European Outlook: Asian stock markets were mostly higher in the wake of yesterday’s U.S. stock rally. Japan underperformed and markets fell back but ra;llied in the final hour to close flat at 19, 379, as the Yen rebounded and spoiled the party for exporters. Overall though bourses remain in a buoyant mood and U.S. and FTSE 100 futures are also moving higher, after the S&P 500 closed at a new record high, and the DAX managed to move above the 11900 mark. The FTSE 100 dropped yesterday, amid a new bout of Sterling strength and while futures are up this morning, the FTSE 100 is likely to continue to underperform the DAX, as GDP moves above 1.18 against the EUR. Against that background core yields are likely to continue to move higher especially if the German Ifo goes the way of PMIs and comes in higher than expected and Eurozone HICP is confirmed at 1.8% See below) . The European calendar also has second-estimate of U.K. Q4 GDP, which is widely anticipated to come in unrevised at 0.6% q/q and 2.2% y/y (also see more below).
FX Update: The dollar has been trading so far today, advancing against the euro into the London open while showing a more net indifferent profile versus other currencies. The euro has come under fresh pressure. EURUSD has breached last Wednesday’s low at 1.0521 and logged a six-week low at 1.0519. EURJPY is also lower, trading at 12-day lows, and EURGBP has forayed into two-month lows. Concerns about Frexit are dominating over what has been a continued run of forecast-beating data out of the Eurozone through to yesterday’s flash February PMI surveys. More of this theme seems likely as currency reserve managers, corporations and investors hedge for the worst. USDJPY has lifted off its 113.33 low, recouping to around 113.50, amid a bullish session in Asian stock markets, which followed a record-high-producing rally on Wall Street on Tuesday. The pair traded as low as 112.62 last Friday, so the yen remains at lower on the week, although it has gained versus the beleaguered euro. USDJPY logged a five-session high at 113.77 yesterday. Cable has ebbed under 1.2500 after failing to sustain a number of rises above here over the last day. AUDUSD has eked out three-session highs just shy of 0.7700, with the Aussie benefiting from the risk-on backdrop.
Oil Breaks Higher? Oil prices broke higher yesterday and have continued to move north today after OPEC continued to suggest a strong compliance with production cuts agreed in November. As production curbs hold the draw on huge stockpiles accrued since 2104 should start to have an impact on prices. However, as OPEC curbs are implemented and non – OPEC follow, the USA shale producers continue to add more rigs into production. (Fridays Baker Hughes rig count was another record at 597). The U.S. West Texas Intermediate April crude contract, the new front-month future, was up 16 cents, or 0.3 percent, at $54.49 a barrel at 0552 GMT. On Tuesday, the March contract expired up 1.2 percent after reaching its highest since Jan. 3. Since the November agreement WTI has continually failed to break the $54.00 level, the next few sessions of the new April contract could determine where prices move from here. The DoE data tomorrow will be where we get our next direction; the data is set to be released on Thursday, a day later than normal, following a U.S. public holiday on Monday.
Fedspeak: Arch hawk Mester was across the airways yesterday with appearances on Bloomberg and CNBC “comfortable with rate hike” and economy “close to inflation target” she is not a voter this year but will be from 2108. Fellow hawk Philly Fed Harker was calling for 3 rate hikes this year, looking for consumer spending to bolster 2% economic growth. He also sees labor market tightening and more or less at full health. Earlier in the day he revealed that a March hike was on the table, though we knew that from Yellen’s semi-annual testimony where every meeting is now “live.” Still, that underscores the recent trends. Finally SF Fed’s Williams: risks to financial stability may be greater with persistently low global interest rates, which present daunting challenges for central banks. He suggests that once-extraordinary central bank policies are likely to become the norm. The typically dovish non-voter has been a bit more vocal of this year on interest rate normalization, but these remarks are offering mixed signals.
Main Macro Events Today
- FOMC Minutes – The minutes, aren’t likely to shed a lot of light on the policy path and the risk for a March hike in the wake of Chair Yellen’s testimony last week. Additionally, the decision is partly dependent on upcoming data, and especially the jobs report (March 10). Fedwatchers will be looking for the degree to which policymakers thought a rate hike might be affected sooner rather than later. But we doubt there were many on the Committee who anticipated some of the big upside surprises the data, including the CPI. Meanwhile, there is only likely to be a minority of FOMC members who were factoring in fiscal stimulus into their outlooks. And, recent Fedspeak suggests the discussions on the balance sheet are still wide open.
- UK GDP – This is the second estimate of UK GDP and expectations are for a stable unchanged estimate of 0.6% for the final quarter of 2016. Year on year estimates are to the upside at 2.2%. A strong end to 2016 is expected but with inflation rising and investment and consumer confidence and consumption showing signs of slowing the first half of 2017 may not be so positive.
- German IFO – After the strong round of German PMI readings yesterday the consensus forecast for a rise in the German February Ifo to 109.9 from 109.8 in January has a bias on the upside. Strong orders data already suggested a pick up in confidence, with inflation and import, as well as producer price inflation, rising sharply and political risks picking up, confidence indicators come with a slightly higher error margin than usual. Still, like the PMIs the Ifo should be less impacted by political jitters than the ZEW investor confidence indicator, which came in weaker than hoped, although even the latter remains at high levels and shows that optimists continue to outnumber pessimists. For Draghi though that doesn’t mean that he can finally relax as Frexit concerns and election jitters keep especially bond markets at tenterhooks and French yields at elevated levels.
- Canadian Retails Sales – The expectations are for retail sales, to improve just 0.1% in December after the 0.2% gain in November. The ex-autos sales aggregate is seen expanding 1.0% in December after the 0.1% rise in November. Gasoline prices rebounded 3.1% m/m in December after the 4.3% drop in November, according to the CPI . But vehicle sales fell in December, taking back the improvement in November. Hence total retail sales are seen as nearly flat due to the vehicle sales drag. But sales excluding the autos component are seen sharply higher, thanks to the boost from gasoline station sales.
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