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I. Market focus:
At the beginning of a new week, the main theme in the global financial markets was the U.S. federal government shutdown as the funding of the executive branch expired on Friday midnight. Because of disagreements between the U.S. President's administration and the Congress, president's budget for the fiscal year 2018 was never adopted wholesale, so the lawmakers had to approve temporary measures to fund the government operations, the next of which was to be adopted on Friday. But Republicans and Democrats did not reach agreement on a number of issues, so the government offices were forced to stop work. Despite the fact that the government shutdown is a negative factor for the country's economy, the markets gave a rather muted reaction to it. Such a reaction is due to the fact that this event was quite expected and a similar situation does not arise for the first time. In addition, legislators continue to work to reach a compromise on existing disagreements, and it is highly possible that a vote on the proposal to fund the government will be held today. The government shutdown is not expected to have a significant impact either on the U.S. economic growth, inflation, or the Fed's plans for further monetary policy tightening.
Apart from the reports from the United States, market participants also paid attention to the news from Germany, where two biggest political parties - the Christian Democratic Union (CDU) and the Social Democratic Party (SPD) - agreed to take up coalition talks to form a grand coalition. It is expected that negotiations on this issue will begin on Tuesday and their positive outcome will provide substantial support to the euro.
Today, market participants will continue to monitor the development of the situation with the approval of a stopgap funding package, as well as reports on coalition talks in Germany. These two topics will continue to remain the main ones in the markets in the coming days.
The Monday session will not be very busy with publications of macroeconomic data. The only noteworthy report today will be statistics on wholesale sales in Canada (13:30 GMT). The monthly report of the German Bundesbank (11:00 GMT) may also be of investors’ interest.
II. The market highlights are:
Statistics Canada reported Friday that foreign investment in Canadian stocks slowed in November as foreign investors bought CAD19.56 billion worth of Canadian securities in the period, compared to a revised CAD20.77 billion in October (originally CAD20.81 billion). According to the report, foreigners purchased CAD17.75 billion of Canadian bonds, by adding CAD9.89 billion worth of government bonds and CAD7.86 billion worth of corporate bonds to their holdings. Non-resident investors also resumed their acquisitions of Canadian money market instruments by adding CAD2.32 billion to their holdings in November, following two straight months of divestment. Meanwhile, non-resident investors cut their holdings of Canadian equities by CAD0.51 billion in November, the first divestment since January 2017. From January to November of 2017, foreign investment in Canadian securities amounted to CAD190.35 billion, compared with CAD161.10 billion for the same period in 2016. At the same time, Canadians reduced their holdings of foreign securities by CAD4.59 billion in November, the first divestment in four months. The divestment was in both foreign debt securities (-CAD0.39 billion) and foreign equities (-CAD4.20 billion). For the ten-month period, Canadians’ net investments in foreign securities amounted to CAD 62.97 billion compared to CAD7.14 billion in the same period of 2016.
Statistics Canada released its Monthly Survey of Manufacturing Friday, which showed that the Canadian manufacturing sales surged 3.4 percent m-o-m in November to CAD55.47 billion, following a revised 0.6 percent m-o-m drop in October (originally a 0.4 percent m-o-m decline). Economists had anticipated an increase of 2.0 percent m-o-m for November. According to the survey, the November advance was primarily attributable to higher sales in the transportation equipment (+9.1 percent m-o-m), petroleum and coal product (+6.1 percent m-o-m) and chemical industries (+5.9 percent m-o-m). Overall, sales rose in 12 of 21 industries, representing 81.0 percent of the manufacturing sector. Sales of durable goods industries and sales of nondurable goods industries both rose 3.4 percent m-o-m in November.
A report from the University of Michigan revealed Friday the preliminary reading for the Reuters/Michigan index of consumer sentiment fell to 94.4 in January. That was the lowest reading since July. Economists had expected the index would hit 97.0 in early January, up from 95.9 in December’s final reading. According to the report, the index of consumer expectations edged up to 84.4 this month from 84.3 in December, while the index of current U.S. economic conditions fell to 109.2 in January from 113.8 in the previous month. The disconnect between the future outlook assessment and the largely positive view of the tax reform is due to uncertainties about the delayed impact of the tax reforms on the consumers. Some of the uncertainty is related to how much a cut or an increase people, especially high-income households who live in high-tax states, face.
The weekly report from Baker Hughes, which was released Friday, showed that the number of active U.S. rigs drilling for oil fell by five to 747 during the week ended January 19. In the prior week, the oil-rig count climbed by 10. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, reduced by three to 936, as the gas rig count rose by two to 189 last week. The U.S. rig count is up 242 rigs from this time last year when it stood at 694.
