Market panorama. 19 June 2018

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I. Market focus:

The main topic in the financial markets at the beginning of the session Tuesday remained the escalation of the trade war between the U.S. and China. At the end of the previous week, the U.S. president announced the imposition of a 25 percent tariff on up to $50 billion of Chinese goods. In turn, China announced the retaliatory measures. Beijing decided to introduce a 25 percent tariff on 659 U.S. goods worth $50 billion. Beijing’s decision did not please Washington, and Donald Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods, which will come into effect if the PRC continues to give a mirror-like response to the U.S. tariffs. Trump’s statement had a negative impact on market sentiment, hurting investors’ risk appetite and supporting the yen and gold. The Australian dollar came under pressure, as the prospects for the imposition of a new tariff on Chinese goods might seriously hurt the economy of China, which is Australia's major trading partner. The stock market also reacted negatively: the indices in Asia and the U.S. stock-index futures fell significantly. Negative sentiment is likely to continue to predominate in the markets in the near future.

Today’s most significant scheduled report will be the U.S. housing market data (housing starts and building permits), which will come out at 12:30 GMT. Another important event could be the speech of ECB President Mario Draghi at 08:00 GMT.


II. The market highlights are:

  • The National Association of Homebuilders (NAHB) reported on Monday its housing market index (HMI) dropped to 68 in June from an unrevised 70 in May. Economists forecast the HMI to stay at 70. A reading over 50 indicates more builders view conditions as good than poor. All three HMI components inched down a single point this month. The indicator measuring buyer traffic decreased to 50, while the current sales measure fell to 75 and the index charting expectations in the next six months declined to 76. NAHB Chairman Randy Noel said that “Builders are optimistic about housing market conditions as consumer demand continues to grow. However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017.”  At the same time, NAHB Chief Economist Robert Dietz noted that “Improved economic growth, continued job creation and solid housing demand should spur additional single-family construction in the months ahead. However, builders do need access to lumber and other construction materials at reasonable costs in order to provide homes at competitive price points, particularly for the entry-level market where inventory is most needed.”

  • The Reserve Bank of Australia (RBA) published on Tuesday the minutes from its June 5 policy meeting, at which the benchmark cash rate was expectedly left unchanged at a record-low 1.5 percent. The minutes showed the members of the Reserve Bank Board reiterated views that the appreciation of the exchange rate could result in a slower pick-up in economic activity and inflation than forecast. They also said they expected that the further progress in reducing unemployment and returning inflation to the target would be gradual. The policymakers noted that “the recent data had been consistent with the Bank's central forecast for GDP growth to pick up to be above 3 percent by the end of 2018”, while “inflation remained low and was likely to remain so for some time, reflecting slow growth in labour costs and strong competition in the retail sector.” Labour market conditions had eased a little in recent months, but forward-looking indicators of labour demand had continued to point to employment growth increasing to above-average rates in coming months, the members said. In addition, they warned that the prospect of the imposition of additional tariff measures by the U.S. administration or in response to its actions “continued to present a downside risk to the global economic outlook.”

  • The Australian Bureau of Statistics’ (ABS) report showed on Tuesday the Australian house prices fell less than expected in the first quarter of 2018. The home price index dropped 0.7 percent q-o-q in the three months through March compared to a 1.0 percent gain in the previous quarter. That was the biggest decline in residential property prices since the fourth quarter of 2011. Economists had expected a fall of 0.1 percent q-o-q. Prices decreased in five of the eight capital cities, with Sydney (-1.2 percent q-o-q) and Melbourne (-0.6 percent q-o-q) leading the fall. ABS Chief Economist Bruce Hockman noted that “Regulatory changes and tighter lending conditions have continued to affect investors, who are more active in the Sydney and Melbourne property markets. These cities have seen strong price growth over recent years particularly in detached dwellings." House prices rose 2.0 percent in the March quarter compared with a corresponding period a year earlier.


III. Market Situation
Currency Market
The currency pair EUR/USD rose slightly at the beginning of the session, refreshing Friday's high, but then retreated to the opening level amid the risk aversion due to reignited concerns over the trade war between the U.S. and China. Experts note that the pair's recent growth indicates that the euro will not drop to new cyclical lows due to the monetary policy divergence, which again became the driver of the currency market, whereas the previous cyclical lows reached in late May were due to a political turmoil in Italy and a slowdown in the Eurozone's GDP growth. Today, investors will pay attention to the speeches of the ECB’s president Mario Draghi and the ECB’s executive board member Peter Praet, as well as the U.S. data on housing starts and building permits for May. According to economists’ forecasts, housing starts grew to a 1.310 million-unit pace last month from 1.287 million in April, while building permits fell to a 1.335 million-unit rate from 1.364 million. Resistance level - $1.1851 (high of June 14). Support level - $1.1511 (low of May 29).

