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08/08/18 Market notes

How To Understand That The Dollar Growth Is Running Out Of Steam?

How To Understand That The Dollar Growth Is Running Out Of Steam?

Dollar and gold price correlation may be key signal for next dollar move

 

The index of the American dollar has closed a yesterday’s trading session on a highest level since the beginning of this year. Following the results of Monday, the Index of dollar (DXY) has reached 95,36 points, highest since July 2017. Since February 2018 the dollar advanced by 7,5% against the main world currencies.

Achievement of local tops became possible thanks to decline of yuan and pound sterling. But euro is fiercely struggling for the current levels and doesn’t want to fall lower than 1,15 to dollar. Meanwhile, DXY managed to take hold above the line of the descending trend that opens the road for further ascension.

The index of dollar strongly correlates with the price of the gold for a while. At the moment of correction in the market of precious metal, DXY goes up and down. For its part, the gold depreciates, as the situation at world stock markets, especially in the US, is moving in a promising direction, so market players have no need to buy safe heaven assets. To determine whether US currency strengthening is over, we need to monitor the gold price.

 

Gold&Dollar

Negative Dollar and gold price correlation, possibly due to US inflation concerns. Source: Bloomberg

 

If gold passes to growth, then DXY will pass to correction. The index of dollar has potential for growth. First, since July Fed has increased the volume of the sold papers from its balance. Secondly, in September, most likely, the rate will be raised. Third, ECB will stop printing money by the end of the year, what makes euro more fragile to dollar. Besides, the stock markets of the USA remain stable, despite the warning of imminent downfall, thus attracting foreign capital.

 

Who will play a supportive role in the US stock markets activity in August?

 

The American investors have preferred not to do any serious actions in July — their activity in the stock market remained abiding. Ordinary investors bought securities, but did it with the same wish, as in June. Investor Movement Index counted by TD Ameritrade remained at the same level, as in the first month of summer — 5,45 points.

 

Investor Movement Index 1

Investors movement index. Source: TD Ameritrade

 

Thus, the summer activity is still 37% lower than in December of last year when the Index has set a record in 8,59 points. Nevertheless, even without purchases of ordinary investors US stock markets have odds to continue the ascension. Prices of shares can be potentially supported by buybacks. Goldman Sachs counted, that August is the most active period of share buybacks from the market. On average, 13% of all annual volume account for the last month of summer. The American stock market, unlike many other world competitors, is directly focused on shareholders. This is the only stock market growing throughout so long period.

 

Distribution of buybacks by month

Distribution of corporate buybacks by months. Source: Goldman Sachs Investment Research

 

That’s why, the culture of buybacks with a view to increasing share prices for the owners of companies is high-level in this country. When the market left buyers, corporations which annually invest hundreds of billions of dollars in securities, come to the rescue. Bearing in mind, that the profit of the companies in the current year is near historical highs, voluminous buybacks would be pursued, so it will be difficult for “bears” to drop its cost.

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06/08/18 Market notes

Saudi Arabia Can’t Find The Buyer For Its’ Oil?

Saudi Arabia Can’t Find The Buyer For Its’ Oil?

 

Saudi Arabia is in no hurry to raise output

 

The kingdom has suddenly scaled down the oil production for July, Bloomberg reports, recalling well-informed sources. The largest oil producer among the OPEC Member States – Saudi Arabia – reduced crude oil extraction last month by 200 thousand barrels. Continue reading

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03/08/18 Market notes

Large players stay away from US stocks, anticipate their fall

Large players stay away from US stocks, anticipate their fall

 

Market-makers have stocked up with the record-breaking amount of government bonds of the US.

According to the Federal Reserve Bank of New York, by last Tuesday the sum of the accumulated state bonds on balance of 23 main dealers of the American treasury bonds reached 159,6 billion dollars. Continue reading

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02/08/18 Market notes

Shale companies in USA are facing with the serious problem?

Shale companies in USA are facing with the serious problem?

Crude oil output in the Permian oil field becomes uneconomic, despite the huge production in this region.

The slack in infrastructure of the Permian basin hit even British Petroleum, admitted Bob Dudley, the head of the company, in the interview for Bloomberg TV. Losses from trade turned out to be insignificant for the oil giant, but many other companies are facing them too. Continue reading

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31/07/18 Market notes

Corporate Profits Or Balance Sheet – What Actually Matters For S&P 500?

Corporate Profits Or Balance Sheet – What Actually Matters For S&P 500?

