Tag Archives: China and Emerging Markets

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Top Priorities for China’s Economy in 2017

China’s Market News: Top Priorities for the Economy in 2017

By Renee Mu, Currency Analyst, DailyFX

 Yuan Rates

- The Chinese currency gained against a basket of currencies last week despite losses against the U.S. Dollar. While the Yuan weakened -0.77% onshore and -0.56% offshore against the Dollar, all three Yuan indexes increased over the same span of time. The CFETS Yuan Index, BIS Yuan Index and SDR Yuan Index rose +0.31%, +0.48% and +0.38% respectively.

Data downloaded from Bloomberg; chart prepared by Renee Mu.

At the same time, both onshore and offshore Yuan borrowing costs remained elevated, although for different reasons.

In the onshore market, the PBOC has been injecting cash in the effort to meet the liquidity need. On Monday, the Central Bank added a net of 65 billion Yuan through reverse repos; however, Yuan funding costs from overnight to 1 year in Shanghai interbank market continued to climb up. In specific, 1-month and 3-month SHIBOR hit the highest levels since July 2015; 1-month SHIBOR has increased for 28 trading days in a row and 3-month SHIBOR rose for 43 consecutive trading days.

While the onshore tightening is mostly resulted from increasing demand in liquidity, the offshore uneased condition is more likely led by intended cuts in supply. The overnight HIBOR remained at 10.00%, which makes it relatively expensive to short the Yuan.

Market News

Sina News: China’s most important online media source, similar to CNN in the US. They also own a Chinese version of Twitter, called Weibo, with around 200 million active users monthly.

- Chinese top policymakers have set strategies for the economy in 2017 at the annual Central Economic Work Conference held last week. Here are the highlights and analysis:

* Maintaining stability while seeking progress will be the main theme for 2017. Stability is the prerequisite for reforms.

China’s economic growth has slowed down to 6.7% in the first to third quarter in 2016. It is expected to drop further to 6.5% in 2017 according to a report released by the Chinese Academy of Social Sciences, a leading Chinese think tank, on December 19th. Within such context, maintaining stability in the economy as well as in financial markets has been set as the country’s top priority among all.

* The fundamental issue that China faces is a severe structural imbalance. Supply-side reforms, as the solution, aim to improve the quality of supply and eventually meet demand.

Chinese policymakers see supply-side reforms to be inevitable when solving this fundamental issue and will continue to implement reforms despite of short-term pains brought by them.

A good example for balancing stability and reforms is the recent regulators’ move on the coal market. Coal producers have been required to cut excessive capacity since the beginning of 2016. As it approach to winter, coal prices began to soar in October amid concerns and speculation on insufficient supply of utilities. On one hand, the National Development and Reform Commission (NDRC) worked with coal producers and commodities exchanges in the effort to maintain short-term stability in supply and price. On the other hand, the regulator reiterated that coal producers will still need to reduce low-quality supply in a longer term.

* Adopting a more proactive fiscal policy while keeping the prudent monetary policy.

We may see more fiscal measures designated to support the economy over the following periods, such as increased fiscal budgets, additional tax cuts as well as government-led projects; monetary policy may be used more to deal with the liquidity dilemma.

* Increasing the priority of preventing financial risks. Curbing asset price bubbles.

More tightened rules on financial markets are likely to be introduced from top regulators, including the PBOC, CSRC, CBRC and CIRC.

* Properties are for residential or commercial use, not for speculation.

The Conference emphasized on the real estate sector in specific, restricting loans to be issued to speculators in the housing market. China’s Central Bank will likely continue to work with local governments and commercial banks to strengthen oversight on home loans.

* A top priority is set to reduce corporate leverage.

Debt-to-equity swap has been introduced as a major solution; private companies are also encouraged to use other market-driven approaches to reduce their high leverage.

China Finance Information: a finance online media administrated by Xinhua Agency.

- The PBOC will include off-balance sheet wealth management products (WMPs) into its Macro Prudential Assessment, a system to evaluate banks’ risks, beginning in 1Q 2017. This measure was first mentioned in October, as a move of the Central Bank to strengthen oversight on commercial banks.

Reprinted with permission of the publisher. The above story can be read on the website www.dailyfx.com. The direct link is: 


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The Outlook For 2017: International

This story was originally published on 6th December 2016. It has now been re-published to make it available to a wider audience.

Equity strategists and economists provide their views and forecasts for the global economy in 2017.