III. Market Situation
The currency pair EUR/USD traded slightly lower, near Friday's low. The euro received some support from news Germany's center-left Social Democrats (SPD) agreed to start coalition negotiations with Chancellor Angela Merkel's conservatives. However, investors were cautious in anticipation of the ECB meeting, scheduled for Thursday. Meanwhile, the U.S. dollar was gradually strengthening, as the attention of the participants shifted from the U.S. federal government shutdown to the likelihood of interest rate rises by the Fed and increase in the yield on the U.S. Treasuries. Today, market participants will continue to monitor the development of the situation with the approval of a stopgap funding package, as well as reports on coalition talks in Germany. The dynamics of the U.S. currency and the general market sentiment toward risky assets will also influence the pair’s performance. Later this week, the focus will be on a set of important data on the Eurozone: the ZEW Institute will present a January report on business sentiment and expectations tomorrow; preliminary PMIs for the manufacturing and service sectors will be released on Wednesday, data on the Eurozone M3 money supply will be published on Friday. Resistance level - $1.2322 (high of January 17). Support level - $1.2165 (low of January 18).
The currency pair GBP/USD traded marginally lower, as the U.S. dollar resumed strengthening, despite news of the U.S. government shutdown due to the expiration of the funding of the executive branch on Friday midnight. With an empty economic calendar in the UK ahead, market participants will focus on news about Brexit talks, as well as the dynamics of the U.S. currency and the general market sentiment toward risky assets. Later this week, investors will pay attention to the UK data on the unemployment and earnings (due on Wednesday), as well as the report on GDP for the fourth quarter (due on Friday). The British economy slowed in 2017, as above-target inflation and restrained growth in earnings adversely affected the consumers’ spending, forcing them to save more. Economists expect that preliminary data will show a stable economic growth in the fourth quarter at 0.4 percent q-o-q. Resistance level - $1.3943 (high of January 19). Support level - $1.3731 (low of January 15).
The currency pair AUD/USD fell slightly, refreshing Friday’s low, due to the positive dynamics of the U.S. currency on the back of an increase in yields on the U.S. Treasuries. Meanwhile, investors’ reaction to news about the U.S. government shutdown was muted. Democrats and Republicans, locked in a dispute over immigration and other issues, failed to agree on a deal to fund government operations, causing a shutdown at midnight on Friday. Moderate senators from both parties held negotiations on Sunday to try to broker a deal. It is expected that the Senate will vote today at 06:00 GMT on whether to extend funding till February 8. Resistance level - AUD0.8101 (high of September 20, 2017). Support level - AUD0.7937 (low of January 16).
The currency pair USD/JPY showed a moderate increase, due mainly to the broad strengthening of the US currency. Investors also adjusted their positions ahead of the Bank of Japan (BoJ) meeting, scheduled for tomorrow. It is expected that the Japanese regulator will keep its monetary easing program unchanged, maintaining its qualitative and quantitative easing (QQE) with yield-curve control (YCC). It is also expected that the BoJ governor Kuroda will downplay the importance of daily market transactions and reiterate the Bank of Japan's commitment to the YCC. Resistance level - Y111.87 (high of January 11). Support level - Y110.20 (low of January 17).
U.S. stock indexes closed higher on Friday, notching new all-time highs, led by gains in consumer stocks, even as a government shutdown loomed. The focus also was on a report from the University of Michigan, which revealed the preliminary reading for the Reuters/Michigan index of consumer sentiment fell to 94.4 in January. That was the lowest reading since July. Economists had expected the index would hit 97.0 in early January, up from 95.9 in December’s final reading. According to the report, the index of consumer expectations edged up to 84.4 this month from 84.3 in December, while the index of current U.S. economic conditions fell to 109.2 in January from 113.8 in the previous month. The disconnect between the future outlook assessment and the largely positive view of the tax reform is due to uncertainties about the delayed impact of the tax reforms on the consumers.
Asian stock indexes closed mostly higher on Monday, as investors shrugged off concerns over political developments in the U.S. after a government shutdown began last week. Expectations of broadening global economic growth and the profit expansion drive the stock markets higher.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 2.65% (0 basis points)
Yields of German 10-year bonds hold at 0.51% (0 basis points)
Yields of UK 10-year gilts hold at 1.34% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in March settled at $63.44 (+0.21%). The crude oil prices rose, helped by the statement of the statement of Saudi Energy Minister Khalid Al-Falih and his Russian counterpart Alexander Novak, who reaffirmed that they would persevere with oil-production cuts until the end of the year and signaled their readiness to cooperate after the end of 2018. In addition, focus is on the latest data from Baker Hughes, which showed that the number of active U.S. rigs drilling for oil fell by five to 747 during the week ended January 19. In the prior week, the oil-rig count climbed by 10. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, reduced by three to 936, as the gas rig count rose by two to 189 last week. The U.S. rig count is up 242 rigs from this time last year when it stood at 694.
Gold traded at $1,329.80 (-0.14%). Gold prices fell moderately, as the U.S. dollar strengthened and yields on the U.S. Treasuries increased. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.10 percent to 90.66. Since gold prices are tied to the dollar, a stronger dollar makes the precious metal more expensive for holders of foreign currencies.
IV. The most important news that are expected (time GMT0)
Bundesbank Monthly Report
Chicago Federal National Activity Index
|remaining time till the new event being published|
Mise au point du marché
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