The Big Question: How will the Fed’s unwinding of its massive balance sheet affect equity markets?
Major Asian indexes were mixed at midday Thursday, as markets saw no surprises from a meeting of the US Federal Reserve, which left interest rates unchanged and set to wind down its balance sheet – both in line with earlier market expectations.
In Japan, the Nikkei 225 surged 0.83 percent to 20,479.88 at midday.
In Greater China, stocks were also pointing higher. The Shanghai Composite Index gained 0.21 percent to 3,372.94 before midday. In Hong Kong, the Hang Seng Index edged up 0.11percent to 28,158.36.
In South Korea, the KOSPI index slipped 0.08 percent to 2,410.21.
Down under, the ASX 200 fell 1.21 percent to 5,639 at midday. Talks of a major correction ahead have been emerging in Australia, where many argue that the Australian stock market has not seen a major correction in six years and the recent bull run might have reached its peak.
The US Fed on Wednesday announced that it would start to wind down its $4.5 trillion balance sheet in October. Much of the balance sheet was accumulated through its stimulus packages following the financial crisis in 2008.
The move marks first of such from the US Fed and markets are paying close attention of how things will unfold. So far markets appear to be calm as the Fed signaled that it will be a gradual process.
The Fed on Wednesday also left its interest rates unchanged, as was widely expected, but it signaled in its unmoved dot plot that earlier projections for another rate hike is still on track with three in the next year.
Today, markets are turning to Japan for potential changes in its monetary policy. The Bank of Japan is expected to end a two-day meeting on Thursday, which was focused on interest rates. Market expectation is that the BOJ will leave the rates unchanged given the low inflation rate.
Main Market Movers – Mid-day Asian Trading Session
|Indexes||Value at Midday||Daily Change|
|China-Shanghai Composite Index||3,372.94||0.21%|
|Hong Kong –Hang Seng||28,158.36||0.11%|
Prices of cryptocurrencies pointed lower overnight during the Asian trading session on Thursday.
At midday in Asia, the bitcoin price dropped 1.40 percent to $3,820. The digital currency has been on a downward trend for three straight days, though at a small pace and with some support along the way, dropping from a recent high of about $4,100.
The price of ethereum also fell 1.32 percent to $279 at midday in Asia. The virtual currency saw a relatively big surge on Wednesday, rising from about $279 to a high of $292.
The Japanese yen depreciated 0.22 percent against the US dollar at midday on Thursday. The USD/JPY rate was at 112.46. Following the Fed’s announcement on Wednesday, the dollar posted big gains from 111.381 to 112.543 per dollar.
The Chinese yuan lost 0.29 percent against the US dollar to 6.5890.
The Australian dollar also lost 0.42 percent on the dollar, changing hands at 1.2498 per dollar at midday.
WTI Oil was up 0.84 percent to $50.23 per barrel.
Brent Crude was flat at $55.37 per barrel.
Gold was up 0.15 percent to $1,312 an ounce.
Business News across Asia
In China, the country’s largest smartphone maker Huawei Technologies has launched an ad campaign against Apple’s new iPhones before the Chinese brand’s new product launch set for mid-October. Huawei called iPhone’s new Face ID function “useless.”
Take away: Though still lagging Apple and Samsung in global sales, Huawei is rising fast. The ad shows that Huawei is aiming for top rivalry as it launches its new Huawei Note phone next month.
In India, a new report found that there is a “time bomb” in the country’s widely-cheered demographic dividend. The report, which was commissioned by the Reserve Bank of India and other regulators, found that most Indian workers are not saving for retirement. The author of the report called that a “ticking pension time bomb.”
Take Away: India’s young population has been frequently cited as a big boost for the country’s economy. But these would get old, and if they don’t have savings for retirement like the report suggested; it could indeed be a problem. The Indian economy has already showed lackluster growth in the first of this year.
Featured image from Flickr.
More Powerful than an Emperor
The elections in the Czech Republic have gone largely as expected but things are far from over. Andrej Babis is also known locally as the ‘Czech Trump’ not only because of his personal wealth but also because of his Czech First anti-establishment populist views.
Unlike in the USA however, winning an election in a Parliamentary system doesn’t necessarily guarantee control. Babis’s ANO (Yes) party has won 29% of the vote so they will need to partner up with one or more of the other eight parties in order to form a majority coalition. The task will not be simple, especially since Babis has already stated that he will not work with some of the parties and vice versa.
These type of negotiations can sometimes go on for quite a while. For example, the Netherlands is only just getting their government in place this week after a deadlock elections more than seven months ago. Over in Germany, Chancellor Angela Merkel isn’t expected to settle on a Government until some time next year.
In Japan, on the other hand, Shinzo Abe has won a two-thirds majority so will have no need for wheeling and dealing. He now holds more power than the emperor himself and is free to continue on his stated mission to aggressively devalue the Yen.
eToro, Senior Market Analyst
Please note: All data, figures & graphs are valid as of October 23rd. All trading carries risk. Only risk capital you can afford to lose.
After the bloody referendum in the Spanish region of Catalonia, things have not died down. In fact, tensions have continued to heat up. Prime Minister Mariano Rajoy has now stated that he will soon strip the Catalonian Government of their power and hold a new election to replace the separatist local government of Carles Puigdemont.
The ball is now in the Catalan’s court. Puigdemont has several options. He can himself call for a snap election in Catalonia or he can simply accept the one that Rajoy has forced on him. A third option would be to make a more aggressive push for independence claiming that Spain has just again violated their rights.
No matter what he decides to do it is unlikely to bring calm as the doors for negotiation are now shut. The EURUSD is sinking this morning and now holding tight to temporary support (yellow) at 1.1750, if it passes there it could likely meet key resistance (red) at 1.1650.
More Powerful ECB
Of course, all the political updates we’ve mentioned above are minuscule when compared to the power of the European Central Bank.
The ECB’s monthly injections of €60 Billion per month have been propping up the stock markets and keeping the Euro down for the past three years. This Thursday, the ECB is largely expected to give some sort of guidance on the future of their massive stimulus package.
We know that they have been talking internally about reducing the injections to €30 Billion as of January and to keep the program going at least until September. In normal market conditions, it’s easy for them to leak these type of internal discussions to see their effect on the markets. But with all of the political uncertainty, their usual tactics may be less effective.
Here we can see the German Dax Index hesitating near it’s all time highest levels. Is the hesitation due to governmental negotiations or the rumors of less stimulus going forward?
Celebrations could be seen across the eToro network over the weekend as Bitcoin reached another all time record high of more than $6,000 per coin. The overall market cap (price per coin times number of coins in circulation) has for the first time surpassed $100 Billion before pulling back.
This very significant milestone clearly cements the role of bitcoin in the future of our global economy. As more people learn about the technology and how to use it, the more useful and valuable it will become.
For those that say “blockchain without bitcoin” just take a look at this chart showing bitcoin’s dominance over all the other cryptocurrencies in circulation…
The bitcoin network is all about consensus and at this time, the consensus is all about bitcoin.
Let’s have an amazing week ahead!
This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation.
The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.
Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.
Asian Market Update – Monday: Tokyo Gains after Election Landslide, Minor Losses in China, S. Korea
The Big Question: Will a new term help Abe to revive the world’s third-largest economy?
Asian stocks were trading in a mixed mode Monday morning, with nice gains seen in Tokyo after Prime Minister Shinzo Abe’s ruling party got a two-third majority in the election and slight losses in Greater China and South Korea.
In Japan, the Nikkei 225 surged 0.93 percent to about 21,658 right before midday, after opening at around 21,709.
Investors were responding to Sunday’s election results, which gave Abe’s party 312 out of 465 seats in the parliament, effectively securing Abe another term. The solid win for Abe suggested continued fiscal and monetary easing under under his economic policy program dubbed as Abenomics.
Before Sunday’s election, the Nikkei closed higher for a 14th straight day on Friday. Monday’s gain was also supported by a weaker JPY against the USD.
In China, the Shanghai Composite Index was down 0.02 percent to about 3,377 before midday. In Hong Kong, the Hang Seng Index lost 0.66 percent to around 28,298, after opening the session at 28,557.
Fresh data out China on Monday showed that the growth in home prices is cooling, following a barrage of measures from mainly local governments to contain the overheated housing market. Average home prices rose 6.3 percent year-on-year in September, slowing from 8.3 percent in August.
In South Korea, the Kospi was down a slight 0.05 percent to around 2,488 shortly before midday.
Down Under, the ASX 200 gained a minor 0.01 percent to around 5,907, remaining relatively flat from 5,908 at the same time on Friday.
Market focus this week:
In the US, markets are closely watching President Donald Trump’s pick for the Fed chair position. News reports cited Trump as saying over the weekend that Stanford University professor John Taylor and Fed governor Jerome Powell are among the candidates under consideration and a decision is coming shortly.
Main Market Movers – Mid-day Asian Trading Session
|Indexes||Value at Midday||Daily Change|
|Japan- Nikkei 225||21,658||0.93%|
|China-Shanghai Composite Index||3,377||-0.02%|
|Hong Kong –Hang Seng||28,298||-0.66%|
Prices of main cryptocurrencies were pointing lower on Monday during the Asian trading session.
At midday in Asia, bitcoin was down 0.18 percent to $5,958. Bitcoin is now down about $200 from the high of $6,156 reached on Saturday following a strong two-day winning strike on Friday and Saturday.
The price of ethereum lost a slight 0.68 percent to about $292 before midday. Ethereum dropped below the $300 level on Sunday.
Litecoin fell 2.11 percent to about $55.30 at midday. The virtual currency has been trading steadily around the $60 mark since Wednesday. Litecoin is currently in its third day of a losing strike, dropping from $61 on Friday.
The Japanese yen lost 0.22 percent the US dollar at midday Monday to 113.76 per dollar.
The Chinese yuan lost 0.19 percent against the US dollar at 6.6311 per dollar.
The Australian dollar also lost 0.13 percent on the dollar, changing hands at 1.2779 per dollar at midday.
WTI Oil was up 0.08 percent to $52.07 per barrel.
