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Tax reform remains key with US CPI in focus this week


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The perception of progress in US tax reform remains a key driver of financial markets with CPI inflation in focus. Treasury yields are still a key factor in how the US dollar trades and for this tax reform plays a key role. We take a look at the outlook for forex, equities and commodities markets this week

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Tax reform remains key with US CPI in focus this week

  1. 1. Weekly Outlook Monday 13th November by Richard Perry, Market Analyst Forex and CFDs are high risk leveraged products that can result in losses greater than your initial deposit and you should therefore only speculate with money you can afford to lose. FX and CFD trading are not suitable for everyone. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. You should first carefully consider your investment objectives, level of experience, and risk appetite and only invest funds you are prepared to lose entirely. For our full risk warning, please go to the end of this report. WHEN: Wednesday 15th November, 1330GMT LAST: Headline 2.2%, Core 1.7% FORECAST: Headline 2.0%, Core 1.7% Impact: As the US yield curve has become the flattest in 10 years (on the 2s/10s spread) the market is clearly questioning the prospects for US inflation and growth going forward. Driven partially by concerns over tax reform, the subdued levels of inflation and average hourly earnings also play into this. This means that US core CPI will be keenly watched this week. The core CPI has not risen since January but has stabilised in recent months. Core CPI is expected to be +0.2% for the month but would be steady again at +1.7%. A surprise would certainly move yields and the dollar. Key Economic Events Date Time Country Indicator Consensus Last Tue 14th Nov 0200GMT China Industrial Production / Retail Sales +6.3% / +10.4% +6.6% / +10.3% Tue 14th Nov 0930GMT UK CPI (headline /core) +3.1% / +2.8% +3.0% / +2.7% Tue 14th Nov 1000GMT Eurozone GDP (flash Q3) +0.6% +0.6% Tue 14th Nov 1000GMT Eurozone German ZEW Economic Sentiment +20.0 +17.6 Tue 14th Nov 2350GMT Japan GDP (Prelim Q3) +0.3% +0.6% Wed 15th Nov 0930GMT UK Unemployment/ Av Weekly Earnings x bonus 4.3% / +2.2% 4.3% / +2.1% Wed 15th Nov 1330GMT US CPI (headline / core) +2.0% / +1.7% +2.2% / +1.7% Wed 15th Nov 1330GMT US Retail Sales (ex-autos MoM) +0.2% +1.0% Thu 16th Nov 0030GMT Australia Unemployment 5.5% 5.5% Thu 16th Nov 0930GMT UK Retail Sales (ex-fuel YoY) -0.4% +1.6% T: +44 (0) 20 7036 0850 │ E: │ W: 1N.B. Please note all times are Greenwich Mean Time (GMT), data source Reuters Macro Commentary With President Trump away in Asia and a dearth of economic data last week the focus has been on the progress of US tax reform. The committee stage of the bill is revealing differences within the Republican Party over the content of the bill. However, expectations already seen to be being scaled back as suggestions that the Senate GOP version would delay the corporate tax from 35% to 20% by a year. Already flattening to 10 year lows, the US yield curve seems to already questioning the longer term benefits to growth. Increasing the deficit by $1.5 trillion over 10 years is certainly a concern. Can Republicans agree on a tax rate for repatriation of corporate overseas profits? Differences between the GOP Senate and Republicans over the treatment of standard deductions and income tax brackets also could delay a final vote which has been expected before Thanksgiving (23rd November) whilst hopes of Donald Trump signing tax reform into law this year seem tentative. The real impact of this slippage could be seen on Wall Street in the coming weeks. With earnings season in its dotage, fully valued equities could be at risk of a correction. As for the yield curve, focus is back on the data this week, with the release of CPI inflation and retail sales. Subdued inflation is a key reason behind the flattening yield curve, however there could be a boost were there to be a positive surprise on core inflation. This could also give a flagging dollar rally another shot in the arm. Must Watch for: US CPI US Core CPI Core CPI may have bottomed, but has not risen now since January. Core CPI rising would be supportive for longer yields
  2. 2. Weekly Outlook Monday 13th November by Richard Perry, Market Analyst Foreign Exchange The US dollar is being driven on a near term basis by expectations of tax reform in the US. The proposed delay to the corporate tax cut by Senate Republicans has flattened the yield curve, hampered the dollar. Bulls will be eying an opportunity on the Dollar Index has unwound to a key breakout of 94.10. However, after the surprise jump in Bund yields enabled a euro rally last week, the Bund spread under the US 10 year yield is worth watching. The spread is a strong gauge for EUR/USD moves and broke a multi-week downtrend channel on the leap in Bund yields. If this is a sign to come it would question the big top pattern on EUR/USD which is again testing its neckline at $1.1660 this week. After diverging for over a week, the