Could 2024 be another 1995 for banking?

23. 9. 2024 - Josef Brynda

The start of a new rate-cutting cycle at the Federal Reserve has bank investors hoping for a return to 1995.

That was the year the banking industry began one of its best runs in US history following a series of new rate cuts from the Fed and a soft landing engineered by then-central bank chair Alan Greenspan.

An index broadly tracking the sector finished 1995 up more than 40%, outperforming the S&P 500 (GSCP). And that outperformance would hold for two more years.

Could it happen again?

So far, bank stocks are off to a good start. This year, the same banking industry index that soared in 1995 (^BKX) is up more than 19%, just behind major stock indexes.

Meanwhile, another index (XLF) tracking big banks along with other major non-bank financial firms is up 21%, just ahead of major indexes.

"History isn’t likely to repeat, but it may rhyme," Mike Mayo, a Wells Fargo analyst who covers the country’s largest banks, said of the 1995 comparison.

Mayo isn’t counting on next year being as good as that mystical year, but he does see similarities.

Daily analysis 09/23/2024

23. 9. 2024 - Josef Brynda

Latest news

• The Federal Reserve cut interest rates by 50 basis points, leading to a decline in the US dollar for the third consecutive week.
• The Japanese yen underperformed, declining over 2% against the US dollar, as the Bank of Japan surprised markets with dovish rhetoric.
• Gold prices hit a record high of $2,621.88, marking a 26% increase in 2024, driven by expectations of US interest rate cuts and Middle East tensions.
• The Bank of Japan kept its interest rates unchanged at 0.25%, with Governor Ueda's dovish remarks indicating caution on further rate hikes.
• China's loan prime rates were kept steady, with officials likely waiting to see the effects of July's cut before making the next move.
• The euro is trading below the key 0.84 level against the British pound, a level that has held since 2022.
• Activity currencies such as the Norwegian krone, Australian dollar, and British pound led gains in the forex market.
• The Swiss franc ended the week lower as markets were in a risk-on mode following the Fed's rate cut.
• US stocks closed mixed on Friday, with the S&P 500 and Nasdaq slipping 0.2% and 0.3% respectively, while the Dow Jones rose slightly.
• Treasury yields ended mixed on Friday, with front-end yields slightly richer and longer-dated yields cheaper.
• The average junk bond yield fell to 6.96%, its lowest since April 2022, prompting companies to continue issuing debt.
• US natural gas futures rose ahead of October contract expiration, with focus shifting to winter demand.
• The US rig count decreased by 2 to 588, according to Baker Hughes.
• Apollo offered to invest $5 billion in Intel, following Qualcomm's interest in acquiring the chipmaker.
• FedEx shares plunged 15.2% after weak earnings and a lowered revenue forecast.
• Nike shares surged 6.9% following the appointment of Elliott Hill as the new CEO.
• CrowdStrike surged 8% after an analyst maintained an overweight rating on the stock.
• Upcoming macro events include flash PMIs for the Eurozone, UK, and US, as well as the US Chicago Fed National Activity Index.
• Fed Governor Waller acknowledged that core inflation is running beneath the Fed's target. He mentioned that August inflation numbers suggest core PCE rose 0.14%, and if annualized over the last four months, inflation is running at less than 1.8%. This acknowledgment could influence future Fed decisions and, consequently, the U.S. dollar's performance.
• At least nine Fed policymakers are speaking this week, including prepared remarks from Chair Jerome Powell. These speeches will be closely watched by forex traders for hints on future monetary policy direction. Any unexpected comments could lead to significant moves in dollar pairs.
• China stimulus hopes have risen after the PBoC lowered the 14-day reverse repurchase rate. The central bank governor Pan Gongsheng will hold a press conference on Tuesday on financial support for economic developments. These developments could impact the yuan and other Asian currencies.
• The market is currently pricing in 200bps of rate cuts by 2025 for the Fed, one more than projected by the Fed's dot plot. This discrepancy between market expectations and Fed projections could lead to volatility in dollar pairs. Any shift in these expectations could cause significant forex market movements.
• European Central Bank President Christine Lagarde and other officials will speak throughout the week. Markets will be closely watching for policy hints from these speeches. Any unexpected comments could move the euro against other major currencies.
• The focus for U.S. Treasuries is on Friday's Personal Consumption Expenditures (PCE) price index. The core PCE is expected to remain steady at 0.2%, pushing the annual measure to 2.7%. This data could influence Fed policy expectations and, by extension, the dollar's performance.
• For Europe, key data includes Eurozone, German, and French Purchasing Managers' Index (PMI) releases on Monday. This will be followed by Germany's IFO Business Climate Index on Tuesday. These economic indicators could significantly influence the euro's performance in forex markets.
• Crude oil has extended gains on Middle East tensions and China stimulus hopes, with Brent trading near USD 75. This key level, once broken earlier this month, helped trigger a slump below USD 70. Oil price movements can significantly impact commodity-linked currencies like the Canadian dollar and Norwegian krone.
• Chicago wheat futures are being supported by dry weather curbing production prospects in Europe, UK, and the Black Sea region. This could impact agricultural commodity-linked currencies. Any significant moves in wheat prices could influence currencies of major wheat-exporting countries.
• Copper reached a two-month high last week, supported by signs of an improved demand outlook in China. Rising premiums on imported copper and falling inventories on the SHFE are contributing to this trend. These developments could impact the Australian dollar and other currencies linked to copper-exporting economies.
• Volatility remains subdued in the equity markets, with the VIX slightly down to 16.15. However, expected moves based on options pricing suggest potential for significant swings in major indices. While this primarily affects equity markets, it could also impact risk sentiment in forex markets.
• In the options market, tech giants like Nvidia, Apple, Tesla, and Intel were the most traded on Friday. While this primarily affects equity markets, significant moves in these stocks can influence overall market sentiment. This sentiment often spills over into forex markets, particularly affecting risk-on and risk-off currency pairs.

