Hardships of transfer or flight from risk

Negative data on the Japanese GDP fastened the idea of a technical recession

One more nervous week added several problems to the financial markets: dramatic decrease of quotes of the shares of European banks, the idea regarding the possibility of negative rates - this time on the part of FRS, another recession in Greece, the growth of the probability of new stimulus measures taken by ECB and the Bank of Japan, possible bankruptcy of North American manufacturers. High volatility is ahead.

The global banking system based on the central banks' policy, securities not supported with real assets and debts that are impossible to pay is gradually falling apart before our eyes. Thursday, February 11, 2016, produced another signal regarding serious problems of the present-day financial schemes. The famous oil/gold indicator (i.e. how many barrels can be purchased for an ounce of gold) broke its historic record registered during the financial crisis of 1893 - more than 41 barrels for 1 ounce. 15.5 barrels for an ounce was the average ration, if the indicator showed below 12 barrels, it was considered that oil was too expensive, if over 20 - too cheap. Exceeding level 24 to 1 was already seen as the indicator of the coming crisis; therefore, there are grounds to believe that all the present problems will exceed all the previous ones in scale.

As early as in December 2015, market players began a massive drift towards the last reserves - gold and silver, the number of both stock transactions and the purchases of the precious metal made by individuals is growing. Within one and half month of this year, the price of gold has returned to the levels of last February. Top analysts, including bank analysts, continue to recommend their customers to get rid of any problematic or suspicious bank papers.

The protocol of FRS meeting published this week is expected to be balanced and will hardly surprise with anything, so will housing market, production, and consumer prices reports. The absence of the Chinese market did not help the general recovery - the market is set for the fall of US dollar, however, it managed to grow slightly (for the first time for the last 2 weeks) due to the growth of retail sales and a technical pull back of oil prices. The Chinese market returned with mixed trade balance statistics and new NBC injections for 10 bln yuans on Sunday and the same amount on Monday. Yesterday's growth of Chinese yaun turned out to be the strongest for over ten years (by 1.20%), that is maximum since the time of its fixation to US dollar in 2005.

For the last two weeks, euro has completely ignored economic indicators and has moved exceptionally due to the closing of short positions. On Tuesday, when Draghi will appear before the European Parliament, he is expected to give hints to the increase of financial stimulation next month, and the chances are high considering dramatic fall of European shares last week and increase of the yield of papers that belong to peripheral countries. The threat of Britain's pull out of the EU was supported by a new wave of talks regarding Greece's pull out and large-scale protests organized by Greek farmers against the pension reform planned by the government.

The following can be mentioned from among the other news:

  1. On February 9, Deutsche Bank shares fell to never-before-seen levels - that had never happened even during the critical phase of the first wave of 2008 crisis; however, they grew by 8% on the following day on the information that the bank was going to redeem its papers of older issues immediately. Such actions in the midst of other problems worsen the general condition and the bank's liquidity. It is clear that Germany (and/or EU) will be active saving this giant; however, how much energy and money will be spent for that and if those attempts will be successful - it is not clear.
  2. Not paying attention to the problems of the stock market and those pertaining to the financial sector, Chinese gold reserves for January grew by another 16 tons; in totality, since July 2015, China has added 120 tons of gold to its reserves. Taking into consideration traditional distrust regarding any Chinese data, it may turn out that the official numbers are too underrated and, possibly, the Chinese gold reserves, by their size, already ranks the first in the world noticeably exceeding the American reserves. The threat of a banking crisis will make precious metals the only way of escape, and Chinese authorities understand that perfectly well and act accordingly.
  3. For the first time in three years, tankers with Iranian oil have been sent to Europe. Iran has reduced prices for Mediterranean processing plants in order to win in the competition and insists that it is the first oil which the country has produced since Western countries cancelled sanctions due to the Iranian nuclear program.
  4. Yellen's speech, as it was expected, has not added any clarity or stability ("growth conditions have worsened, but we expect improvements"), China is quality of provoking a fall on global stock exchanges, etc. Nothing new has been said, investors have swallowed the hint regarding rate decrease, but refused to stop the decline. In the result, FTSE100 Index has lost 2.4% within one week and approached a minimum of four years.

This week is expected to be quite calm, without any force-majeure circumstances, and with the movement in the boundaries of the current ranges. Negative data on the Japanese GDP fastened the idea of a technical recession, and the trust to sweet-voiced Japanese officials is deteriorating. USD/JPY returned to level 114, where it was last Wednesday for the last time, copying the dynamics of stock indexes. Long-term risks have shifted to 117.76 - 118.00. Strong intraday supports 113.26/113.02, 111.53/111.30, 110.80/110.05; resistances 112.92/112.98, 113.52/ 113.70, 114.22/114.43. Market makers' key mark from above - 118.86. In case of trading above that the price may make a significant upward movement. Presently, downward perspectives are more preferable.

作者: Navsher Bartash,
ForexChief Currency strategist