Creating and killing bond bubble

 

ECB said on last Thursday that it plans to halt bond-buying program in December 2018.

According to the press release, monthly asset purchases will be reduced from 30 to 15 billion euros In October, and from the beginning of next year the balance sheet will stop to grow. In 2019 the ECB will remain on the market and will stick to reinvestment policy, i.e. the funds received at maturity will be used to buy European bonds. It means that there won’t be aggressive bond buying and instead ECB will try to maintain its balance sheet on some fixed level. Continue reading

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20/07/18 Market notes

China biggest corporate default in history and some thoughts on US production

China biggest corporate default in history and some thoughts on US production

EIA data is at odds.. with it’s own forecasts

 

US oil output has been stagnating for almost a month, what doesn’t stop US Energy department to anticipate production growth in the country.

The average daily crude oil production in the United States in June stalled at 10.9 million barrels per day. At the same time, according to the data of the same Energy Department, production in the seven main coastal fields of the country in June increased by 1.8% or 126 thousand barrels and amounted to 7.2 million barrels. In July, it is projected to increase by another 139 thousand barrels

It was thought that the Permian basin – main oil field in the country has transportation issues, as all pipelines are full of oil. But according to the estimates of the US Department of Energy, Premium basin was the driver for output growth in June, where production increased by 67 thousand barrels per day. In July and August, it is expected to show additional output gains of 72.9 and 73 thousand barrels per day, respectively.

 

Production in Permian Basin

Permian based production continues to rise – despite contradictory data

 

At the same time, US refineries have almost full capacity utilization, what means hubs are fulls and freshly extracted crude oil should go to exports.

There have been cases when the Ministry of Energy noticeably slashed its forecast and output numbers of the seven largest US fields. Therefore, it is likely that these figures will also be revised.

Also earlier, the department noted that the data is referred only to shale oil. Now this wording is excluded, and the Ministry reports both traditional and “shale” oil has been produced in the basins.

It’s embarrassing that the production in the US hasn’t change in the last month, but according to the forecast the United States has increased and will increase its production. It’s possible that in the near future EIA will either report about sharp increase in production or adjust forecasts to lower values.

One of China’s energy companies specializing in coal mining, Winline Energy Co., Ltd. went bust in the current month. The total debt of the firm estimated at 72.2 billion yuan or 10.8 billion dollars. Thus, the scope of corporate debt problems in China rose to a new record level. As it was announced yesterday, state banks will come to the rescue of Winline.

 

China biggest corporate default happened. What’s next?

 

The current year may be the worst for the debt market in China in history.

Against this background, the fall of the yuan continues against the dollar. The hope for rebound of the Chinese market rapidly wanes. For the period of February-July, the market erased retreated almost by 15% from its’ peaks.

In addition, since 2014, currency and gold reserves have ceased to grow in China, which can signal problems in the country’s economy and in the current financial model.

 

 

China FX reserves

China FX reserves rapidly declined following massive capital flight in 2015. Source: tradingeconomics.com

 

There are special funds in China that on command of the government buy securities to support the stock market.

Also, the state is now carrying out a campaign to reduce the credit burden of enterprises and Winline case shows that the government helps large players in the market.

Given the size of China’s economy and the volume of loans issued, the snowball of corporate bond defaults can happen and the likelihood of this event is growing.

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17/07/18 Market notes

OPEC hits spare capacity limits, US budget deficit growth accelerates

OPEC hits spare capacity limits, US budget deficit growth accelerates

 

According to an estimate of the EIA released last week Saudi Arabia will have to use all of its spare production capacity to make up for the drop in oil exports from sanctioned Iran and financially troubled Venezuela. The data shows that OPEC spare capacity equals to the Saudi Arabia’s meaning it’s the only member in the cartel which can substantially raise production.

However prices started the week with a severe drop, pricing in the news that US may deploy its strategic reserves to correct market prices if OPEC won’t take action on request from the US. 

IEA released a report this week which stated that, the Kingdom could expand production additionally up to 2 million barrels in May. In June, it fell to 1.58 million, and in July it was already up to only 1 million barrels.

 

Saudi Arabia spare output capacity

Saudi Arabia spare capacity heads to the lower bound. Source IEA, Bloomberg

 

What this data says is that Saudi Arabia hiked its oil output by about 500 thousand b/d in May. Over the summer months, the output of the kingdom rose by 0.9-1 million barrels.

