06
Dec
06
Dec

Vestle Daily Analysis - VIX Up, Stock Indices Broadly Decline, Yield Curve Inversion Worries

The US dollar further improved against other major currencies on Wednesday and Thursdays morning. Especially emerging market currencies were overall trading again weaker against the greenback over the course of this week, with the Indian rupee (INR) or the Turkish lira (TRY) losing more than one percent against the dollar compared to the previous week. Even the South African rand (ZAR) traded weaker, despite the better-than-expected GDP statistic released on Wednesday.

Oil prices traded roughly unchanged ahead of the much anticipated OPEC+ meeting, which is set to take place on Thursday. While the strong dollar might had somewhat adverse impact on gold prices, no significant downside was seen. Some analysts mentioned the inversion of the US Treasury Note yield curve as a factor supporting higher gold prices.

Equity indices broadly declined on Wednesday and extended losses on Thursday morning, while the Volatility Index (VIX) traded up for the third consecutive day. Markets were concerned about the possible fall-out over the detention of the CFO from the Chinese telecom company Huawei in Canada following a request from the US possibly over alleged violations of Iran sanctions.

In the US the Challenger job-cut report, the ADP employment report, data on nonfarm productivity, unit labour costs, jobless new claims and the trade balance for October, the ISM non-manufacturing index and factory orders data for October will be released. Canada also discloses its trade balance followed by the Ivey PMI.

In the Asian-Pacific trading session from Japan data on household spending and from China on its trade balance is expected.

EUR/USD

The euro ended the day again almost unchanged against the dollar but traded then lower on Thursday morning in line with the performance of other major currencies compared to the greenback.

On Wednesday the European Commission released a proposal to improve the role of the common currency in international payments and as a reserve currency. This move comes as other countries like China or Russia seek to boost the trade in currencies other than the US dollar, especially since the US under US President Trump moved away from the deal with Iran that was brokered by his predecessor.

German factory orders were reported higher for October at +0.3% m/m, contrary to expectations of a decline. On Friday the EU will release its gross domestic product (GDP) figures for the third quarter of the year. Italy publishes its retail sales numbers and Germany and France release their industrial production statistics.

The EUR/USD chart

Gold

Given the again stronger dollar, gold prices fell marginally from the highest level since October. Analysts explained that the inversion of the yield curve for US Treasury Notes could be seen as a sing of caution about future economic growth and could possibly also affect the strength of the dollar. Currently US Treasury Notes with a maturity of 5 years have a lower yield compared to those with a 3 year term. Under normal market conditions bonds with a longer term maturity tend to have higher yields compared to bonds with a shorter term. Markets could be worried over this development as in the past situations with an inverted yield curve in some cases accurately indicated worsening economic conditions and even recessions.

Also the 10 Year US Treasury Note, which is often used as a benchmark indicator for interests on safer assets sharply declined to the lowest level since September. In theory gold can benefit from falling yields on other assets that might be deemed a ‘safe-haven’, as the difference in interest generated decreases between those securities and gold which does not bear any interest at all.

The Gold chart

WTI Oil

Oil traded roughly unchanged on Wednesday ahead of the much anticipated OPEC meeting. Many analysts believe that with the agreement of Saudi Arabia, Russia and other stakeholders in the so-called ‘OPEC+’ group a resolution to reduce production by at least around one million barrels crude oil per day is possible.

Reports indicate that Libya is closing oil ports due to bad weather and production is expected to further decrease as storage facilities are near capacity. This move reportedly decreased oil production by 150 thousand barrels per day and further reductions seem possible.

The Energy Information Agency is yet to release its data on crude oil, gasoline and distillate stockpiles this week. The release data was pushed from Wednesday to Thursday due to the National Day of Mourning following the death of the former President George H.W. Bush.

The WTI Oil chart

US 500

US stock indices further extended losses on Thursday pushing closer to the low from mid-November. The negative move came despite stock markets like the NYSE being closed in honour of the former President George H.W. Bush. According to some analysts market could have adversely reacted to the news that a key executive of the Chinese telecommunication company Huawei was detained in Canada on an extradition request from the US possibly due to alleged violations of Iran trade sanctions. This development could further escalate the conflict between the US and China, while the leaders of both countries recently tried to take some steps to the normalization of their relationship.

On Thursday in the US the Challenger job-cut report, the ADP employment report, data on nonfarm productivity, unit labour costs, jobless new claims and the trade balance for October, the ISM non-manufacturing index and factory orders data for October will be released.

The US 500 chart

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