Euro, Pound, Aussie and Gold gain on weak US data

Euro, Pound, Aussie and Gold gain on weak US data
by Ipek Ozkardeskaya

Poor US retail sales in September combined with Walmart’s profit warning sent USD lower against the majority of G10 and EM currencies as the prospects of a rate hike from the Fed in the near term were scaled back.

Investors were clearly left unhappy with lower sales forecast although the heavy investment in e-commerce to face the increasing competition had to be done for the business continuity in the long-term. From a strategic point of view, Walmart does what it has to do. The fast changing consumer habits and the necessity to modernise and adopt the business could soon attract investors back on board.

Still, investors said the last word. Walmart lost $20 billion dollars as its stock tumbled by 10% yesterday. Hence, the US’ biggest employer’s market cap fell below $200 billion and boosted up the opinion that the Fed could no longer consider hiking its rates any time before March 2016.

Looking at the US sovereign bond activity, the probability for a December Fed rate hike fell to 27%.

The US will report its September inflation figures today (at 1330 BST). Given the cheap energy prices and meagre retail sales, the expectation of a deeper deflation on the month seems feasible. Given the ‘data dependency’ of the decision to hike rates, each notch is taking the Fed one step away from the policy normalisation. Credibility, or the lack thereof in the Fed’s ability to pull the trigger in 2015 is also starting to become a problem in itself.

EURUSD rallied to 1.1495. The appreciation in the euro increases the level anxiety at the heart of the ECB. Should the euro continue its advance past 1.15 against the US dollar, the ECB will certainly be tempted to intervene, either verbally or concretely, to announce plans to expand its QE program. Draghi is certainly ready to do whatever it takes, which is the major downside risk to positive trend currently building in the euro.

In the UK, GBPUSD reversed gains on the good jobs data as anticipated. The 3% y/y progress in wages has especially revived the BoE hawks again, and broad based USD weakness has sent Cable to 1.5497.

The Australian economy lost 5,100 jobs in September; mostly full-time jobs. Little reaction to jobs data was seen in AUDUSD. AUDUSD is rather bid on the back of soft USD and a minor sense of stability in base metal prices. On the technical front, the 0.7380 remains the key level (Fib 38.2% retrace on May-Sep decline). Below 0.7380, the mid-term bias remains negative and be another opportunity for AUD-bears to sell the top betting for a setback to 0.7195 (minor 23.6% retrace) before 0.7107/0.7042 (Fib 50% and 61.8% retrace on Sep 29-Oct12 rise). If however the AUDUSD successfully breaks above the 0.7380, then the pair will step in bullish consolidation zone and extension to 0.7500/30 could then be considered.

Finally, gold stretched to $1190. Although the yellow metal price action presently trades very close to the overbought territory, the weakness in USD has whetted the appetite for gold. The daily pivot is at $1165, which should distinguish between a further advance to $1200 and correction down to $1155/50 area. Weekly support remains at 1135/40.

Today’s equity highlights by Brenda Kelly, Head Analysts:

The FTSE is up 0.85% led by the IT and materials sector. JP Morgan has upgraded the investment grade metals and mining sector to neutral from underweight as the spread widening in the likes of Glencore and Anglo American has resulted in severe industry underperformance.

Anglo American +3% Signed a contract with Hoa Phat to import steel ore. Even with the demand for steel down in China, China iron ore imports reside at their highest this year.

Glencore +4.6% The mining giant seems to like either the top rung or the lower rung of the UK benchmark these days and this choppy price action looks set to continue with many investment houses disagreeing on the future of the company and the price target too. The cutting of zinc production and the debt restructuring has not relegated all the Glencore bears. Until we see copper prices rise dramatically form present levels (unlikely to be driven by an increase in demand) the issue of declining commodity prices will continue to weigh. For the time being, copper is rising and this is aiding sentiment to some degree,

Burberry (-11%) despite the company lowering its guidance back in May sales rose less than expected for the group owing in part to the Chinese slowdown . China’s recent yuan devaluation and concerns over the economic growth for the country weighed on demand.
Retail sales rose by 2%, despite an increasingly difficult environment for the luxury sector, to £774m for the six months to 30 September.

Unilever +3.84% Beat sales estimates – underlying revenue increased by 5.7% - best growth in 3 years. The hottest summer in Europe on record has also benefited the group as the demand for the ice-cream increased. Sales in emerging markets also increased (60% of the group’s business) by 8.4% in Q3. Improvements in consumer sentiment were witnessed in China, Mexico and India.