The US government Keeps the Drama Looming

Daily Analysis - 22/01/2018

The US government Keeps the Drama Looming

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The US government keeps the drama looming while the earning season is promising and Central Bankers pave the way for future normalization of their policies.

Netflix – A great early indicator of risk appetite


Netflix Inc’s (NFLX.O) quarterly report on Monday may offer an advanced preview of whether Facebook, Amazon and other heavyweights behind much of the U.S. stock market’s record-breaking rally can keep delivering.

Netflix is due to report its quarterly results on Monday after the stock market closes and so far, it had jumped nearly 15 percent this year alone, outpacing the S&P 500’s 5 percent increase. Last year Netflix surged 53 percent.

According to the quarterly report on Oct. 16, Netflix added more global subscribers than analysts had expected. In response, its stock hit a record high in after-hours trade before dipping the following day.

On the other hand, Netflix hiked U.S. prices for the first time since 2015, potentially providing more cash to produce original content, but also increasing the risk of losing customers.

Based on the forecast Netflix is expected to add 6.3 million subscribers worldwide in the December quarter, which would bring its global customer base to nearly 115.6 million.

Analysts on average expect a 32.5 percent jump in revenue to $3.28 billion, and net income of $186.3 million, up 179 percent. Analysts expect earnings per share of 41 cents.

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US Government Shutdown helps the Yen rise


On Monday, the European and US economic data releases are quiet which is likely to put sentiment trends at the forefront as the trading week begins. FTSE 100 and S&P 500 future stock indexes are pointing lower before London and New York come online, hinting at an overall risk-off bias. That may imply gains for the Japanese Yen as investors unwind carry trades funded in the standby low-yielding currency.

The ongoing US government shutdown is among the stories shaping the markets’ mood in the short term. Congress failed to agree upon a budget deal over the weekend. The longer the impasse lasts, the greater headwind it will represent for overall economic growth, and thereby for market-wide risk appetite. In the 2013 shutdown, the number of executive-branch employees who were affected on a given day peaked at 850,000, or about 40 percent of the workforce.

In the forex market, DXY, the dollar’s index against a basket of major currencies fell about 0.2 percent from late last week to 90.465, not far from the three-year low of 90.104 touched on Wednesday, before edging back to 90.63.

Many see minimal impact on the economy from a short-term government shutdown. Analysts say a prolonged deadlock in Washington could dampen investors’ confidence in U.S. assets.

“The markets had not expected this shutdown. Given that U.S. share prices have rallied strongly since the beginning of the year, we have to see if this event is a trigger to change the market trend,” said Takafumi Yamawaki, head of Japan fixed income research at JPMorgan Securities.

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The Strong Euro: Pros and Cons


The ECB meeting this week won’t produce any substantive change in policy, although the press conference could bring dovish commentary from President Mario Draghi.

Euro strength has become a concern for policymakers in recent weeks, and its nearly 5% above the ECB’s 2017 year-end expectation of 1.1700.

The euro opened the day 0.4 percent higher at $1.2275, but it stopped short of testing Wednesday’s three-year peak of $1.2323 and pared back much of the gains to trade at $1.2230.

The common currency was also helped after Germany’s Social Democrats (SPD) voted on Sunday to begin formal coalition talks with Chancellor Angela Merkel’s conservatives, moving Europe’s biggest economy closer to a stable government after months of political deadlock.

The Euro’s performance against the US Dollar finally started retracing back last week, with the EURUSD pair slipping back by -0.16% despite the US government being on the precipice of a shutdown. But gains were still widespread elsewhere, with five of the seven major EUR-crosses turning in positive performances over the past five days: EUR/AUD added +0.82% and EUR/GBP gained +0.78%.

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BOJ Policy Announcement


On Tuesday the Bank of Japan is seen keeping policy on hold at the conclusion of its two-day rate review, including a pledge to keep short-term interest rates at -0.1%, while painting a slightly better picture of the economy. Governor of BOJ, Haruhiko Kuroda will also hold a press conference afterward to discuss the decision.

The expectations that the central bank is setting the framework to begin discussions on winding back its quantitative easing program. Normalizing policy sooner than expected is concluded from a small reduction in the purchase of long-dated Japanese Government Bonds (JGB) by the BOJ earlier this month, which triggered speculation the Federal Reserve and ECB are going to follow.

Meanwhile, Thursday's inflation report is expected to show consumer prices posting a 12th straight month of gains in December, although remaining behind the BOJ's 2%-target.

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