- Stronger global growth
- Trump offers hope, and risk
- Europe offers political risk
- Emerging markets to outperform

By Greg Peel

Strategists agree on at least one thing in their outlooks for 2017 – it will be a potentially more volatile year than 2016. That’s not particularly comforting for investors given the volatility experienced throughout the year now coming to a close.

2016 began with a collapse in commodity prices, particularly oil, and a collapse in global bank shares, given concerns over the potential bankruptcy of major European banking houses. The counter was a rush to the bottom among central banks in terms of policy easing, compounded by the Fed holding off, and holding off, and holding off again with a rate hike. Yield stock valuations soared globally.

In the middle of the year we had Brexit. No one saw that coming. Commodity prices managed to rebound somewhat on supply-side constraints, before surging ahead once more on Chinese government production restrictions and the anticipation of, and eventual delivery of, OPEC production cuts (effective from January).

Expectations for a Fed rate rise grew and grew thus when the whole Brexit scare proved (so far) to be misguided, we soon saw a violent shift in investor allocation as previously oversold commodity stocks rebounded strongly and previously overbought yield stocks were dumped.

Then along came Trump. No one saw that coming.

As had been the case with regard Brexit, the worst was feared and all and sundry were proved wrong. Trump would of course be great for America. Or at least Wall Street. Presumably.

And strategists are suggesting 2017 is going to be even more volatile?

The buzzwords for 2017 are “political risk”. Not that we haven’t experienced political risk in recent times. We recall that the word that gave us “Brexit” was “Grexit”. We recall that not so long ago, the US government shut down. But 2016 gave us Brexit, and Trump, and possibly a developed market-wide seismic shift in voter perception and power. The workers are revolting, against globalisation, the GFC and what has transpired in the eight years hence.

2016 was the year of Farage, Hanson and Trump, and the Orange by-election. 2017 could be the year of Marine Le Pen and a possible Frexit, another Far Righter in the Netherlands and a possible Nexit, and an Italian comedian offering a possible Italeave. Germany, too, goes to the polls next year.

But before we get to the potential collapse of the EU, we have Trump.

Trump won the US election on policies of building a wall on the Mexican border, locking up Hillary Clinton, tearing up the TPP, NAFTA and the NATO and Pacific alliances, declaring Beijing a “currency manipulator” and whacking a 45% tariff on Chinese imports, while cutting the US corporate tax rate from 35% to 15%.

“Lock her up” went out the window as early as Trump’s victory speech. The Wall will partly be a fence. The Japanese prime minister left New York happy he could work with a Trump presidency. To date, many of Trump’s campaign “promises” appear to have been watered down and the man does not even take office until late January.

Few believe a full 45% tariff on Chinese exports is even remotely likely. A 15% tax is a very long way down from 35%. There is much faith being placed in Trump’s infrastructure intentions, but even if they do ring true, Rome wasn’t built in a day.

In other words, despite a full sweep of houses for the Republicans – upper lower and White – no one is really sure just what a Trump presidency might bring.

Markets do not like uncertainty.

The Global Economy

Morgan Stanley believes the global recovery is likely to gain more momentum in 2017, driven by faster US growth, stable developed market growth and rebounding emerging market momentum. But the strategists warn that while global growth may become more balanced, material risks emanate from fiscal stimulus, faster Fed rate hikes and a wider globalisation backlash.

The good news is global GDP growth should push back towards its historical average, Morgan Stanley suggests, with faster growth in the US and Japan offsetting a slower Europe, and a rebound for commodity-exporting emerging economies offsetting a gradual slowdown for China.

The bad news is the 2017 outlook is subject to material uncertainty, thanks to a new US administration taking office, key ballots in Europe and the formal start of Brexit.

Commonwealth Bank’s economists agree with Morgan Stanley that the global growth rate should move towards its historical average, rising 3.3% in 2017 and 3.5% in 2018 on their forecasts. This is still short of the average of 3.7%, but well above the 2.7% assumed for 2016.

CBA suggests global economic policies, particularly fiscal policies, will spill over into financial markets next year. Already the UK government has announced a large fiscal stimulus package intended to ward off the negativities implied by Brexit. Meanwhile, Donald Trump is expected to “unleash a very large fiscal stimulus” in the US, CBA notes.

The economists also expect Europe to be the centre of political risk.