According to the US Department of Energy, in June, OPEC’s ability to raise oil production fell to 1.54 million barrels per day, which corresponds to capacity reserves of Saudi Arabia. That is, the only country capable of materially increasing production is the Middle Eastern kingdom.

At the same time, in 2016, when the world oil market was hit by extreme oversupply, OPEC spare capacity averaged 1 million barrels. It is possible that production of the cartel will be difficult to fall below this level.

 

OPEC spare capacity

OPEC spare capacity is equal of the Saudi Arabia’s

 

Spare capacity is used like a safety cushion as it allows to absorb supply shocks and maintain production at safe level to meet it with demand. Flurry outages from Iran, Libya, Venezuela and Canada create dangerous situation where the oil shortages may not pass unnoticed and cause sharp price spikes as reserve capacity of OPEC and Russia is reaching lower existing bound. 

Taking into account historical data, won’t likely to add more than 500K barrels additionally to its production but the market glut may loom on the horizon, because US producers don’t sleep as well and keep output at record peaks. Recall that according to OPEC estimates, global demand will reach 99.4 only million barrels per day in the third quarter of 2018, while projected total world supply – 99.2 million barrels. In other words oil market will probably need to find additional supply to return to equilibrium.

So even with increase of output by 1M barrels in June to 11M barrels, Saudi Arabia probably failed to cover the deficit of crude oil and the fears of oversupply could be overstated.

 

No worries about the debt…yet

 

Since the beginning of the fiscal year, the US budget deficit has risen to $607 billion.

In the first nine months of 2018 (fiscal year in the US started in October 2017), the budget deficit exceeded $607 billion, which is 16% more than in the same period of last year.

In 2017, expenses exceeded revenues by $665.8 billion, $ 58.7 billion higher than the current amount for only 9 months from 12.

 

Budget deficit US by year

US budget deficit by year. Source: Treasury.gov

For the first nine months of this year, the budget received 2.5 trillion dollars, and spent 3.1 trillion dollars. Against this background, the US national debt reached 21.2 trillion dollars.

By the way, the growth of public debt is far from the fastest in the last ten years. For example, in 2009, due to the economic crisis, the budget deficit exceeded $1.4 trillion. And for four consecutive years it was more than 1 trillion.

Despite the fact that the US debt is already more than 21 trillion dollars, at the current interest rates, the United States creditworthiness is not particularly at risk. It is enough for the United States that the world economy grow at a moderate pace what ensures low interest rates and the dollar remains major reserve currency. That also ensures stable demand from the world to US debt securities which credit risk remains at 0 level. 

Each year the United States sells Treasuries worth $600-700 billion through auctions, and for the entire global economy this is not pretty much. The US will be in danger when the cost of debt servicing will surge. Today it is about 400-450 billion dollars a year.

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12/07/18 Market notes

Saudi Arabia June Output Hike Misunderstood?

Saudi Arabia June Output Hike Misunderstood?

 

“Embarrassed” oil market due to Saudi Arabia June output hike. But why?

 

Crude oil output from OPEC in the past months increased by 173 thousand b/d. Saudi Arabia added the most in joint cartel’s production.

Saudi Arabia June output hike averaged 405 thousand barrels a day. This was quite unexpected information for the market and prices posted biggest intraday decline for several months (-4% for Brent on July 11). This was truly a market crash. Continue reading

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11/07/18 Market notes

US corporate bond market structure indicates rising risks

US corporate bond market structure indicates rising risks

The US corporate debt market is rapidly losing its quality.

 

Deterioration in credit rating – a signal of the uncertainties of the times ahead for US firms?

According to Morgan Stanley estimates, the volume of bonds issued with investment grade “BBB” exceeded 2.56 trillion dollars, which is 10 billion dollars more than the amount of debt securities with the highest credit rating.  Continue reading

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10/07/18 Market notes

Investor Movement Index rebounds, correction fears ebb

Investor Movement Index rebounds, correction fears ebb

A sigh of relief on retail side?

 

Retail investors resumed cautious buying of US equity in June despite trade war fears.

Last month, the Investor Movement Index (IMX) rose to 5.45 points maintaining growth for a second month in a row. Prior to that, the Index was down for four consecutive months. Continue reading

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09/07/18 Market notes

What bond yield curve tells us about stock market rally?

What bond yield curve tells us about stock market rally?

 

What’s happening with the bond yield curve today?

