Chinese PMI up

The Chinese PMI index rose to 49,7 pts. from 48,8 pts. in January. Even though this is the seventh of out of last eight months when the index was below 50 mark (indicating a slowdown), the index was also the highest since October and might have calmed those fearing a deeper slowdown in a near future. Notice, that at this point we have improving data and the monetary policy being relaxed in all major places around the globe! One cannot have a better combination for a risk-driven assets.

Keep in mind, that this rally might be on borrowed time though. Pumping up liquidity when the economy is growing encourages risk-taking, probably beyond sound limits. One (already present) consequence is a rise in commodities’ prices. If the price of oil continues to rise at a recent pace, the global economy might be hurt sooner (with Europe on top of the list) than some will notice a recovery.

…but German down

Flash PMIs in Germany disappointed though – both industrial and services indices were lower than expected and lower than in January; the doesn’t deny a scenario of recovery in the euro zone but suggest the path will be rocky

Elections in Greece on 8^th of April

There are rumors that elections in Greece might be delayed by two or three weeks but for now the date is April 8^th. In fact, the sooner the better as a short campaign reduces a risk of populist parties gaining ground and rejecting the just-sealed deal. The campaign is definitely the time to watch developments on the Greek streets.

On the charts:

S&P500 futures (H4) – an attempt from the bears to move down the triangle has been stopped by the Chinese PMI; the index may easily crawl to ’11 highs (1373 points) within the formation

COPPER (H4) – yesterday we pointed out that bulls were trying to move out from the downward corrective channel; they indeed succeeded and the bullish Chinese PMI may fuel a rally back towards Feb’ highs of 8737 USD  

OIL (Daily)  – even though there are hopes that a confrontation between Iran and the US will not materialize, supplies have been disrupted elsewhere – namely in Sudan (which exports to China); that might encourage bulls, especially that they’ve just managed to cross a key 120 USD resistance; the closest target is at 126,75 USD (’11 highs)  but the technical target resulting from the previous downward channel is as high as 133,30 USD per barrel

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

 

EURUSD – maintaining the momentum…

The EURUSD managed to move out of the multiday 1,3030-1,3230 consolidation and yesterday tested the upper limit but this time as a support. Despite numerous attempts bears failed to push the pair back into this range as the 1,3230 was tested this time as a support and consequently the pair moved up. A typical target is a range of a previous consolidation, that is 1,3430. On the weekly bulls may aim at an upper limit of the long-term downward channel – currently at around 1,36.

Naturally, those prospects are dependent on the ECB today. The Bank will almost certainly refrain from cutting rates but the consensus assumes the cut may be suggested for March. Should that happen, the EURUSD rally could be undermined. Only stopping short of such suggestion by Mr Draghi will be a clear buy for the pair.

GBPUSD – another surprise?

The BoE meeting today is no less relevant. The Bank was observing the situation for a while and the consensus assumes that it is a time for some action. Precisely, the Bank is expected to expand the capacity of the bond purchases program by 50 bln GBP (to 325 bln). Nevertheless, the decisions does not look as a done-deal to us. The British PMIs in January literally sky-rocketed and since it was (more less) a Europe-wide tendency, authorities may hope for the recovery to come sooner than expected and thus refrain from expanding the balance sheet.

A situation on the GBPUSD is somewhat tricky. The pair failed to move above 1,59 and we saw a bearish engulfment yesterday on the daily which could well herald some correction of the recent rally. That could happen if the BoE expands the balance sheet and the ECB announces a cut (for March), undercutting a rally on the EURUSD. However, should the market be surprised in both instances, we may well have a surprise rally, taking us even to 1,6125.

Copper – Chinese inflation

One of the reasons behind a recent rally, especially on industrial commodities, was an expectation that the Chinese authorities were once again bound to support the economy in light of a global slowdown. Those expectations were not without a ground as the Chinese may want to keep the economy running at full speed ahead of the political shift in 2013. In that context, the CPI data for January are disappointing.

The CPI rose to 4,5% y/y from 4,1% in December, beating expectations of 4,0-4,1% y/y and suggesting the reserve ratio cuts were not so certain. That’s a bad news for copper that has been testing a key 8600 USD resistance following an impressive rally. This new uncertainty suggest a profit taking, taking us at least to 8150 USD.

