Financial market research and analysis

The UK has a busy agenda on Tuesday and Wednesday.

Today, UK PM Theresa May has yet another tough day before the House of Lords. The UK’s lawmakers are expected to amend her Brexit draft to guarantee their right to reject the final Brexit proposal if it is not satisfactory enough. Britons need a soft and business friendly exit strategy to guarantee a smooth transition to the Brexit era.

Some industries in the UK have already started feeling the pinch after the country voted to exit the European Union on June 23rd. The most recent example is the Peugeot’s deal to buy GM’s European operations, including Vauxhall plants that would wipe out some 4500 jobs given that the UK will no longer be part of the EU and PSA may want to repatriate jobs to the mainland Europe. Vauxhall plant would generate opportunities in case of hard Brexit according to Carlos Tavares, Chairman of the Managing Board.

On Wednesday, Chancellor of the Exchequer Hammond is expected to deliver a cautious budget statement, which would include higher taxes to finance extra social spending instead of higher government debt. This means that the Bank of England (BoE) has not much to worry about a fiscal expansion, hence could remain seated on its accommodative monetary policy.

Cable extended losses to 1.2201 before the UK’s budget announcement. The pound is expected to remain under selling pressure pre-1.2394/1.2410 (50 and 100-day moving averages).

The FTSE 100 opened slightly better bid, as the cheap pound remained supportive of the buy camp. Nevertheless, the cheaper pound’s benefits to the FTSE will depend on news regarding the amendment to May’s Brexit draft and Wednesday’s budget statement.

In case of further stress, the UK stocks could extend losses to 7285p (20-day moving average) and 7225p (50-day moving average).


German factory orders contracted by 7.4%m/m

Across the Channel, the DAX opened with limited positive momentum in Frankfurt, amid German factory orders contracted by 7.4% month-on-month in January.

In France, the election shenanigans dent the appetite in the financial markets. Alain Juppe said he would not run for the election, as a scandal hit hard Francois Fillon’s campaign. Left with Fillon only, the French right camp could lose more blood. The question is who between Emmanuel Macron and Marine Le Pen would be more susceptible to catch undecided UMP voters?

Despite a softer open in the European markets this morning, we remind that the overall sentiment remains positive. European stocks are trending higher on the back of higher global growth prospects and perhaps expectations that some British businesses could decide to move toward the mainland Europe after the Brexit. Dip buyers could find opportunities to strengthen their long positions. Cheaper euro could further increase the appeal of the European stocks.


US stocks lose steam

The US stocks are losing steam as Donald Trump repeatedly fails to give more clarity regarding his policies. The Dow Jones traded below the 21K level on Monday and is set for a slightly softer open in the US.

From a technical point of view, the actual pullback is nothing but a minor downside correction following a four-month high-pitched rally. We do not rule out further headwinds in the US stocks should Donald Trump delays to unveil his plans in accurate numbers.

The nearest daily support stands at $20291 (minor 23.6% retracement on the relation rally) and $19752 (major 38.2% retracement).


No surprise out of RBA statement

As expected, the Reserve Bank of Australia (RBA) maintained the cash rate unchanged at 1.5%. In its accompanying statement, the RBA hinted at medium-term risks to the Chinese growth and the reflation trend in most developed economies, cited that the resulting recovery in commodity prices has been a boost to the Australian economy and the cheap Aussie helped, warning that appreciation in the currency could complicate the recovery process onwards. Given that the labour market remains mixed and conditions in the housing market vary considerably, it is appropriate to keep interest rates low in Australia for an extended period of time. The low inflation is also consistent with the accommodative monetary policy.

All in all, the RBA’s dovishness matched the expectations and the AUDUSD held ground above 0.7577 and recovered to 0.7633 posterior to the RBA’s announcement. The AU 10-year yields remained above 2.80%, yet failed to increase the carry appetite against the US dollar as on the other hand, the US 10-year yields hit 2.50% on Monday.

Lacking carry appetite, combined to downside correction in iron ore prices since end February are expected to cap the upside approaching the 0.7700 handle, before 0.7740 (Feb peak) and 0.7785/0.7800 mid-term resistance. The 200-day moving average (0.7546) has acted as a solid support since mid-January.


Gold trends lower on improved US yields

The US dollar consolidated gains, as markets remain comfortably long USD moving into the Federal Reserve’s (Fed) March meeting. The Fed is expected to raise rates by 25 basis points, and may deliver a hawkish accompanying statement hinting at a steeper policy path in 2017 than previously anticipated.

Gold is among the biggest losers as improved US yields encourage investors to move toward the US sovereigns. The precious metal traded at $1224 in Asia and has room to weaken toward $1210 (major 38.2% retracement on December – February rise) before the mid-term positive trend is questioned.


USDJPY to face solid 115-barrier

The yen gained against the greenback in Tokyo. The USDJPY was sold into 104.08, despite a widening US-Japan yield spread. It appears as the actual inflows toward the yen are mostly safe-haven amid North Korea threats. There is a clear lack of positive momentum to fight back the 115.00 offers.