#Ξεκάθαρα #Καιρός για Ευρωεκλογές
No tariffs on autos, CNY depreciates, EU goes to the polls
12 minutes read report, 8 pages
To help speed reading blue is used for new arguments, forecasts are underlined and found at the beginning of each page, hyperlinks are marked.
How the forecasts did:
Although the majority of equity markets managed to cover a significant part of their losses caused by the US-China trade negotiations collapse, the forex market has not recovered. The USDCNY could easily reach the 6.96 level, USD strengthened all across the board.
Last week’s forecasts failed. The rally of the USindex was missed by 0.06$, short USDCAD was not triggered, long EURUSD is 17pips in the red, long EURJPY is 29pips in the red and long AUDUSD is 100pips in the red.
Major events of last week:
- Geopolitics: Demonstrations in Brazil against the far-right President Bolsonaro. Mike Pompeo, US Secretary of Sate,visited EU and then travelled to Russia to talk on Iran and arms control. USA announced that they have seized a cargo vessel belonging to North Korea. US naval forces headed to Iran.
- USA-China: Steven Mnuchin is confirming that negotiations have not fell apart, while President Trump downplayed negotiations failing as a “little squabble”. At the same time he signed a national emergency executive order that practically denies Huawei’s access in the USA and banns a list of Huawei affiliate companies from buying US technology.
- USA-EU, USA-Japan: Tariffs on autos have been postponed for another 6 months.
- Elections: India is having the 7th and final round of elections. Modi is set to get re-elected as voting against his grip of power is not the prudent thing to do in a country that is only democratic on papers. Australia is having general elections tomorrow and the EU is having EU Parliament election on next Sunday.
- Venezuela: Representatives from the Maduro and the opposition side, arrived in Norway to find a solution.
- Cryptos: Another week in a row of increasing market cap. $230.5bn, +11.65% w/w, -72% from last year’s $821bn peak. During the week the market cap had reached $263bn.
Major events of next week:
- EU elections
Long EURJPY at 121.10
Strengths of JPY:
- Domestic demand is expected to pick up due to increased government spending and the current monetary policy. Yet, economy needs to overcome the upcoming consumption tax hike, scheduled to be imposed on October.
- improving macro readings: GDP (yet, it is expected to decrease in 2019), inflation, retail sales, trade balance, M2, manufacturing PMI (crossed 50), average cash earnings, capital spending, household spending, industries activity (but remains negative for 4th month in a row), housing starts, economy watchers sentiment, consumer sentiment, bank lending
Weaknesses of JPY:
- downward revision of expected GDP from OPEC.
- The source of concern are the exports due to the moderate global growth. Indeed, the trade balance fell.
- deteriorating macro readings: unemployment, trade balance, current account, Services PMI, industrial production, machine tool orders, consumer confidence, PPI(prices sold to corporations)
Watch / New Releases:
GDP, trade balance, manufacturing PMI, industrial production
next Monetary Meeting of the Bank of Japan on 20 June.
Exit the long AUDUSD positions at 0.6968
- Tomorrow’s Parliamentary Elections. The current coalition has been politically weak since the Prime Minister swap on August 2018. Polls are giving the first place to the Labor party.
- RBA kept rate unchanged while the Central Bank of New Zealand proceeded with a rate cut.
- rising Chinese inflation. (The only favoring macroeconomic release.)
- Australian is currently having the first surplus budget of the decade.
- improving macro readings: current account, unemployment, M1, service PMI (crossed above 50), private sector credit, private capital expenditure, AIG manufacturing index, household consumption, consumer’s sentiment, wage price index
- The CNY is aggressively being depreciated, while latest macro releases disappoint.
- GDP latest reading was unexpectedly lower, unemployment increased and inflation fell.
- Westpac, one of the top four Australian banks, is expecting two rate cuts, in August and November 2019.
- deteriorating macro readings: GDP, inflation gauge, unemployment, job advertisements, inflation expectations, retail sales, trade balance, manufacturing PMI, home loans, home sales, building approvals, AIG construction index, company operating profits, decreasing capital expenditure, business confidence
Watch / New Releases:
Manufacturing PMI and Services PMI, construction work
Next monetary meeting of the RBA on June 4
Short USDCAD at 1.3528 and 1.3580 (same entries as previous week)
Strengths of CAD:
- OPEC’s latest monthly report gives enough reasons for oil and CAD strengthening. No downward revision of the global demand growth for oil, no increase of the Saudi Arabia’s and UAE’s production. Iran’s production during the last month of granted waivers was 2,5mb/d. The only troubling reading was the increase of US Crude oil inventories.
- housing market is expected to pick up in 2H19, following the stabilization in Toronto and Vancouver.
- Iranian oil is supposed to be out of the market, pressing prices upwards.
- improving macro readings: unemployment, inflation at the BOC’s target, Ivey PMI, retail sales, manufacturing sales, employment change, current account, trade balance, wholesale sales, housing starts, building permits
Weakness of CAD:
- downward revision of expected GDP growth from the BOC and negative m/m GDP.
- fiscal policy expected to have a -0.2% net effect in GDP growth.
- weak government until the upcoming elections on October.
- deteriorating macro readings: GDP (negative m/m number), wholesale sales, labor productivity, capacity utilization, Manufacturing PMI (bellow 50), Ivey PMI, corporate profits,foreign securities purchases, manufacturing sales
Watch / New Releases:
retail sales, wholesale sales, corporate profits
Next Monetary meeting of the Bank of Canada on 29 May.
