Please be informed that instruments GEM.IT and CON.DE are no longer available for shortselling.

Today, there is a change of delivery date for CATTLE instrument. Clients who have open positions will be credited or debited with proper swap points amounts.
These are:
- CATTLE 98 swap points for long position; -98 swap points for short position
XTB
 

Rollovers:

Monday 20.05 – CATTLE,

Tuesday 21.05 – NATGAS, NATGAS., HEATINGOIL, GASOLINE,

Thursday 23.05 – LEANHOGS,

Due to national holidays trading on given instruments will be cancelled:

Monday 20.05 – HUNCom, HUNComp., SUI20, SUI20.

Due to national holidays trading on given instruments will be limited:

Friday 24.05 – TNOTE, TNOTE. – trading till 22:15

Friday 24.05 – U2000, US2000. – trading till 23:15

Dividends Equity CFD (paid in cash):

Monday 20.05 – VIE.FR, ENI.IT, SRG.IT, TEN.IT, VLO.US, SPM.IT, FRE.DE, FRE3.DE, LUX.IT, GEO.IT,  ISP.IT, TOD.IT, CPR.IT, UBI..IT, IPG.IT, SFER.IT,  DIA.IT, ALT.IT, UCG.IT, BZU.IT, G.IT, AZM.IT, MED.IT, UNI.IT, TEF1.ES, LTO.IT, PC.IT, STS.IT, IT.IT, EGPW.IT, EDP.PT, EDPR.PT

Tuesday 21.05 – AMAT.US, BNP.FR, EGL.PT, ZON.PT

Wednesday 22.05 – HOME.UK, GLEN.UK, RBAG.CZ, ITRK.UK, HSY.US, CCL.UK, HSBA.UK, RENE.PT, MAR.US, COP.US, MMM.US

Thursday 23.05 – FER.ES, JNJ.US

Friday 24.05 – DBK.DE,  ML.FR, SZG.DE, LXS.DE, KN.FR

Due to national holidays trading on given instruments will be cancelled:

Monday – HU Equity CFDs. (.HU)

Who’s shorting the Japanese currency? At the first glance it seems like everyone around. The yen lost nearly 30% against the dollar and euro in a span not much longer than 6 months. To see that kind of a depreciation one needs to have a wall of sell orders, especially on the market that was reluctant to move up by an inch for months. In fact, since the parliamentary overhaul last year in Japan and resulting changes to the BoJ and the monetary policy, short JPY might look like a „no-brainer” to many. Everything would be fine if not the data showing there is money gowing the opposite way.

Without a question the change in the Japanese monetary policy was paramount. Limited asset purchases combined with threats of the FX interventions were replaced by the one, massive, unlimited program of asset purchases and a pledge to bring inflation to the target of 2%, preferably within a 2-year period. The move had a strong impact on the currency not only because of the sheer size of the expansion but beucase of a political nature of the process. It was widely believed that the BoJ purchases will crowd out local investors from the JGB market, forcing them to look for yields elsewhere, including foreign markets. Actually, a recent wave of bond price increases across Europe (including emerging markets from Central Europe) was associated with an inflow of the Japanese money, agressively seeking yields, especially on the riskier assets. 


The data published weekly by the Japanese MoF show that flows reported by financial institutions were massively JPY positive this year. That rises the question – who, and on what grounds, is taking the opposite fx side of these trades?​

There were even hopes that the BoJ will have no less impact on Europe that the ECB had. That all would make sense… it just does not find a confirmation in the data released by the Japanese MoF. The Ministry shows the data on flows to major asset classes to and out of Japan for both domestic and foreign financial institutions. The last row in a table above confirms that foreign institutions cut the exposure to the JGB. However, at the same time, they have increased the exposure to the Japanese equities by the amount nearly 5 times higher this year. Since the weakness of the JPY is apparent, some of these flows might have been currency hedged but still the flows from foreign institutions should exert some appreciation pressure on the JPY. Having that said, the picture painted by Japanese institutions is even more striking. It seems that these not only didn't jump onto foreign assets but instead have been selling both bonds and equities in the net terms and on a very large scale. In fact for many Japanese players a weaker yen is a great opportunity to cut their foreign fx exposure. To sum this up, the data denies theories that the Japanese money is leaving the country – the opposite seems to be the case. So why is the JPY going down like a rock and what are implications of this?

The simple part of the answer is that, well, someone is shorting it the hard way. The data also indicate that these might be institutions (hedge funds?) not taking any exposure beyond the FX and not reporting to the MoF. That gives a rise to a theory of global macro hedge funds making a one giant short on the JPY. If that’s the case, what are the implications? First and obvious: the Japanese savings are not storming the World, will not save Europe neither flood emerging markets. Second, since the old school carry trade is not the game being played, the weakness of the JPY might have much weaker fundamentals that broadly believed.