News summary

• The global financial landscape has seen significant shifts in recent days, with major central banks making key decisions and economic indicators shaping market sentiment. The Federal Reserve's surprising 50 basis point rate cut has sent ripples through currency markets, leading to a third consecutive week of decline for the US dollar. This move has particularly impacted the USD/JPY pair, as the Japanese yen simultaneously faced pressure from the Bank of Japan's unexpectedly dovish stance. The divergence in monetary policy between these two major economies could lead to continued volatility in the USD/JPY pair, potentially pushing it higher in the near term
• Meanwhile, the euro has been struggling against the British pound, trading below the key 0.84 level - a threshold that has held since 2022. This weakness in the EUR/GBP pair reflects the relative strength of the UK economy and the more hawkish stance of the Bank of England compared to the European Central Bank. The upcoming flash PMIs for both the Eurozone and the UK will be crucial in determining the near-term direction of this currency pair. Strong UK data could further strengthen the pound against the euro, while any positive surprises from the Eurozone might help the euro regain some ground.
• In the commodity currency space, the Australian dollar and Norwegian krone have been leading gains. The AUD has been buoyed by rising copper prices and signs of improved demand from China, Australia's largest trading partner. The potential for further Chinese stimulus measures could provide additional support for the AUD, particularly against currencies of countries with less exposure to Chinese growth, such as the USD or EUR. The NOK, on the other hand, has benefited from rising oil prices, with Brent crude approaching the key $75 level. 
• The Canadian dollar, another commodity-linked currency, may also see positive momentum from higher oil prices. However, its performance against the USD might be more muted due to the close economic ties between Canada and the United States. The CAD/JPY pair could be an interesting one to watch, as it combines the potential strength of the CAD from oil prices with the weakness of the JPY from the Bank of Japan's dovish stance.
• Gold prices have hit record highs, driven by expectations of US interest rate cuts and geopolitical tensions in the Middle East. This surge in gold prices often correlates with weakness in the US dollar, particularly against safe-haven currencies like the Swiss franc. However, the current risk-on sentiment in the market has somewhat dampened the franc's performance. 
• Looking ahead, the forex market will be closely watching the numerous Fed policymaker speeches scheduled for this week, including remarks from Chair Powell. Any hints about future monetary policy could cause significant moves in USD pairs across the board. Additionally, the Personal Consumption Expenditures (PCE) price index release on Friday will be crucial for the dollar's performance, as it could influence expectations for future Fed rate decisions.
• In Europe, speeches from ECB President Christine Lagarde and other officials will be closely monitored for their potential impact on the euro. Any shift in tone regarding future policy could move EUR/USD and other euro crosses. The upcoming economic indicators, including PMIs and Germany's IFO Business Climate Index, will also be key in shaping the euro's near-term trajectory against major peers like the USD, GBP, and JPY.

Daily analysis 09/19/2024

19. 9. 2024 - Josef Brynda

Latest news

• The Federal Reserve cut interest rates by 50 basis points, taking the target for the federal funds rate to 4.75-5.00%.
• The Fed's dot plot showed the 2024 median rate forecast was revised down to 4.4% from 5.1%, implying further easing.
• Fed Chair Powell stressed that the Fed is not on a pre-set path and decisions will be taken on a meeting-by-meeting basis.
• The Bank of England decision is due today, with no change in interest rates expected.
• The market is pricing in 50 basis points of rate cuts for the Bank of England through to the end of the year.
• Australia's unemployment rate remained steady at 4.2% in August, with the labor market still operating close to recent historical tightness.
• The Australian bond market lowered the prospect of a rate cut before year-end from 85% to 70%.
• The Norges Bank is expected to keep rates unchanged at 4.5%.
• US Initial Jobless Claims are expected to come in at 230k.
• The Japanese yen weakened past the 143 level against the USD for the first time in ten days.
• Focus will turn to the Bank of Japan announcement due on Friday, where plans for further hiking could bring another leg of support for the yen.
• The New Zealand dollar and British pound outperformed despite USD gains.
• The Australian dollar rose after a robust jobs report.
• The US dollar initially slipped significantly on the Fed's jumbo rate cut but quickly retraced the losses.
• Traders are now pricing in around 70 basis points of additional cuts for the rest of the year for the Fed.
• European sovereign bonds sold off, with German 10-year yields rising by 5 basis points to 2.19%.
• UK 10-year gilt yields climbed 8 basis points as traders reduced their expectations of Bank of England rate cuts.
• China is widely expected to trim its main policy and benchmark lending rates on Friday.
• The forex markets saw choppy trading following the Fed's rate decision.
• Governor Bowman opted to vote for a smaller 25bp rate reduction, dissenting from the Fed's decision.
• Powell remained upbeat on the economy despite signs of loosening labor market, indicating that the bigger rate cut comes from a position of strength.
• The clear message is that achieving a soft landing remains the Fed's key objective, which could impact currency movements.

News summary

• The Federal Reserve (Fed) surprised markets with an aggressive 50 basis point interest rate cut, setting the target range for federal funds at 4.75-5.00%. This move, along with a revised dot plot indicating further rate cuts, signals a looser monetary policy in the U.S. However, Fed Chair Jerome Powell emphasized that the central bank is not on a pre-set course, and decisions will be made based on current data.
• The U.S. dollar has traded on the weaker side throughout Q3, largely in anticipation of the Fed's rate cuts. However, the narrative of U.S. economic exceptionalism remains intact, a point emphasized by Fed Chair Jerome Powell’s remarks on the economy's resilience. While the "Dollar Smile" theory suggests the dollar could weaken in a soft-landing scenario, this would require other major economies to outperform the U.S.—a condition that currently seems unlikely. The Eurozone, China, and even Canada (now facing deflation) are showing no signs of eclipsing U.S. economic strength, despite some slowing in American growth.
• That said, the dollar's trajectory remains data-dependent. Periods of weakness are possible if certain parts of the U.S. economy falter, but a sustained, structural selloff seems improbable. In fact, a broader global slowdown could bolster the dollar via haven demand. Moreover, upcoming U.S. elections could add volatility, with fiscal policy, tariffs, and geopolitical risks all influencing the currency’s direction. At this stage, the risk-reward remains tilted in favor of dollar strength rather than weakness and the outlook is balanced.
• The initial reaction of the dollar to the Fed's decision was negative, but the losses were quickly erased, suggesting that markets had largely anticipated the easing of monetary policy. Still, the dollar may face short-term pressures, especially if further economic data supports a soft-landing scenario.
• The Australian dollar strengthened following the release of a solid employment report, which reduced the likelihood of rate cuts before the end of the year. This strengthening could continue, particularly against currencies of countries with looser monetary policy
• Increased volatility is expected in forex markets as investors reassess their positions in response to divergent monetary policies of major central banks. It will be key to monitor economic data, particularly regarding inflation and labor markets, which will influence future central bank decisions. Currencies of countries with more robust economic fundamentals and tighter monetary policies may outperform others in the coming months.