 

US structure of interest rates continues to flatten out, i.e. the difference between the interest rates on Treasuries of longer and shorter maturity has been decreasing steadily towards zero, what fuels rumors about the fragile growth of US economy we witness today.

At the end of last week, the difference between yields on 30 and 10-year US government bonds has dropped to 0.11 basis points – a record low which hasn’t been seen from during the height of 2007 mortgage crisis. Continue reading

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28/06/18 Market notes

Credit spreads in US and some thoughts on 200-day average

Credit spreads in US and some thoughts on 200-day average

The spread between US investment-grade debt securities rose to a 16-month high.

As a result of Friday, spreads between the yields of investment-grade bonds reached 1.22 percentage points, which is the highest level since the beginning of 2017. Continue reading

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29/04/18 Market notes

Market overview – Oil, CFTC data and US stock market

Market overview – Oil, CFTC data and US stock market

United States will probably outpace all its rivals on the oil market in terms of export growth next year, forecasts Citigroup.

 

Amid robust output increase in the United States to unprecedented levels and considering production caps imposed inside OPEC members, the US will probably become the world’s largest exporter of black gold, Citigroup believes.

According to the US Department of Energy, last week US oil exports rose to the new record highs of 8.3 million barrels per day. At the same time Saudi Arabia has been exporting 9.3 million barrels and Russia 7.4 million barrels, calculated in the bank. Continue reading

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12/04/18 Market notes

Net long oil position continues to decline – bearish sign for oil?

Net long oil position continues to decline – bearish sign for oil?

Hedge funds keeps scaling back wagers on oil growth after a two-week break. Swap dealers do not lag behind.

 

Hedge fund portfolios had 461,8 thousands long contracts and 37,6 thousands short contracts in the week ending in April 4. So the total net long position for crude shrunk to 424.3 thousand contracts, which is 43.8 thousand contracts less than a week earlier. The gap between the record volumes set at the end of January rose to 71.9 thousand contracts.  Commodity swap activity from the swap dealers accounted for the respective cut of hedge funds longs Continue reading

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01/04/18 Market notes

Smart money flow indicator – technical implication

Smart money flow indicator – technical implication

Before we start talking about dollar, stocks and Smart money flow indicator I would like to share with you a quick set-up for AUDUSD before RBA cash rate decision on Tuesday.

The reason to be bullish on AUDUSD is a lag of RBA policy comparing to its counterparts like ECB or Federal Reserves, what may cause money outflow from the Australia what is not good. The policymakers in Australia will be possibly forced to support AUD with hawkish comments after a long dovish period. Continue reading

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21/03/18 Market notes

10YR-2YR Treasury spread – what it means for the market?

BTCUSD forecast

Today we start from fast BTCUSD forecast and its entry point levels:

 

Bitcoin-levels
 

Why we consider BTCUSD bullish? It’s the result of G20 meeting where world financial leaders decided to loose grip on cryptocurrencies and after period of drawdown and then purgatory phase large investors may consider adding more crypto in their portfolio. Also crypto market proved to be resilient to FUD and complete market collapse, holding levels quite above of the last year. Continue reading

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13/03/18 Market notes

The echo of ECB stimulus

The echo of ECB stimulus

EURUSD has been long staying in the range 1.21-1.25 throughout this year but firm expectations on ECB tightening points to gaining strength for further upside movement.

The currency pair driven to multi-year lows on massive ECB stimulus measures turned to consolidation at the start of 2017 and later moved to growth on signals of policy tightening. Since then, the buck erased almost 20% against european currency. It would seem that such movements are more typical for Continue reading

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14/02/18 Market notes

Oil market review: Why prices should fall further?

Oil market review: Why prices should fall further?

Trump’s tax reform will not only leave marked footprint on corporate profits but also pose a big threat to the oil market.

Recall that in December last year, Donald Trump and Republican party successfully pushed the bill featured with massive tax cuts. Its too early to say what will be the precise impact on corporate earnings and social welfare. But the distinguishing thing is that sharp increase in oil production followed the Republican’s victory. The output boost can be attributed to mere coincidence but for oil traders it was completely unexpected outcome. Continue reading

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03/02/18 Market notes

Oil market review: Saudi Arabia exports and technical picture

Oil market review: Saudi Arabia exports and technical picture

Saudi Arabia Oil supplies

After a short break Saudi Arabia continued to increase oil exports from the country.

According to JODI, the Middle East Kingdom supplied to the world market more than 7 million barrels per day in November, marking the growth of export for two consequent months. Continue reading

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