Financial market research and analysis

The euro has had a solid week so far, after the first round of the French election was perceived as a major relief from the markets, which already declared Macron the next President of France. The far-right finalist Marine Le Pen is given 39% chances of winning the final round of the election versus 61% for the centrist Emmanuel Macron.

The French election considered out of the way, EUR-traders’ attention shifts to the European Central Bank (ECB). The ECB will meet on Thursday and will likely keep the policy unchanged. Yet, the market is calling for a more hawkish accompanying statement from President Mario Draghi. He is expected to give more details about the Quantitative Easing (QE) exit plans at the June meeting, six months earlier than previously anticipated. In this respect, Draghi is expected to adopt his language at the communiqué as early as this week.

On a side note, it is well possible that the markets have gone well head of themselves, given that we could also expect the ECB to be less emotional and more pragmatic and wait until the official result of the French election before moving into action.

Since Monday, the euro gained 2.10% against the yen, 1.35% against the Aussie, 0.70% against the US dollar, 0.42% against the pound and 0.37% against the Swiss franc.

The EURUSD extended gains to 1.0951, as the ECB hawks are taking the lead before Thursday’s meeting. The 1.10 level is the next natural target and wet the EUR-bulls’ appetite. Support to the positive trend that started in April is seen at 1.0860 (minor 23.6% retrace on April rise) and the critical 1.0804 (major 38.2% retrace).

German 10-year yields spiked to 0.38% for the first time in April, as a combined result of the first round of the French election and anticipation of the ECB QE exit. French 10-year yields remained capped below 1.00%.

There is a lack of enthusiasm in the European and the UK stock markets this morning. The majority of sectors opened in the red across Europe.

The FTSE is testing the 200-day moving average on the downside. Energy and mining stocks are downbeat due to the softer underlying market prices.

The barrel of WTI is exchanged below $50 before the weekly EIA report. The US oil inventories are expected to have decreased by 1.1 million barrels last week, versus 1 million barrel contraction a week earlier. Lower US oil inventories could be a reason to challenge the $50 barrier, nevertheless, the market remains comfortably short oil. The short speculative positions in WTI futures spiked to the highest levels since November 2016.


US stocks rally into the US ‘big announcement’ on tax reforms

All eyes are on the White House today, which is due to make the ‘big announcement’ on Donald Trump’s major tax reforms.

The US stocks are on the rise, as Trump prepares to unveil significant tax cuts on corporate and personal income. We already know that he plans to dampen the corporate tax rate to 15% from 35%, the top income tax rate to 15% from 39.6%, and propose 10% increase on offshore earnings.

Solid US corporate earnings gave an additional boost to stock investors on Tuesday.

As a result, Wall Street rolling index is testing the $21’000 level on the upside. The all-time high ($21’162) could be bettered within this week, if investors are satisfied with the White House announcement. If not, we could see a renewed downside correction toward $20’740 (50-day moving average) and $20’293 (minor 23.6% retracement on Trump-reflation rally).

 The Dow is called 24 points firmer at $21’020 at the US open.

Likewise, the S&P500 neared the all-time high of $2’400 on Tuesday. Solid earnings from Caterpillar and McDonald’s helped further boosting the appetite before the White House announcement.

In summary, money moves from US bonds to the equities, lifting the US bond yields higher. The US 10-year yields are up to 2.33%.

What could go wrong? An announcement highlighting the tax cuts without mentioning how to finance the multi-billion dollar deficit it would add to the government’s budget, could dampen the mood. Therefore, it is worth mentioning that the downside risks on the stock markets prevail due to an eventual lack of details, as it has often been the case over the first 100 days of Trump’s presidency.


Some colour out of Japan

The risk-on was on Japanese traders’ plate on Wednesday. Nikkei (+1.10%) and Topix (+1.20%) gained in Tokyo, as the USDJPY advanced to 111.51. Improved risk appetite and higher US yields could encourage a further rise in the USDJPY. The next critical resistance is eyed at 112.13 (major 38.2% retracement on December – April decline), if surpassed, should signal a mid-term bullish reversal and bring the 115.00 mark back on the radar.

The Bank of Japan (BoJ) is expected to maintain the status quo at Thursday’s monetary policy meeting. The BoJ should also deliver a dovish accompanying statement, based on Governor Kuroda’s comments that the BoJ will remain easy until the 2% inflation target is reached. Due on Friday, the March inflation ex-fresh food may have steadied at 0.2% year-on-year, comfortably far from the BoJ’s policy target.


Aussie softens post-CPI

The inflation in Australia stagnated at 0.5%q/q in the first quarter. The consumer prices rose 2.1% on yearly basis from 1.5%, marginally lower than 2.2% expected by analysts. The AUDUSD (-0.53%) was rapidly handed back to the bears after testing 0.7554 in Sydney. Sellers are touted above 0.7545 (200-day moving average), betting on a re-test of the 0.7472 (March support), before 0.7454 (50% retracement on December – March rise).


Turkey gives verdict, no change expected

The Central Bank of Turkey (CBT) will announce its rate decision today and is expected to maintain the status quo.

Rising inflationary pressures should prevent the CBT from shifting toward more unorthodox strategy, although the critical constitutional referendum is behind.

The USDTRY tested the 3.60 level in Istanbul on the back of a broad-based USD demand. We could see a minor relief purchases if the CBT remains on hold, as expected.

In case of a dovish surprise, the fears and suspicions vis-à-vis the credibility of the CBT would trigger an aggressive sell-off, in which case the USDTRY could advance to 2.70-2.75 by the end of the week.

If not, the USDTRY should continue oscillating within the downtrend range toward the 3.55 (2017 support), then to the 3.50 level.