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LCG: Into the European open

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The week started with a limited risk appetite. European stocks closed Mondays session in the red. The FTSE (-0.35%), the DAX (-0.46%) and the CAC (-0.56%) fell. Energy (-0.99%) and mining stocks (-1.19%) were among the leading losers in London, as Bloomberg industrial metal subindex retreated by more than 1.5%. WTI crude bounced lower from $59/barrel level.
The US stock markets were flat on Monday. The controversies on the US tax reform bill weighed on the sentiment. According to Bloomberg news, two top members of the Senates budget panel might not send the bill for debate today. That would mean plans for a full Senate vote this week would fall through. A delayed vote could curb the upside momentum in the US stock markets. This being said, the uncertainties on the US tax reforms didnt prevent the S&P500 from closing above the $2600 level for the second session in a row. There is still no sign of anxiety in the market; the VIX index remains below the 10% level. Some traders could find opportunity in buying the price pullbacks. Yet provided that the US stocks trade at historically high levels, we could hardly talk about dip-buying. On the other hand, buying US stocks at the historical high levels has been a prosperous strategy over the course of the past year. Investors keep their expectations high, but even a phenomenal tax reform would not justify a rise in stock valuations endlessly. Buying at the historical high levels represent a risk and this risk increases along with the stock prices.
Japanese stocks stagnated; Nikkei (-0.13%), Topix (-0.28%) reversed earlier losses, as Chinese stocks edged lower. Hang Seng (-0.72%) and Shanghais Composite (-0.01%) couldn't find buyers.
The yen extended gains versus all of its G10 counterparts on news that North Korea may be preparing a new nuclear missile test. The USDJPY eased to 110.84 on Monday and the downside move could stretch toward the 110.00 level. Solid resistance is eyed at 111.70 (200-day moving average). Put options are waiting to be exercised at this level today.
Gold trades near its daily upper Bollinger band ($1295). More resistance is eyed at $1300/1306 (October high). Two factors could help clearing this resistance. First, a renewed escalation in North Korean crisis could trigger rapid risk-haven inflows in to the yellow metal. Second, investors could increase their gold allocations, if the US 10-year yield threatens the critical 2.30% support (200-day moving average).
What causes the slide in the US yields? The probability of a December rate hike stands at a solid 95.9%, meaning that the market has almost fully priced in a 25 basis points hike in the US rates before the end of the year. In addition, the future Federal Reserve (Fed) chief Jerome Powell said that the Fed should continue raising rates and reduce the size of its balance sheet gradually under his leadership. His confirmation hearing is due today. The US economic data has been encouraging so far. The core inflation picked up in October after having stagnated for five months. The US third quarter GDP is expected to be revised to 3.2% from 3.0% on Wednesday. Looking at the actual picture, the US yields should be edging higher, instead of falling to decade-low levels. There are rumours in the market that the pension funds are adjusting their portfolios to a positive outcome on the fiscal leg. This means that a delayed Senate vote, and/or a failure to pass the tax bill could halt or reverse the negative trend in the US yields.
The EURUSD consolidates gains near its 50-hour moving average (1.1906) on the back of the softening US dollar. Meanwhile, the Eurozone yields remain under pressure and could cap the topside by 1.1980/1.2000 in the dirt of a significant bullish boost in the euro.
The GBPUSD advanced to 1.3383 on Monday. The Bank of Englands (BoE) Financial Stability Report and the UK banks stress test results will be released today. In its statement, the BoE will publish its assessment of conditions in the financial system and risks to the financial stability. Traders will be seeking any clues regarding the future of the UKs monetary policy and recalibrate their expectations. It is highly likely that the BoE will point at the Brexit risks and reiterate its dovish stance in the short-run. We remind that the UK revised its official growth forecast lower last week. Therefore, the BoE hawks could hardly find a motive to capitalize on at today's FPC (Financial Policy Committee) statement. Failure to extend gains above the 1.3383 level (Monday high) could be an early toppish sign and encourage short-term traders to realize profits and move to the sidelines. A downside correction in the GBPUSD could encourage a slide toward the 50-day moving average (1.3250).

The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. Losses can exceed deposits.

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About the author

Ipek Ozkardeskaya is a senior analyst at MBAex with a solid experience in the financial industry. She has strong technical background in economics and quantitative finance. Previously, she worked as a senior market analyst in London Capital Group, FX strategist in Swissquote Bank and as a client sales executive at HSBC Private Bank in Geneva. She also developed quantitative models in automatic trading as part of BCV’s Structured Products team. Ipek has a Master’s degree in Financial Engineering & Risk Management and a Bachelor degree in Economics from University of Lausanne.
Contributing  author since 11/09/2017

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