Holiday Volumes in Full Swing

Analisi Giornaliera - 27/12/2016

Light Trade on Monday Followed by Slow Overnight Session in Asia


With the year rapidly winding down, market volumes are fading fast as portfolio managers abstain from adding new positions.  Despite higher potential for volatility amid less market liquidity, the absence of major news has seen market momentum ebb significantly as the risk aversion mentality prevails, sending haven assets higher on the session.

Japanese Headline Inflation Hits 16-Month High

In spite of persistent headwinds, Japan is still managing to eke out a small victory, this time in the form of annualized consumer prices.  The headline CPI figure for the month of November rose to 0.50% from 0.10% in October, driven primarily by rising food prices.  However, other figures which strip away the more volatile food component show that core inflation remains firmly in negative territory at -0.40%, marking 9-straight months of falling prices.  This is another headache for policymakers at the Central Bank despite forecasts that inflation will rebound to 1.00% by the middle of 2017.

Adding to the more downbeat news overnight was household spending which slipped -0.60% month over month and the unemployment rate which surprisingly rose to 3.10% from 3.00% during October.  After weakening four of the last five sessions, USDJPY is back on the climb after bouncing off support at 117.00.


Italy Fights for Embattled Banks

As Italian banks face a new crisis amid ongoing political turmoil, the government moved swiftly last week to secure €20 billion to shore up beleaguered Banca Monte dei Paschi di Siena.  However, sources close to the ECB cited that the bank needs to raise an additional €8.8 billion to diminish existing funding gaps.  Nevertheless, on the whole, the banking system remains fragile and desperately requires additional funding.

Analysts estimate that nearly €360 billion of nonperforming loans remain on bank balance sheets nationwide, hurting the prospect of any recovery in economic activity over the near-term.  Furthermore, spreading losses could see bondholders face losses while also hurting the larger Euro Area banking system.  Meanwhile, the Euro was trading slightly lower after the weekly reopening, with EURUSD volumes remaining thin heading into the end of the year, barely budging from a narrow 25 pip range.


Chinese Growth Expected to Meet Target Range

According to state media Xinhua, the Chinese economy is set to meet Beijing’s ambitious GDP growth target between 6.50% and 7.00% this year.  In light of a troublesome environment for trade and challenging conditions domestically, the news agency was quick to warn that the economy faces numerous headwinds in 2017.  The main looming issues are centered on increasingly protectionist rhetoric regarding trade alongside chronic overcapacity in certain industries and a cooling property market.

Even with the emphasis on shifting the economy, the industrial sector remains a strong component of the economy, with profits increasing 9.40% year-to-date versus the same period in 2015. Although the Yuan is slightly lower against the dollar as holiday volumes remain below average, Bitcoin prices have pulled back from Friday’s highs after a dramatic rally the prior week sent prices of the cryptocurrency to the highest point since January of 2009.


French Unemployed Fall to Near Four Year Low

In another sign of a continued pickup in French fundamentals, the latest figures pertaining to joblessness showed the best improvement since 2008.  The number of registered unemployed individuals seeking jobs in France fell to 3,447,000, marking the lowest point in the figure since early 2013.  Alongside inflation trending at 25-month highs and modest GDP growth, the ECB’s accommodative activities should help fundamentals continue to recover.

Nevertheless, the absence of fiscal stimulus in France means that unemployment remains at 10.00%, threatening a major political upset during the spring election.  Right now, the incumbent socialists face the continued advance of right wing political parties amid tepid economic activity and a spate of terrorism-related incidents.  After a rapid advance following the ECB’s announcement of extended asset purchases, the CAC 40 is trading mostly flat for the third straight session as market momentum fades.


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