key.

This is How to Trade the NFP Report

What is the NFP report?

The headline data point is the non-farm payrolls number. It is a measure of how many net new jobs are added to the U.S. economy each month. Along with the NFP figure are data on unemployment, which sectors are hiring or firing employees, the average number of hours worked, the average hourly earnings, and a few other key metrics of employment.

Two of the lesser watched yet still important metrics are the employment-to-population ratio and the labor-force-participation rate. The employment-to-population ratio is a measure of how many people are working relative to the total population, the labor-force-participation rate is a measure of how many people are working relative to those who could be. In recent years, because the Baby Boomers are retiring, the employment-to-population and labor-force participation rates have seen sharp declines.

Why is the NFP report so important?

The NFP report is so important because it is a reading of the core fundamental conditions that drive the U.S. The United States. is a consumer-driven economy, labor market health and wage gains have a direct impact on consumer health. When more people are working, when wages are rising, when employees are confident, and labor markets are tight the consumer if flush with money. When the consumer is flush with money, it is more comfortable spending on things it needs, services it likes, luxuries it can’t resist, and that fuels the broader economy.

The Report has flaws

It may surprise you to know that the NFP, the most closely watched economic indicator in the market, is also one of the most flawed. To begin with, the NFP is the difference between two estimated figures. The government estimates the number of job losses and the number of job gains subtracts one from the other and gives the NFP. It is far from an exact figure and gets revised not once but twice before it is finalized. This means the first figure you hear is often far from accurate.

Additionally, the margin of error is often larger than the actual number. At any given time, on any given release, the Non-Farm Payrolls figure you see in the headline is affected by such a large margin of error it is near meaningless without context.

Bottom line, the NFP is affected by so many variables, the figures are subject to so many revisions, with such a large margin of error it is unusable on its own.

This is how you read the NFP figures

The best way to read the report is over time. For one, this allows the first estimates to be finalized and revisions to be made. It is far better to track the trend of the Non-Farms Payroll numbers than the numbers themselves. Even more importantly, it is necessary to track the trend of the twelve-month average of job gains. The twelve-month average is the best gauge of labor market trends and can be used to judge the importance of all other data within the report.

Likewise with the unemployment and average hourly wage figures, the next two most important data points within the non-farm payrolls report. The headline figures are subject to revision so tracking them over time is the best approach. If unemployment is tracking lower, or wages are tracking higher, it is a good sign of overall economic health. The problem is that on any given month either of these figures could give a false signal, a market moving signal, and you can’t confirm it until the next report comes out.

What the NFP means for The FOMC, the Economy, and Inflation

FOMC has two mandates that it must work to fulfill; full employment and inflation. With this in mind, it makes sense that the FOMC would pay close attention to the NFP numbers and how they are tracking over time. In this respect, the average hourly wages are as important as the payrolls data. Ironically, the FOMC’s two mandates are often at odds with each other because their relationship is circular, one leads to the other.

Full employment leads to inflation leads to higher interest rates leads to less activity leads to less employment leads to lower inflation leads to lower interest rates leads to more economic activity leads to rising employment leads to full employment and on and on.

he FOMC’s true mission is to balance their mandate, keep economic activity as high as possible without inducing too much inflation. In terms of the NFP, the FOMC will be watching the trajectory of job gains, the number of employed persons relative to the workforce and population, and average hourly earnings. They want to see employment on the rise,  unemployment on the decline, and wages rising but not rising too fast.

The two biggest problems faced by the FOMC, relative to the NFP, is if wages are rising too fast and if wages are shrinking. When wages are rising too fast, the economy is in danger from unsustainable over acceleration which brings the need for higher interest rates into focus. Higher interest rates have a negative effect on the economy by making it more expensive to do business. When it is more expensive to do business there is less expansion, less expansion means less demand for employees and less inflationary pressure in wages.

Falling wages are a sign of an economic recession. Wages fall because there is an overabundance of employees for business to choose from. They are able to pay less for the same job because someone will always be there to take it, no matter how low the pay is. In this environment, the FOMC is faced with the dual problem of slowing activity and slack labor markets, problems that can be fixed with lower interest rates. Lower interest rates make it cheaper to do business and are a motivating factor for economic expansion.

