As we approach another significant week in the financial markets, several pivotal events are lined up that could influence market dynamics extensively. Here’s what traders at VT Markets should focus on:

Upcoming US Economic Indicators

US GDP for Q1: Due for release on Thursday, the preliminary estimate of US GDP for Q1 2024 is anticipated at 2.9%, following a previous quarter’s growth of 3.4%. This release will be pivotal in assessing the durability of the US economic expansion. Historically, a robust Q1 GDP figure has buoyed market sentiments but it’s crucial to remain cautious, as higher-than-expected growth could stoke fears of continued Fed tightening.

Core PCE Index for March: Set for Friday, this inflation measure will be scrutinised for any signs of persistent inflation pressures. Any deviation from expected levels could prompt a reevaluation of the Federal Reserve’s interest rate trajectory, potentially leading to market volatility.

Preliminary S&P Global PMIs for April: These early indicators of Q2 economic activity will provide insights into the ongoing recovery. Markets will likely react to the strength of these PMIs, with stronger figures possibly signaling a sustained recovery and weaker ones may incite concerns over economic momentum.

Anticipate Bank of Japan (BoJ) Decision

Rate Decision: This Friday’s decision comes at a critical time with recent policy shifts signaling a potential end to negative interest rates. Markets are keenly awaiting indications of possible rate hikes, especially given rising inflation in Japan. A hawkish stance could strengthen the yen, whereas a dovish one might exacerbate its current weakness.

Currency Intervention Watch: With the yen nearing 155.00 against the dollar, speculation about intervention from Japanese authorities to stabilise the currency is high. A significant intervention could disrupt market trends, particularly in currency pairs involving the yen.

European and UK Economic Releases

EU and UK PMIs: With these set to release on Tuesday, they are crucial for assessing the economic climate in both regions. The focus will be on how these figures might influence the European Central Bank and Bank of England’s monetary policy, especially with inflation concerns at the forefront.

BoE Rate Expectations: Markets have already priced in a 25bps rate hike by the BoE in September. This expectation could solidify further if upcoming economic indicators reinforce a robust economic outlook.

Australian Economic Data, Inflation

Australian CPIs: Wednesday’s CPI data will be key in assessing inflation trends and shaping the Reserve Bank of Australia’s rate decisions for the year. Given the mixed signals from previous data, this release will be crucial in determining the short-term monetary policy path.

Tech Earnings Report

Tech Reporting: With Alphabet and Tesla on Tuesday, followed by Meta on Wednesday, and both Microsoft and Amazon on Thursday, these reports are critical. The tech sector’s performance has been under the microscope after recent market corrections, and these earnings results could heavily influence market sentiment, either bolstering confidence with strong earnings or fueling concerns if results falter.

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Forex Analysis: 19 April 2024

CURRENCIES

Pound Sterling Analysis: GBP/USD, GBP/JPY

• Mixed economic signals and Bank of England (BoE) comments on inflation complicate GBP recovery.
• GBP/USD faces challenges gaining momentum, hovering below key resistance levels.
• GBP/JPY shows signs of stability near yearly highs amid speculation of potential JPY intervention.

Insights on Sterling’s Performance

• BoE anticipates a sharp decline in inflation, targeting a 2% rate by mid-year despite mixed CPI results.
• Persistent wage growth and services inflation in the UK suggest that higher interest rates may be necessary longer than anticipated.
• BoE Governor Andrew Bailey notes a softening labor market, forecasting a significant drop in next month’s inflation figures.
• Monetary Policy Committee member Megan Greene mentions difficulties in achieving full disinflation, indicating possible pressures on GBP.

GBP/USD Trading Dynamics

• Recent attempts to stabilize and recover to the 1.2500 level falter amid strong USD conditions.
• Despite a slight retreat in the US Dollar Basket (DXY), GBP/USD struggles to overcome the 1.2500 resistance.
• Failure to surpass 1.2500 may lead to further declines, with potential targets near 1.2200.
• A successful breach above 1.2500 could lead to a recovery towards the 200-day simple moving average, contingent on USD performance.

Overall Market Considerations

• The interplay of UK economic fundamentals and US dollar strength remains a key challenge for GBP stabilization and growth.

STOCK MARKET

Market Overview: Impact of Mideast Tensions

• Global stock markets experienced declines due to escalating conflicts in the Middle East.
• Haven assets such as U.S. Treasuries, the dollar, Swiss franc, yen, and gold saw notable gains amid growing geopolitical risks.