Long USindex at 97.33$
Strengths of USD – Risk off points:
- GDP q/q growth at 3.2%, way higher than the expected 2.1~2.8% range, resilient job market. OPEC made an upward revision for GDP growth and expects 2.6%
- Geopolitical risk is rising again in North Korea,Taiwan and Iran.
- Improving macro readings: GDP, inflation expectations, personal spending, trade balance, unemployment, wholesale inventories moving lower, consumer confidence, consumer sentiment, optimism, unit labor cost, durable goods orders, manufacturing Index, manufacturing PMI, services PMI, housing starts, building permits, new home sales, vehicles sales
Weaknesses of USD –Risk on points:
- the steeper reversion of the US Government Bond yields. Short term maturities have decreased by 3~4bps since the Trump’s tweet on May , whereas the longer maturities have decreased by 13~16bps
- Economy is experiencing zero inflationary pressure with home prices increasing at a slower pace and unit labor costs decreasing.
- Deteriorating macro readings: inflation, unit labor cost, core PCE, PPI,capacity utilization rate, retail sales, factory orders, industrial production, business inventories, current account, trade balance, Non-manufacturing PMI, consumer credit, construction spending, existing home sales
Watch / New Releases:
existing home sales, manufacturing PMI, services PMI, new home sales, durable goods orders
- Next Monetary Meeting of the FED on 19 June.
Long EURUSD at 1.1110
Strengths of EURUSD:
- polls on EU elections suggest that the shift of power in EU will not be significant. Yet protectionism is in the agenda of far too many parties.
- Tariffs on autos have been postponed. Nevertheless, the trade relations between the USA and the EU are the next hot issue for 2H19.
- improving macro readings: GDP, inflation, unemployment, M3, German GDP, German Trade balance, Manufacturing PMI (bellow 50),German Manufacturing PMI (way bellow 50), German factory orders, service PMI, wage growth, industrial production, business climate, investor confidence
Weaknesses of EURUSD:
- deteriorating macro readings: retail sales, current account, trade balance, private loans, PPI, consumer confidence, German industrial production, German retail sales, European industrial production, economic sentiment, German economic sentiment
Watch / New Releases:
current account, consumer confidence, manufacturing PMI, service PMI, business climate,
Next monetary meeting of the ECB on 6 June.
Long GBPUSD at 1.2671 and 1.2619
As the negotiations between the Tories and the Labor party fail measurably and as we are heading towards the EU Parliament elections, where the Euro-skeptic and unblushing Nigel Farage is set to win the most votes, GBP has weakened.
Prime Minister May could bring her plan for approval by the House of Commons for a 4th time at the beginning of June.
- GBPUSD has weakened to a technically significant point were the bearish momentum should exhaust.
- Upward revision of GDP growth from the BOE (1.2% February’s expectation, 1.5% May’s expectation) coupled with Carney’s comment that “it will require more, and more frequent interest rate increases, than the market currently expects”.
- Unemployment fell and is expected to further fall to 3.5% by 2022.
- improving macro releases: GDP, retail sales, unemployment, industrial production, construction PMI, Service PMI, wages, trade balance, increasing public sector net borrowing, high street lending, lending to individuals, home prices
- Negotiations between the Tories and the Labor party failed
- polls for the EU elections are presenting the unblushing Nigel Farage in the first place
- property values predicted to fall by 1,25% within 2019, according to the BOE
- deteriorating macro releases: average earnings, consumer’s confidence, current account, M4, Business Investments, Manufacturing PMI, construction output, manufacturing production, industrial order expectations
Watch / New Releases:
home prices, inflation (increased reading is expected that would help GBP), retail sales
Next Monetary Meeting of the Bank of England on 20 June.
Issued by Labis Michalopoulos, CFA
For the readers of the report:
Redistribution is allowed as long as the author and his contact details are referenced.
This material is for Qualified Investors and Professional Clients only and should not be relied upon by any other person.
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 investment decisions involve an element of risk.
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Any research in this document has been independently 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.
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For qualified perspective clients of the advisory service:
GIPS standards are all about full, fair, consistent and comparable presentation of actual returns of the past. No models, no back-testing, no promises. I am doing that. I am publishing in real time, via a 3rd party, my actual returns since inception where one can see the most strict, comparable, revealing metric of the industry: the monthly Sharpe ratio.
My current monthly Sharpe ratio stands at 0.27 as can be found at www.forexfactory.com/dxmix
My current annual Sharpe ratio is 0.27 multiplied by √12 = 0.27 x 3.46=0.93 Annual Sharpe Ratio
The numbers used to stand at 0.5 monthly Sharpe ratio and 1.73 annual Sharpe ratio up until the August of 2019 for 45 consecutive months. On 24 August 2018, I mistakenly ordered to open a position 10 times bigger that I am used to. My equity level is currently back on track, but my statistics are no longer as impressive as they used to be. My 54 months, since inception, monthly Sharpe Ratio (that includes the leveraged AUDUSD trade) stands at 0.27, equal to 0.93 Annual Sharpe Ratio.
I cannot claim that I will be performing with the return of my best months, but I can tell that I will hover around my average returns. Claiming with a 95% confidence, that my next month* return will be within my average monthly return ± 2 standard deviations is a well educated statement I can make anytime.
My average monthly* return ± 2 standard deviations is from -16.54% up to 20.49%
My average monthly* return ± 2 stadard deviations becomes -5.74% up to 9.47% , excluding the 4 months effect of the one time mistake trade.
* the monthly returns are the actual returns within a month. They are not presented on annualized basis.