Yellen’s benefit performance: oil and the falling dollar

The research of the ECB demonstrates that the banks within the eurozone expect decrease in a net profit by 20%

The dollar gives up most gains in the market, but on Friday the situation has improved. Attempts to find the positive shifts in the eurozone economy, Draghi constantly talks about, remain unsuccessful. The subject matter of Yellen’s speech was too vague, and therefore market’s expectations from a «dress rehearsal» before September meeting, as always, have not been met.

All the European data slightly move around a certain zero point and once again prove that all measures taken by the European Central Bank do not work. The filling the banks with the «empty» money does not lead to the inflation growth: money are not directly put into real economy sector, and intermediaries (banks) even under low interest cannot give these to either consumers, or producers. The data from the UK are encouraging: the provisional estimate shows the GDP growth by 2,2% in the second quarter, and increase in business investments by 0,5%.

The research of the European Central Bank demonstrates that the banks within the eurozone expect decrease in a net profit by 20% for the first time in three months of this year, so that all main sources of profit of the banks - crediting, trade, charges and the commissions – actively decrease. Not all banks cleared their balances of the debt burden and along with insurance companies have serious problems because of low interest rates. This poses even higher risk for the European economy and currency, than the Brexit consequences.

The new conflict arises: the Ministry of Finance of the USA considers that the European Commission (within investigation of intragroup transactions of Apple, Amazon.com and Starbucks Corp corporation) breaks the international tax rules and regulations, as well as the status quo in the sphere of transfer pricing. Furthermore, since 2014 the EC began to consider the tax benefits in a number of the countries as a form of the state help which directly breaks the prohibition on similar actions operating in the EU. It can lead to collection of the additional taxes from the American corporations. Development of this situation is recommended to be monitored by those who work on raw and corporate assets.

There is no certainty in the speech of the head of the Federal Reserve on terms, any new financial instruments (all hope is only on purchase of bonds), and the next promises to hold rates during the long period. Probably, the data of the next NFP (on September 2) will clarify the issue. Only 3 months left for the FRS face saving that is unreal term for the promised double raising of a rate. This week we will wait for more sensible and less emotional assessment of what the Chairman wanted to tell.

Last week the verbal wars in the oil market became more active that reminds a situation before a meeting in Doha in the spring this year. New information constantly came to the market so that the quotations reacted. On Friday oil prices grew after the data on the attack of rockets from Yemen to oil objects in Saudi Arabia.

Nevertheless, it is Saudi’s who deemed to have initiated the meeting in Algeria on September 26-28. Most of the Arab analysts state that the situation in the market does not require intervention, but possible fixing of volumes of production at the current levels will be the positive phenomenon. It is possible to expect decisive steps from OPEC if the cost of oil starts falling, but the serious increase in prices is also unprofitable. Stable level (especially at a mark of $60) can return oil producers to the American market, and therefore the American industry can put the constraining pressure upon any agreement on freezing of oil extraction.

From the additional information it is possible to note the following:

  1. There have been the strange things in the market of metals: a certain large player made the decision to derail the market, having sold contracts for the amount of $1,5 billion in one minute, but pressure upon the market didn't stop on it. Sale of large lots (up to 10 thousand contracts) continued for several hours, naturally, gold fell in price by $10 for ounce. Similar reaction was observed on silver then there was a technical kickback of the price which was met by a new wave of sales. As a result, the cost of precious metals dropped even lower. One of the main indicators of the market of precious metals – the gold/silver ratio-returned to the marks on which it was prior to a referendum in the UK. It is difficult to estimate global effect of this manipulation so far, but it is worth being especially attentive next week.
  2. Finland plans to make an experiment on the guaranteed minimum income in 2017. The bureau of social security of Finland (Kela) will choose 2000 people for receipt of a social benefit of about €560 per month. We will remind, the similar referendum in Switzerland was not approved by citizens (though there it was offered to pay more than $2500), the Finish positive result can quite revive the similar idea.
  3. Saudi Arabia is almost ready to enter the debt market in the closest months - the sale of bonds already began. The low oil prices force the local authorities to receive bank loans, withdrawing a money supply from the system and urging on growth of credit rates. Since March of the current year, the government has been paying by bills of exchange for state procurements instead of cash payments. According to Bloomberg, the total amount of 5-year credit and default swaps to Saudi Arabia has already reached $1,1 billion that is an absolute record for all history of the kingdom. There is a mass buying up to ensure the country will avoid the default - the additional loans will press on the budget, and traders already count this risk. So increase in prices for black gold anyway will be beneficial for a financial position of Saudi Arabia.
  4. The opposition of the European Central Bank and Deutsche Bank begins to affect the bank’s clients. Deutsche Bank considers that the monetary policy of the European Central Bank has become the reason of accumulating of too large volume of unsecured derivatives, and it evidences the risks of destabilisation of all the financial sector of Europe. The DB securities have already fell to the minimum level for all history and if activities of bank become unsuccessful, then savings and pension plans will face the fatal consequences. Whereas the majority of sovereign bonds, including 10-year German bonds as a part of portfolios of many insurance companies demonstrate negative yield, the future pensioners will have think of economy.

It is worth paying attention this week to the release of the report on GDP of Japan in the second quarter, as well as the data on consumer prices, retail sales and employment in the UK. The pound has the next opportunity to update the minima.

EUR/USD: Friday has slightly corrected key levels. Intraday resistance: 1.1250 - 1.1320 - 1.1295 - 1.1309 - (1.1332/1.1336) (strong) - (1.1354/1.1370). In case of steady trade in higher than 1.1295 following purpose there can be a mark 1.1400. Intraday supports: 1.1178 - 1.1138 - (1.1111/1.1100) (very strong) - 1.1077 - 1.1000 (very strong). For breakdown the strong information background is necessary down, current week NFP can only be it.

USD/JPY: Intraday supports: 101.80 - 101.00 - 100.50 - (100.09/99.82) (strong) - (99.44/99.15) (protection of market makers). The main resistance - 102.90, at breakdown is possible the movement to the levels 103.20 - 103.60 - 104.00 - 104.40. After the test of a mark 101.80 the course has grown to 102.25 at opening of week. Strong positions for sale remain about 102.30 and above, and large warrants for purchase are visible in the area 101.60 below. It is necessary to pay attention to the Japanese statistics within a week.

Author: Alexander Ward,
ForexChief Currency strategist