weekly outlook march 09 2015

Weekly Outlook

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9th March 2015 by Richard Perry, Market Analyst

Macro Commentary

Once again a strong Non-farm Payrolls report has sent the dollar soaring higher. The Federal Reserve already views the

labor market as “strong” but with payrolls significantly beating expectations with a robust 295,000 jobs, expectation of a

summer rate hike by the Federal Reserve have been heightened. As a result, according to CME’s “Fed Watch” which looks

at the Fed Funds futures, the chances of a rate hike by the September meeting have improved from 54% to 64%, and by

October improving from 73% to 82%. However, the report was not all positive, labor force participation fell to 62.8%

from 62.9% and was lower than expected, whilst average weekly earnings also remain anchored around 2.0% on an

annual basis. But hang on, isn’t the FOMC looking closely at wage growth? This is where I see the market getting ahead of

itself. Until there is a notable improvement in wage growth, with inflation still anchored and showing little sign of a pick

up (core CPI steady at 1.6%), the FOMC which is heavily weighted with doves has a great excuse to stay lower for longer.

Having said that I see the dollar remaining strong at least until the next FOMC meeting on Wednesday 18th March.

Another miss on retail sales could take the shine off the recent rally, but the way is clear at least for the next week or so.

WHEN: Thu, 12th Mar, 1230GMT

LAST: -0.8% (month on month)

FORECAST: +0.5% (month on month)

Impact: Retail sales have fallen in recent months.

December and January data fell sharply with -0.9%

and then -0.8% month-on-month readings which

are a concern. This concern will be exacerbated if

the February reading misses the +0.5% estimate.

It would continue year-on-year growth of +3.3%

which is well below the growth for much of 2014

which was pushing more towards 5%. With

Consumer Confidence falling back last month

could this reflect a deterioration in the spending

preference by the man on the street? This would

harm sentiment, the US dollar and equities.

Must watch for: US Retail Sales

Key Economic Releases

Date Time Country Indicator Consensus Last

Tue 10th Mar 01:30 China CPI (YoY) +0.9% +0.8%

Tue 10th Mar 14:00 US JOLTS job openings 5.05m 5.03m

Wed 11th Mar 09:30 UK Industrial Production (YoY) +1.4% +0.5%

Wed 11th Mar 14:30 US Crude Oil Inventories 10.3m

Wed 11th Mar 20:00 New Zealand RBNZ monetary policy 3.50% 3.50%

Thu 12th Mar 00:30 Australia Unemployment 6.3% 6.4%

Thu 12th Mar 12:30 US Retail Sales +0.5% -0.8%

Fri 13th Mar 13:30 Canada Unemployment 6.7% 6.6%

Fri 13th Mar 13:30 US University of Michigan Consumer Sentiment 94.5 93.6

Fri 13th Mar 13:30 US Baker Hughes rig count -64

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US Non-farm Payrolls since 2009

N.B. Please note all times are GMT, data source Reuters

Weekly Outlook 9th March 2015

by Richard Perry, Market Analyst

Foreign Exchange

A quick one-two punch from the ECB and then Non-farm Payrolls has sent the euro spiralling lower and driven a huge

breakout on the Dollar Index to levels not seen since late 2003. The factor to consider for dollar traders is that the

strength of the payrolls report has driven an expectation that the Fed may now be pushed into a summer rate hike. We

now have another week and a half to find out what the FOMC thinks about all this as the Federal Reserve releases its

forward projections. This could therefore open the door to further dollar strength in the time being. However, the

potential for a near term technical correction must be growing, with such as huge sell-off on both the euro and sterling in

the past few days, which resulted in a loss of almost 300 pips on EUR/USD and over 350 pips on Cable last week alone. I

would still look to use any near term unwinding moves as a chance to sell. We have also seen key breakdowns on the

Aussie and Kiwi, whilst the remarkable recovery on Dollar/Swiss continues incessantly. The market is behind the dollar

and fighting the market tends to be a risky move.

WATCH FOR: China CPI will have an impact on the commodity currencies (Aussie, Kiwi and Loonie) whilst

the US JOLTS jobs openings data will impact o the dollar. US Retail Sales could be the release that takes the

shine off the dollar bull run if there is a third straight negative surprise in the data.

EUR/USD

Watch for: A technical rally amidst the

weakness

Outlook: We saw an incredible sell-off on

the euro last week on a move that took the

RSI to the low 20s. This may sound

stretched, but during the January decline the

RSI got to 17 so there is still scope for further

downside. When instruments move into this

phase od selling there is a big question of

whether to chase or not. There is little sign

of support, but across the course of this

week the likelihood of a technical rally is

fairly high. I would still look to sell rallies

though, with resistance around $1.1000.

GBP/USD

Watch for: Support around $1.5000 could

house a technical rally

Outlook: The sharp decline on Cable last

week has the bears in full control.

