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. Weekly Outlook
Monday 13th November by Richard Perry, Market Analyst
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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%
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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. 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
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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. 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
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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. 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
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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. Weekly Outlook
Monday 13th November by Richard Perry, Market Analyst
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5
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