Citi’s global strategists note “easier” fiscal policy (stimulus) and a shift away from super-accommodative  monetary policy was already underway ahead of the US election but Trump has “potentially supercharged” this theme for 2017-18.

To gauge some idea of what might transpire, Citi is not alone in making the comparison to the last Washington outsider candidate who pledged to “make America great again”, Republican pin-up boy Ronald Reagan. While the period 1980-85 is not, by Citi’s admission, perfectly comparable, that experience suggests bond yields rise and the US dollar rallies well before fiscal deficits actually begin to widen (spending kicks in).

We have already seen substantial moves in both.

Goldman Sachs is another house assuming a pick-up in global growth next year. But Goldman does not believe stronger US growth will do much for asset classes beyond shift the narrative from “low-flation” and monetary accommodation towards reflation and rising rates. This will not change the fact that the trend growth rate of GDP appears to have fallen for both advanced and emerging economies during the post-GFC period.

Meanwhile, valuation levels for equities and especially bonds remain highly elevated by historical standards, Goldman notes, so expected returns appear to be low across most asset classes. In fixed income, yield is scarce, and in equities, growth is scarce.

Many of the fundamental drivers behind declining trends in developed market GDP growth are likely to remain weak for the foreseeable future, the investment bank believes. One of the sustained headwinds for economic growth in recent years has been the declining growth rate of the working age population. Productivity growth is also low, so has been no offset to the demographic drag.

Asset manager Blackrock is of a similar opinion.

Ageing societies, weak productivity growth and high levels of public debt will, in Blackrock’s view, limit the future pace of economic expansion and the ability for central banks to raise rates. The asset manager believes that from today’s depressed level, the average developed market ten-year bond yield will only rise by 50 basis points over the next five years.

On that basis, Blackrock does not see asset valuation multiples, elevated due to low interest rates, reverting to historical averages over the period. Equities should outperform fixed income over that time.

The United States

Morgan Stanley expects the US dollar to “break out” to the upside. Inflation will rise, and the Fed will be forced to tighten monetary policy more rapidly than assumed pre-Trump. While fiscal stimulus will help growth, it must not be forgotten that higher interest rates mean tighter financial conditions.

Current corporate debt levels are unprecedented outside a recession, Morgan Stanley points out. Stronger earnings will help but higher interest rates will not, and “the Fed could push us to the edge quicker”. To justify current Wall Street valuations, investors need to believe in modest growth, support from central banks and low defaults, and not just for the next year.

Markets anticipate defaults one year in advance, Morgan Stanley notes. Lower defaults in 2017 are “in the price”, rising defaults in 2018 are not.

The investment bank is presently tracking 2016 US growth at 1.6% year on year and has lifted its 2017 forecast to 2.0% and introduced an initial 2018 forecast of 2.0%. These numbers are consistent with Fed forecasting.

CBA had been forecasting 1.7% growth in 2017 but has now lifted that to 2.3% and has introduced a 2018 forecast of 2.6%, attributing the strength to “Trump’s fiscal pump-priming”. The economists expect promised cuts to personal and corporate taxes to be delivered in the first half of 2017, driving a pick-up in consumer spending and business investment.

There are nevertheless a couple of caveats.

Most of the value of the cuts to personal income tax will accrue to high income earners with high savings rates, CBA warns. And there is a risk in the form of the inevitable infrastructure time lag – large infrastructure projects are typically complex and take time to implement.

CBA, too, expects the fiscal boost to the US economy when it is already close to full employment will lead to higher inflation, a stronger US dollar and higher interest rates. The economists expect the Fed to lift its funds rate range by 50 basis points in 2017, to 1.00-1.25%, and another 50 in 2018, to 1.50-1.75%.

Goldman Sachs expects four Fed rate rises between now and end-2017.

These forecasts are in line with Morgan Stanley’s expectations of a “quicker” Fed. Prior to Trump’s election, and backed by constant talk from the Fed of “gradual” tightening and running the US economy “hot”, markets were pencilling in one 25 basis point hike in each of 2016, 2017 and 2018.

Morgan Stanley has retained its pre-Trump US stock market forecast, suggesting a base case 2300 for the S&P500 in twelve months (current level circa 2200). However the strategists now see more upside to their bull case than downside to their bear case. The same 2300 target is reached on a combination of a stronger earnings forecast and a lower PE multiple forecast, which the strategists see as “prudent”.