The currency pair GBP/USD traded higher, as the U.S. currency weakened. However, the stronger growth was limited by the flight of investors from risks. With an empty economic calendar in the UK ahead, investors will focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Later this week, attention will be given to the policy meeting of the Bank of England (BoE). It is anticipated that the BoE’s statement will not become a surprise for the markets. Analysts expect that the BoE’s Monetary Policy Committee (MPC) will vote 7-2 in favor of leaving benchmark interest rate unchanged at the June meeting as it did in May. The volume of corporate bond purchases and the UK government bond purchases is expected to be maintained as well. Resistance level - $1.3298 (high of June 15). Support level - $1.3204 (low of May 29).

The currency pair AUD/USD fell sharply, reaching its lowest since June 1, 2017, amid growing concerns over the imposition of additional tariffs on Chinese goods. Experts note that the new tariffs might seriously hurt the economy of China, Australia's major trading partner. Investors also digested the minutes from the RBA’s latest meeting. The minutes showed the members of the Reserve Bank Board reiterated views that the appreciation of the exchange rate could result in a slower pick-up in economic activity and inflation than forecast. The policymakers also said that “the recent data had been consistent with the Bank's central forecast for GDP growth to pick up to be above 3 percent by the end of 2018”, while “inflation remained low and was likely to remain so for some time, reflecting slow growth in labour costs and strong competition in the retail sector.” In addition, it was noted that the prospect of the imposition of additional tariff measures by the U.S. administration or in response to its actions “continued to present a downside risk to the global economic outlook.” Resistance level - AUD0.7480 (high of June 15). Support level - AUD0.7371 (low of June 1, 2017).

The currency pair USD/JPY declined steeply, reaching its low of June 11, as the escalation of trade tension between China and the U.S. spurred a demand for the safe yen. The U.S. President Donald Trump announced Monday evening that he had asked the U.S. Trade Representative to identify $200 billion in Chinese goods for additional tariffs of 10 percent. The new duties will go into effect "if China refuses to change its practices, and also if it insists on going forward with the new tariffs that it has recently announced," he said. The move was a response to China’s decision to impose tariffs on $50 billion in U.S. goods, which came after Trump announced similar tariffs on Chinese goods on Friday. Resistance level - Y110.89 (high of June 15). Support level - Y109.19 (low of June 8).

Stock Market

Index

Value

Change

S&P

2,773.75

-0.21%

Dow

24,987.47

-0.41%

NASDAQ

7,747.03

+0.01%

Nikkei

22,278.48

-1.77%

Hang Seng

29,441.98

-2.86%

Shanghai

2,906.43

-3.82%

S&P/ASX

6,102.10

-0.03%


U.S. stock indexes closed mostly lower on Monday, as tit-for-tat tariffs between the U.S. and China raised concerns about a possible trade war between the world's two largest economies. Investors also received data on the NAHB’s housing market index (HMI), which showed a drop to 68 in June from an unrevised 70 in May. Economists forecast the HMI to stay at 70. A reading over 50 indicates more builders view conditions as good than poor. NAHB Chairman Randy Noel noted that “builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability.”

Asian stock indexes closed sharply lower on Tuesday, as escalating trade tensions between the U.S. and China triggered a global sell-off of riskier assets.

European stock indexes are expected to trade lower in the morning trading session.


Bond Market
Yields of US 10-year notes hold at 2.87% (-5 basis points)
Yields of German 10-year bonds hold at 0.40% (0 basis points)
Yields of UK 10-year gilts hold at 1.32% (0 basis points)

Commodity Markets
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in July settled at $65.09 (-0.91%). The crude oil prices fell on the back of the comments of the participants of OPEC+ deal and reports about the possible increase in crude production under the OPEC+ agreement. Market participants are awaiting data on oil inventories in the U.S. Today, the American Petroleum Institute (API) will publish its weekly data on the U.S. crude oil stockpiles. Tomorrow, the focus will be on official report on crude inventories in the U.S. from the U.S. Energy Information Administration (EIA). Later this week, OPEC and allies will meet Vienna to consider the future of their production cut agreement.

Gold traded at $1,282.10 (+0.30%). Gold prices rose moderately, supported by a stronger demand for safe-haven assets amid growing trade tensions between the U.S. and China. The U.S. currency’s dynamics also helped the gold prices. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell by 0.15 percent to 94.66. Since gold prices are tied to the dollar, a weaker dollar makes the precious metal cheaper for holders of foreign currencies.

IV. The most important scheduled events (time GMT 0)


08:00

Eurozone

Current account, unadjusted

08:00

Eurozone

ECB President Mario Draghi Speaks

09:00

Eurozone

Construction Output

11:00

U.S.

FOMC Member James Bullard Speaks

11:00

Eurozone

ECB's Peter Praet Speaks

12:30

U.S.

Housing Starts

12:30

U.S.

Building Permits

22:45

New Zealand

Current Account

23:50

Japan

Monetary Policy Meeting Minutes

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Focus market

  • ECB's Weidmann says first ECB rate hike could follow the end of QE more closely than in the U.S
  • Industrial producer prices rose by 0.1% in the euro area (EA19) and by 0.2% in the EU28
  • European Commission forecasts Euro Zone inflation will accelerate to 1.6 pct y/y in 2019 from 1.5 pct y/y seen in 2018
  • UK service providers signalled a modest rebound in business activity - Markit
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