US economic data and sovereign bond yields to continue to drive markets this week

Weekly Outlook

Forex and CFDs are high risk leveraged products that can result in losses greater than your initial deposit and you should therefore only speculate with money you can afford to lose. FX and CFD trading are not suitable for everyone. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. You should first carefully consider your investment objectives, level of experience, and risk appetite and only invest funds you are prepared to lose entirely. For our full risk warning, please go to the end of this report

18th May 2015 by Richard Perry, Market Analyst

Macro Commentary

If the US data continues like this, the Fed will find it difficult to tighten monetary policy this year, let alone in the

summer. According to Fed Funds futures, the CME Group Fed Watch now suggests a 0% chance of a June rate hike. This

comes just a few months after the market was seriously getting excited about an increasing probability of a summer rate

hike. On Friday the probability of a rate hike by December moved below 50% (i.e. now unlikely). When the word

“patient” was removed from the FOMC statement, it was taken that a rate hike could be just around the corner,

providing the data supported. However, data dependency works two ways, and with economic data continuing to

deteriorate the chances of a 2015 rate hike are ebbing ever further. On Friday alone, the Industrial Production data

disappointed across the board, with Capacity Utilization (one measure the Fed would look at to measure the amount of

slack in the economy) falling to a five month low. The Michigan Sentiment (a measure of consumer confidence) fell to a

six month low. This followed disappointing factory gate inflation (PPI) and retail sales last week. The US dollar will come

under further selling pressure now as the expectations that drove the dollar higher in H2 2014 are recalibrated.

WHEN: Wed, 20th May, 1900BST

LAST: n/a

FORECAST: N/A

Impact: For the meetings when Janet Yellen does

not hold a press conference and the FOMC do not

update projections, the FOMC minutes are

probably given even more attention. The FOMC

statement considered that much of the bad

economic data in recent months had been

“transitory” and it will be interested to see the

debate on the committee for this. The market did

not know really how to react on the release of the

FOMC statement there could be a more decisive

move this time as the bad data has seen no real let

up yet. Treasury yields and the dollar will be

reactive as will equities.

Must watch for: FOMC meeting minutes

Key Economic Releases

Date Time Country Indicator Consensus Last

Tue 19th May 09:30 UK CPI 0.0% 0.0%

Tue 19th May 10:00 Eurozone German ZEW Economic Sentiment 49.0 53.3

Tue 19th May 15:00 US Housing Starts (Building Permits) 1.02m (1.07m) 0.93m (1.04m)

Wed 20th May 10:00 Japan GDP (Q1 prelim QoQ) +0.4% +0.6%

Wed 20th May 09:30 UK BoE meeting minutes

Wed 20th May 19:00 US FOMC meeting minutes

Thu 21st May 15:30 China Flash Manufacturing PMI 49.4 49.2

Fri 22nd May 15:00 Japan BoJ monetary policy

Fri 22nd May 09:00 Eurozone German Ifo Business Climate 108.3 108.6

Fri 22nd May 13:30 US CPI -0.1% -0.1%

Trust Through Transparency T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com

1

US 10 year Treasury yield

N.B. Please note all times are GMT, data source Reuters

Weekly Outlook 18th May 2015

by Richard Perry, Market Analyst

Foreign Exchange

The dollar continues to be pulled around by the US economic data and with the data being weak the dollar has been

under pressure. Friday was a classic case in point, where the dollar had managed to claw back some lost ground through

the morning only to be hit by the disappointment of the US Industrial Production data which subsequently induced a

sharp decline. The Dollar Index (.DXY) broke its 10 month uptrend a couple of weeks ago and has re-affirmed this break

with further losses, whilst rallies are being seen as a chance to sell the dollar now. A confirmed breach of a key February

low at 93.25 on DXY would open further downside. This coincides with the resistance band $1.1450/$1.1530 on EUR/USD.