Powell Warns Not to See Half-Point Cut as Fed’s New Pace

18. 9. 2024 - Josef Brynda

The Fed has cut interest rates by 50 basis points, marking the arrival of a long-anticipated event. The central bank has indicated a continued inclination towards further rate cuts. The market’s reaction to this move will be particularly interesting to watch, as several scenarios could unfold.

While Chairman Powell has emphasized that there are no clear signs of a recession, the market may perceive this rate cut as a preemptive "emergency brake" to prevent economic downturn. On the other hand, it could stimulate markets, as lower interest rates may make financial conditions more attractive for both consumers and businesses, potentially boosting economic activity.

This delicate balance between market perception and actual economic conditions will be critical in shaping future monetary policy and investor sentiment.

• Fed cuts rates by half point in bid to defend economy
• Bowman dissents in a first by a Fed governor since 2005
• Powell warns not to see half-point cut as Fed’s new pace
• Fed’s growth and inflation forecasts signal soft-landing view    

"The Fed delivered what the market wanted. The market is happy with the Fed. Market is still ahead of the Fed a bit, pricing 75 bps for the year. With unemployment and PCE estimates very close to (the current levels), it’s easy for them to (cut more) than what is in the dots." --Xe Xie

Fed to Kick Off Rate Cuts, Signal Next Steps

18. 9. 2024 - Josef Brynda

The Federal Reserve is widely expected to lower interest rates this week after holding borrowing costs at a two-decade high for more than a year.

By how much, however, remains an open question.

Forecasters largely anticipate the Federal Open Market Committee will reduce rates by a quarter point to a range of 5% to 5.25%, though economists at JPMorgan Chase & Co. expect a bigger, half-point move. Investors see better-than-even odds of a half-point adjustment.

Daily analysis 09/18/2024

18. 9. 2024 - Josef Brynda

Latest news

• Markets anticipate a Fed rate cut, with a 65% probability of a 50 basis point reduction. This decision will significantly impact the US dollar and other currencies.
• The dollar has made modest gains due to better-than-expected retail sales and short-term covering ahead of the Fed decision. This dollar strength affects its relationship with other currencies.
• The yen was the weakest among major currencies due to rising US bond yields. Attention is focused on the Fed's decision and its potential impact on the yen.
• The pound has weakened, awaiting today's inflation data release. The persistence of inflation in services will be a key factor for the Bank of England's monetary policy easing pace.
• The Kiwi dollar has also weakened, awaiting the release of Q4 GDP, which could signal a recession. This data may significantly influence the New Zealand dollar's exchange rate.
• The Aussie recorded slight gains despite US dollar strength. This shows some resilience of the Australian currency against global trends.
• Inflation in Canada fell into negative territory in August, creating a strong argument for a 50 basis point rate cut by the Bank of Canada in October. This could have a significant impact on the Canadian dollar.
• Investor confidence in Germany fell to its lowest level in almost a year, signaling a risk of a hard landing for the German economy. This situation may affect the euro given Germany's importance in the eurozone.
• Traders have reduced expectations for aggressive rate cuts by the ECB for 2024 by 7 basis points. This may influence the future development of the euro.
• Better-than-expected US retail sales supported the dollar. US economic data will continue to be a key factor influencing forex markets.
• Japan's trade balance narrowed less than expected in August, which may affect the yen. Imports and exports lagged behind expectations.
• Gold and oil prices affect currencies of countries dependent on exporting these commodities. Gold fell due to profit-taking, while oil focuses on inventories and Middle East tensions.
• Increased volatility, measured by the VIX index, can affect risk currencies. The VIX rose 2.74% to 17.61, signaling increased market uncertainty.
• Bond markets are pricing in aggressive rate cuts of 250 basis points during the cycle, which would only be necessary in case of a full-fledged recession. This expectation may influence safe havens like the Swiss franc or Japanese yen.
• Reports of Israeli explosives in Hezbollah pagers may increase geopolitical tensions. Such events often lead to strengthening of safe-haven currencies.
• Microsoft and Blackrock's plans for a $30 billion AI infrastructure fund may affect currencies of countries with strong tech sectors, such as the US or South Korea.
• Final eurozone inflation data will be released today. It's expected to remain at 2.2%, which may influence the euro and ECB monetary policy.
• Today's US housing starts data may influence the dollar. An increase to 1318k from the previous 1238k is expected.
• Results from companies like General Mills can influence market sentiment and indirectly currency exchange rates. Attention is focused on company revenues and debt levels.
• Historically, only 3 out of 20 rate-cutting cycles since 1957 ended with negative stock returns in the following 24 months. This trend may influence investors' risk appetite and thus currency exchange rates.
•  

News summary

• The forex market is on edge as the Federal Reserve's rate decision looms, with a 65% probability of a 50 basis point cut. Gains for the US dollar, supported by better-than-expected retail sales data at tuesday. The decision will likely cause significant volatility across major currency pairs, potentially weakening the dollar if a larger cut is implemented, or strengthening it if the Fed maintains a more hawkish stance than expected.
• The Japanese yen has weakened considerably due to rising US bond yields and a less-than-expected narrowing of Japan's trade balance. Meanwhile, the New Zealand dollar awaits Q4 GDP data that could signal a recession. These developments highlight the vulnerability of Asian currencies to both domestic economic performance and US monetary policy. In the coming weeks, we may see increased volatility in Asian currency pairs, with potential for further weakening against the dollar if economic data continues to disappoint.
• The euro faces headwinds as German investor confidence plummets to its lowest level in nearly a year, signaling recession risks for Europe's largest economy. Simultaneously, traders have reduced expectations for aggressive ECB rate cuts in 2024. The British pound has also weakened ahead of crucial inflation data. These factors suggest potential weakness for European currencies in the near term, especially if inflation data surprises to the upside or if economic indicators continue to deteriorate.
• While the US dollar strengthens on positive retail sales data, the Canadian dollar faces pressure due to inflation falling into negative territory in August. This divergence in economic performance could lead to interesting dynamics in the USD/CAD pair, with the potential for Canadian dollar weakness if the Bank of Canada implements expected rate cuts. However, the long-term trajectory will depend on how quickly inflation rebounds in Canada and the pace of economic growth in both countries.
• Gold prices have fallen due to profit-taking, while oil markets focus on inventories and Middle East tensions. These movements in commodity prices can significantly impact currencies of resource-exporting nations. Additionally, increased geopolitical tensions, such as reports of Israeli actions against Hezbollah, may strengthen safe-haven currencies like the Swiss franc and Japanese yen. In the coming months, commodity currencies may experience heightened volatility as markets balance economic data with geopolitical risks.
• Microsoft and Blackrock's plans for a $30 billion AI infrastructure fund could have far-reaching effects on currencies of countries with strong tech sectors, such as the US and South Korea. This development may provide long-term support for the US dollar and Korean won, as increased investment in AI could boost economic growth and attract foreign capital. However, the impact may take time to materialize and will depend on the success and implementation of such initiatives.
• Historical data shows that only 3 out of 20 rate-cutting cycles since 1957 ended with negative stock returns in the following 24 months. This trend suggests that despite current economic uncertainties, there's potential for a positive market outlook once rate cuts begin. For forex markets, this could mean a gradual shift towards risk-on sentiment, potentially benefiting currencies of emerging markets and countries with strong growth prospects. However, the path to this outcome may be volatile, and much will depend on the pace and extent of rate cuts, as well as global economic recovery patterns.

