Market Wrap (Oct 24,2017)
Currency markets lack direction, VIX up
By Ipek Ozkardeskaya, Senior Market Analyst LCG
The EURUSD cleared support at the 100-day moving average (1.1750). The decline in the euro yields weighed on the sentiment on Monday, as the generic 10-year euro yield slid by 4.43%. European yields rebounded by 3.70% shortly after the opening bell on Tuesday.
The Eurozone’s October flash manufacturing data is due today, and a solid read could revive the speculation that the European Central Bank (ECB) would give crunchy details on its Quantitative Easing (QE) exit plans on Thursday’s meeting. Latest news suggested that the ECB could cut its monthly purchases by half, to 30 billion euros. There are bets that the ECB could do more than investors expect at this week’s meeting. But there is also a risk of disappointment, as Mario Draghi will likely reiterate his warning that the euro rates will remain low ‘well past’ the end of the QE program. Traders remain buyer at dips below the 100-day moving average. The topside could be limited by 1.1855/1.1880 area (50-day moving average / Fibonacci 50% retracement on September – October pullback, which has acted as October resistance).
The 0.89 level is where the EURGBP bulls and bears compete. Failure to hold ground above this level will likely prevent last week’s upside attempt from gathering a stronger momentum. The death cross formation on hourly chart (50-hour moving average crossing below the 200-hour moving average) could cap the intra-day gains and encourage a further slide toward 0.8855 (October 15 low). On the upside, resistance is eyed at 0.8962 (50-day moving average) before the 0.90 hurdle.
European stocks opened marginally higher. IBEX (+0.38%) is better bid, Spanish financials are up by 0.61%, yet downside risks prevail on escalating political crisis in Catalonia.
The GBPUSD has come close to testing the 1.3237-resistance in Asia (50-day moving average), yet the sudden improvement in the USD appetite reversed the intra-day positive trend soon after the London open. Pound traders prefer trading safe within the 1.3237/1.3110 range defined by the 50 and 100-day moving averages respectively.
Last week’s inflation read failed to boost the hawkish expectations regarding the Bank of England’s (BoE) rate hike plans. The market is pricing in a dovish hike; a one-and-done rate increase by the end of the year could be a good compromise to temper the inflationary pressures as the Brexit negotiations stall.
The FTSE 100 is flat above 7500p level. Steady oil and upbeat commodity prices could temper the selling pressure.
USD mixed, VIX jumps past 11%
The US dollar edged lower in Asia, yet reversed gains as European traders stepped in. The US equity futures traded in the green after the week kicked off on a slightly negative note. The S&P500 (-0.40%), the Dow Jones (-0.23%) and the NASDAQ (-0.64%) pulled back from historically high levels. FANG (Facebook, Amazon, Netflix and Google) dropped. Twitter, Google and Amazon will release earnings on Thursday; Facebook results are due on November 1.
Meanwhile, there is some support building for Donald Trump’s tax reforms as latest news report that fiscal hawks may be willing to disregard deficit spending to allow Trump to go ahead with his tax cut plans to boost growth. If approved, the fiscal reforms will cost an arm to the government, but on the other hand, it is important for the congress to achieve some progress before the end of the year in order to restore confidence. US treasury yields are soft, the 10-year yield stagnates below the 2.40% level, as the possibility of good news on the fiscal front is not been priced in the Federal Reserve (Fed) rate expectations just yet. The VIX index jumped past 11% on Monday, hinting at some anxiety in the US stock markets. This being said, good news regarding the tax reforms could give another boost to the US stocks later this week.
Yen consolidates above hourly Ichimoku cloud base
Timid knee-jerk reaction to Shinzo Abe’s victory, combined to softer US yields prevented the USDJPY from extending gains beyond Monday’s top, 114.10. This being said, the post-election bias is negative for the yen on prospects of a longer period of ultra-loose monetary policy and higher fiscal spending under Abe’s empowered rule. The hourly Ichimoku cloud base (113.20) is lending support to the USDJPY. Buyers could encounter light resistance by 113.77 (cloud top), 114.10 (post-election high) and 114.48 (July high) before considering the 115.00 mark.
Nikkei (+0.50%) and Topix (+0.67%) gained on cheaper yen despite a softer-than-expected flash manufacturing PMI read in October.
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