Very near term a correction on major pairs has set in, but this is likely to be seen as a chance to buy the likes of the euro,

sterling and Aussie again. There are notable exceptions though. The Kiwi is not playing the game as it remains under

pressure in the wake of comments from the RBNZ of potential loosening of policy, whilst the Japanese yen stubbornly

rangebound. Both majors have been underperforming on a relative basis.

WATCH FOR: Lots of key US data to drive (or should that be disappoint) the dollar, with housing data, flash

manufacturing, FOMC minutes and US CPI inflation throughout the week. Sterling will take a cue off UK

inflation and retail sales; whilst other than the prospect of the Bund the euro will run off the ZEW and Ifo.

EUR/USD

Watch for: Use any correction to buy for

pressure on resistance $1.1450/$1.1530

Outlook: The resistance from the February

peaks which is lending a barrier between

$1.1450/$1.1530 is just holding the euro

back from the latest upside break. A near

term correction has set in but momentum

indicators remain strong and there is little

reason to not expect further gains this week.

The technical set-up suggests that dips

should be bought into. This outlook will

continue until the key support band

$1.1065/$1.1130 has been broken. Above

$1.1530 opens $1.1675.

GBP/USD

Watch for: Correction towards $1.5550 to be

used as a chance to buy again

Outlook: A move above $1.5550 was a key

medium to longer term breakout on Cable,

completing a large base pattern that implies

upside towards $1.6420. However, there has

yet to be a serious pullback to the neckline

support. The corrective near term signals are

building up and with the RSI closing last

week around 71 the prospect of a near term

retreat towards $1.5550 support is high as

Monday has shown a slight dip taking hold. I

see this as a positive medium term

development helping to unwind overbought

momentum and renew upside potential.


FX Outlook

2



Indices

Equity markets continue to be thrown around by the prospects of the bond markets. The DAX Xetra has been at the

mercy of the yield on the German Bund, whilst the negative correlation between the euro and the DAX has also been

strong. These are all factors that are tied in together. The unwinding of the huge bull run on the German Bund suggests

that the “carry trade” of using borrowed euro’s to buy equities is in the process of being unwound (reversing out of

equities and buying back the euros). So keep an eye on the Bund. The subsequent volatility on the DAX in recent sessions

has been elevated by this. Wall Street has managed to be relatively well insulated from this volatility and has been able

to achieve a closing all-time high. However there is still much to do to convince for a breakout and technically the range

continues. Although there ahs been a minor reaction on a day to day basis, the sharp rise in US Treasury yields has barely

impacted on the S&P 500. The fact is that the US economic data has continued to disappoint in recent months and this

continues to push back expectations of a 2015 rate hike by the Federal Reserve, which is seen as positive for equities.

WATCH FOR: Eurozone equity markets are being dragged around by the bond markets so watch for

movements on the German Bund. A raft of US data releases such as the FOMC minutes, flash

manufacturing and US inflation will drive expectations of FOMC policy and Wall Street will run off this.

DAX Xetra

Watch for: The resistance band between

11,620/11,750 holding back any recovery

Outlook: The top pattern that completed

below the neckline at 11,620 still implies a

correction to 10,850. I still see the neckline

as providing a barrier to a recovery, whilst

the falling 21 day moving average is also

acting as the basis of resistance for the

sellers. Friday’s price action has merely

acted to strengthen these assertions.

Volatility in trading the DAX remains high.

With the medium term bears gaining control

I still expect pressure on the lows at 11,218

and 11,167 this week.

S&P 500

Watch for: Continued pressure on a range

breakout this week

Outlook: Closing all time highs on both

Thursday and Friday failed to inspire Wall

Street to push for a confirmed breakout, so

with the intraday levels showing the

resistance at 2126 remains intact, the range

continues for now. It is interesting that the

momentum indicators are not reflecting the

breakout yet, with the RSI, MACD and

Stochastics still muted. Watch for these

levels to confirm a breakout should one be

seen this week as if not then it could

question the move.


