Financial market research and analysis

The European Central Bank (ECB) meeting is the major highlight of this Thursday. The ECB is broadly expected to maintain the status quo, yet the focus will be on the accompanying statement. President Mario Draghi could ‘tweak’ the language of his communiqué in line with the expectations that the ECB could start reviewing the Quantitative Easing (QE) exit options as soon as the June meeting. This is six months earlier than anticipated until this week. Many think that the EUR-favourable outcome from the first round of the French election could give a reasonable justification to start the tapering talks. We warn that the markets could have gone well beyond themselves, along with the over-excitement vis-à-vis an eventual, though high probability Macron win. Therefore, we could expect the ECB to be down to earth and wait until the official results of the election, then move into action. A less hawkish than expected ECB rhetoric could temporarily dent the appetite in the EUR crosses.

The EURUSD advanced to 1.0951 on Wednesday. The 1.10 level is the main challenge before the EUR-bulls and could be breached if Draghi hits the nail on the head at his press conference. Support to the actual positive trend stands at 1.0860 (minor 23.6% retracement on April rise) and 1.0805 (major 38.2% retrace).

The European stocks were handed in a risk averse market. The majority of sectors traded in the red.

Deutsche Bank shares tanked at the open, as investors refused to buy into what looked like a solid results at the first sight. In fact, the DB announced that its Q1 profits more than doubled on the back of improved market activity.

The Trump-reflation environment has indubitably been a favourable playground for banks and financial institutions. Improved yields, enhanced market activity and volumes are expected to play in favour of the financial businesses. Yet apparently, the DB results remained far behind its US peers, while the equity trading revenues dropped 11%, versus a flat performance across the Pacific.

The DB lost up to 3% in Frankfurt.

Across the Channel, the market reaction was much better regarding Lloyds (+3.56%), as the Q1 adjusted tax profit rose to 2.08 billion pound versus 1.96 billion expected by analysts. Statutory pretax profit rose 99% to 1.304 billion pound. The bank also upgraded its guidance for the 2017 net interest margin (NIM) and capital generation. In the aftermath of the results, it is obvious that Lloyds has not suffered the consequences of the Brexit this far and the damages are expected to remain limited given that 97% of the bank’s business is in the UK. Hence, news are encouraging for Lloyds that will be owned by private investors only after eight years of public support. The average 12-month price target is set at 70.43p; 55% of investors are positioned in favour of the long side, 22% remain on hold, while 22% would prefer selling the stock.

Finally, Total (-0.55%) also failed to wet investors’ appetite as it printed 56% increase in Q1 profits to $2.56 billion versus $2.44 billion expected on recovery in oil prices and its cost cutting program. Lower production costs allow the company to ‘launch new projects an acquire resources’ said CEO Pouyanne in a statement. This being said, the topside pressures on oil prices continue worrying the majority of investors, given that the OPEC’s efforts have not been sufficient to build a solid base for the price recovery. Still, the earnings are estimated to gradually grow through 2017. According to the latest Bloomberg survey, 65.7% of analysts are in favour of buying Total shares, 31.4% remain on hold with a twelve month average price target of €52.87.


Investors not yet convinced with Trump’s blurry tax reform plans

President Donald Trump’s tax proposals lacked details as suspected. ‘The plan he promised was a one-page list of bullet points which included cutting the corporate rate, targeting overseas profits and eliminating the estate and alternative minimum levies’ cited Bloomberg news, yet gave little-to-no detail on the above-stated actions’ impact on the government budget and how to finance these significant cuts.

In summary, Trump knows how to spend and how much to spend, yet isn’t sure about where to get the funding. We doubt that future revenues from aggressive import tax increases would be enough to pay the expensive bill in the long-run.

The Dow Jones remained capped at $12’070 and closed the Wednesday’s session 21 points softer at $20’975. Likewise, the S&P500 gave back 1.16 points. Trump’s tax reform objectives are indeed positive for the US corporates and businesses, and would support a further rise in the stock valuations. Yet, the lack of details on the financing leg compromises the ability to bring these reforms to life. Therefore, investors are undecided. Is it the right time to jump on the back of the bull, or would it be better to wait for an eventual correction and enter the bull market at a lower level, ideally when there is more visibility over the entire tax plan.

Either way, the Trump news gave a boost to the Federal Reserve (Fed) hawks. The probability of a June rate hike rose to 69.7%. The US dollar gained marginally, yet the appetite remained limited.

The Dow is set for a flat to slightly positive open.


Investors reluctant on both directions

Gold is supported by a number of dip-buyers at $1260/1256 (major 38.2% support to the positive trend in March), if broken, should suggest a short-term bearish reversal.

At the moment, Trump’s tax reforms aren’t solid enough to convince investors to cut their gold allocations and rush into the stocks. Though, the topside appetite remains limited due to the rising Fed rate hike probability.


AUDUSD view revised to neutral after hitting the downside target, 0.7454

The AUDUSD rebounded after hitting the 0.7454 support (50% retracement on December – March rise). Offers are touted pre-0.7500/ 0.7545 (option barriers / 200-day moving average) as the Fed hawks remain in charge of the USD markets. We revise our view from negative to neutral within the 0.7450/0.7545 range. Large put options stand at 0.7450 at today’s expiry, and could reinforce an eventual negative breakout. The next critical support is eyed at 0.7384 (major 61.8% retrace).