CFD Markets News and Forecasts — 06-01-2020

James Smith, a developed markets economist at ING, notes that within just three trading days of December's UK election, the initial optimism about a smoother EU withdrawal quickly gave way to concern about the next stage of negotiations.

• "Investors are probably right to be cautious - 2020 has the potential to be another turbulent year for Brexit.
• To recap, December's election result, which saw Prime Minister Boris Johnson's Conservatives gain an 80-seat majority, now virtually-guarantees ratification of the withdrawal agreement - the deal agreed between the UK and EU back in October. That means the UK will almost certainly leave the EU smoothly at the end of January.
• But the discussions on the terms of future UK-EU trading arrangements have barely got started. Remember the withdrawal agreement covered mostly 'exit issues' - that's things like the UK's financial obligations, citizens' rights, alongside a trading framework to avoid frictions along the Irish border.
• The current direction of travel is towards a free-trade agreement between the UK and EU - but exactly what form that will take, and the length of time it will take to negotiate, are both still subject to change."

Final Services PMI came in at 52.8, following November's reading of 51.6.

The previous publication was 52.2. Economists had expected the reading to remain unrevised.

Above 50, the index reflects an expansion in the economic activity, below it indicates a contraction.

Employment and new orders increased the most since July, with new business from abroad posting the first advance in five months. Meanwhile, backlogs of work were broadly unchanged, as firms signaled little strain on capacity. On the price front, selling prices were raised the most since February on efforts to pass higher costs on to clients.

Analysts at TD Securities note that China's Caixin Composite PMI for December came in at 52.6, a -0.6 point decline from November.

• "The Caixin Services PMI was lower than market expectation (mkt 53.2), coming in at 52.5 in December, a decline from 53.5 in November, expanding at a slower pace following a strong rebound in November's eight-month high."

• Trump did not say U.S. would target Iran's culture sites
• Trump was just asking question

U.S. stock-index futures fell on Monday after a sharp drop on the final session of the previous week as concerns over escalating geopolitical tensions between Iran and the U.S. remained high following the assassination of a top Iranian military leader.

Global Stocks:

Analysts at Deutsche Bank list down the major events and economic releases, which are expected to have maximum impact on the financial markets for the week ahead.

"Tuesday

• Data: Japan final December composite and services PMIs, Germany December construction PMI, Euro Area November retail sales, Italy preliminary December CPI, Euro Area December CPI estimate, preliminary December core CPI, US November trade balance, December ISM non-manufacturing index, November factory orders, final November durable goods orders, Canada November international merchandise trade.

Wednesday

• Data: Germany November factory orders, France December consumer confidence, trade balance, Euro Area final December consumer confidence, economic confidence, US weekly MBA mortgage applications, December ADP employment change;
• Central Banks: Fed's Brainard speaks.

Thursday

• Data: China December PPI, CPI, Germany November trade balance, industrial production, Italy preliminary November unemployment rate, Euro Area November unemployment rate, Canada December housing starts, November building permits, US weekly initial jobless claims;
• Central Banks: Fed's Clarida, Williams, Evans and Bullard speak.

Friday

• Data: Japan preliminary November leading index, France November industrial production, manufacturing production, Italy November industrial production, Canada December net change in employment, unemployment rate, US December change in nonfarm payrolls, unemployment rate, average hourly earnings, participation rate, final November wholesale inventories."

(company / ticker / price / change ($/%) / volume)

Citigroup (C) downgraded to Hold from Buy at Deutsche Bank

Travelers (TRV) downgraded to Underweight from Equal Weight at Wells Fargo; target $137

Apple (AAPL) downgraded to Buy from Strong Buy at Needham; target raised to $350 from $280

Alphabet (GOOG) upgraded to Buy from Hold at Pivotal Research Group; target raised to $1650 from $1445

Bank of America (BAC) upgraded to Overweight from Equal Weight at Barclays; target $43

Citigroup (C) added to Conviction Buy List at Goldman; target raised to $88

Analysts at TD Securities note that a bit more upside in the final services PMI prints for December was seen, with Spain gaining 0.8pts to 52.7 (market 52.0), and Germany revised nearly a full point higher to 52.9 (market 52.0).

• "While the Eurozone services PMI hit a 4-month high in December, Q4 overall was its worst quarter since Q1 2014 and the overall economy continues to struggle."

FX Strategists at UOB Group expect USD/CNH to keep the 6.93-7.02 range for the time being.