Morgan Stanley is the first to admit it had a bad year in 2016, following five consecutive years of portfolio outperformance. The strategists were caught out by “huge factor reversals, crowding and unwinds”, despite their overall market call a year ago proving to be quite accurate. Many an investor will have been caught in the same violently revolving door of rapid asset reallocation.

The strategists expect uncertainty and volatility will be a greater threat in 2017 given the Republican Sweep and impact this will clearly have on some policies. Big changes to interest rates, or moves in the US dollar or oil, and a different policy outlook will have a dramatic impact upon which market segments lead and lag the overall index. The strategists gut instinct is to “fade” current optimism about reflation and be prepared for a bit of legislative gridlock, despite the Republican Congressional majority, relative to current consensus banter.

“Fading” is trader-speak for incrementally selling into, or taking profits on, a rising market. Morgan Stanley’s best guess is to stay long the reflation trade until close to Trump’s inauguration and then fade it sometime after that.


Trump’s 2016 election shocked the world. In 2017, a five-year change to China’s top leadership team will take place, followed by a five-yearly government reshuffle in 2018. While there is little doubt ultimate leader Xi Jinping will be granted another go-round, the make-up rest of the seven member leadership team is considerably uncertain.

These pending changes should keep Chinese policy-makers risk averse in the meantime, CBA suggests, given no one wants questions raised over his/her running of the world’s second largest economy.

CBA is forecasting 6.8% GDP growth for China in 2017, slightly better than 2016’s expected 6.7%, and above consensus of 6.4%. Growth is then expected to moderate to 6.6% in 2018 as China gradually converges towards slower structural growth rates.

Heading into 2017, the Chinese economy should be boosted by a lower exchange rate and a stronger US economy providing support to export growth, CBA suggests. Import growth should remain moderate due to a cooling housing market and easing consumer spending. A big spike in government expenditure in 2016 should be dialled back in 2017.

Of course there remains one small issue that leads the CBA economists to warn the risk to their 2017 forecasts lay clearly to the downside. If Trump does indeed follow through with threats to name China as a currency manipulator and imposes a 45% tariff on imports from China, it could reduce China’s GDP by a full percentage point in the first year.

But if there is a major disruption to global trade flows, CBA would expect the Chinese government to renew policy easing to support economic growth.

Morgan Stanley’s strategists have lifted their rating on China to Overweight from Underweight.

Europe and the UK

In the wake of Brexit, the European economy has proven to be resilient, Morgan Stanley notes. Morgan Stanley is forecasting 1.4% GDP growth for the eurozone in 2017 and 1.6% in 2018. Slower consumer spending and sluggish investment activity will be offset by stronger net exports, thanks to the weaker euro, and stronger global demand.

The combination of a higher oil price and weaker euro will push European headline inflation materially higher, Morgan Stanley suggests, while core (ex food & energy) inflation will rise more gradually. The ECB will likely extend its bond buying program (QE) for another six months to September 2017 while leaving its cash rate unchanged, before “tapering” purchases thereafter.

CBA’s economists agree the lower euro will provide for stronger European exports, as will a stronger US economy. Some 14% of European exports are destined for the US. But household spending will remain resilient and business investment will further improve, in CBA’s opinion, leading to faster GDP growth than the ECB’s forecasts of 1.6% in each of 2017-18.

Once again, all forecasts come with the caveat of political risk.

CBA does not believe the ECB will increase easing measures in 2017, rather the central bank will begin tapering in the September quarter.

CBA does believe the much lower pound will crimp household spending and business investment in the UK, while improving net exports. Brexit uncertainty will also contribute to restraint. The Bank of England is forecasting a slowing in UK economic growth to 1.4% in 2017 and 1.5% in 2018, but given the UK government’s recently announced fiscal stimulus package, CBA forecasts a more confident 1.6% in both years.


Morgan Stanley believes stronger global growth in 2017 will be led by the US and Japan, with the weaker yen against the stronger US dollar proving supportive for the latter. The Bank of Japan is forecasting 1.3% GDP growth in 2017 and 0.9% in 2018, which in Japan’s case can be considered “strong”.

CBA agrees the Japanese economy will see strength next year thanks to modest further cuts in the Bank of Japan’s cash rate and further fiscal stimulus from the government. The BoJ will nevertheless be wary of cutting its cash rate too much further into the negative given the effect on pension returns.

