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18/02/2015: Weekly Trading Notes


KEY DRIVERS

  • Negotiations continue over Greece and the ending of the bailout programme on 28th February.  It looks increasingly as though the Greeks will need to agree the some sort of extension either of the bailout or a loan agreement. It is still just semantics really, but the Eurozone has a long history of muddling through so do not expect a ground breaking change to the terms. The impact on financial markets could be fairly limited but still a small positive. Outside of Greece bond markets are barely registering the impact.
  • The oil price continues to remain supported (on WTI) or rebound (on Brent crude). This is a general positive with oil majors playing a large weighting in the FTSE 100 (18%). This is also impacting on the commodity currencies, with the Kiwi and Canadian Loonie both performing well against the dollar (although not so much today).
  • The ceasefire in the Ukraine is having mixed results, with some news agencies suggesting that troops are being withdrawn but others saying that fighting continues. The announcement of the ceasefire resulted in DAX and CAC sharply higher and also sing gains today. If the ceasefire proves to be an improvement on the previous deterioration in the geopolitics in eastern Ukraine then this should be supportive of market sentiment
  • In forex, the Dollar Index is consolidating in the uptrend and this has been the case now for around 3 weeks (coinciding with the sideways trading on major pairs such as EUR/USD and USD/JPY. Cable continues to push higher, helped by improving employment and wage growth.
  • Watch for: The fallout from the Eurogroup decision on Greece, the FOMC minutes

Varoufakis

MARKETS

EUR/USD – Consolidation is into its third week 

  • The uncertainty of the Eurogroup meeting with Greece has stymied euro traders and the rate has settled down as a result. The market has been massively dollar long now for several months and this consolidation could be part of a correction within this trade.
  • Technically, the outlook continues to consolidate between $1.1260/$1.1530 and until we get a decisive closing breakout it is difficult to call direction either way. The longer term technicals suggest that this consolidation is merely helping to unwind oversold momentum and should help to renew downside potential.
  • Watch for: Updates on the progress of the Eurogroup, FOMC minutes

GBP/USD – Building off the support band $1.5300/$1.5350

  • With the Bank of England guiding for potential deflation in the coming months, the market took a dip from 0.5% to 0.3% on CPI as a minor positive. The strong employment and wages growth today helps, whilst comments that 2 members of the MPC were seeing the decision over the raise rates as finely balanced will also help to support sterling..
  • The rebound is moving well and a break above $1.5440 would open the next resistance band $1.5485/$1.5620. The longer term technicals are certainly now improving and the rebound continues to take shape.
  • Watch for: FOMC minutes and flash US Manufacturing PMI

USD/JPY – Bulls are regaining momentum after last week’s correction

  • Signs that the Bank of Japan was unwilling to ease further have just calmed down a little as the Bank of Japan stood firm on monetary policy and no mention was made in the press conference. Dollar/Yen should retain upside bias with the Fed continuing to move towards easing. The FOMC minutes tonight should reconfirm this..
  • Holding support around 118.30 has helped to assure that the correction form last week was just unwinding some overbought momentum and the bulls are beginning to regain the ascendancy. Holding a brea above 119.20 would continue to improve the outlook for a test of 120.50 and then further gains.
  • Watch for: FOMC minutes and Japan & US flash manufacturing PMIs

 

Gold – The bears are now in medium term control again for further weakness

  • Gold has come under pressure as the Asian traders are about to go on holiday for lunar new year.
  • The consistent lower highs and lower lows now into its 4th week puts further pressure on gold and suggests that the correction is gathering pace. The breach of $1221 now implies a potentially full retracement of the January bull run, back towards $1168.25. Resistance is now in the band $1216/$1236
  • Watch for: FOMC minutes

 

Indices – Indices remain extremely volatile

Indices are still moving on a variety of different fundamental factors and volatility having fallen away this should be positive for equities . The S&P earnings season coming towards a close now, with companies still talking about the impact of a strong dollar on profit margins – however only around 14% of the US economy comes from exports, so this should not impact too badly. Resolving Ukraine and Greece would certainly give the DAX a boost. FTSE 100 has started to make a move into multi-year highs, aided by the improvement in oil .

  • S&P 500 at an all-time high above 2094 with strong momentum indicators suggesting further upside potential.
  • DAX has struggled around 11,000 and is fighting to hold off the threat of slightly deteriorating momentum indicators
  • FTSE 100 still needs to confirm the move above 6905 with a closing breakout which would then open the move on 6950 the all-time high. The outlook looks fairly decent for this attempt but it has failed on so many occasions previously, so fear of a correction (at least near term) will be in the minds of traders.

 

WATCH OUT FOR THIS WEEK

Wednesday 18th February

  • Japan – BoJ monetary policy
  • UK – Unemployment
  • US – Building Permits/Housing Starts
  • US – Industrial Production
  • US – Crude Oil inventories
  • US – FOMC meeting minutes

Thursday 19th February

  • US – Weekly Jobless Claims

Friday 20th February

  • Eurozone – Flash Manufacturing PMI
  • UK – Retail Sales
  • US – Flash Manufacturing PMI

 

NEXT WEEK

Monday 23rd February

  • Eurozone – German Ifo Business Climate
  • US  – Existing Home Sales

Tuesday 24th February

  • Eurozone – CPI (Final)
  • US – Consumer Confidence

Wednesday 25th February

  • China – Flash Manufacturing PMI
  • US – New Home Sales
  • US – Crude Oil inventories

Thursday 26th February

  • Eurozone – Targeted TLTRO
  • Canada – CPI
  • US – CPI
  • US  – Durable Goods
  • Japan – CPI

Friday 27th February

  • Eurozone – German CPI (Prelim)
  • UK – GDP (Q4 2014 – second reading)
  • US – GDP (Q4 2014 – Preliminary)
  • US – University of Michigan Consumer Sentiment (revised)

 


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