positive correlation between US 10 year yield and USD/JPY has come back together again. These two tend to move in lock step and the US CPI announcement next week could have a significant impact on both. Politics of the unstable UK Government and the outlook for Brexit negotiations are still a key aspect for direction on sterling. There is a suggestion that the UK is preparing a plan to significantly increase the “divorce settlement” for the EU, as an attempt to bridge the apparent gapping chasm between the €20bn offered by the UK and the €60bn wanted by the EU. Could this oil the cogs of a breakthrough? The outlook for the Kiwi remains muted with the RBNZ likely to remain on hold for “a considerable period” with “numerous uncertainties” (i.e. the economic reaction the Labour government). WATCH FOR: Progress on tax reform, driving yields and the dollar. Brexit and inflation driving sterling T: +44 (0) 20 7036 0850 │ E: │ W: 2 FX Outlook USD/JPY Watch for: The bulls have just lost control near term meaning 112.95 support is key this week. Outlook: The rally has rolled over and now the market seems to be building a near term consolidation above 112.95 support after the market failed to decisively break the 114.50 resistance. Momentum indicators rolling over to reflect the move suggest that the market could be at risk of further correction if the RSI drops consistently below 50. This is becoming a near term consolidation that could be a key directional indicator on the breakout. This means that support at 112.95 and resistance at 114.50 will take on added importance now. EUR/USD Watch for: Rallies that fail around $1.1660 will remain a chance to sell. Outlook: The rebound from last week is once more back at the medium term resistance of the big top neckline of $1.1660. With a series of lower highs in the past two months the opportunity is there once more to sell. The medium term outlook continues to be a likely 220 pip downside move in the coming weeks and possible 400 pip move over the coming months. Initially, if the dollar bulls resume control look towards a retest of the $1.1550 low from last week. Momentum indicators continue to shows near term recoveries are a chance to sell with the RSI failing under 50 and MACD lines negative.
  3. 3. Weekly Outlook Monday 13th November by Richard Perry, Market Analyst Equity Markets US earnings seasons seems to have panned out broadly as anticipated. Lowballing of expectations combined with the usual balance of positive surprises (always the same…) has seen earnings growth improve from initial expectations of around 2% to a likely which should end earnings season somewhere between 6% to 7%. However, the string of positive newsflow is drying up now as traders looking beyond earnings season to tax reform being the major driver. A delay of corporate tax cuts and likely slippage in reform delivery means that equity traders have an excuse to take profits driven by earnings season off the table. Subsequently we are seeing uptrends that have built up over several weeks on these major markets starting to break down. Formerly positive medium term technical signals (RSI and MACD lines) have been showing warning signals for a couple of weeks, but now on Wall Street we see the Dow beginning to break an 8 week uptrend, whilst the S&P 500 is threatening an 11 week uptrend. Key support to watch for a decisive downside break comes in at 23,250 on the Dow and 2540 on the S&P 500. However, it is noticeable that even now, Wall Street is outperforming the European markets, with the S&P 500 less than 1% off its all time highs. In less than a handful of sessions, the DAX unwound over 2.5% from its all time high of 13,525 to break its 10 week uptrend and leaving support between 12,910/13,095 now key. With the euro picking up against the dollar last week, the negative correlation of the DAX and the euro remains a key factor. Sterling is also holding up against the dollar to weaken the FTSE 100 which is around 2% off its recent peak of 7583. A decisive breach of 7437 completes a six week top. WATCH FOR: Tax reform progress continues to drive Wall Street and subsequently other major markets T: +44 (0) 20 7036 0850 │ E: │ W: 3 DAX Xetra Watch for: A broken uptrend and momentum sell signals deepen the potential correction Outlook: The bear pressure is moving quickly to pull the DAX lower. Technically there has been a breaking down of a ten week uptrend whilst momentum indicators are throwing off a series of negative signals. The RSI is retreating sharply now at a nine week low, whilst confirmed sell signals have formed on the MACD and Stochastics lines. The band of support between 12,910/13,095 comes into play and is a potential consolidation point but should negative momentum continue to build, the next support then comes in around 12,675. FTSE 100 Watch for: Trading consistently below 7450 opens the downside Outlook: A sharp reversal has once more come as the market had been threatening a move on the all-time highs. This is the latest failure in string of disappointments for FTSE 100 and the momentum of a correction is building now. The Late October low which formed support around an old pivot of 7450 has been breached and with momentum indicators deteriorating sharply now the prospect of further weakness remains this week. The RSI falling at a 6 week low, the bear kiss on the MACD lines and to cap it all, a completed top pattern now imply a retreat towards 7300 which is another old key support. Resistance is now between 7450/7480. Index Outlook