How to trade the NFP report

There are two ways to trade the non-farm payrolls report, these are the long-term trend and the near-term news. By far the most effective way of using the NFP for trading is from the long-term perspective. Basically what you are doing is using the NFP to determine or confirm the trend, changes in trend, and major turning points in the market. If the NFP is trending positively and showing signs of strength ie trending above the 12-month average then the fundamental trend of the market is bullish.

In this case, it is advisable to follow only bullish signals when they are presented on a price chart. Price corrections and pull-backs to support levels are often opportune entry points for longer-term style trades. By longer-term style trades I mean trades you will want to keep open for multiple days, possibly even weeks or months.

The other method of trading the NFP is the short-term news; is the NFP better or worse than expected, or does it confirm or refute market expectations. The problem with this method is that the NFP doesn’t always get the market wound up enough to produce a move and, because of its flaws, rarely produces a figure that is truly market moving.

In practice, the two techniques bare some similarities. In order to capitalize on near-term expectations, you need to have a good understanding of the long-term trends and why today’s NFP is more or less important than any other NFP report. Changes in trend and confirmations of expectation are by far the best signals.

These are the assets that are most affected by the NFP

The non-farm payrolls report is important as an economic indicator and as an inflation gauge so it makes sense that it can affect multiple assets and assets classes. It is important to note that two important data points are the actual NFP figure including revisions and trend, and the hourly wage gains.

The Dollar

The dollar is the most obvious market affected by the NFP. The NFP is a gauge of economic health, it is a gauge of inflation, it is an FOMC influencing figure, it has bearing on interest rates, and it can move the dollar. When the NFP is positive and trending positive, especially the hourly wages, you can expect to see the dollar exhibit bullish behavior. Better than expected data is a possible catalyst depending on the inflation situation.

If underlying core inflation, as read by the PCE price index, is running tame it may not matter if hourly wages are running hot. Ironically, hot wage gains are good for the consumer which is also good for the overall economy. Tradable assets that may see a price move when the NFP is released include the Dollar Index (DXY), USD/EUR, GBP/USD, USD/JPY, USD/CHF, any other USD denominated pair including BTC/USD and other cryptocurrencies.

S&P 500/Indices

the NFP can have an impact on individual stocks and that effect is best seen in the indices. The indices movements are the net gain/loss of the stock market as a whole. If the NFP has buyers buying or sellers selling you will see it in the index charts. A strong NFP number can help confirm trends and pinpoint key turning points in bear markets. Likewise, weak or weakening NFP, especially with slowing wages or wage declines, would help confirm bear markets and changes in bull market conditions.


The NFP has an impact on gold if only because of its effect on the dollar. In reality, the NFP’s economic impact goes much further. A strong NFP may, in fact, support gold prices if there is a sign of industrial and/or physical demand within the economy. If not, you can expect to see gold move contrary to the dollar in relation to the labor data most times.


The NFP is an economic indicator that can affect oil/energy/gas demand outlook as well. If the NFP is trending strongly it is a sign of underlying economic strength and consumer health. These kinds of conditions typically lead to higher energy use for industry, housing/homes, travel, and work. By itself, the NFP is not a good indicator of oil price direction but it can affect the importance of other data. If global oil supplies are tight, tightening, or demand is high or rising, a strong NFP could help spark a rally or fuel one that is already in place.

Some other labor market indicators you should know

There are a few other important labor market indicators you can watch to help predict labor market trends and the NFP.

  • The ADP Report is a private-sector gauge of labor market trends akin to the NFP. The ADP and NFP are frequently out of alignment on their gauge of monthly job gains but tend to track alongside each other over time.
  • The Challenger, Gray & Christmas report on planned layoffs gives a read on job cuts and planned hirings over the course of the month.
  • The JOLTs report is a read on the number of job openings; when there are more job openings than available workers you can expect to see labor markets tighten.
  • The Kansas City Federal Reserve’s Labor Market Conditions Index is a broad gauge of labor market health and useful for pinpointing major changes in labor market trends.

The Non-Farm Payrolls Report; The Final Analysis

The Non-Farm Payroll’s report is without a doubt an important monthly data point. It is also, without doubt, one of the hardest to handicap and trade from. While it does have a near-term effect on the market and price movement its value is in the long-term analysis. The trend of job growth, the trend of wage inflation, and the trend of unemployment is far more important than any single data point on any given month.

You can trade the NFP report across any or all asset classes with Tickmill, a regulated forex and CFD broker with operations in all major jurisdictions.

A Big Sigh of Relief on the US Jobs Numbers

Global equity indices closed on a high note on the back of the Friday report. After a horrifying print in February, the U.S. labour market rebounded forcefully last month as the employment data showed the US economy added more jobs than expected in March but the disappointing wage growth, considering how tight the labour market is, continues to undermine the Feds effort to reflate the economy. But indeed, the Goldilocks economy should keep the economic bears at bay, at least over the short term. While the solid data print does walk back some domestic recessionary concerns, it doesn’t alleviate potential adverse knock-on effects from a possible worsening economic climate in China, Europe or even Brexit fallout.

But the improving economic landscape in China is bullish suggesting the global economy could catch a much-needed tailwind especially for the sickly manufacturing sectors in Europe that are mired in their worst slump since the 2013-14 recessionary lows. Indeed, the booming manufacturing scrim at the end of 2017 is all but a distant memory.

Frankly, I don’t find the NFP as a significant influence as much as I see the shifting economic tides in China a critical impulse.

While equity market revelled, the US dollar reaction was muted as US yields fell and bond curve flatteners were the flavour of the day as investors heaped into US bonds on the weaker than expected average hourly wages print which suggests the Feds will continue to remain on hold. While the strong NFP headline dispels thoughts of a Fed interest rate cut, the wage data dismisses any ideas of a rate hike suggesting equity markets will continue to edge forward on the dovish Fed outlook. But the big question investors now face is from Economics 101: As we reach full employment, hiring gains will likely cool but will it be enough to trigger a Fed ease?

FOMC Minutes

We expect the minutes to provide a good window into the Federal Reserve Boards mindset amid their strenuous effort to find harmony and strike a balance between conflicting forces that are asymmetrically associated with the pillars of the dual mandate. Ultimately, the markets will try to determine the Feds near, and medium-term reaction function while keeping in mind that policymakers views have a lot more to do with divergence from inflation targets than with builds or drops in the natural rates of employment.

But ultimately the markets will be looking for details why the Fed thinks it was appropriate to hold rates steady through 2019 and then resume rate hikes in 2020. Not the easiest of needles to thread as they must be uber careful not to send off any economic alarm bells, so we expect the Fed to explain their rate cycle recalibration in terms of inflationary shortcomings and little else.

Overall, we expect the FOMC minutes to steer the ship on a steady as she goes path.

Oil Markets

Hedge funds continued to pile into US crude future as bullish bets rose by more than 4 % last week according to the CFTC.

Our model suggested we had an optimistic set up entering last week, but we didn’t expect this much of a positive juice. However, our bets were helped along by but surprisingly positive economic data (PMI) out of China and the US which will continue to ease concerns of a potential threat to global oil demand. The PMI data is one of the best forward-looking indicators and last week numbers paint a very positive backdrop for oil prices.

Bullish signals continue to emanate based on last week price action even more so when traders quickly sidestepped the surprise US inventory builds, which only managed to slow not thwart this bullish oil rally.

The OPEC saga continues to support as the ongoing crisis in Venezuela shows little signs of abating. And Saudi Arabia continues to drive the bus with its ability to influence prices by tweaking domestic exports.

At $70 prompt Brent we believe OPEC supply cut compliance is fully priced in, but the market is now pivoting to escalating tensions n Libya, a possible slowdown in shale production and the nascent global economic recovery.

In Libya, OPEC’s persistent ‘rabble-rouser’ producer, political tensions could escalate and threaten oil production after the eastern regional military commander General Khalifa Haftar (LNA)ordered his forces to march on the capital, Tripoli, where the UN-backed government is based. With this critical OPEC oil producer on the fringe of a full-blown civil war, the potential for supply disruption is real. Given global supplies are tight it would not be out of the question to see prompt Brent overshoot to $ 75 per barrel if the eastern oil terminals which are currently under the LNA control come under fire from competing factions.

Traders have been focusing on non -OPEC supply growth and Shale Oil ability to respond to rising prices. However, a possible slowdown in US domestic production as its been reported by numerous inside sources that independent exploration and production companies are trimming spending as they focus on earnings growth instead of increased output.

The nascent global growth recovery is worth keeping an eye on but in a market starved for good news the fear is that asset prices start marching ahead of economic reality. But with the economic supply and demand function looking supportive we could see a significant near-term bounce on Libya supply disruption or news of a US-China trade agreement, both arguably unpredictable factor but pretty decent wagers in the overall all oil markets calculus

Also, the focus for the rest of April is veering towards the US decision on Iran sanctions waivers, which expire in early May. An extension of waivers has the potential for a time to assuage some of the pressure on global supply, but not to the extent necessary to offset renewed concerns on Libya and the crumbling situation in Venezuela. The bullish game plan remains in play.

