Financial market research and analysis

The FTSE extended gains to 7328p at the open. Financials (+0.45%) led gains, whilst mining (-0.51%) and energy stocks (-0.03%) softened.

The City of London lobbying group abandoned the idea of EU passporting versus an easier-to-implement ‘equivalence’ deal. The risk is that the equivalence would restrict UK lawmakers’ to the EU regulations, hence the UK’s banking sector could slowly diverge from the EU causing a less efficient environment for the banking business, for both sides of the Channel.

Prime Minister Theresa May is expected to reveal details regarding her Brexit strategy on Tuesday next week. Although Britain may be heading towards a hard Brexit, traders have time to benefit from another day of positive trading session, and perhaps a fresh all-time high. According to one spokeswoman, May will be ‘setting out more on the negotiating approach to Brexit as part of preparing for the negotiations and continuing to be an outward-looking nation.’

Switzerland is the first model that comes to mind, if the UK decides to exit the single market as part of its Brexit strategy. This would involve years of bilateral negotiations in order to settle efficient and profitable relationships with the European Union, both in terms of trading and free circulation of workers. The only nuance is that Switzerland has never been part of the EU, hence never quit an existing setting, unlike Britain, preparing to walk out the door in somewhat a sharp, unfriendly fashion.

Healthcare stocks started on a positive note. Shire (+1.71%) and GlaxoSmithKline (+1.20%) attempt to pare the aggressive sell-off triggered by US President-elect Donald Trump’s comments on Wednesday.

Cable traded rangebound between 1.2140/1.2186. The EURGBP consolidated above 0.8720.


Hawkish comments revived the Fed hawks, pushed USD higher

The Federal Reserve (Fed) members, including Chicago Fed’s Charles Evans and Dallas Fed’s Robert Kaplan, are in favour of a tighter US monetary policy on the back of a rising case for a large fiscal stimulus under the freshly elected President Donald Trump’s rule. At her speech yesterday, the FOMC Chair Janet Yellen reassured investors, as she said that the US economy is not facing serious obstacles in the short-term. Nevertheless, she warned against lower productivity and rising inequality given the prospect of an important shift in the US' government policies.

The US dollar pared losses across the globe, as the emerging market currencies traded lower in Asia. US equity futures traded marginally in the green, after closing the New York session in the red. The Dow Jones and the S&P500 are set for a flat US open.


Technical view: Gold stepped in bullish consolidation zone

Gold retreated to $1192, after it traded above $1200 for the first time since November 22nd. While the daily MACD indicator turned positive, the overbought threat to the gold market eased; the 30-day RSI points at 62, suggesting that buyers could still find opportunity in a renewed pushed to and above the $1200 level. A key resistance is eyed at $1219 (major 38.2% retracement on Jul’16 to Dec’16 decline).

PBoC asked banks to stop cross-border payments as outflows rise to record

Shanghai’s Composite reversed early gains as Chinese exports in US dollar terms slumped by 6.1% year-on-year in December, versus -4.0% expected; imports expanded by 4.2% y/y in December compared to 13% a month earlier, and significantly lower than the 10.8% expected by analysts. The trade surplus fell to $40.82 billion from $44.61 billion. Apparently, the rapid Yuan depreciation is taking its toll on Chinese consumers and even business. As it stands, even the exporters failed to benefit from the cheaper Yuan.

Earlier this week, China printed 5.5% year-on-year acceleration in its producer prices, while the consumer prices were left almost unchanged as the retailers absorbed the US dollar hit. The Chinese retailers could no longer carry the weight of the heavier dollar on their shoulders.

This rising tension would at some point bring the People’s Bank of China (PBoC) to take liquidity restrictive measures and temper the yuan’s depreciation. In this perspective, the PBoC asked some of the banks to halt their cross-border Yuan payments to ease the capital outflows, until the inflows and outflows are balanced. This is a measure to prevent outflows amid a record amount of Yuan denominated funds left the country over the past couple of months.


Turkish lira pares gains, as investors crave for rate action

Turkish lira pared losses as the Central Bank of Turkey (CBT) didn’t fund the market through weekly repurchases at 8% on Thursday. Instead, the banks were left with the late borrowing option at 10%. The sharp liquidity tightening revived speculations that the Central Bank would finally act on rates. The unusual, and somehow discrete intervention eased the selling pressures on the lira and triggered a rally in the Turkish assets. The BIST closed the day 4.15% higher in Istanbul, but the upside momentum is waning. The USDTRY eased to 3.7483, the EURTRY shortly traded below 4.00 handle yet failed to consolidate below this level so far.

We warn that the relief could be temporary as investors are now expecting a significant interest rate rise at the January 24th meeting. If not, the risks of a downgrade from Fitch could further weigh on the currency. Fitch is due to announce its decision on January 28th.