Daily analysis 09/17/2024

17. 9. 2024 - Josef Brynda

Latest news

• The US dollar is trading near its year-to-date lows as markets anticipate potential rate cuts from the Federal Reserve.
• Speculation about a 50 basis point rate cut from the Fed is increasing, which could significantly impact the dollar's value.
• Activity currencies like the New Zealand dollar, Australian dollar, and British pound gained against the US dollar.
• The Canadian dollar weakened due to expectations of a larger rate cut from the Bank of Canada.
• The Japanese yen reached its highest levels in a year, with USD/JPY briefly trading below 140.
• Market focus is on the upcoming US retail sales data and the Federal Reserve's interest rate decision.
• Economic data releases, including US retail sales, Canadian CPI, and the German ZEW survey, are likely to influence forex markets.
• Volatility remains relatively low, but uncertainty surrounding the Fed's rate decision is keeping markets cautious.
• The DXY index trades close to its year-to-date lows that were printed in August.
• Expectations for the European Central Bank's rate cuts are also influencing currency movements, with around 37.5bps of cuts priced in by the end of the year.
• Oil prices trading near a one-week high could impact commodity-linked currencies.
• Gold holding steady near a record high may affect safe-haven currencies.
• The upcoming FOMC meeting tomorrow is a key event that could cause significant forex market movements.
• The Bank of Japan's decision this week is another important factor for the yen and broader Asian currencies.
• Copper's rise and speculation about Chinese economic support could influence the Australian dollar and other commodity currencies.
• European gas prices slumping to a six-week low may impact the euro and other European currencies.
• The NY Fed Empire manufacturing data came in better-than-expected, potentially supporting the dollar.
• Traders have priced in around 118bps in cuts for the rest of the year from the Fed, which could affect dollar strength.
• ECB Chief Economist Philip Lane's comments reinforced the idea of a rate cut in December rather than October, potentially impacting the euro.
• The overall risk-on sentiment in the market could lead to weakness in safe-haven currencies and strength in riskier, high-yielding currencies.

News summary

• The US dollar is trading near its year-to-date lows as markets increasingly expect rate cuts from the Federal Reserve. Speculation about a potential 50 basis point cut is growing, which could substantially weaken the dollar. The DXY index is hovering close to its August lows, reflecting this bearish sentiment. With approximately 118 basis points of cuts priced in for the rest of the year, the dollar may continue to face downward pressure against major currencies.
• Currencies associated with higher-risk appetites and economic activity, such as the New Zealand dollar, Australian dollar, and British pound, have gained ground against the weakening US dollar. The rise in copper prices and speculation about Chinese economic support could further boost the Australian dollar and other commodity-linked currencies. However, the Canadian dollar has weakened due to expectations of a larger rate cut from the Bank of Canada.
• The euro's movements are being influenced by expectations of rate cuts from the European Central Bank, with about 37.5 basis points of cuts priced in by year-end. ECB Chief Economist Philip Lane's comments suggesting a rate cut in December rather than October could provide some near-term support for the euro. The slump in European gas prices to a six-week low may also impact the euro and other European currencies, potentially weakening them against currencies from regions with more robust energy markets.
• Market focus is on several key events and data releases that could cause significant forex market movements. These include US retail sales data, the Federal Reserve's interest rate decision, Canadian CPI, the German ZEW survey, and the Bank of Japan's policy decision. The FOMC meeting tomorrow is particularly crucial and could trigger substantial currency fluctuations depending on the Fed's stance and forward guidance.
• While overall volatility remains relatively low, uncertainty surrounding the Fed's rate decision is keeping markets cautious. The general risk-on sentiment could lead to continued strength in higher-yielding, riskier currencies at the expense of safe-haven options. However, this sentiment could quickly shift based on the outcomes of the upcoming central bank meetings and economic data releases.
• Based on these factors, we might expect to see continued weakness in USD pairs, particularly against activity currencies like AUD/USD, NZD/USD, and GBP/USD. The EUR/USD could see some volatility but may find support if the ECB maintains a less dovish stance than the Fed. USD/JPY could continue its downward trend, especially if the Bank of Japan signals any shift away from its ultra-loose monetary policy. Commodity currencies may outperform, with potential gains in AUD/USD and NZD/USD, while USD/CAD could see some upward pressure due to expectations of larger rate cuts in Canada.

Graphs

9. 9. 2024 - Josef Brynda

USD Performence                                                              Consumer price index

Policy rate decisions since the pandemic