  4. 4. Weekly Outlook Monday 13th November by Richard Perry, Market Analyst Other Assets: Commodities & Bonds The perception of slippage on tax reform has helped to flatten the US yield curve and dragged gold higher in recent sessions. However, if a US 10 year yield rebound is sustainable enough to pull above 2.40% again then gold and silver are likely to come back under pressure once more. The overhead supply of resistance between $1290 and up to $1310 will also provide a key barrier to gains this week. US CPI inflation will certainly be watched as any positive surprise would certainly be a boost for yields and the dollar, helping to pull gold lower again too. The sharp moves higher on oil in recent weeks have just begun to consolidate and it will be interesting to see if this is a consolidation that turns into a correction. Stronger demand has been supportive, but a surprise EIA inventory build is beginning to turn a trend higher which could induce some profit-taking. Pushing out corporate tax cuts by 12 months does little for longer dated yields which remain depressed against the shorter end. This is pulling the yield curve to its flattest level in 10 years as measured by the 2s/10s spread. However it was interesting to see the 10 year yield bouncing off 2.30% which is a key gauge to maintain a positive medium term outlook. A decisive move back above 2.40% would be a key move for US yields. It was interesting to see the Bund yield jump last week despite the market being risk off. This was after an upward revision to Eurozone growth forecasts and it is worth watching how German and Austrian hawks react. WATCH FOR: Tax reform progress and US inflation impacting on yields and commodities T: +44 (0) 20 7036 0850 │ E: │ W: 4 Gold Watch for: Renewed Key resistance at $1290 and then $1300/$1310 to limit the recovery Outlook: The gradual recovery on gold in the past week is helping to bolster an increasingly important medium term support band $1251/$1260. However the momentum indicators are coming back to levels where the sellers have tended to resume control this week. The RSI is back around 50/55 whilst the MACD lines are unwinding back to neutral again. With resistance initially of a pivot at $1290 and then the longer term pivot band $1300/$1310 looking overhead, the bulls may begin to struggle for further gains. An 11 month uptrend comes in at $1256/$1259 this week. Markets Outlook Brent Crude oil Watch for: Consolidation above $62.95 is key to prevent a correction Outlook: The huge run to two year highs on Brent Crude has hit the buffers in the past week. Is this a consolidation or the beginning to an unwinding correction? The strength of the momentum indicators on the daily chart would suggests that the bulls are still in control even if they have just taken the foot off the accelerator. Last week’s low of $62.95 becomes the key level to watch this week. An unwinding move would not be a negative move though as the uptrend channel built over the past few months is now supportive above $59.50 this week. A retreat towards $60.00/$61.70 would help to renew upside potential.
  5. 5. Weekly Outlook Monday 13th November by Richard Perry, Market Analyst T: +44 (0) 20 7036 0850 │ E: │ W: 5 Risk Warning for Financial Promotions This report is issued by Hantec Markets Limited, who is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, No. 502635. The report is prepared and distributed for information purposes only. Trading in Foreign Exchange (FX), Bullion and Contracts for Differences (CFDs) is not be suitable for all investors due to the high risk nature of these products. Forex, Bullion and CFDs are leveraged products that can result in losses greater than your initial deposit. The value of an FX, Bullion or CFD position may be affected by a variety of factors, including but not limited to, price volatility, market volume, foreign exchange rates and liquidity. You may lose your entire initial stake and you may be required to make additional payments. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. Before deciding to enter into FX, Bullion and/or CFD trading, you should carefully consider your investment objectives, level of experience, and risk appetite. You should only invest in FX, Bullion and/or CFD trading with funds you are prepared to lose entirely. Therefore, only your excess funds should be placed at risk and anyone who does not have such excess funds should completely refrain from engaging in FX and/or CFD trading. Do not rely on past performance figures. If you are in any doubt, please seek further independent advice. This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such. All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability. Trust Through Transparency Hantec House, 12-14 Wilfred Street, London SW1E 6PL T: +44 (0) 20 7036 0850 F: +44 (0) 20 7036 0899 E: W: