29 October-Issue 38

Equities traded at -10% from latest peak-Bonds rebounded

Last week’s report included no forecast, other than going short USD at 96.10$. Global markets are overstretched towards a risk-off sentiment. None of the doom scenarios will happen. CNY will not fall apart if it ever crosses the 7.00 level, equities have no reason falling another 10%, government bonds yields are already decreasing.

Major last week’s events:

  • Australia:Liberals lost their one seat majority at the parliament, as they lost the by-elections.
  • China-Japan: The two countries managed to sigh a $30bn swap line between them
  • Equities : Equities continued dropping, erasing all of 2018 gains. Worth noted the bounce of Tesla as it manage to post profits during 3Q, the bounce of Amazon and on the other hand, the drop of Caterpillar. The negative impact of trade-wars at Caterpillar’s earnings was explicitly mentioned.
  • US Trasformation: US may move out from the nuclear deal they have signed with Russia since the 80s. On the other hand, OPIC, a US organization for African projects that was underfunded during 2017, received a $60bn funding. Note that China has already commited $60bn for infrastructure projects in Africa
  • Cryptos: Total market cap unchanged at $209bn, +0% w/w, -74% from January’s $821bn peak, +12% from the $186bn September’s low.

Major next week’s events:

  • Central Bank of Japan (Tuesday) and Bank of England (Thursday) are having a monetary meeting

  • the 180 days deadline, for US sanction on Iran to take full speed, expires

  • we are approaching the 6th November US Midterm Elections


No forecast

Snapshot unchanged :

  • Core CPI (=BOJ’s compass) at 1.0% (2.0% target,expects 1.2~1.3% within 2018), BOJ rate at -0.1%
  • GDP at 1.00% annual, 0.7% q/q, 10Y Government bonds yield at 0.12%(-3bps w/w) vs BOJ’s target of 0.00±0.20% level
  • Unemployment at 2.4%

Strengths of JPY:

  • The new agreement signed with China

  • Abe’s win at the Liberal Party elections provides stability.
  • QQE will stay, up until core CPI reads 2.0% in a stable manner. The scheduled VAT hike in Oct’19, rules out any possible monetary policy change, before 2020.
  • improving macro readings: GDP reading, inflation, unemployment, bank lending, retail sales, housing spending, housing market, capital spending, sentiment readings, manufacturing PMI and all industries activity

Weaknesses of JPY:

  • I do not expect a continuation of the recent equity sell-off, that could further boost JPY

  • deteriorating macro readings: Services PMI, monetary base, M2, industrial production,trade balance and current account


  • Monday’s Retail Sales

  • Tuesday’s Unemployment

  • Wednesday’s Monetary Meeting

  • Thursday’s Manufacturing PMI and 10y bond auction

  • Friday’s Monetary base


I would short USDCAD at 1.3155

Snapshot improved.

  • Inflation decreased at 2.2% (vs 2.5% target, BOC expects 2.0% within 1Q19), BOC rate increased to 1.7% (4 hikes in the cycle, neutral rate according to BOC within 2.5%~3.5% range).
  • GDP at 1.9% (vs. BOC expectations of 2.0% in 2018 and long term potential of 1.8%), GDP m/m at 0.2%, 10Y Government bonds yield at 2.39%(-10bps w/w).
  • Unemployment at 5.9%

Strengths of CAD:

  • the volatile inflation readings are explained by the volatile airfare prices so the recent drop has not postponed BOC’s rate hike. The new rate is still characterized as stimulative
  • investment indicator rebounded to a high level, following the recent USMCA deal
  • improving macro readings: GDP

Weakness of CAD:

  • OPEC’s October report included a decrease of world’s demand growth, coupled with increasing supply and increasing inventory levels. The OECD inventory increase(14Mb increase of inventory over a month) is very small but enough to halt the increasing oil price scenario. Some inventory building up, is also found in USA for a third consecutive week. Latest JMMC review did not offer any news.
  • Demand shock driven by marine-time industry may happen on 2020 or even later. Some numbers to be remembered: 30~80tn per day is the average consumption of marine-time ships, the price difference between the oil used now and the refined one is 300~450 $ per Tone and the investment needed per ship to refine oil on ship is $2.5Mn investment.
  • deteriorating macro readings: unemployment, housing market, wholesale sales, foreign securities purchases and retail sales


  • Wednesday’s GDP, Thursday’s Manufacturing PMI, Friday’s Trade balance and Unemployment

  • Next Monetary Meeting on 5 December


I keep my long AUDUSD positions.

Snapshot unchanged

  • Inflation at 2.1% (expected at 1.75% later in 2018 and then higher in 2019), RBA ‘s rate at 1.50% (no hike so far)
  • GDP at 3.4% (RBA expects more than 3.0% within 2018 and 2019), 10y Bond yields at 2.59% (-12bps w/w)
  • Unemployment at 5.0% (was expected to reach that level by 2020)


  • AUD is demonstrating a persuasive behavior during all latest equity sell offs.
  • I expect Australian Household consumption to increase

  • improving macro readings: GDP, employment change, household consumption recovered in 3Q18, retail sales, trade balance, consumer sentiment


  • China‘s latest GDP reading coupled with a USDCNY move towards 7.00 (now at 6.95). Note that at the latest Currency Report of US Treasury, China’s intervention was described as limited.
  • Following the by-election Australia is now having a minority government
  • market participants expect the RBA’s rate to remain unchanged and not follow the rate hike schedule of other Central Banks
  • deteriorating macro readings: current account,company operating profits, decreasing capital expenditure, building approvals, home sales, home loans, business confidence


  • Monday’s new home sales, Tuesday’s building approvals, Wednesday’s inflation, Thursday’s trade balance and Friday’s retail sales. All numbers are expecting to be improving, helping the long AUD scenario

  • Next Monetary Policy meeting on November 5



I keep my ground and continuing favoring short USD positions.

Snapshot improved:

  • Core PCE (=FED’s inflation compass) at 2.0%, CPI at 2.3%, FED ‘s rate at 2.25% and expected to reach 3.1% within the cycle. FED’s view of long run rate at 2.9%
  • GDP at 3.0%y/y, 3.5% q/q, 10y Bond yields at 3.08%(-10 bps w/w)
  • Unemployment at 3.7%

Points to be considered

  • Equities have not found support at the 200day moving average. They headed lower, erasing all 2018 earnings and tested the -10% level from the peak.
  • Government bond yields are decreasing
  • inflation is not worrying. Latest releases showed decreasing numbers, labor cost data decreased & Trump canceled a 2.1% wage raise for federal employees.
  • The combination of increasing wholesale and business inventories and decreasing retail sales is alarming
  • GDP, Manufacturing PMI, Non-manufacturing PMI, Services PMI, durable goods orders and housing market are all recording big and increasing numbers.

  • risk-on news like a EU-UK negotiations concluding, consensus with China, may simultaneously hit the headlines sending USD lower. I believe that the worse outcome of both topics is already priced.


  • Earnings: Tuesday: General Electric, SunPower

Wednesday: AIG

Thursday: Apple

Friday: Exxon Mobil

  • Monday’s core PCE

  • Thursday’s Prelim Unit Labor Cost and ISM Manufacturing PMI

  • Friday’s Unemployment readings

  • Next Monetary meeting on November 8, following the Midterm Elections (6th November)



I am favoring long EURUSD positions and could enter at 1.1320

Snapshot improved:

  • Annual CPI at 2.1%, core CPI (=ECB’s compass) at 0.9%, ECB ‘s rate at 0.00%
  • GDP at 2.1% growth (OPEC reduced expectations to 2.0%), 10y Bond yields of EFSF at -0.37 (-2bps w/w), 10y German Bond yields at 0.37% (-7bps w/w), 10y Italian Bond yield at 3.47% (-24bps w/w, +63bps in 5 weeks), 10y Greek Bonds yields at 4.30% (-19bps w/w)
  • Unemployment at 8.1%

Strengths of EUR/USD:

  • Markets are only punishing European periphery bonds and not the core

  • inflation is expected to peak up by the end of 2018. The weaker momentum is explained as growth returning to potential growth and not as a downtrend.