Gold Markets

It was a mixed payroll report for markets, but Gold prices recovered slightly as Bulls took solace in a slower pace of US wage increases in March, which support the dovish market expectation of Fed policy through 2019. But ultimately the wild card remains the US-China trade negotiations, as its expected equity markets will spike, denting near term gold appeal, if news of an agreement is signed.

Gold ETF continues to see outflows as investors look to take advantage of improving risk sentiment driven on the back of US-China trade optimism. But the stronger-than-expected March readings of the manufacturing PMI in the US and China have subdued fears that the end of the global expansion was approaching fast which may further reverse out more bearish views on dovish central bank policy.

Currency Markets

I thought I was much more optimistic than the market when it comes to trader’s reaction to a US-China trade deal, but after chatting with my colleagues in Tokyo and Singapore over the weekend, it seems everyone is more optimistic than me and by a wide margin!! So now I am suggesting that we could see an even more significant bounce in risk sentiment on the day before “mean reversion” over the ensuing 24 hours. Assuming we do get a trade deal.

Weeding out all the distraction including Presidents Trump who is now calling for a rate cut and everything else just short of helicopter drops, trading currency markets is no less certain today than it was a month ago after the Federal Reserve Board and the ECB squeezed every drop of volatility out of the markets by their dovish shifts.

But there are so many mixed signals to deal with that suggest no one wants to get stuck looking to pass the hot potato on a US-China trade deal or Brexit kerfuffle.

But ultimately the central banks are still on hold and flows will flock to carry, which in G-10 will keep the dollar downside in check.

The Euro

The ECB is widely expected to remain on hold at its April meeting, and no one is expecting any fresh policy insights. I’m sitting in the March 2020 rate hike camp with everyone else but waiting for a consistent signal for improving EU data which will support Bund yields higher and tow the EURO along for the ride. Until then I expect the EURUSD slumber feast to continue.

Aussie and Kiwi

Traders will be keying in Debelle this week to shed some light on the RBA dovish tack, but with a big China economic calendar over the next two weeks, this will be key for the Aussie and Kiwi as much as it will be the key driver for the global reflationary theme. While to the extent the imminent US-China trade deal is priced in or not, it’s ultimately the comprehensive global growth narrative that will drive the Aussie and Kiwi fortunes given their critical roles in the global supply chains.

Malaysian Ringgit

Much of the current debate is centering around the BNM, but some factors that were contributing to some elements of dovish bias are gradually being alleviated.

Oil prices (prompt Brent) is trading above the key $ 70, and we could see a significant bound in prices on a US-China trade deal. Also, a US-China trade deal would likely bolster Palm oil prices and be incredibly supportive of the shrinking current account balance.

On a trade deal, the USD haven status should diminish, but with the dovish global central banks firmly on hold, the US still offers the best G-10 carry although we could expect more supportive carry flows.

However, some negatives do linger concerning the tepid domestic inflation prints that do suggest the BNM has room to tweak monetary policy lower slightly.

However, ultimately the MYR should benefit from US-China trade agreement, and that should keep the Ringgit in check over the short term.

This article was written by Stephen Innes, Head of Trading and Market Strategy at SPI Asset Management

US Stock Market Overview – The Nasdaq Rallies, Lead by Apple, While Walgreens Weighs on the Dow

US stocks were mixed on Tuesday with the Nasdaq notching up a small 0.25% gains, the S&P 500 also finished in the black and the Dow Industrials bucked the trend. Sectors were mixed, led higher by real-estate and technology with energy the worst performing sector. This comes despite a surge in crude oil prices which notched up robust gains.  Durable goods orders were subdued and GM reported weak car sales. The Atlanta Fed up its forecast of Q1 GDP growth which helped the dollar remain buoyed.

Durable Goods Orders Slide

Business investment in the US is dipping according to the US Commerce Department. US orders for non-defense capital goods excluding aircraft slipped 0.1% pulled down by declining demand for machinery. The January figures were revised slighter higher to 0.9% from 0.8%. Expectations were for core capital goods orders to increase 2.6% year over year. Shipments of core capital goods were flat in February. Headline durable goods orders dropped 1.6% in February. The report by the Commerce Department was delayed because of the government shutdown. Orders for motor vehicles dipped 0.1% in February. Orders for non-defense aircraft plunged 31.1% after rising 9.2% percent in January.