Conclusion: It seems that the Japanese are much less eager to take their savings outside of the country than many believe or… would like investors to believe. That translates into limited room for a further depreciation of the Japanese currency, especially that a massive increase of competitiveness will soon start to be visible in the current account. Moreover, if the hedge funds are the drivers of the UJ/EJ rally, there is a risk that all these trades might want to go through a one exit doors… obviously at the time when no one will expect that. 

As we mentioned on the first page, the crisis in Cyprus has helped markets ignore the macroeconomic data released in Europe last week. In fact as of early afternoon on Monday both DAX30 and CAC40 are less than 0,5% off their close prices from March 15th (before the first bailout deal has been announced) and less than 1% off ‘13 highs. Looking at the data and the impact they should have had on the markets, one may even say the crisis had a net positive impact. Disregarding those short term reactions one thing seems to be clear: a recovery in Europe is not following an expected path and thus equities deserve a sizeable discount.

Even before the release of PMIs in March we warned that markets saw an economic recovery in Germany but ignored a stagnation elsewhere. One could argue that a charging German powerhouse would pull along the rest of the zone. However, something opposite is taking place. In March French industrial PMI remained at a recessionary 43,9 pts., staying in this area for nearly a year. PMI for services tumbled to a new low of 41,9 pts. signaling that France is not only suffering from a weak external demand but an imploding domestic demand. With a large fiscal deficit the country could use an export fueled recovery but because of years of stiff regulations (especially concerning the labor market) lacks competitiveness to achieve that. Consequently the country might be bound for a recession, not making things easier for its southern neighbors. From that perspective it looks more like a peripheral country than a core, yet it’s still priced as if it was a core.

If that was not enough, German indicators deteriorated too, causing worries that instead of rescuing partners, Germany may be dragged by them. A recession in France may have consequences beyond a reduction in expected growth and earnings in Europe. As we have observed in the FX part, a weaker economy means less credibility. Unless things improve, markets may start worrying about a stbility of the euro once again and that would cause risk premiums (and thus a discount rate) to go up.

Conclusion: During that last 9 months major European equity indices rallied by some 35% with a very small disperssion between key markets. Some of that rally might be justified by diminished risks of a collapse of the euro, however a large part was based on expectations of economic recovery in Europe. The data, however, shows that such scenario may not materialize. Therefore, while the timing remains uncertain, European equity indices are very likely to suffer from both reduced growth expectations and increased risk premiums.

Przemysław Kwiecień PhD
Chief Economist
X-Trade Brokers Dom Maklerski S.A.
Przemyslaw.kwiecien@xtb.pl

Investment risk warning
X-Trade Brokers Dom Maklerski S.A. does not take responsibility for investment decisions made under the influence of the information published on this website. None of the published information can be treated as a recommendation, disposition, promise, or guarantee that the investor will achieve a profit or will minimize risk using the information published on this website. Transactions including investment instruments, especially derivatives using leverage, are in its nature speculative and can provide both profits and losses that can exceed the initial deposit engaged by the investor.

We wrote on the first page that a one good thing about a bailout for Cyprus is that a precendce of an euro exit has not been made. Such move could reignite fears of stability of the bloc and fuel a fresh surge in credit premiums, pushing the EURUSD down. While there are risks credit premiums will widen either way, a status quo policy from the Fed keeps USD bulls at check as well.

Certainly a part of the recent EURUSD slump was about the USD appreciation. A stir caused by FOMC minutes envigorated by a strong payrolls reading in February had a strong impact on the currency market, even though reaction elsewhere (as we reported last week) was very moderate. Now with the FOMC meeting behind us, there is no reason for USD bulls to strike again ahead of the payrolls release for March (next Friday) and even then only a very strong reading could revive the QE3 exit talk.

However, there are not many reasons to buy the euro either. Even though the Cyprus mess has been resolved, at least for some time, there are other worries. In other parts of the bulletin we write about very weak data from France and here we will focus on the FX implications. France holds a negative outlook at all three major agencies with Fitch still assigning the country the highest AAA. A recession means that despite some (luckluter) efforts to trim a deficit, a debt/GBP ratio will continue to soar. Since Hollande is slow at introducing structural reforms too, we would be very surprise if France was still enjoying current rating by the end of the year. In fact, we expect the cuts to take place much sooner. However, its not only about France. In fact, the danger here is that the core of the euro zone will include only one large country. That means a credibility of ESM/EFSF and bailouts sponsored by those entities would be imparied. In an extreme scenario, even a credibility of the ECB and a stability of the German AAA could be at risk. While that seems like a very remote scenario, such fears were not uncommon back in 2011.