Momentum indicators are bearish across the

board now and not only that but also contain

further downside potential. However there

is a big support band approaching between

$1.4950/$1.5000 which are the January and

February lows, whilst there is also the

potential that the old 7 month downtrend

could provide support on the way down too.

However be careful because support is not

guaranteed and the sentiment is now

extremely bearish.


FX Outlook

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Indices

Once again, the key macro drivers of last week (the ECB and Non-farm Payrolls) showed there to be a huge difference in

the performance of the Eurozone indices (DAX and CAC) and the US/UK markets (S&P 500 and FTSE 100). The easing

measures put in place by the ECB could be extended if the inflation targets are nor met in 2016, so this will underpin the

DAX in the coming months. It would appear that valuation is beginning to hold back the S&P 500 and FTSE 100, trading on

20 times historic earnings according to Reuters), whilst the DAX only trades on 16 times. Furthermore, traders might also

be viewing US earnings season as a bit of a disappointment with around 55% of the S&P 500 beating estimates on

earnings (usually between 60%/70%) whilst revenue beats of 49% is also lower than usual. Also, earnings growth

continues to wilt, with a strong correlation between corporate earnings growth and US GDP. With the market increasingly

convincing itself that there will be a Fed rate hike potentially in Q3 (although I remain sceptical), this could be causing

traders to question how much further this bulls run on Wall Street can possibly go.

WATCH FOR: The strong payrolls report will retain a legacy into the new week with little data on Monday.

The JOLTS data will give further impression of the US labor market. A downside surprise in China inflation

would drive expectation of further PBOC easing and be positive for risk. The US Retail Sales on Thursday is

the week’s key data point and a strong number could drive equities higher.

FTSE 100

Watch for: Underperformance versus the

DAX to continue

Outlook: After several weeks of threatening,

the FTSE 100 finally achieved a closing level

above the 1999 peak of 6950. Essentially

there is still a positive outlook on the FSTE

100 but the dramatic underperformance of

FTSE versus the Eurozone indices on Friday

is a concern. Trends remain positive and the

lure of 7000 still remains. However, the

longer this slog through the mud of a bull

run continues the less enthused I am

becoming by it. Key near term support is at

6862.

DAX Xetra

Watch for: The DAX continues to make gains

Outlook: The technical outlook on the DAX

remains remarkably positive. Clearly Mario

Draghi and the ECB have underpinned the

support for the DAX with QE and this is

driving strong outperformance versus the

S&P and also FTSE 100. The RSI is a touch

stretched up at 75 however momentum is

positive and the strength of the trend

suggests this is reflective of the sentiment

behind the bulls. The latest breakout means

that initial support comes at the breakout

level at 11,465 however the significant

support now comes in at 11,193. Buying into

weakness looks to be a good strategy.


INDEX Outlook

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Other Assets: Commodities & Bonds

A negative correlation between the US dollar and precious metals remains strong as a stronger dollar has negatively

impacted on metals prices. Gold and silver have both broken sharply lower on the strong Non-farm Payrolls report, whilst

platinum was also weaker to move to the brink of a breakdown. Gold and silver are now eying a full retracement of the

January bull runs. Throughout the dollar strength the oil price has remained remarkably stable. What makes this even

more interesting is that the US oil stocks gave a big upside surprise and yet WTI remained supported.

Macro fundamentals have driven sharp moves on the bond yields in the past week. Eurozone sovereign yields have

plummeted to record lows after the announced that it would buy sovereign debt as part of its QE programme even into

negative yields up to the bank’s -0.20% deposit rate. The German 2 year is trading around -0.2% and this will put a floor

on the yield. The strong Non-farm payrolls report resulted in a sharp steepening of the US yield curve, with the 10 year

yield pushing well above 2.2% for the first time in 2015.

WATCH FOR: A surprise on the US JOLTS could impact Treasuries, the dollar and subsequently

commodities, but there is little to impact on the prevailing trends until the big data release, US Retail Sales

Gold

Watch for: Rallies to be sold into for

further downside pressure

Outlook: The move may look near term

stretched as a breach of the January low

at $1168.25 has bounced from $1163.45.

It is likely now that with momentum

indicators reaching stretched levels that

this is merely an oversold reaction and

that overhead resistance levels will be

seen as a chance to sell again. Therefore

watch for $1180.70 (old key historic floor)

and $1191 to become key points of

resistance (old support is new resistance)

this week as a chance to sell.

Brent Crude oil

Watch for: Continued consolidation on

Brent Crude

Outlook: The strong recovery which has

seen Brent Crude rally over 39% from the

bottom to the recent peak is now

undergoing a period of consolidation.

Breaking the recovery trend does not

necessarily mean that the rally will now start

to correct, it may be just that this move is

seeing a pause for breath. Watch the

momentum for negative signals, with the

falling Stochastics an initial slight concern.

The support at $57.80 now takes on an

important role as a breach could signal a top

pattern. Expect the consolidation to

continue this week though.


COMMODITIES & BONDS Outlook

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weekly outlook march 09 2015

Economy & Finance