GM Reports Sales Drop

The drop in vehicle sales reported by the commerce department was mimicked by a sales report released by General Motors on Tuesday. The company reported Q1 sales on Tuesday that fell 7% year over a year saying that buyers are spending more on expensive sport utility vehicles and pickup trucks. The company said that same store sale on transaction prices for pickups increased to $8,040 compared with the outgoing models in the same quarter of 2018, reflecting the continued interest among buyers.

GDP Forecasts Point to Stronger Growth in the US

Solid construction spending helped buoy the forecasts for Q1 growth in the US. The Atlanta Fed’s GDPNow model is now tracking 2.1% growth up from 1.7% previously.  The New York Fed’s Nowcast model is tracking 1.3% for Q1 and 1.6% for Q2.  Final Q4 growth was just revised down to 2.2% from 2.6% according to the US Commerce Department.

World Trade is Contracting

World trade slipped by 0.3% in the Q4 and is forecast to growth by 2.6% in 2019 according to the  World Trade Organization. It forecast in September that 2018 growth would be 3.9%, down from 4.6% in 2017. Goods trade volumes are expected to grow more strongly in developing economies this year, with 3.4% growth in exports compared with 2.1% in developed economies.

Energy Shares and Oil Diverge

There was a divergence in energy shares on Friday. The entire sectors were lower, from upstream to integrated and downstream. Even oil services stocks were under pressure. This came despite a breakout in crude oil prices which eclipsed the 200-day moving average and close at $62.75, the highest close since early November.

The U.S. Yield Curve Is Flattening And What You Need To Know About It

What Is The Yield Curve And Why Does It Matter

The yield curve is a much-talked-about phenomenon, especially in today’s market environment. With central banks around the world shifting policy stance, trade relations impeding economic activity, and global GDP slowing the yield curve is going to be in focus for some time. 

A yield curve is a plot showing the relationship between interest rates for similar securities across different maturities. The securities in question are fixed-income securities such as bonds. The most commonly tracked yields are for bonds issued by the U.S. Treasury but they are not the only ones. Bonds issued by any government could be tracked in this manner to glean information about the market.

The U.S Treasury issues bonds in durations of 3 months, 2 years, 5 years, 10 years and 30 years. The curve is most often used in two ways. In the first, the rates are used as a comparative benchmark when looking at other forms of investment.  These include but are not limited to mortgages and bank lending rates.

The second way the curve is used is to determine changes in the economy. A normal yield curve is one in which longer-termed maturities have higher interest rates. This creates a rounded or humped curve. A flattened or inverted curve shows longer-maturity bonds have an equal or lower interest rate than the shorter end of the curve.

A normal yield curve is viewed as a sign of economic expansion. That is because it shows buyers are more interested in shorter-duration securities. Flattened or inverted yield curves are often viewed as signs of impending recession because traders are rushing to lock in higher rates on longer-term “safer” securities. This is a sign of investors seeking shelter from the storm. When the curve is flattening, in either direction, it is a sign of economic change.

What Is The Yield Curve Doing Now?

The U.S. yield curve has flattened over the past year. The odd thing is that rates on the long end of the curve, rates for the 5, 10, and 30-year maturities, have remained relatively flat while those on the short end are rising. This shows investors are selling their short maturities but not yet begun buying up the long end. Economic change is afoot, the problem for investors is knowing what kind of change is coming.

Economic indicators show the U.S. and global economy slowed down in the fourth quarter of 2018. That slow down may linger into 2019, it may turn into a recession, but there is a question waiting to be answered before the market will commit to that view; trade.

The economic slowdown and the gloomy economic outlook is all tied to the trade war between the U.S. and China. If the two sides reach agreement and trade ties are renewed economic activity will pick up and the curve will return to normal. If the two sides are not able to reach consensus tariffs and non-tariff barriers, and escalation of tensions, will drag the global economy and the yield curve will invert.

The curve may continue to flatten or invert, with or without a trade deal. If it does the FOMC will be forced to ease monetary policy in order to support the U.S. economy.  Easing policy, lowering interest rates and ending the balance sheet run-off, are the only tools the Fed has to support economic growth and the yield curve. If there is no trade deal the Fed may not have enough fiscal power to stop the curve inverting. 

