FTSE +10 points at 7295 DAX +20 points at 12625 CAC +11 points at 5279 Euro Stoxx +6 points at 3540
The US dollar is better bid as the Federal Reserve (Fed) Chair Janet Yellen hinted at one more rate hike before the end of the year and President Donald Trump is expected to unveil details on his tax reforms today. Trump’s reforms will likely include a 20% corporate tax rate and maximum 35% personal tax rate. There are also talks that companies could write off at least five years of capital expenditure immediately according to Bloomberg news. News is positive for equity prices per se, yet the inability of Trump administration to push through reforms is still a risk. How would the drastic reforms be financed is another pending question.
The US equity futures traded marginally higher in Asia. The VIX index (at 10.17%) is relatively low. Investors seem confident; there is no apparent interest in hedging the long S&P 500 positions.
The US sovereign yield curve is steepening on hawkish Fed rate expectations. The probability of a December rate hike stands at 68.6%. The DXY index traded at a month high on Tuesday. The positive momentum is gaining pace.
The US August preliminary durable goods orders data is due today. Analysts expect 1.0% rise versus -6.8% printed a month earlier. Strong data could further boost the USD appetite.
The risk sentiment has not fully recovered following the latest North Korean crisis and the Kurdish referendum. However, investors move away from the safe-haven holdings. Money doesn’t flow into riskier assets either; the US dollar is where investors are positioned at the moment.
The Kurdish referendum has increased the geopolitical risks in the Iraqi region and the recent developments are all but pleasant for Turkey. The Turkish lira could suffer further losses due to the regional instability. Talks of economic and/or military sanctions will likely keep high-yield investors away from the lira holdings in the short-run. The USD/TRY consolidates gains above the 100-day moving average (3.5211) and the upside move could easily extend toward 3.5925 (200-day moving average)
The G10 high-yielders are also on the back foot. The AUD/USD sold-off to 0.7857 in Sydney. Improved US yields and lower risk appetite keeps carry traders on the sidelines. The MACD (Moving Average Divergence Convergence) index turned negative, suggesting that the negative momentum is gaining strength and could encourage a further slide to 0.7820 (100-day moving average & major 38.2% retracement on April – September rise). Below this level, the Aussie will step in the mid-term bearish consolidation zone against the US dollar.
The NZD/USD neared the 200-day moving average (0.7158) at Tuesday’s sell-off. Looming political uncertainties following Saturday’s election will likely keep investors on the short-side of the market, even if the risk appetite improves across the board.
The USD/JPY rebounded from its daily Ichimoku cloud top (111.50) and consolidated gains above 112.20 in Tokyo. Nikkei (-0.32%) and Topix (-0.52%) edged lower despite the softer yen. PM Shinzo Abe announced a snap election on October 22nd. He is expected to consolidate his power and to boost monetary and fiscal policies to foster growth and inflation. These developments are fundamentally negative for the yen. Light risk-off inflows still irrigate the JPY-market during times of crisis. However, the proximity of North Korean threat hardly justifies the yen’s popularity as a safe harbour. The EUR/JPY rebounded from 131.75.
The EUR/USD legged down to 1.1757. The downside correction could deepen to 1.1730 (minor 23.6% retracement on April – September rise), if broken, could pave the way toward 1.1625 (100-day moving average). The market is currently pricing the hawkish Fed expectations. The key Fibonacci support to EUR/USD’s April – September positive trend stands at a distant 1.1509 (major 38.2% retrace).
The DAX and the CAC hold the ground on softer euro, although two thirds of retail traders are positioned on the short side of the trade.
Cable retreated to 1.3409 on the back of a broad-based USD rebound. A break below the 1.3404 (Fib 50% on post-Bank of England (BoE) rally) could encourage a further fall to 1.3344 (major 61.8% retrace). Softer pound may translate into a better FTSE-appetite, although the upside could be limited due to the overall lack of enthusiasm across the equity markets. The ratio of short-term long-to-short positions is nearly 50%.
Gold slipped below the $1,300 mark as the knee-jerk reaction to the North Korean jitters waned. The decline could extend to $1,282 (Fib 50% on July – September rise). The MACD is about to turn negative, suggesting a stronger downside momentum. Geopolitical tensions are still the major upside risk. The price rallies could be interesting opportunities for top-sellers.
The Brent crude retreated to $57.77 and the WTI crude extended gains to $52.43 as the US crude inventories unexpectedly fell by 761,000 barrels last week according to the API data. The more official EIA data is due today. Analysts expect a 2.9-million-barrel rise in the US inventories last week. A slower expansion in the US stockpiles, or a negative surprise, could give a hand to the WTI-longs. The next resistance is seen at $53.75/$54.00 level (April high).