• "24-hour view: We expected USD to 'stay under mild downward pressure' but highlighted that 'any weakness is viewed as a lower trading range of 6.9550/6.9750'. USD subsequently traded in a quiet manner between 6.9570 and 6.9742. Momentum indicators are mostly neutral and further sideway-trading would not be surprising. Expected range for today, 6.9600/6.9800.
• Next 1-3 weeks: While USD plunged to 6.9247 in mid-December, but it snapped higher almost immediately. The price action has resulted in a mixed outlook and USD could trade in an 'undecided' manner between 6.9300 and 7.0200 for a period. From here, the slightly weak underlying tone suggests the bottom of the expected range at 6.9300 is more vulnerable."

Analysts at Nordea Markets note the latest FOMC minutes signaled that the Fed is on hold for now and that a rate cut would require a material change of the growth outlook.

• "Minutes reiterated the message from both the FOMC meeting and several Fed speeches over the past months that the Committee is on hold for now. Thus, the Fed thinks it has done enough to avoid a downturn and will instead monitor the lagging effects on easier monetary policy on incoming data. Therefore, the dot plot median also signaled no rate changes in 2020.
• Still, the FOMC sees the risk to the downside. This is primarily related to "global developments and international trade" (i.e. the trade war), while the inflation outlook constitutes another risk factor with "various participants being concerned of longer-term inflation expectations being too low.
• Overall, however, little news on the monetary policy outlook was offered today. The Fed still needs to see the growth outlook "materially change" before potentially adjusting policy. Given the limited news, today's minutes do in turn not change our view on the Fed. We have penciled in a rate cut in March, as we expect growth to slow below potential and the labour market to soon show weakness."

FX strategists at UOB Group suggest tThe AUD could still experience extra selling pressure in the near-term.

• "24-hour view: Instead of 'edging lower to 0.6960', AUD plummeted to a low of 0.6930 last Friday. Despite the bounce from the low, the underlying remains weak and it is too early to expect a recovery. From here, AUD is more likely to consolidate and trade sideways. Expected range for today, 0.6930/0.6985.
• Next 1-3 weeks: While we detected the weakened upward momentum last Friday (03 Jan, spot at 0.6985) and cautioned that 'odds for further AUD strength have diminished', the subsequent swift and sharp sell-off that easily cracked the 'strong support' at 0.6960 came as a surprise (AUD hit a low of 0.6930). The price action suggests that last Tuesday's (31 Dec) peak of 0.7032 is a short-term top and AUD could trade below this level for the next couple of weeks. From here, the risk for AUD is on the downside but any weakness is viewed as a corrective pull-back and not the start of a major reversal. To look at it another way, AUD is likely to trade lower but for now, any weakness is viewed as part of a broad 0.6900/0.7000 range (a sustained decline below 0.6900 is not expected)."

Analysts at TD Securities note that the UK services PMI for December was revised from 49.0 to 50.0.

“The surveys that came in late and didn't make it into the initial estimate may have been completed post-election, and would reflect the kind of bounce we could see in the January data.

Although it's worth noting that the manufacturing PMI released on the 2nd was actually revised down 0.1pts (to 47.5), so is likely affected by global weakness more than election uncertainty.”

FX Strategists at UOB Group expect the EUR/USD to navigate within a consolidative mood for the time being.

• "24-hour view: While we expected EUR to weaken last Friday, we held the view 'any weakness is part of a 1.1145/1.1200 range'. EUR subsequently dropped to 1.1123 before rebounding quickly. Despite the relatively sharp drop, downward momentum has not improved by much and the 1.1123 low is likely 'safe' for today. That said, it is too early to expect a recovery and EUR is more likely to consolidate and trade sideways. Expected range for today, 1.1135/1.1190.
• Next 1-3 weeks: As highlighted, the movement in EUR is likely the 'early stages of a corrective pullback' but any weakness is viewed as part of a broad 1.1110/1.1230 range and a sustained decline below 1.1110 appears unlikely. The subsequent short-lived dip in EUR to 1.1123 last Friday and the rapid recovery reinforces our view. The 1.1110 level is a relatively strong support and a clear break of this level would suggest that last week's peak at 1.1239 could be a more significant top than currently expected."

Confirms that Johnson, von der Leyen and Barnier will be discussing Brexit later this Wednesday in London

Analysts at the Royal Bank of Scotland (RBS) note that a new Bank of England (BoE) governor is for a new decade and while many of the challenges remain the same, low growth and low inflation, there's a growing realization that monetary policy cannot fix the problems the economy faces.