This Is The Outlook For The U.S. Yield Curve

The outlook for the U.S. yield curve is uncertain although there are some who say it will invert in 2019. The flattening we’ve seen over the past year suggest a change in the economy is at hand, the fact that change is induced by trade relations leaves the outcome uncertain. For now, investors should view the flattened curve as a sign of caution; the market is ready for a recession but equally hopeful an economic downturn won’t happen. If the data remains weak, if the trade talks fall apart, we may see an inversion.

How Interest Rate Differentials Fundamentally Drive the Currency Markets

The differential between the short or long term interest rates of the countries that make up a currency pair is used to create the forward rate, and over the long term, help drive the direction of a currency pair. While most professional traders are keenly aware of the debt market and how it affects the currency markets, many novice traders are unaware of how interest rates drive currency markets movements.

What are Interest Rates

Interest rates are the amount that is charged for a loan. The interest rates that affect the currency markets are sovereign interest rates. A sovereign rate is an interest rate from a loan that a country issues in the form of bonds to provide the capital it needs to run its country. Generally, when economic strength is pervasive, interest rates will increase, and when an economy contracts, interest rates generally decline.

Bonds, which are loans, are issued for many different tenors. Countries will issue short term notes or bills that can be as short as overnight rates, as well as terms that last for 30-years. The most actively traded bonds are those from developed countries such as the United States, Japan, and Germany. Emerging countries also have bond markets but those instruments are less liquid.

How Do Interest Rates Make Up the Forward Curve

When you purchase or sell a currency pair, you are buying one currency and simultaneously selling another currency. The majority of the currency transactions that take place globally are within the spot market. Spot market transactions settle within 2-business days. If you are interested in holding a currency transaction longer than 2-business days, you need to transact a forward trade. Forward trades add forward points to a currency pair that is transacted for three or more days.

To calculate the forward rate, currency traders use the interest rate differential. This is the difference between the short term interest rates of each of the countries that make up the currency pair. For example, if you purchase the USD/JPY currency pair, you would receive the US dollar interest rate, and need to pay away the Japanese short term interest rate.

Forward points are added or subtracted from the currency pair.  You would first need to determine which rate is higher. Currently, US dollar interest rates are higher than Japanese interest rates.  In using the example of the purchase of the USD/JPY, you would subtract the forward points from the rate which would provide a new rate that incorporated the forward points.

What Effects the Interest Rate Differential

There are several factors that drive the interest rate differential. Obviously, monetary policy changes are key to changes in countries interest rate levels. Since market forces drive interest rate levels, changes to economic data are also a key factor. For this reason, you might want to follow an economic calendar to determine if there are specific events that will drive the future direction of rates. In addition to economic events and policy changes, political strife can also drive interest rate levels. When there is uncertainty within a country, the markets will demand more from a country to lend them money.

Most developed bond markets move in tandem with one another. There are plenty of occasions where a specific event will alter the course of a countries interest rates, but when there is little new information available, most developed bond markets will move in tandem. Historically, the US bond market is the driving force behind most of the rate movements globally.

How Does the Interest Rate Differential Effect the Currency Pair

Interest rate differentials can be a benefit or deterrent when you determine to purchase or sell a currency pair. For example, if you are planning to either buy or sell the USD/JPY for 2-years, you will either receive 2.68% by purchasing the greenback, or pay away 2.68% if you purchase the yen and sell the dollar. This is because the 2-year US rate is 2.50% and the Japanese 2-year yield is -0.18%. If you buy the dollar and nothing happens for 2-years you will earn 2.68%. If you buy the Japanese yen and sell the dollar and nothing happens for 2-years you will lose 2.68%

Charting the Interest Rates Differential

One of the best ways to follow the interest rate differential is to chart it. Each currency pair reacts differently to changes in the interest rate differential. What is important to remember is that the differential works in tandem with the currency pair, so you are looking to see what the future interest rate differential will be.

You can see from the chart of the US 10-year yield versus the Japanese 10-year government bond yield that the interest rate differential trades in tandem with the USD/JPY currency pair. While there are times when the 2-assets diverge, over time they move in tandem with one another.

Many have asked the question, does the rate differential drive the currency pair, or does the currency pair drive the interest rate differential. Since the interest rate differential makes up the forward rate, the answer is both. What you want to evaluate as a trader is whether the currency pair is moving in one direction and the interest rate differential is moving in another.