Which brings us back to the developed world problem of an ageing population. Nowhere is this as more pronounced than in Japan. CBA’s GDP forecasts for Japan are lower than those of the BoJ – 0.9% in 2017 and 0.6% in 2018 – given an economic recovery cannot be sustained without a larger lift in real wages.


And now for the good news.

Back in the noughties, when the commodity super-cycle prevailed, India was invariably mentioned in the same breath as China as the new frontiers of global growth. But in the meantime India has wavered China has completely stolen the spotlight, through economic boom to globally influential slowdown.

The Reserve Bank of India is forecasting 7.9% growth in fiscal year 2017-18, up from 7.6% in 2016-17, in line with the CBA economists’ forecasts. If accurate, India would be the fastest growing economy in the world.

Unlike the developed world, India does not suffer from an ageing population. Solid growth in wages is leading to robust consumer spending, CBA notes, and the introduction of a GST should boost business confidence and investment, albeit low capacity utilisation and funding constraints will provide headwinds.

Morgan Stanley’s strategists have India as their “largest Overweight”. They believe concerns over India’s de-monetisation have been overdone.

While the Indian government could not be accused of being smooth operators when it comes to the recent assault on India’s black market cash economy, the combination, via banknote reissuance and banking sector initiatives, of forcing billions of rupees into the real economy and providing banking facilities for poorer regional areas for the first time should provide a significant boost to the Indian economy, it is generally believed.

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Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.

By Greg Peel

It is quite possible next week’s Fed meeting proves the biggest non-event of a very eventful year. The world has fully priced in a rate hike, so not a lot will happen if the Fed delivers. Of interest will nevertheless be the FOMC’s projections beyond 2017, and Janet Yellen’s first press conference since the election. What will the Trump factor imply for policy ahead?

There’s also quite a bit of US data due next week. Now that a rate hike is assumed, data can be actually assessed on their worth rather than on how the central bank might respond. Next week sees industrial production, inventories, retail sales, inflation, housing sentiment and starts, and the Empire State and Philly Fed activity indices.

Next Friday is a quadruple witching derivatives expiry.

China will release industrial production, retail sales and fixed asset investment numbers.

The Bank of England will hold a policy meeting next week.

In Australia the focus will be on the monthly jobs lottery, along with the NAB business and Westpac consumer confidence surveys.

Australia will also see a “witching” next Thursday as index derivatives expire.

There’s also a late run of AGMs later in the week, most notably those of ANZ Bank ((ANZ)) and National Bank ((NAB)).

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Saxo Bank’s Outrageous Predictions

A summary of Saxo Bank's annual report on its ten "outrageous" predictions for 2017. Are they that outrageous?

-Trump sends US yields soaring
-Brexit doesn't happen
-Bitcoin ascends
-EU banks buckle

By Eva Brocklehurst

It is that time of year when Saxo Bank delivers its ten outrageous predictions for 2017. As usual, the selection aims to provoke discussion on what might surprise or shock investors in the year ahead. The predictions are not an official market outlook but are deemed possible events which have the potential to upset consensus views.

2016 will become known as the year where reality managed to surpass even seemingly unlikely calls, such as the UK vote to leave the European Union (Brexit) and the election of Donald Trump as the US president.

Saxo Bank's chief economist, Steen Jakobsen, believes 2017 could be a wake-up call, with a departure from business as usual, both in terms of expansionary policies by central banks and austerity policies from governments which have characterised the period post the global financial crisis. In this spirit the following are offered as the most outrageous predictions for 2017.


Number one involves China's GDP. China comprehends it has reached the end of its manufacturing and infrastructure growth phase and, through a massive stimulus of fiscal and monetary policies, opens up capital markets to steer a transition to consumption-led growth. This results in 8% growth in 2017. Euphoria over private consumption-led growth pushes the Shanghai Composite index to double its 2016 levels and surpass 5,000.

US Federal Reserve

As US dollar and interest rates rise, the fiscal policies of President Donald Trump cause the US 10-year bond yields to reach 3%, creating market panic. In this second outrageous prediction , on the verge of disaster, the US Federal Reserve limits 10-year yields to 1.5%, effectively introducing an endless quantitative easing. This provokes a sell-off in global equity and bond markets, leading to the biggest gain for bond prices in seven years.

High-yield Rates

At number three, long-term average default rates for high-yield bonds rise as high as 25%. As the limits of central-bank intervention are reached, governments around the world move towards fiscal stimulus and yield curves dramatically steepen. As trillions of corporate bonds are trashed, the problem is exacerbated by rotation away from bond funds, which widens spreads and makes refinancing of low-grade debt impossible.