Detailed Market Movements

• 10-year U.S. Treasury yields dropped by up to 14 basis points as investors sought safer assets.
• The U.S. Dollar Index increased by as much as 0.6%.
• Oil prices surged over 4%, with Brent crude briefly topping $90 per barrel before falling back.

Geopolitical Developments and Market Reactions

• Recent missile strikes by Israel on Iran intensified market volatility, following an attack from Iran earlier in the week.
• Initial market reactions were risk-averse, though some stability returned after Iran confirmed the safety of its Isfahan nuclear site.

Sector-Specific Impacts

• Semiconductor sector faced challenges as Taiwan Semiconductor Manufacturing Co. adjusted its revenue growth forecast downward.
• Infosys Ltd. saw a decline in U.S. trading following a modest sales growth forecast for the year.

Economic Data and Monetary Policy

• Japanese inflation data came in below expectations, influencing Bank of Japan rate speculation.
• Comments from Federal Reserve officials indicated a cautious approach to interest rate adjustments, with no immediate plans for cuts.

Global Currency and Crypto Markets

• Emerging market currencies, including the Mexican peso and Indian rupee, weakened against the dollar.
• Cryptocurrencies, including Bitcoin, retreated amidst the broader market downturn.

Credit and Investment Outlook

• The credit risk for Asia excluding Japan increased significantly, with credit default swaps rising sharply.
• Investment strategies may need to adapt to a prolonged period of higher inflation and interest rates, as suggested by industry experts.

Geopolitical Risk Assessment

• Israel’s credit rating was downgraded by S&P due to heightened regional tensions, affecting the outlook on geopolitical stability in the Middle East.

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ICYMI – Market summary for today, 19 April 2024

Israel’s attack on Iran following a retaliatory drone strike, has intensified market volatility. This series of events caused a flight to safety among investors, influencing various asset classes and currency valuations globally. Following the initial news, the Swiss franc appreciated against the dollar, with an increase to 0.9089, reflecting a 0.35% rise on the day. Such movements were more pronounced earlier, suggesting an immediate risk-off sentiment among traders.

Israel’s credit rating has also been downgraded by S&P due to escalating regional tensions – a move which is indicative of the greater risk and instability in the region. The country is now rated AA- with heightened risks.

Changes in Markets Today

The yen saw an appreciation, reaching 154.38 against the dollar, a rise of approximately 0.2%. Historically, during times of uncertainty, on top of gold, both the Swiss franc and the yen have served as reliable safe havens. For instance, during the 2011 European debt crisis, both currencies experienced significant appreciation due to their perceived stability amidst regional instability.

The Australian and New Zealand dollars both dropped to five-month lows, with the Aussie falling to $0.64015 and the Kiwi to $0.58825. These movements underscore the sensitivity of these currencies to shifts in risk sentiment, particularly in the context of geopolitical strife.

Currencies Fall

Turning to the prospect of higher-for-longer interest rates in the United States, the ongoing robustness of the U.S. economy continues to recalibrate expectations around Federal Reserve policy. The anticipation of rate cuts has been markedly adjusted with only about 40 basis points of easing now expected, down significantly from earlier predictions of 160 basis points.

In Asia, the pressure on local currencies prompted a trilateral warning from the finance chiefs of the United States, Japan, and South Korea regarding potential interventions. This reflects a serious concern over the weakening of the Korean won, which hovered above the 1,400 mark against the dollar, indicating a potential area for joint currency intervention.

As central banks prepare for their upcoming policy meetings, the statements and actions they take will be crucial in shaping market movements. For example, the Bank of Japan hinted at a possible rate hike if the yen’s depreciation leads to inflation concerns, which could influence their policy decisions in the near future.

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Brent Futures on the Rise

Today, oil prices experienced a notable increase, with Brent futures rising $3.03 to $90.14 per barrel and U.S. West Texas Intermediate crude ascending by 3.7% to $85.76. This uptick is attributed to market reactions to potential geopolitical events in the Middle East, specifically unverified reports on X (formerly known as Twitter) of explosions in Iran, which have raised concerns regarding disruptions to Middle East oil supplies.

These concerns likely stem from speculations of a possible Israeli retaliation to the drone and missile attacks by Iran on April 13. If anything, this reflects the ongoing impact of geopolitical tensions on oil price volatility, where unconfirmed news can significantly influence market dynamics.

Venezuela Loses Key U.S. License

The broader context includes the U.S. withdrawing a critical license for Venezuela, another OPEC member, to export oil globally, which complicates the supply landscape. Additionally, recent U.S. sanctions targeted Iran’s unmanned aerial vehicle capabilities but notably excluded its oil industry, mitigating broader impacts on global oil supply.

