October 2015

 

Technical Analysis

On the first half of October the market observed an uptrend of the EUR/USD which quickly developed into a downwards trend for the second half of the month.
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On the 15th of October, when the MACD fell below the signal line, it shaped a downward cross, interpreted by the market as a strong bearish signal. At that time the MACD was very high (0.005152), so there was a risk of the EUR/USD being overbought. Despite these early signs, it only fell greatly (2%) on the 22nd of October. Applying a Fibonacci Retracement on the downtrend, an important support at 23.6% of the starting point can be observed. This corresponds to a quotation of, approximately, 1.100 EUR/USD. After the fall, the quotation recovered back to this support line, which should persist in the future. We predict that the EUR/USD find important resistances at 1.105, 1.111 and 1.116.


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Fundamental Analysis

In October, the EUR/USD started bullish making a rally towards 1.15 driven by the disappointing figures from the other side of the Atlantic, especially the weaker than expected change in the non-farm employment and the bad performance of the US Trade Balance.
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This sentiment was boosted when the FED minutes revealed that the economic conditions are not yet ideal to warrant an increase in the funds rate, postponing further analysis to December. However, as inflation remained in negative territory (in Europe), the idea that it would be necessary to somehow reinforce the asset purchase program, confirmed by Mario Draghi on the ECB’s monthly press conference, made the euro erase all the previous gains against the dollar and hit a two month low at 1.09. Regarding this, the ECB President scheduled further decisions to December but assured that the “QE is set to run until 2016 or beyond if necessary”

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Tumbling China

On the 24th of August, China's "Black Monday”, the Shanghai Stock Exchange plunged 40%, since its peak on June 12 at 5,166.350 points, losing all ground gained since the beginning of the year.
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Attractive margins, combined with the easy credit (6%) led many private Chinese investors to enter the capital markets and to overvalue assets. The government, who declared to informally hold debt obligation on the stock market’s future, covering any bets with its own considerable assets overvaluation, contributed to this development: price-to-earnings ratios for Chinese stocks averaged an astounding 70-to-1, against a worldwide average of 18.5 to 1 (Source: REUTERS). Ordinary Chinese people had become so intoxicated by bull-market euphoria that stories began to proliferate about people leaving their jobs, and even their families, to become day traders, often using funds borrowed from high-interest rate “shadow banks” or loans taken out against their homes. In July, margin borrowing surpassed $320bn, representing almost 10% of the total market capitalisation of all stocks being traded. Outstanding borrowing surged by two-third to 208% of GDP compared to 2008 (Source: Bloomberg). Producer prices have slumped for 43 consecutive months and the consumer price index began a downward trajectory in the middle of last year. The risk was a vicious downward spiral that infected companies, as their assets lose value at the same time as real financing costs rise, forcing them to borrow more to stay afloat in a cascading downward plunge.

From its highest value, the Shanghai Stock Exchange Composite Index has since been falling. Among the companies affected are some who recently invested in Portugal. This is the case of Fosun, owner of Fidelidade, which lost over 7% market value, a decrease by 6.8 billion euros since June. Shares of Haitong, which bought BESI, fell 20 % market value, contributing to a reduction in market cap in 2.5 billion since June 12 (Source: Jornal de Negócios).

Side effects of the stock market decline extended to the commodity sector. China is the world's largest consumer of most raw materials (between 50% and 100% of global consumption) (Source: Business Insider). Especially oil prices declined since mid-June, also because of diminishing demand from the world largest oil importer, China. The reduced forecasted demand by China furthermore, pressured copper and aluminium prices by 27% and 19% respectively since August 2015.

For years, the central banks of emerging market countries (China, Brazil, Russia and Taiwan) have devoured U.S. debt in order to bolster their foreign currency reserves. Now, amid a global economic slowdown spurred by China, these purchasers of U.S. Treasury bonds opted for the sale of US government bonds to increase government revenue. They sold $123 billion in U.S. Treasury debt maturing within a year over the period of 12 months until July. This must be put into comparison to the peak of $230 billion in purchases of U.S. debt January 2013 (Source: Wall Street Journal). The International Business Times stated it to be the biggest decline in foreign official demand for U.S. notes and bonds since records began in 1978,causing a slowdown in emerging economies threatening the US economy. While central banks have been selling, other buyers have stepped in, including U.S. and foreign firms. That buying, driven in large part by worries about the world’s economic outlook, has helped keep bond yields at low levels from a historical standpoint.

To counter this fall, the monetary authorities in China cut the interest rates by 25 basis points to 1-year loans to 4.6%, a decision that is repeated for the fifth time since November 2014. The central bank cut by 25 basis points the interest rate on deposits of one year to 1.75%. Chinese authorities have also decided to decrease by 0.5 %-points the amount of money banks must keep in reserves.

The implementation of new reforms is also a solution, perhaps the most needed. Wang Tao, China´s economist at UBS Group AG in Hong Kong, said– “China needs to embark on more structural reforms to unleash new sources of growth, to retire excess capacity and close "zombie" companies and write off bad debt on banks’ balance sheets". "All the old growth engines are dead”, just like “the cyclical fixes they are using to address demand”. This year, export growth is zero, property investment is zero, heavy industry and commodity producers have slumped” (Source: Wall Street Journal).[/read]