This month we have seen global equities fall strongly, the US dollar continues its strong run on the back of the Federal Reserve's outlook for another rate hike in December, three more next year, and one increase in 2020. Trade talks took a back seat during October as central bank moves dominated the market commentary.
During the month of October, the EURUSD has only traded in one direction falling strongly lower from a three month high above 1.18 down to multi-month lows near 1.13. After the EURUSD seem destined to remain within the 1.15 – 1.17 range for an extended period, the support at 1.15 finally gave way leading to the recent lows. The EURUSD is now close to falling to its lowest levels in 18 months. It is also likely the key 1.15 level may play a role in some selling pressure should the EURUSD rally higher and regain some lost ground.
The European Central Bank (ECB) might be forced to raise interest rates sooner than they had planned amidst inflation and divergent monetary policy, according to Allianz's Chief Economic Advisor, Mohamed El-Erian. El-Erian told CNBC, “It wouldn't surprise me if they (the ECB) start hiking in the middle of summer (2019), as opposed to the end of the summer, or even the beginning of the summer. But they're going to retain optionality 'til the very last moment." He continued to say, "The interest rate dynamics are completely consistent with divergence in economic policy and divergence in performance. The question is, does it (raising rates in one country) break something somewhere else?" The ECB have indicated that it will not raise their record low interest rates before September 2019, which just so happens to be a month before current President Mario Draghi is due to step down.
The Bank of England (BOE) has been working with financial institutions to ensure they are prepared for any market chaos caused by a messy Brexit next March. BOE Deputy Governor Sam Woods said that banks in Britain must hold enough cash to withstand any disorderly Brexit hitting financial markets next March. Even if there is no exit deal between London and Brussels, Woods wants to make sure that Britain’s departure from the European Union (EU) is as smooth as possible for markets. “Just in case things go badly we have been working with firms to ensure they have in place liquidity sufficient to accommodate a severe dislocation in financial markets,” Woods told an audience of bankers at the annual City of London dinner. “We all need to be ready for a range of outcomes. We encourage all firms to opt into the regime because it will provide certainty until March 2022, independent of the existence and duration of any wider implementation period,” Woods said. Britain is legislating to allow banks and insurers in the EU to continue serving UK customers after Brexit.
The AUDUSD has spent most of October trading between two key current levels of 0.7050 and 0.7150. It is trading near multi-year lows having only just recently reached a 2½ year low. After meeting resistance there for several days, the AUDUSD had slowly but surely eased lower from the key 0.7150 level before resting on the support at 0.7050. It was only several weeks ago that the AUDUSD reached a four-week high above 0.73 before the recent declines. The 0.7150 level has played a role in the last couple of months as it has bounced off this level several times, however it has now reversed roles.
The Reserve Bank of Australia (RBA) is now highly unlikely to move interest rates any time soon, after inflation softened to 1.9%. In fact, the change of a rate cut may have just increased. The 1.9% inflation figure is below the RBA’s target range of living costs increasing by 2 – 3% over the year. The consumer price index rose 0.4% over the September quarter, or 1.9% for the year. Underlying inflation has been below the RBA’s target band for 11 consecutive quarters as wage growth stays low. Underlying inflation is the RBA's preferred measure and removes volatile items such as food and fuel. Inflation results varied noticeably across the capital cities and the data supports a view that a rate rise is some distance away, however the chances of am RBA rate cut are rising. It is a widely held view that the RBA won't raise interest rates until at least 2020 and now with the weak inflation, Sydney and Melbourne housing markets declining and weakness in wages growth, the conversation may soon turn to when the RBA will next cut rates.
The USDJPY started the month of October moving strongly lower threatening to return all its strong gains from September. In the second half of the month the USDJPY has rallied well to come back within reach of the key 113 level after falling heavily in the last few weeks from a 2018 high above 114.50. The 113 level provided stiff resistance to the currency pair back in July and forcing it lower strongly so it may play a role again. Throughout September the USDJPY surged higher from the key 111 level up to resistance at 113 for a few days before pushing higher to the 2018 high above 114.50.