Market participants had been anticipating a restrained response from Israel to Iran’s recent actions, possibly moderated by international diplomatic pressures. However, the immediate market reaction suggests traders are factoring in risks of a potential escalation that could disrupt key oil flows.

Oil Market Anticipated to Stay Reactive Beyond April

The oil market is expected to remain sensitive to further geopolitical developments. Escalation of tensions or additional sanctions affecting oil-producing nations could lead to further increases in oil prices. On the other hand, any signs of diplomatic resolution or de-escalation could stabilise or reduce prices.

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Looking at today, April 19 2024, the U.S. dollar is on track to achieve a second consecutive week of gains as of this Friday, driven by an unexpectedly robust U.S. economy which has recalibrated both investor and policy expectations concerning Federal Reserve rate cuts for the remainder of the year. The greenback reported a 0.17% rise over the week, even as its upward momentum experienced a minor pause since Thursday. This slight stall follows a unique trilateral warning issued by financial leaders from the U.S., Japan, and South Korea, targeting potential joint intervention due to the depreciation of the Japanese and South Korean currencies.

Currently, the strength of the dollar has put considerable pressure on Asian currencies. Carol Kong, a currency strategist from the Commonwealth Bank of Australia, notes that the likelihood of a joint Asian foreign exchange intervention has increased, though U.S. involvement remains uncertain. The intervention would primarily counteract the negative effects on local economies while inadvertently supporting the U.S. Federal Open Market Committee’s efforts to combat inflation.

Japanese Yen Stable

The Japanese yen has remained relatively stable at 154.61 against the dollar, hovering near a 34-year low. The currency is down 0.8% this week and 2% for the month, signaling potential further interventions if it reaches or surpasses the critical level of 155. In response to the yen’s depreciation, Bank of Japan Governor Kazuo Ueda indicated the possibility of an interest rate increase to manage inflation risks, underscoring the interconnectedness of currency values and monetary policies.

In Europe, the sterling and euro have both seen modest declines against the dollar this week, with expectations set for the European Central Bank to initiate rate cuts by June. This anticipated policy divergence from the Federal Reserve, which has delayed its expected rate cuts until later this year, could further weaken the euro against the dollar. Fed funds futures currently anticipate roughly 40 basis points of U.S. rate cuts in 2023, a substantial reduction from the 160 basis points anticipated at the year’s start.

US Economy Remains Strong.. For Now

The ongoing strength of the U.S. economy, coupled with persistent inflation, has prompted Federal Reserve officials, including Chair Jerome Powell, to suggest a more prolonged period of restrictive monetary policy. Economists from Wells Fargo believe that while rate cuts may be delayed, they are still likely before year-end, anticipating a gradual reduction in inflation.

Amid these developments, the Australian and New Zealand dollars also experienced declines this week, influenced by domestic factors such as employment figures and the broader global economic context. The Australian dollar saw a weekly decline of over 0.8%, and the New Zealand dollar is set to lose 0.7% for the week.

Historically, shifts in U.S. rate expectations have had profound implications on global currency markets. For instance, during the 2000 dot-com bubble burst and the 2008 financial crisis, rapid adjustments in U.S. monetary policy significantly impacted currency valuations worldwide, demonstrating the global ripple effects of U.S. economic indicators and Federal Reserve decisions. The current economic climate suggests similar patterns may unfold, influencing not only domestic policies but also international financial stability.

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Forex Analysis: 18 April 2024 USD & Stock Market

CURRENCIES

US Dollar’s Current Trajectory: Despite a recent pullback from multi-month highs, the US dollar remains bullish. This comes after senior Federal Reserve officials suggested a potential delay in easing monetary policy due to strong economic indicators and persistent inflation.

Key Currency Pair Analysis: Technical analysis will next examine the US dollar against four major currency pairs: EUR/USD, GBP/USD, USD/JPY, and USD/CAD. This section will detail the critical price levels that may act as support or resistance in the upcoming trading sessions.

EUR/USD Technical Outlook: The EUR/USD pair found stability after recent declines, bouncing back from the key 1.0600 level and climbing above 1.0650. Resistance is anticipated at 1.0695 and 1.0725, with a further upside target at 1.0820. Conversely, if the downward pressure resumes, the 1.0600 mark is crucial for bulls to defend. A breach below could exacerbate selling, potentially pushing the pair towards the yearly low of around 1.0450.

