The European market (Stoxx-600) is currently trading around 361.54 early Wednesday, soared by almost +1.70% on earnings optimism, lower local currencies (EUR, GBP) and month-end rebalancing (short covering) after a flat closing on Tuesday. Overall, Stoxx-600 plunged almost -5.80% in October (till now) amid Italian budget aftershocks, German political tensions, Brexit uncertainty, and higher EU Bund yields. As per ECB, a hard Brexit would be also negative for the EU banks.
Another reason for the European surge is that the market is catching up overnight Dow rally of more than 400 points (+1.77%) on hopes of US-China trade truce and solid Q3 earnings. The Dow was up by around 200 points when Europe goes home Tuesday. On early Wednesday, the European market was boosted by solid report card (earnings and guidance) from L’Oréal, Sanofi (PA:SASY), Standard Chartered (LON:STAN) and Santander (MC:SAN) banks. On early Wednesday, the European market is also getting support from higher oil ahead of Trump’s Iran sanction. Techs and banks & financials also helped.The French pharma giant Sanofi jumped over 5% after upbeat earnings and solid guidance for rest of 2018 (Q4). Sanofi is now trading around 79.11.
EURUSD edged down almost -0.10% on Italian budget tensions and subdued economic data, although core inflation edged up and flashed better than expected at +1.1%. EURUSD slumped almost -0.25% Tuesday and for October plunged by almost -2.35% (till now) and helped the export savvy European market to some extent.
Similarly, GBPUSD tumbled almost -0.66% on Tuesday and in October, it stumbled almost -2.23% on increasing probability of a hard Brexit despite marathon negotiations with the EU. On early Wednesday, GBPUSD jumped almost +0.30% from the multi-month low of around 1.2700 on hopes of a hawkish hold by BOE and forecast of an upside risk in inflation (due to lower GBP) on Thursday.
On early Wednesday the US dollar index (DXY) is almost flat around 97.00 after a surge of +0.43% Tuesday. The USD (DXY) scaled a 16-month high of 97.06. On Tuesday, USDJPY surged almost +0.61% and scaled a 2-week high of 113.33 early Wednesday as BOJ goes for dovish hold- stands pat as expected and lowers inflation projection once again.
As unanimously expected, the BOJ left monetary policy unchanged on Wednesday by 7-2 vote again. The Short-term policy interest rate is held at -0.1%. On long-term interest rate (YCC), the BOJ will continue with asset purchases to keep 10Y JGB yield at around 0%. Kataoka dissented again, pushing for more monetary easing due to “heightening uncertainties regarding development in economic activity and prices”. Harada dissented because “allowing the long-term yields to move upward and downward to some extent was too ambiguous”.
In the Outlook for Economic Activity and Prices report, the BOJ noted that the economy is likely to continue to grow above potential in FY-2018. For FY-2019 and 2020, the economy is expected to continue on an “expanding trend”, partly supported by “external demand”. But growth is projected to decelerate due to a “cyclical slowdown” in business fixed investments and the scheduled sales tax hike.
Japanese CPI continued to show “relatively weak developments” comparing to growth and labor market. Though, BOJ maintained that “further price rises are likely to be observed widely and then medium- to long-term inflation expectations are projected to rise gradually”. Thus, CPI will gradually increase towards 2% target. On risks, BOJ said both economic and prices risks are “skewed to the downside”.
In the updated economic projections, FY-2018 GDP growth forecast was downgraded from 1.5% to 1.4%. Growth forecasts for 2018 and 2019 were kept unchanged at 0.8%. Fiscal 2018 core CPI projection was lowered notably to 0.9%, down from 1.1%. For fiscal 2019 and 2020, ex-sales-tax-hike core CPI projections were also lowered, to 1.4% and 1.5%, down from 1.5% and 1.6% respectively. Also, note that the ex-sales-tax-hike core CPI projections are notably lower than April’s forecasts, at 1.8% in fiscal 2019 and fiscal 2020 respectively.
Pivot: 112.85 Support: 111.6 110.25 109.7Resistance: 113.25 114.75 115.5 Scenario 1: STRONG ABOVE 112.85 Scenario 2: WEAK BELOW 112.55 Comment: NEAR TERM RANGE: 109.70-114.75
On Italy’s budget drama, the EC said in a letter Tuesday “Italian debt is a cause of concern for the whole Eurozone, while, Italy’s planned fiscal expansion is incompatible with a debt cut”. Italy, on its part, will officially reply the EU on 13th November in this endless “game of chickens”. The market is now concerned that this political game will linger for years like the case in Greece before someone from the EU/ECB pays the Italy debt bill.
On Tuesday, Italy’s PM Conte reiterated that his government won’t change the 2019 budget deficit target despite weak Q3 GDP growth. Conte said the weak Q3 GDP data was expected, that’s why the government presented an expansionary budget. Conte also insisted that Italy will not change budget but will also not exceed the 2.4% budget deficit target. Elsewhere, Italy’s one deputy PM Salvini said Italy will continue on its planned budget and the soft Q3 GDP number is another reason to press ahead with the expansionary budget.
On Wednesday, Italy’s 10Y Bund yield is currently trading around 3.44% after slumping to a low of 3.401%, plunged by almost 8 bps, while the stock market (FTSE MIB-40) edged up BY almost +0.35%. The market is expecting some compromise between Italy and the EU on budget deficit despite lingering “war of words”.
Italy 40 Chart
Pivot: 19200 Support: 19100 19000 18940Resistance: 19300 19450 19630 Scenario 1: STRONG ABOVE 19200 Scenario 2: WEAK BELOW 19180 Comment: NEAR TERM RANGE: 18350-19630
GM reported upbeat Q3 earnings on Wednesday amid solid sales of trucks, SUV and crossovers. GM reported an adjusted EPS of $1.87 vs $1.25 expected, while net revenue was at $35.79B vs 34.85 estimate. GM jumped 10% in pre-US market trading. GM bucks China pressures to beat earnings estimates despite higher tariff-related costs and a weak auto market in China.
Pivot: 36.5 Support: 36 35.15 34.2Resistance: 36.75 37.05 37.95 Scenario 1: STRONG ABOVE 36.50 Scenario 2: WEAK BELOW 36.40 Comment: NEAR TERM RANGE: 30.50-36.50
In commodities space, Natural Gas (NG) jumped almost +1.55% to 3.240 on the concern of a harsh winter: The new weather outlook sees for colder trends overnight for the 2nd week of November and ended by milder spells (rains and snowfall). All focus now on EIA inventory data.
Natural Gas Chart
Pivot: 3.37 Support: 3.2 3.1 2.95 Resistance: 3.45 3.7 3.75 Scenario 1: STRONG ABOVE 3.37 Scenario 2: WEAK BELOW 3.35-3.25 Comment: NEAR TERM RANGE: 3.10-3.37