Bank of Japan Governor (BOJ) Haruhiko Kuroda has said that steady interest rate rises by the U.S. Federal Reserve were "basically good" for the world economy, ignoring concerns that higher US rates could hurt Asian economies by triggering capital outflows. "Gradual normalisation with a clear statement of (the Fed's) intention and future policy ... That's basically good for the world economy", he said. Kuroda said the BOJ was facing a slightly different challenge than that of the Federal Reserve as it was taking longer to achieve its inflation target of 2%, reiterating his resolve to maintain a massive stimulus programme in Japan for now. However Governor Kuroda wasn’t as excited about the ongoing trade tensions and the risks associated with them, as he described them as of a "rather unusual" scale and a "new development" for the global economy.
US equities have suffered during the month of October with the US30 index falling sharply down to its lowest levels in four months, after attempting to rally off support at 25000 a few weeks ago. If the index continues to fall lower, the next obvious level for some potential buying is around 24000 which supported the index well back in June sending it higher to its recent all time highs. Only a few weeks ago the index dropped down through support at 26200 before rallying higher back above the key 25000 level. After reaching a new all time high several weeks ago the US30 index eased a little in the week after and was enjoying some support from the previous key level of 26200, however this has now clearly given away to immense selling pressure.
The markets have long been expecting the U.S. Federal Reserve to go through with a 25 basis point increase in its benchmark funds rate at the year's final Federal Open Market Committee Meeting. The ‘Fed’ has raised its benchmark interest rate target three times this year and is on track for a fourth in December. Current projections from Federal Open Market Committee (FOMC) members point to three more increases in 2019 and one or two more in 2020. After considerable market volatility in October, traders have reduced their probability of a December funds rate rise from 87% down to 74% in the last week, according to CME data. The probability of a March 2019 increase is down to 48% from around 62% a week ago. Atlanta Federal Reserve President Raphael Bostic said that the risk of a powerful economy overheating is the reason the Fed should stick to its schedule of interest rate increases. With the unemployment rate currently at 3.7% percent and significantly below what is considered full employment, the Fed has to weigh the risks of tightening too quickly and choking off what has been a robust economic run, and waiting too long and risking runaway price pressures.
Gold has enjoyed a little rally higher through the month of October moving to a four month high however it has run into a wall of resistance at the key $1240 level. Throughout August and September, it was content to trade right around the key $1200 level for an extended period. It has received both support and resistance from this level in the last couple of months and didn’t appear to be in any rush to move too far away, therefore it was a positive sign to see it break away and regain some of the lost ground from earlier in the year. The $1240 level was significant several months ago when gold received some short-term support there and subsequent resistance, and yet again it has struggled with this.
As global equities have continued to fall, gold has enjoyed its ‘safe haven’ status and climbed higher to a four month high. U.S. equities have led the fall in stocks dropping for several straight days in a row on earnings disappointment, concerns over Italy's budget and worries that world economic growth is losing momentum, as well as escalating trade tensions between the world's two largest economies. As is often the case, gold has been well supported as investors use bullion as insurance against growing political and economic tensions in the world. Increased concerns about international affairs is contributing to investor concerns about the overall economy and stock markets.
Generally, oil has moved very strongly lower well throughout the month of October returning all the gains from September. It has fallen sharply from its multi-year high above $86 down to the key level of $75 where it has enjoyed solid support in the last week of the month or so. Oil enjoyed a very healthy last couple of months moving from the key $71 level to its highs before easing back to its current trading levels. Whilst possibly not as significant as the $70 level, the $75 level has played a role in oil’s price in recent times and is likely to continue to support oil as it attempts to regain some lost ground. It may also receive some resistance from the $80 level as only last month oil was struggling with the resistance around the key $80 level despite strong surges higher in the few weeks leading up to it.
There are currently a lot of moving parts driving oil. Over concerns about rising oil inventories and economic uncertainty the Organization of the Petroleum Exporting Countries (OPEC) signalled it could cut output in 2019. U.S. President Donald Trump has repeatedly demanded that OPEC keep prices low, so if OPEC follows through with this plan, it will no doubt inflame the U.S. President and change the outlook for the oil market. Saudi Arabia is the largest oil exporter in the world and has told the Trump administration it could step up production after sanctions against Iran take effect on 4th November. Saudi Arabian OPEC governor Adeeb Al-Aama told Reuters on Thursday, "The market in the fourth quarter could be shifting towards an oversupply situation as evidenced by rising inventories over the past few weeks. We think that demand will start dropping off as we approach year-end in accordance with regular seasonal patterns. We have the flexibility to adjust our production to mirror it.”
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