Brent Crude lost 0.02 percent to $57.86 per barrel.
Gold was down 0.34 percent to $1,276.03 an ounce.
Business News across Asia
In China, focus remains on the ongoing 19th National Congress of the Communist Party, which is expected to produce a new lineup of leadership for the powerful politburo.
Take Away: Markets would be paying attention to the new leadership to search for clues on economic and monetary policies. However, don’t expect anything else than continuation of the current path forward.
In Japan, the government announced that Prime Minister Shinzo Abe, who just emerged from a big win on Sunday’s election, spoke to US President Donald Trump over the phone. The two, once again, agreed to increase pressure on North Korea over the nuclear issue.
Take Away: Tensions on the Korea Peninsula remain high and fragile, with new missile tests from the North expected at any moment now. However, markets are getting used to these provocations so we need more than just the usual missile launch to create panic.
Featured image from Grips.ac.jp
5 Things to Watch Next Week: Earnings Bonanza, Bitcoin in Danger Zone, Trump’s Tax Reform, The Dollar Rally, The US Yield Curve
1. $4.5 Trillion in Market Cap Reporting
So far, the US earnings season has been a positive affair, as the most important companies, especially mega caps, beat the estimates across the board, lifting the major indices to new all-time highs in the process. Next week, is calendar will be full of another huge batch of key earnings, such as Microsoft (MSFT), Google’s parent Alphabet (GOOG), ExxonMobil (XOM), Amazon (AMZN) and Visa (V).
With the overbought readings in the Dow, the S&P 500, and the Nasdaq, there is not much left in the tank for the equity rally, and the long-term prospects are not better by any means. That said, trying to pick a top in such a rally is futile, but controlling the Fear of Missing Out is not an easy feat. The correction will come, without a doubt, and it will either bring a trading opportunity as in August or a confirmation for the bears.
Dow 30 Index, Daily Chart Analysis
2. Bitcoin Reaches Target but Uptrend Remains Intact
The new all-time highs in BTC have been the most important move in the cryptocurrency segment this week, even as Ethereum‘s major update made headlines earlier on. As the short-lived break-out of ETH and some of the other major altcoins faded away, Bitcoin’s dominance reached levels not seen for months, surpassing 58% as the coin reached the $6000 level towards the end of the week. While the long-term picture is clearly overbought for BTC, we wouldn’t rule out another leg higher towards the range extension target at $7000, but pocketing most of the recent gains is probably the way to go. The quick and deep corrections in the segment always come when the last bears had given up hope, and we are close to that state.
BTC, Daily Chart Analysis
3. Trump Tax Plan Might Live After All
As the Senate passed the 2018 budget resolution this week, the new tax bill got much closer to passing this year than previously thought. While a lot of experts agreed that the controversial proposal had a good chance of failing at one of the many legislative hurdles, but he Senate’s decision opened up the way for a short-cut and if the GOP speeds up the process of writing the bill, the much-awaited tax cuts could arrive very soon. The next step is to pass the budget bill in the House, while tackling the opposition towards the actual bill in the Senate and the House. So while the process will be grueling, the market already hailed the first step with a rally, and the progress could be a major driver for stocks and the Dollar in the coming weeks.
4. The Dollar Showing Stability
With the focus still on the next Fed Chair, and the above-mentioned tax reform, the Greenback had a choppy but slightly bullish week, even compared to the relatively strong Euro. The Yen, the Pound, and the smaller majors all lost considerable ground compared to the USD, with the New Zealand Dollar falling the most after the announcement of the new coalition. Technically speaking, the Dollar is not out of the woods, but it seems that a higher low formed on the daily chart of the DXY, and that could have a major implication for all markets. Should the Index post a new swing high next week, the door could open for a major rally in the battered currency.
Dollar Index (DXY), Daily Charts
5. The US Yield Curve is Collapsing
As short-term Treasury yields are rallying thanks to the hawkish tone of the Fed, and the modest economic numbers, the longer end of the curve is lagging severely. That represents the doubts regarding the long-term growth potential of the US economy, and is usually a strong precursor of a looming recession.
Some analysts argue that raising interest rates this late in the cycle is a major policy error, but with the extremely loose monetary policy of recent years, the normalization must begin, or the Fed will be out of options in the case of an economic shock. In any case, long-term investors should keep a close eye on Treasuries, as the bond market is usually a better predictor of troubles ahead than the stock market.
Key Economic Releases Next Week
|Wednesday||GERMANY||IFO Business Climate||0.4%||0.2%|
|Wednesday||US||Core Durable Goods Orders||1.1%||2.0%|
|Wednesday||CANADA||BOC Rate Decision||1.0%||1.0%|
|Wednesday||US||New Home Sales||556,000||560,000|
|Wednesday||US||Crude Oil Inventories||–||-5.7 bill|
|Thursday||EUROZONE||ECB Rate Decisiion||0.00%||0.00%|
|Thursday||EUROZONE||ECB Press Conference||–||–|
|Thursday||US||Pending Home Sales||0.7%||-2.6%|
Featured image from Shutterstock
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