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Hectic Nikkei spoiled risk sentiment
The overnight session was all about the hectic trading in Japanese stock markets. Nikkei 225 first rallied as much as 2% past 23000 level for the first time in 25 years, then plunged by 1.8% on rapid profit taking and closed the session 0.20% lower. The economic data was weak. Japan’s current account balance fell more than expected in September, as the core machine orders fell by 8.1% month-on-month, compared to -2.0% expected by analysts and +3.4% printed a month earlier. Soft data boosted the Bank of Japan (BoJ) doves. The USDJPY traded near the 114 mark, then eased to 113.44 as the equity sell-off revived some risk-off inflows into the yen.

Gold advanced to $1'285 per ounce. World Gold Council published its 3Q Gold Demand Trends. The demand for the precious metal fell to 915t, while the gold production hit a record high year-to-date, hinting that the supply/demand dynamics are in favour of cheaper gold in the medium term. Short-term offers are touted at $1’294/1’296 (50-day moving average / upper Bollinger band on daily chart).

The risk-off spilled over to the US equity and FTSE futures. All reversed earlier gains, though the volatility eased into the European open. European stocks showed little-to-no sign of anxiety because the sharp equity sell-off in Japan was mainly due to profit-taking rather than an unpleasant factor.

FTSE stocks opened downbeat. The mining stocks (-0.85%) reversed a part of yesterday’s gains at London open, energy stocks (-0.86%) opened under pressure as oil prices began sending signs of exhaustion.

WTI crude is taking a breather below $58/barrel and Brent crude is offered pre-$65/barrel on unexpected rise in US stockpiles by 2.2 million barrels last week. The US crude production advanced to the highest in more than three decades, which is a good reason for traders to pause and think about their next move. The relative strength index stands at 75%, pointing at an overbought WTI. Tactical profit-taking and a downside correction could be healthy at the current levels. Nearest support is eyed at $55.10 (minor 23.5% retrace on August – October rebound).

The stronger pound weighs on the UK’s big caps as well. Despite talks that the positive correlation between the FTSE and the pound could soon break, the softness in pound continues providing an increasing support to the UK stocks for the moment. The 40-day correlation between the FTSE 100 stocks and the trade-weighted GBP index advanced to 70% in November from roughly zero percent at the beginning of September. Even though the higher UK rates could weigh on this negative relationship, short-term traders have yet nothing to worry about. Three-fourths of the UK's big caps generate revenues overseas and a softer pound increases the GBP-denominated revenues, while rising these companies’ competitiveness on the international platform. Many investors believe that the UK stocks are cheap at the moment.

Cheap hedge for pound risks

‘Buy underpriced GBPUSD option volatility’ recommended ANZ, based on its expectation for higher pound volatility on rising internal and external risks in the UK politics.

Inside the UK, recent political scandals may further damage Theresa May’s thin majority. Outside the borders, the Brexit talks resume in Brussels. There is an increasing pressure on UK policymakers as time passes with no easy deal in sight. Big US banks demand more clarity as soon as early next year, if not they could start moving jobs out of London. A synchronized bank-exit would compromise London’s position as an influential global financial center. ‘Some 50 London-based banks have approached Eurozone banking regulators about relocating key services within the revised bloc’, the European Central Bank (ECB) said on Tuesday. Under these circumstances, the volatility in the pound market could in fact start rising and encourage investors to hedge their positions.

The price of 15Dec17 call option with 1.32-strike stands at the lowest since more than a month, put options with 1.30/1.28 strike trade at the bottom of the monthly range as well. On the spot market, the GBPUSD sees resistance at the 200-hour moving average (1.3164). Support is eyed at 1.3040/1.3000 (November low – psychological support).

Little reaction to Catalan tensions

The EURUSD edges lower with the flattening Eurozone yield curve. The euro's upside attempts encounter solid resistance. Intra-day offers are eyed at 200-day moving average (1.1620) as bears continue eyeing the critical Fibonacci support at 1.1509 (major 38.2% retrace on April – Sep rise).

On a side note, the Spanish assets showed little reaction to revived tensions in Catalonia, where a general strike congested roads and railways on Wednesday, as hundreds protested Catalan leaders’ and independence campaigners’ arrests in Barcelona.

Chinese stocks rallied on $250 billion business deal with the US

In China, the consumer price inflation accelerated to 1.9% year-on-year in October from 1.6% printed a month earlier. Producer prices steadied at 6.9% compared to 6.6% expected by analysts. Industrial metals reversed a part of early intra-day losses, iron ore futures gained 1.70%, steel bar futures added 2.46% in Shanghai, before the Nikkei sell-off dented the appetite in the afternoon session.

Both Hong Kong (+0.81%) and Hang Seng (+0.55%) gained on news that the US and China agreed on more than $250 billion-dollar worth of business deals on a wide range of sectors during US President Trump's visit in Beijing. Trump still complained about China’s ‘unfair’ trade practices, as Chinese President Xi called the US businesses to participate in its gigantic Road and Belt Initiative. Overall, the sentiment was positive.

AUD gains compromised by soft carry appetite

The AUDUSD (+0.12%) traded marginally higher in Sydney. In the last two weeks, the pair has been trapped in a tight trading range. On the topside, sellers are touted by the 200-day moving average (0.7708). The downside is capped by buyers below the 50-week moving average (0.7638). A negative breakout below 0.7638 should trigger a further sell off to 0.7573 (lower Bollinger band on daily chart). A positive breakout above 0.7708 could encourage a rise to 0.7742 (minor 23.6% retrace on September – October decline), max 0.7815 (major 38.2% retrace). Long positions should keep in mind that the carry conditions are not ideal at the moment, the 2-year AU/US rate differential fell to the lowest since the beginning of 2001.

The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. Losses can exceed deposits.