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

 

(US) Equities head for ’11 highs

Despite a weaker ADP in January, the NFP surged to +243k, the highest reading since April’11 and clearly above a consensus of +155k. Moreover the ISM services index leaped to 56,8 pts. (vs a consensus of 53 pts.), confirming that the US economy is back on a recovery track. As we argued last week, strong data – given the Fed’s policy – is clearly bullish for equities as the risk of monetary tightening seems very remote. With key US indices in a proximity of ’11 highs bulls might be encouraged to buy short-term expecting a test of those levels.

However, historically the trends on equities were more aligned to the industrial ISM rather than the labor market data (which is lagged to the economic cycle) and maintaining the momentum in the economic activity seems to be the key to mid-term prospects. Unless this happens, the market may retreat to the trend line (currently running at ca. 1250 points). So in other words, a test of 1350-1370 on S&P500 futures is possible with a correction below 1300 later on should regional activity measures suggest a stall in a rebound of activity (other key factors like Greece held constant).

The week ahead: central banks…

Central banks are on top of the agenda this week and each of three meetings might be interesting:

Australia (Tuesday) – following a poor labor market report the RBA looks set to slash interest rates by 25 bps. Interestingly (as a result of market sentiment), the Aussie is testing multi-month highs of 1,07-1,0750

Euro zone (Thursday) – the ECB is likely to wait with another cut but may indicate such cut for March; given a weakness of the EURUSD (failing to continue a rally despite a bullish mode on the markets), even such a suggestion may trigger a sell-off

UK (Thursday) – probably the most tricky of all meetings. The consensus sees the Bank expanding the QE program by 50 bln GBP. However, the latest data from UK (especially the PMIs) is very optimistic. Should BoE wait with this expansion and unless sentiment on global markets deteriorate, the GBP may gain substantially

…and Greece

While everyone on the market could get used to lingering negotiations in Greece, this week might bring a culmination. Greek FinMin said the deal must be made on Feb 13^th at the latest should Greece complete the swap ahead of the debt repayment scheduled for March 20^th. That will require all parties to make serious concessions: private bondholders to accept a loss of at least 72%, Trojka to offer more money (in forms of loans to Greece) and Greece to accept more painful measures like a lower minimum wage, cuts in holiday allowances and cuts in supplementary pensions. With parliamentary elections scheduled for April, those measures might not be easy to introduce…

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

 

The payrolls report today

Ben Bernanke reiterated yesterday in Congress that given current expectations the Fed may hike rates as late as in the second half of 2014. That statement goes well along the data we are awaiting today: a rebound in employment would be less positive for the dollar and even more positive for equities.

The market consensus sees the non-farm employment in January at +155k, less than in December (+200k) and exactly matching the 4-month average. This seems to be a reasonable, given the data we got so far. The ADP was clearly weaker than in December (+170k vs +292k), although still solid, the claims continue to fluctuate around 380k and employment subindex in the industrial ISM indicates a moderate increases in employment.

Should the data surprise, it is worth to keep in mind a different optic given the Fed’s recent statement. A positive surprise (say a reading above +200k) would be even more positive for equities as investors do not need to fear the policy tightening any time soon. Then again the number wouldn’t be as positive for the dollar as it used to be – we could still see the dollar gaining in the initial reaction but at the end of the day this gain could be limited or even reversed (as a rally on equities would favor European currencies). A weak reading (less than +125k) could drag down both equities and the EURUSD.

GBPUSD – still within the upward channel

While the EURUSD failed to make new highs and begun a consolidation, the cable still remains in a firm upward channel. The British currency was helped greatly by the data and the pair managed to break a strong 1,5770 resistance, paving a way towards (a weaker) 1,59.

The UK’s PMI surged to 52,1 (from 49,6) in January, signaling a possible delay or even a cancelation of more quantitative easing from the BoE. Should that be confirmed (both in data and in signals from the central bank) the GBP may do well vs. EUR as the ECB still seems to be bound to relax monetary policy in the relatively near future. The GBPUSD is more dependent on the global sentiment so the rally might be corrected should that sentiment deteriorate. Certainly there are many stop losses below the trendline on H4.

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