STOCK MARKET

Impact of High Rates on Stocks: Despite recent concerns, high interest rates have not consistently hindered stock performance. Historical data shows variable effects of rate changes on the stock market.

Historical Performance Data: According to BMO Capital Markets, the S&P 500 showed a significant difference in performance based on the 10-year Treasury yield levels. When the yield was under 4%, the average annual return was 7.7%. However, when the yield rose to 6% or higher, the return nearly doubled to 14.5%.

Rate Direction and Stock Performance: Stocks have historically fared better during periods of rising rates compared to falling rates. Specifically, the S&P 500 averaged a 13.9% return during times of increasing rates, as opposed to only 6.5% during periods of declining rates. This pattern suggests that rising rates often coincide with stronger economic conditions.

Current Trends in Bond Yields and Stock Market: Since the beginning of April, the 10-year Treasury yield has surged by approximately 40 basis points to around 4.58%, a peak not seen since November 2023. Concurrently, the S&P 500 has experienced a decline of over 4%.

Market Outlook and Rate Expectations: Despite the uptick in yields driven by inflation concerns and revised expectations for Federal Reserve rate cuts, the bond market’s response might reflect positive anticipations of economic growth and effective inflation management, which can benefit stocks. Belski from BMO projects that, with yields likely to stabilize between 4% and 5% and coupled with strong employment and earnings, the stock market is positioned for a successful year-end.

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The focus is intensifying on the U.S. dollar’s interaction with major currency pairs such as EUR/USD, GBP/USD, USD/JPY, and USD/CAD. The EUR/USD pair, for instance, has shown resilience, rebounding from a crucial support at 1.0600 and ascending past 1.0650. Technical indicators set resistance levels at 1.0695 and 1.0725, with potential to reach 1.0820. Should the pair face renewed downward pressures, maintaining above the 1.0600 level will be vital for avoiding a drop towards the year’s low around 1.0450.

The influence of high interest rates on equity markets is complex. Despite prevailing anxieties, increased rates have not uniformly impacted stock market performance. Historical evaluations reveal a mixed impact: the S&P 500, for instance, has yielded higher returns during periods of rising rates, signaling that such environments often accompany strengthening economic conditions. For example, when the 10-year Treasury yield exceeded 6%, the S&P 500’s average annual return escalated impressively to 14.5%.

Bond Yields in April 2024

Presently, the trajectory of bond yields is noteworthy. Since early April, the 10-year Treasury yield has ascended by approximately 40 basis points to about 4.58%, marking its highest since November 2023. This upsurge contrasts with a more than 4% drop in the S&P 500 over the same period, reflecting the market’s sensitivity to interest rate expectations and inflation concerns.

Looking forward, the bond market’s response, coupled with projected economic growth and inflation management, suggests potential positive implications for equities. Analysts, including Brian Belski from BMO, anticipate that if yields stabilise between 4% and 5%, and with strong employment and corporate earnings figures, the stock market could see considerable gains towards the end of the year.

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European stock markets observed a mixed performance with the STOXX 600 index recording a slight increase of 0.2%, amid varying results from key sectors during the ongoing earnings season. The industrial sector, tracked by the .SXNP index, stood out with a 0.7% gain, primarily propelled by Swiss engineering company ABB, whose stock surged nearly 6% following first-quarter earnings that surpassed market expectations.

ABB 2024 Performance

ABB’s performance is significant as it contributes to the overall strength observed in the industrials sector, which often correlates with broader economic trends such as manufacturing and production growth. The positive movement in ABB’s stock price today may encourage investor confidence in the sector, potentially hinting at a stable outlook, barring any unforeseen economic disruptions.

In stark contrast, the healthcare sector, represented by the .SXDP index, experienced a decline of 0.3%. This was influenced heavily by the performance of Sartorius, a Franco-German lab supplies maker, whose shares plummeted by 7.4%. This marked its most significant drop in six months following a quarterly report that fell short of analyst expectations for both order intake and revenue.

Nokia’s Share Slump

Similarly, in the telecommunications sector, Nokia’s shares fell by 2.2% after the company reported quarterly profits that did not meet analysts’ forecasts. This underperformance may signal potential challenges within the sector, possibly due to operational inefficiencies or competitive pressures, which could impact the company’s stock price and investor sentiment in the near term.

Historical performances, such as Nokia’s struggles in the early 2010s, demonstrate how earnings misses can presage longer-term challenges for tech companies facing stiff competition and market saturation.

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