The interest rate differential is the driving fundamental force behind the movements of currency pairs. The interest rate differential makes up the currency forward curve and therefore is an integral part of currency trading. Monetary policy, economic events, and political strife are the key factors that drive interest rates. To get a gauge of where the interest rate differential is relative to the currency pair you can chart the two. What you are looking for is a situation where the path of the interest rate differential and the currency pair have diverged, which might give you clues to the future direction of the currency pair.

Author: Fundamentals Translation

Fundamentals Translation, a division of the BelTranslation International Group, helps forex brokerage firms expand to 70+ global markets. Since 2002, we have been offering translation & localization services: fundamentals analysis, financial reports, broker reports, weekly market outlooks, webinar content, website text, and training material translation to our global clients. We proudly work with leading forex brokerage firms such as Swissquote, London Capital Group, trade Berry, TRADEMOTE, TRADEHOUSES.

Strong U.S. Inflation Supports Dollar on the Contrast with Europe

Official data from ONS noted overall consumer prices decline by 0.8% in January and annual inflation slowdown to 1.8%. A year earlier, this figure was at 3%. It is also worth noting that other inflation indicators – the retail price index and producer prices were also weaker than expected. A sharp inflation drop is considered a sign of sluggish economic activity and additionally reduces the chances of interest rates increase by the Bank of England in the near future.

Earlier this week, poor UK performance was already in the spotlight of the market after report notes GDP to decline by 0.4% and industrial output fell by 0.5% in December. The deterioration of business performance is due to increasing uncertainty over Brexit.

In contrast to the disappointing data from Europe, where the decline in industrial production is growing, and the U.K., which has been marked by weak inflation today, the US continues to surpass expectations.

The US consumer price index slowed to 1.6% against expectations of 1.5%. Core inflation kept the growth rate of 2.2% YoY, which is also somewhat higher than expected. The core inflation, in this case, looks more accurate in light of the recent oil price volatility. And in this case, the indicator remains above the Fed’s 2% target.

The US dollar increased after the publication of CPI data, as contrast statistics returned to focus markets. Strong inflation in the US is able to bring back the Fed its hawkish rhetoric, or at least reduce the expectations of the market for lower rates this year. According to the latest CME data, market participants put 12.4% probability of rate cut in the next 12 months.

This article was written by FxPro

Russia – Not the Rating it Needs but the Rating it Deserves

But let us not focus on the glorious admirers of Karl Marx. The very question of Russia’s rating is quite amusing.

Three large agencies, in particular, S&P, Fitch and Moody’s, currently provide an investment rating for Russia. Interestingly, the first two did not even lower Russia’s rating (despite the sanctions). Moody’s, in its turn, lowered it and then returned it to the previous level.

The main intrigue is whether this will have any effect. At this stage, the effect will most likely be a purely speculative one. The truth is that a rating is not valid unless it is awarded by two of three agencies. This means that the decision of Moody’s will not affect the situation with Russian assets. Let us see what will happen next. The picture may change if Russia’s rating continues to grow and at least two of three agencies ‘grant’ Russia one more level.

Does Russia actually deserve its current rating? Russia’s current rating implies that it is in the same line with such ‘locomotives of the global economy’ as Hungary, Morocco and Portugal. The ratings of Poland and Mexico, for example, are only one level higher. Only a little higher are the ratings of China and Ireland.

Does Russia deserve this indicator? The numbers, alas, give a negative answer.

Sovereign Dept as percantage of GDP

Let us analyze the ratio of Russia’s sovereign debt to GDP. In Russia, this ratio is one of the lowest in the world and the lowest among the countries presented in the tables below.

We can also review the ratio of gold reserves to GDP and budget replenishment.

The figures obviously speak of Russia’s underestimation. International reserves as percentage of GDP Credit Rating EM

Now let me summarize. According to real macro-economic indicators, Russia should have at least a BBB+ or A- rating. We can assume that geopolitics and sanctions have directly affected the decisions of the world’s leading credit agencies.

I prefer to keep away from excessive optimism. There are too many problems in the economy. Commodity dependence is still there. The ruble is very volatile. Let alone small and medium businesses that suffocate under the burden of bureaucracy and barely make ends meet instead of pushing the economy forward. Not all of them, of course, but the majority. The Russian economy is in dire need of reforms and the reduction of the state’s role. Anyway, this is a completely different story and I’ll certainly get back to it.

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.