  • Italian debt latest downgrade by rating agencies, has been downplayed by markets

  • excluding Italy, fiscal policies will not be as neutral as previously expected.

  • improving macro readings: M3, wage growth, decreasing unemployment, German factory orders, industrial production, current account and trade balance

Weaknesses of EURUSD:

  • Italian budget drama may be prolonged until the end of 2018

  • the automobile sector is having troubles

  • the different stages of monetary policy between EU and US, can only be simulated with another dip of EUR/USD in mid December. (the expected dip on late September has already happened, as I had noted at previous reports)

  • deteriorating macro readings: Manufacturing and Services PMI, retail sales, investor confidence and economic sentiment


  • Monday’s EU Economic Forecasts

  • Tuesday’s GDP reading

  • Wednesday’s Inflation readings and Unemployment rate

  • Next Monetary Meeting on 13 December


No forecast for GBP.

As no extra EU summit is scheduled for November, the week included many arguments in favor of the extension of the March deadline and a crowded march in London (over 500,000 people) asking for a new referendum.

Snapshot unchanged Arguments unchanged:

  • Inflation at 2.4% (vs 2.0% target), BOE ‘s rate at 0.75%
  • GDP at 1.2% growth (vs 1.75% BOE’s expectations and 1.3% decreased OPEC’s expectations), 10y Bond yields at 1.39% (-15bps w/w)
  • Unemployment at 4.0%


  • positive macro releases: Services PMI and Manufacturing PMI, average earnings, decreased actual inflation


  • a no deal with EU is possible. In this case UK would be able to be competitive to EU regulatory wise, but would loose tax revenues from the decrease of financial activity in the City.
  • the no deal scenario has already been characterized as bad outcome by Mark Corney (Governor of BOE) and has been quantified to be equal to a £80bn in public finance by Philip Hammond (Head of Treasury)
  • Negative macro releases:GDP m/m, Manufacturing production, construction output, consumer’s confidence, current account, industrial order expectations, retail sales, high street lending


  • UK politics and negotiation process

  • Monday’s M4, mortgage approvals and net lending

  • Thursday’s Monetary Meeting and Manufacturing PMI

  • Friday’s Construction PMI



Issued by Labis Michalopoulos, CFA




To help speed reading green is used for numbers that have a risk on effect, red is used for numbrtd with risk off effect, blue is used for new arguments, forecasts are underlined and found at the beginning of each page.

Readers checking the returns at www.forexfactory.com/dxmix will notice a leveraged trade on AUDUSD opened on 24 August that ruined the hard earned statistics of 0.5 montly Sharpe Ratio, for over 45 months. I mistakenly ordered to open a position 10 times bigger than I am used to, and my reaction to the mistake was a series of new wrong actions.

This material is for Qualified Investors and Professional Clients only and should not be relied upon by any other persons.The degree of confidence in our forecasts gets smaller, the more knoledge we posses for each security.

Past performance or past accurate forecasts is not a guide to future performance and the accuracy of future forecasts and should not be the sole factor of consideration. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to go up and down. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

This report is for information purposes only and does not constitute an offer or invitation to anyone to invest or trade and has not been prepared in connection with any such offer.

Any research in this document has been produced by Labis Michalopoulos, CFA for his own purpose. The views expressed do not constitute investment or any other advice and are subject to change. The author has an interest in the currency pairs, indexes and any other security disclosed in this report as he is an active trader.

Reliance upon information in this material is at the sole discretion of the reader.

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