Daily Fundamental Analysis

28 June, 2017

Mario Draghi shook up markets on Tuesday by announcing victory against deflation and stating that policy needs to gradually normalize. He was quoted saying: “deflationary forces have been replaced by reflationary ones” and that monetary policy will run in stride with economic recovery, largely due to the fact that although inflation is increasing in Eurozone interest rates are holding creating fertile ground for growth. This in turn would necessitate or even force a policy adjustment. This is one of strongest indicators that Draghi given that the EU is considering reducing generous stimulus that the ECB was open-handed with.

The ECB President’s speech was another indicator that Central Banks are becoming more confident that recovery is near and are reconsidering policies necessary post-Great Recession and Crisis.  The graph below shows that the market is adjusting its estimates for an ECB interest rate hike forward. Conservative estimations after Draghi’s speech show a hike in April a 50/50 possibility, where before the possibility of rate hike was assumed to happen in September.

These affects caused the EUR to gain sharply against the dollar (which inevitably dropped slightly). Amongst the World’s Major currencies, the JPY was the biggest loser, based largely on the BoJ reluctance to increase their rates. Another safe-haven CHF on the other-hand grew, under traders’ assumption that due to the SNB’s close ties to the ECB moves, if one institution enacts a rate hike (the ECB) so will the other.

Federal Reserve’s Chair of the Board Yellen, didn’t reveal much in terms of her stance on monetary policy during her speech but instead covered subjects related to regulation largely.

Although when the USD usually drops the NZD and AUD gain, but the opposite was true during yesterday’s trading.

Oil price saw a slight bump up, which was reversed when the American Petroleum Institute (API) reports showed a surplus in inventories even though inventories were expected to shrink. Although oil prices dip momentarily they still were up by market closing.

Although the ECB Money Supply data will be released today, bank lending will probably be the only factor that affects markets.
Most expect the margin between US advance goods trade balance and the US trade deficit to narrow. Although there will be a movement, it will likely be to miniscule to be felt by markets. As Oil prices continue dropping, in addition to US oil imports diminishing, the trade deficit should shrink.

Wholesale inventories, which are released concurrently with the merchandise trade balance and figure into the GDP number. The expectation is that inventories will recover from the dip experienced last month, but its shouldn’t be taken as a full reversal. The forecast at the moment is around the 6-month moving average.

The Central Banking Forum in Sintra, Portugal, will feature some heavy hitter of the financial industry: Bank of England Gov. Carney, European Central Bank President Draghi, Bank of Japan Gov. Kuroda, and Bank of Canada Gov. Poloz. Bank of Israel’s Gov. Flug will be serving as moderator to the panels and discussions during the Forum. Traders will be following these speeches closing for any indications regarding monetary policy or other market relevant policies, especially from Gov. Kuroda which interest rates have remained solidly immobile in 2017. Another point of interest will be any remarks made by Gov. Poloz. The reason why Poloz is an anticipated speaker is he is the only Central Bank official that hasn’t recently. The last unofficial news out of the Bank of Canada, was Gov, Carolyn Wilkins’ unexpected speech calling for a more aggressive monetary policy. Investors and traders will want of course to see if Gov. Poloz backs that perspective especially considering the low inflation figure for Canada announced the previous week. Some assume that the entire statement was a strategic set-up for Poloz to back the hawkish view, ultimately to boost CAD.

Home sales are expected to rise after two months of faltering figures. The previous week we saw the data being revised showing a stronger than expected increase. Another increase we’ve seen is applications for home financing (mortgages). This confirms the health of the US housing market which in turn  means the Fed can increase interest without it being detrimental to the economy.

The US Dept of Energy weekly crude oil figures were expected to show a decline in about 2.2mn barrels during the latest week, but the API data showed a rise of 851,000 barrels. The news pushed oil off its peak, but it recovered much of the losses. As I’ve mentioned before, the two series disagree even on the direction of inventories about 40% of the time, so it is possible that the DoE figures do show a decline.

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