While those risks are serious, one should also notice that there was virtually no reaction on French bonds. This complacency is a bit puzzling and while we are not going to find reasons to justify it, we must be aware that only a rise in those premiums could spark a negative reaction of the euro.

Conclusion: a status quo policy in the US limits a short term downward potential for the EURUSD. Macroeconomic tendencies are euro negative, but we should first see a negative reaction on credit premiums before selling in. Short term relationships point to a moderate uptick on the pair but we are somewhat uncomfortable being bullish on the EUR. We would rather see such move as an opportunity for the bears to reenter the trend at a better price.

EURUSD, D1 – last week we saw a decline which has reached the target of the head and shoulders pattern. Since then bulls have taken control and the market broke an upper limit of a downaward channel. However, the pair is testing another important resistance area (an upper limit of a short term red channel). If that line is broken, the EURUSD should move towards 1,3133 – 1,3160 area at least. 1,2880 and 1,2843 are the main support levels and can be tested, if the red line is not broken soon.

EURJPY, D1 – a potential symetrical triangle pattern is being observed on the daily chart of EURJPY currency pair. This kind of pattern is usually favourable for those who expect the trend to be continued. Currently the pair is in the middle of a structure with support at 50% of a wave A. Another support is set by the lower limit of the triangle. If the mentioned levels are not broken, the bulls should lead us to a breakout of the upper limit of the formation and rally above 125,93, 127,50.

GBPJPY, D1 – On the daily chart we can observe a head and shoulders pattern with right shoulder probably being created now. The resistance is set by a left shoulder (144,74) and the market is still under that level. That makes good opportunity for bears to push the pair lower. The nearest target can be set by the recent low 137,87 and by a neck line from the H&S pattern (dashed blue line).

This scenario can be negated if the market rises above 147,92.

Przemysław Kwiecień PhD
Chief Economist
X-Trade Brokers Dom Maklerski S.A.
Przemyslaw.kwiecien@xtb.pl

Investment risk warning
X-Trade Brokers Dom Maklerski S.A. does not take responsibility for investment decisions made under the influence of the information published on this website. None of the published information can be treated as a recommendation, disposition, promise, or guarantee that the investor will achieve a profit or will minimize risk using the information published on this website. Transactions including investment instruments, especially derivatives using leverage, are in its nature speculative and can provide both profits and losses that can exceed the initial deposit engaged by the investor.

The deal is struck. Cyprus remains in the euro zone. However, this is hardly a moment to celebrate. Soon, there might be bigger issues. In case anyone would miss it, here the details of the bailout:

1. The second largest bank in Cyprus (Laiki) will be shut down, good assets and deposits of up to 100k EUR will be moved to th largest bank – Bank of Cyprus; deposits over 100k will absorb the losses and will be frozen until the whole process is complete
2. Large (100k+) deposits at BoC will also face a haircut, according to gov spokesman – roughly 30%
3. The country will receive 10mln of loans from the Troika Certainly, the fact that Cyprus remains in the eurozone is positive for credibility of the block. Should parties fail to reach a consensus and Cyprus exit the zone, a dangerous precedence would have been made. From now on, any country could face the same fate. Keeping in mind that as recently as a year ago market priced some risk of collapse of the euro, this outcome would be indeed very unwelcome. Avoiding it, reduces some risks and help markets move on. Having that said, it is hard to look at things through rosy glasses. For Cyprus there was no easy fix at that point. Either way there are years of pain ahead. In fact it’s too early to say the country is better off staying in the bloc. While the banking system might have been saved, the banking industry has just been destroyed and it is not easy to see how the economy of Cyprus may prosper in a foreseeable future. Accounting for merely 0,2% of the zone’s economy, Cyprus cannot deal a direct blow to the zone. That’s a good news. The bad news is that the European economy really does not need an additional blow to be in trouble. The crisis overshadowed PMI releases for March and these reveal an assumed and hoped for scenario of economic recovery is simply not taking place. That may have a much more pronounced impact on both euro and equities than the Cyprus.

Przemysław Kwiecień PhD
Chief Economist
X-Trade Brokers Dom Maklerski S.A.
Przemyslaw.kwiecien@xtb.pl

Investment risk warning
X-Trade Brokers Dom Maklerski S.A. does not take responsibility for investment decisions made under the influence of the information published on this website. None of the published information can be treated as a recommendation, disposition, promise, or guarantee that the investor will achieve a profit or will minimize risk using the information published on this website. Transactions including investment instruments, especially derivatives using leverage, are in its nature speculative and can provide both profits and losses that can exceed the initial deposit engaged by the investor.