INDEX Outlook

3



Other Assets: Commodities & Bonds

Finally the gold price has started to react to the persistent disappointment in US economic data. The fact that Treasury

yields have spiked higher in recent weeks without any discernible improvement in the economy is not a positive and is

starting to feed through for a safe haven alternative, which is positive for gold, whilst silver has also been positive too. It

is also interesting to note that the Gold/Silver ratio is back to the support of a near 4 year uptrend channel c. 69. The

price of WTI oil has been consolidating and needs to hold above $58.30 to prevent a continued correction.

Financial markets have taken their cue from the bond markets in the past couple of weeks as yields on US Treasuries and

German Bunds have spiked higher. Rising yields (sell-off in bond prices) have put pressure on equities and the dollar

(supporting the euro). All eyes are now on whether the consolidation at the end of last week will continue. Peripheral

Eurozone yields have followed the Bund yield higher, with one notable exception. The yields on Greek sovereign debt

have been consolidating as negotiations between Greece and its international creditors as yet remain unresolved.

WATCH FOR: With key tier one economic data for the US this week focus remains on the direction of

Treasury yields. Gold is taking its cue from the desire for safe haven assets.

Gold

Watch for: A close above $1224 key

resistance implies $1270

Outlook: The gold price is now putting

increasing pressure on the resistance at

$1224 in place since mid-February. With

four completed positive sessions in a row,

the bulls are now beginning to build

confidence with the RSI now pushing

above 60 and signs of life on MACD and

Stochastics. A closing breakout above

$1224 would imply an upside target of

around $1270. Support now comes in

between $1200/$1211.

German 10 year Bund yield

Watch for: Key support at 0.520% keeps

intact the yield rally

Outlook: Since the bottom at 0.049% in mid-

April the Bund has jumped an astonishing

750 basis points at its recent rally high of

0.796%. However the resistance now seems

to be in place at around 0.8%, at least for

the near term. Technical studies such as the

RSI and Stochastics are showing a series of

bearish divergences which suggests a loss of

upside momentum. Reaction lows of 0.599%

and 0.520% become important as a breach

of the latter would confirm continued

retracement. A dip may be temporary, but

trading this week could therefore be

important for the outlook of the rally.


COMMODITIES & BONDS Outlook

4

T: +44 (0) 20 7036 0850 │ F: +44 (0) 20 7036 0899 │ E: [email protected] │ W: hantecfx.com

Risk Warning for Financial Promotions

This report is issued by Hantec Markets Limited, who is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, No. 502635. The report is prepared and distributed for information purposes only. Trading in Foreign Exchange (FX), Bullion and Contracts for Differences (CFDs) is not be suitable for all investors due to the high risk nature of these products. Forex, Bullion and CFDs are leveraged products that can result in losses greater than your initial deposit. The value of an FX, Bullion or CFD position may be affected by a variety of factors, including but not limited to, price volatility, market volume, foreign exchange rates and liquidity. You may lose your entire initial stake and you may be required to make additional payments. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. Before deciding to enter into FX, Bullion and/or CFD trading, you should carefully consider your investment objectives, level of experience, and risk appetite. You should only invest in FX, Bullion and/or CFD trading with funds you are prepared to lose entirely. Therefore, only your excess funds should be placed at risk and anyone who does not have such excess funds should completely refrain from engaging in FX and/or CFD trading. Do not rely on past performance figures. If you are in any doubt, please seek further independent advice. This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such. All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.

Trust Through Transparency

Hantec House, 12-14 Wilfred Street, London SW1E 6PL

T: +44 (0) 20 7036 0850

F: +44 (0) 20 7036 0899

E: [email protected]

W: hantecfx.com



US economic data and sovereign bond yields to continue to drive markets this week

Economy & Finance

Transcript of US economic data and sovereign bond yields to continue to drive markets this week