Good morning
FX, Stocks, Bonds, Precious Metals and Oil markets find themselves awash with news resulting in rising volatility levels and increased uncertainty.
Let’s start with Oil: Oil prices tumbled to their lowest levels in more than two years after Saudi Arabia unexpectedly cut prices for crude sold to the U.S and in so doing paved the way for further declines and adding to pressure on American energy producers. While lower crude prices help consumers by reducing the amount they pay for gas, analysts said falling oil prices will in turn squeeze profit margins at many U.S. energy companies, particularly smaller firms or those with large debt levels. On the other hand, Saudi Arabia raised the prices for its oil in other locations (Asia), where the country had cut its prices for four consecutive months. Market makers had expected the Saudis to either cut prices in every major region, or to raise prices across the board. Asia has been an especially competitive market for exporters in recent months, so the focus on maintaining market share in the U.S. surprised traders, leading market makers to the conclude that these price differentials will ultimately lead to price wars. Bottom line, lower oil prices will add well needed additional income to the consumer. Let be honest, the fall was widely expected in many circles.
Overnight the RBoA (Australia) left interest rates unchanged (expected) at 2.50%. They repeated their forward guidance of steady rates despite the mixed data seen in September. The AUD has fallen over the past week from 0.8880 to 0.8710 presently. Not helping the AUD was the poor data out of China. It seems the AUD (and NZD) are being battered left right and centre. The RBA complaint about the higher exchange rate was toughened up a little, noting “the Australian dollar remains above most estimates of its fundamental value, particularly given the further declines in key commodity prices in recent months”. The RBA repeated that interest rates have continued to edge lower amidst increased competition to lend. In short, we expect the AUD (and NZD) to remain under pressure vis-a-vis the USD in the near term.
USDJPY, WOW!! Japan returned from yesterday’s public holiday to see the USDJPY rise to a 7 year high, of 114.22 before falling back to 113.65. The JPY continues to be driven down by the BoJ’s unexpected stimulus package announcement on Friday that it would be expanding its easing programme from JPY60-70 trillion annually to JYP80 trillion. Asian stocks rose strongly overnight, with the Nikkei gaining to break 17,000 for the first time since 2007, before closing at 16,862.47, up 2.73 percent on the session. That means over the past 2 sessions the Nikkei has risen just shy of 8% which is quite simply astounding.
Dallas Fed President Richard Fisher said ‘raising the U.S. Federal Reserve’s key interest rate in late-summer of 2015, as financial markets generally expect, would be waiting too long.’
German government spokesman said ‘it is incomprehensive that official Russian voices should recognize separatist elections in Ukraine; current developments in Ukraine rule out premature lifting of sanctions, if situation worsens may need to think of further sanctions; it is up to Britain to make clear what role it wants to play in future in European Union.’
GBPUSD above 1.60 remains tenable despite yesterday’s better-than-expected UK Manufacturing PMI report. As I mentioned in yesterday’s blog, the market is still pricing in stronger economic growth in the USA compared with the UK economy. As a result GBPUSD is MOST LIKELY to attempt another break below 1.5900 (October lows). The immediate support is located around 1.5925. Like other G7 and EM currencies, the GBP is at the mercy of the USD and expectation are growing by the hour (let alone the day) that further losses are expected. Unless we see (on Thursday) Gov. Draghi of the ECB launch a BoJ style stimulus package, the GBP will continue to suffer vs the USD. On the other hand, vs the EUR the GBP is trading just above the psychologically important 0.7800 (1.2820) level. We tried to take it out yesterday but it failed. I would hazard a guess that someone or something was protecting it. One thing is for certain, if we break that level we could see a 30-40 pip move quickly.
FX implied vol which had started to move higher during September, has gathered steam over the past 2 weeks as the USD makes new moves. The recent turmoil has left implied volatility higher and implying that we have now entered a new environment in which financial markets are more vulnerable to bouts of panic. over the past 2 days we have seen the following rises, , USDJPY 1m is trading at 10.3/10.55 (+3%), EURUSD 1m 8.10/8.4 (+1.10%), GBPUSD 1m 6.00/6.30 (unch), EURGBP 1m 6.10/6.30 (+0.75%), EURCHF 1m 3.25/3.65 (+0.75%) to name but a few. EM currency volatility has not been sparred with the markets trading up 0.50% in the ZAR and ILS.
Good luck and have a good day ahead