• "When the outgoing governor took up his role in 2013 Bank Rate was at 0.5%. Six and a half years later it's a whopping 25bps higher at 0.75%, so little room to provide conventional monetary support.
• The new governor could very quickly be debating the relative merits of a host of unconventional measures - more quantitative easing, negative interest rates, even 'helicopter money' (direct cash transfers to the government or households).
• More widely he will be expected to participate in the climate change debate, and build on the work already underway at the Bank, including incorporating climate risks into bank stress tests."

FX strategists at UOB Group suggest that GBP/USD could test lower levels in the next weeks.

• "24-hour view: We highlighted last Friday that GBP 'could test 1.3100 before stabilizing'. We underestimated the downward pressure as GBP not only cracked 1.3100 but also the next support at 1.3070 (low of 1.3054). While the decline still appears to be running ahead of itself, the current weakness is not showing sigh of stabilizing just yet. From here, GBP could dip below 1.3054 but the next support at 1.3025 is unlikely to come into the picture (there is another strong support at 1.3000). Resistance is at 1.3120 followed by 1.3150.
• Next 1-3 weeks: While the rapid retreat from last week's 1.3284-peak is in line with our view from last Thursday (02 Jan, spot at 1.3250) wherein GBP is 'trading sideways between 1.3000 and 1.3400', the swift pace of decline has increased the risk of a break of the bottom of the expected range. 1.3000 is a relatively strong support level and a breach of this level would suggest the mid-December low of 1.2900 could come under threat. From here, GBP has to move and stay above 1.3190 or the current mild downward pressure would increase quickly."

Analysts at National Bank Financial suggest that in Canada, the release of October December's labour force survey will draw a lot of attention as it comes on the heels of an abysmal print the prior month (-71K, the worst monthly drop since the recession).

"As November's result reflected what are likely to be temporary factors - abnormally cold weather for instance - we expect job creation to have resumed in the final month of the year; we're calling for a +20K figure. That gain would push the total number of jobs created in 2019 to 305K, the second-best performance in the last 7 years. We'll also get data on November's merchandise trade balance. Commodity prices rose during the month, a development which, in normal times, should have resulted in an increase in nominal exports. Unfortunately, this backwind is likely to have been more than offset by a drop in export volumes, the latter caused by the CN strike. As a result, we expect the trade deficit to have widened to around C$2.0 billion in the month. Bank of Canada Governor Stephen Poloz will give a speech in Vancouver on Thursday."

FX Strategists at UOB Group slipped the chance that the greenback could have peaked in Q3 2019.

"The US Dollar finished higher for a second straight year in 2019, against both Majors and Asian peers. A resilient US economy underpinned USD strength across most part of 2019 even as the Fed delivered three insurance rate cuts since July to cushion against trade headwinds. However, in December, the USD started to lose ground as a Phase-One trade deal spurred risk taking and a rebound of most currencies against the USD. As such, the US Dollar Index (DXY) pared gains on the year and finished off its peak in Sep. Heading into 2020, the USD may face intensifying headwinds. We expect US growth to moderate further to 1.5% in 2020 from 2.5% this year, and we also see the Fed delivering its fourth rate cut in 1Q20. Overall, we expect the USD to weaken against most of the Majors this year, including the EUR, AUD, NZD and GBP, eventually targeting 95.6 in DXY by end-2020."

According to estimates from Eurostat, in November 2019, compared with October 2019, industrial producer prices rose by 0.2% in the euro area (EA19) and by 0.1% in the EU28. Economists had expected a 0.1% increase in the euro area. In October 2019, prices remained stable in both euro area and EU28.

In November 2019, compared with November 2018, industrial producer prices decreased by 1.4% in the euro area and by 1.0% in the EU28. Economists had expected a 1.5% decrease in the euro area.

Industrial producer prices in the euro area in November 2019, compared with October 2019, rose by 0.9% in the energy sector and by 0.2% for non-durable consumer goods, while prices remained stable for capital goods and for durable consumer goods and decreased by 0.3% for intermediate goods. Prices in total industry excluding energy remained stable.

In the EU28, industrial producer prices rose by 0.5% in the energy sector and by 0.2% for non-durable consumer goods, while prices remained stable for capital goods and for durable consumer goods and decreased by 0.4% for intermediate goods. Prices in total industry excluding energy decreased by 0.1%.

Morale among investors in the euro zone jumped for the third month in a row in January, buoyed by positive economic news from Asia and signs of an easing in U.S.-China trade tensions.

The Sentix index of investor morale rose to 7.6 points from 0.7 in December, hitting its highest level since November 2018. Expectations reached their highest since February 2018, and current conditions their highest since last June.

"Thus, a recession in the euro zone seems to be off the table for the time being. The recent events surrounding Iran have not unsettled investors," Sentix said of the survey.

UK service providers indicated that business activity was unchanged in December, following a marginal reduction in the previous month. The stabilisation of service sector output was helped by a return to improving order books, as signalled by the sharpest rise in new work since last July. Job creation also strengthened in the latest survey period, partly driven by a rebound in business optimism to its highest for 15 months.

The seasonally adjusted IHS Markit/CIPS UK Services PMI Business Activity Index registered 50.0 in December, up from 49.3 during November, to signal a stabilisation of overall service sector activity. Economists had expected a decrease to 49.2. Moreover, the latest reading was higher than the earlier 'flash' estimate for December (49.0). Some survey respondents noted a boost to activity from higher underlying customer demand at the end of 2019. Meanwhile, those reporting a drop in output generally cited a headwind from delayed spending decisions ahead of the general election. December data revealed a modest overall expansion of new work received by service sector companies, which ended a three-month period of decline.

The seasonally adjusted IHS Markit/CIPS UK Composite Output Index registered 49.3 in December, unchanged from that seen in November and slightly below the neutral 50.0 threshold. Moreover, the latest reading was the joint-lowest since July 2016. A stabilisation of service sector activity (index at 50.0) was offset by a sharp and accelerated decline in manufacturing output (index at 45.6).

The IHS Markit Eurozone PMI Composite Output Index improved slightly during December, but still signalled weak economic growth. After accounting for seasonal factors, the index recorded 50.9, up from 50.6 in November and slightly better than the earlier flash reading. Despite the improvement to a four-month high the index nonetheless continued to post at a level amongst the lowest seen since the first half of 2013. The divergence between the performances of the manufacturing and services economies remained noticeable in December. Overall growth remained centred on the service sector, with growth here reaching a four-month high. In contrast, manufacturing output declined at a rate not exceeded for nearly seven years. Supporting the upturn in overall activity was an increase of incoming new work for the first time in four months. Growth was, however, only marginal, and again undermined by weakness in foreign demand. Latest data showed exports falling for a fifteenth successive month, albeit to the weakest degree since the start of 2019.

The Eurozone PMI Services Business Activity Index improved in December to a four-month high of 52.8, up from 51.9 in November. All nations covered by the survey recorded growth in activity, led by Spain and Ireland. A similar-sized increase in new work was recorded in December, although growth was again dampened by a reduction in new export business, the sixteenth in as many months.

Looking ahead to the coming 12 months, business confidence about the future strengthened to its highest level since July. The upturn was led by a strong improvement in sentiment amongst German service providers.

According to Karen Jones, analyst at Commerzbank, USD/CHF's outlook is overall negative, but near term having held the .9659 August 2019 low on a closing basis we would allow for a small bounce higher to the .9755 accelerated downtrend.

"Below .9647 targets the September 2018 low at .9543. We have the .9623 23.6% retracement from the 2015 low also found here. Slightly longer term we look for a fall back to the 2018 low at .9188, this is also the 38.2% retracement of the same move from 2015. While rallies are capped by the lows seen in September and October 2019 at .9841/44, the market will remain immediately offered. A rise above the .9844 resistance would suggest recovery to the .9707/22 band of resistance, which if seen we would again look to cap."

A flare-up in U.S.-Iran tension may be keeping oil elevated, but an actual disruption to global crude supplies is needed to keep prices at current levels, according to Goldman Sachs Group Inc.

Price risks for Brent, which has surged about 6% since the U.S. strike killed a top Iranian general, are skewed to the downside in the coming weeks without a major supply disruption, Goldman said in a note. Oil was already trading above the bank's fundamental fair value of $63 a barrel prior to the attack, buoyed by an "over-enthusiastic December risk-on rally" despite limited evidence of an acceleration in global growth, they said.

"It is not a given that any potential retaliation by Iran would target oil producing assets," Goldman analysts including Jeff Currie said. "The recent incident at the U.S. embassy in Iraq occurred while there was no disruption to neighboring oil fields."

The September strike on key oil producing facilities in Saudi Arabia indicated that the market has significant supply flexibility, according to Goldman. There is only "moderate upside" from current levels, even if an attack on oil assets actually occur, the bank said.

Danske Bank analysts suggest that the markets focus remains on the escalating conflict between the US and Iran as Iran has announced that it will no longer abide by the 2015 agreement about enrichment of uranium and the Iraqi parliament has decided that US troops should be expelled from the country.

"Focus is on a possible retaliation from Iran as Trump in a tweet stated that the US would bomb 52 Iranian sites - a specific reference to the 52 US diplomates held hostage under the Iranian revolution - if Iran retaliates. Oil has continued to move higher overnight and the Brent future is above USD70 a barrel, up USD4 since the conflict started. In the FX market we note that USD/JPY briefly dropped below 108 this morning; but is now above Friday night's closing level again. We see a risk that the weekend's events will be viewed as an escalation of the crisis and with a market waiting for a possible Iranian retaliation, uncertainty is expected to stay high. When we combine that with the weakening of the US manufacturing cycle it does not bode well for risk appetite the coming days."

According to Karen Jones, analyst at Commerzbank, EUR/USD has started the New Year under pressure as it consolidates recent gains.

"The market is holding just below a critical juncture - namely the 55 week ma at 1.1197 and the 2019-2020 down channel at 1.1215 and we are not surprised to see consolidation here. With dips lower well supported by the 55 and 20 day ma at 1.1094/1.1064 we look for the market to hold here and recover. Above the 1.1240 recent high lies the 200 week ma at 1.1360, and this represents a critical break point on the topside from a medium term perspective. Dips lower will ideally hold over the 1.1066 20th December low and the 1.1043 3 month support line and while above here our outlook stays positive. Failure would target the 1.0981 29th November low."

The number of new cars sold in Britain last year fell to its lowest since 2013, as consumers held back from purchases amid increased restrictions on diesel vehicles and ongoing economic uncertainty in the run-up to Brexit.

New car registrations dropped by 2% in 2019 to 2.31 million, according to provisional data from the Society of Motor Manufacturers and Traders (SMMT), the third annual fall since sales peaked at 2.69 million in 2016.

"Undoubtedly consumer confidence on big-ticket items is still very weak," SMMT Chief Executive Mike Hawes said.

Sales in December alone were up 4% from a year earlier, when stocks of some models were limited pending new emissions tests.

Brexit remained the industry's top concern, Hawes said, due to the risk of 10% tariffs on imports and exports of cars in 2021 if Prime Minister Boris Johnson cannot negotiate a post-Brexit trade deal with the European Union before then.

A tariff of this level would make a lot of car production in Britain uneconomic, and the risk of this has caused many manufacturers' investment plans to stall, he added.

According to estimates of the Federal Statistical Office (Destatis), retail turnover 2019 in Germany is expected to be between 2.8% and 3.0% higher in real terms than in 2018. In nominal terms turnover growth is expected between 3.3% and 3.5%. This estimation is based on data for the first eleven months of 2019. According to provisional data, turnover in retail trade in November 2019 increased 2.8% in real terms and 3.1% in nominal terms from November 2018. Economists had expected a 0.9% increase in real terms. The number of days open for sale was 26 both in November 2019 and November 2018.

Compared with the previous year, turnover in retail trade was in the first eleven months of 2019 in real terms 2.9% and in nominal terms 3.5% higher than in the corresponding period of the previous year.

When adjusted for calendar and seasonal variations, the November turnover was in real and nominal terms 2.1% higher than in October 2019. Economists had expected a 1.1% increase.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1300 (2122)

$1.1273 (1945)

$1.1253 (2376)

Price at time of writing this review: $1.1164

Support levels (open interest**, contracts):

$1.1114 (1941)

$1.1078 (4772)

$1.1037 (4019)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date February, 7 is 40654 contracts (according to data from January, 3) with the maximum number of contracts with strike price $1,1100 (4772);

GBP/USD

Resistance levels (open interest**, contracts)

$1.3281 (899)

$1.3225 (1209)

$1.3183 (852)

Price at time of writing this review: $1.3082

Support levels (open interest**, contracts):

$1.2979 (2732)

$1.2952 (1006)

$1.2921 (1690)

Comments:

- Overall open interest on the CALL options with the expiration date February, 7 is 16079 contracts, with the maximum number of contracts with strike price $1,3500 (2362);

- Overall open interest on the PUT options with the expiration date February, 7 is 16529 contracts, with the maximum number of contracts with strike price $1,3100 (2732);

- The ratio of PUT/CALL was 1.03 versus 0.87 from the previous trading day according to data from January, 3

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.