No Brexit

The fall-out from Brexit creates a more disciplined EU leadership and a more cooperative stance towards the UK. In the fourth prediction, the EU makes key concessions on immigration and passport rights for the UK-based financial services firms. By the time Article 50 is triggered, Brexit is turned down in favour of the new deal. The UK stays within the EU and the Bank of England raises its rate to 0.5%. The EUR/GBP slumps to 0.7300.


Number five is about copper. Copper was a clear commodity winner following the US election and in 2017 the market begins to realise the new president will struggle to deliver promised investments and the increased demand expected for copper fails to materialise. President Trump turns up the volume on protectionism as a result and introduces trade barriers, spelling trouble for emerging markets as well as Europe.

Global growth weakens and China's demand for industrial metal slows, as it moves towards more consumption-led growth. Having breached trend line support, copper descends all the way back to 2002 prices of US$2/lb and a wave of speculative selling then sends it down to the 2009 financial crisis low of US$1.25/lb.


President Trump spending increases the US budget deficit to US$1.2-1.8 trillion and this causes growth and inflation to skyrocket. The Federal Reserve accelerates its rate hike agenda and the US dollar reaches new highs. China starts looking for alternatives to a system dominated by the US dollar and its over-reliance on US monetary policy.

This leads to an increased popularity of currency alternatives and Bitcoin benefits the most, as leading banking systems move to accept Bitcoin as a part alternative to the US dollar. It triples in value to US$2100 from US$700.

US Health Care

Seventh on the list is healthcare expenditure in the US, at around 17% of GDP versus the world average of 10%. An initial relief rally in health care stocks after President Trump's victory quickly fades in 2017, as investors realise the administration will not go easy on health care and lodges sweeping reforms of the unproductive system. The healthcare sector plunges, ending the most spectacular bull market in US equities since the financial crisis.

Mexico and Canada

The market has drastically overestimated President Trump's true intention, or ability to crackdown on trade with Mexico, allowing the beaten down peso to surge. Meanwhile, Canada's higher interest rates initiate a credit crunch in the housing market and the banks buckle, forcing Bank of Canada into quantitative easing and injecting capital into the financial system.

Additionally, the Canadian dollar underperforms as Canadians enjoy far less of the US growth resurgence than they would have had in the past, because of the long-standing decay in the manufacturing base, as a result of globalisation and an excessively strong currency. The CAD/MXN corrects as much as 30% from 2016 highs.

EU Banks

German banks are caught up in the spiral of negative interest rates and flat yield curves and cannot access capital markets. In the EU framework a German bank bail-out inevitably means an EU bank bail-out. This is not a moment too soon for Italian banks which are saddled with non-performing loans and a stagnant local economy. A new guarantee allows the banking system to recapitalise and a European bad debt bank is established to clean up the balance sheet of the eurozone. Italian bank stocks rally more than 100%.

EU Stimulus Bonds

Finally number ten, where faced with success of populist parties in Europe and a dramatic victory for Geert Wilders far-right party in the Netherlands, traditional political parties begin moving away from austerity policies and favour Keynesian policies similar to those launched by US President Roosevelt post the 1929 crisis.

The EU lodges a stimulus package but to avoid dilution resulting from an increase in imports announces the issuance of EU bonds, at first geared towards EUR1 trillion of infrastructure investment, reinforcing the integration of the region and putting capital flows back into the EU.

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The Overnight Report: Commodity Price Surge

By Greg Peel

The Dow closed up 88 points or 0.5% while the S&P gained 0.8% to 2198 and the Nasdaq rose 0.9%.


It was a quiet session on the local bourse yesterday. Volume was weak as the ASX200 meandered its way in a minimal range to a soggy close. But again the lack of movement in the index belies what was going on underneath amongst the sectors.

It would seem investors are simply not sure how they should be positioned going into year-end. I have highlighted in the previous couple of sessions that it appeared the long sell-off of yield stocks and defensives was finding a bottom and the abrupt run-up in resource stocks was tipping over. But yesterday, we went back the other way once more.

On a tick-up in the oil price, energy was the best performer on the day with a 1.7% gain. It would seem traders were heartened by the WTI price rising back through the US$45/bbl mark on cautious confidence of an OPEC agreement being reached, rather than tanking down through 40. That buying will prove rather prescient today.

Materials chimed in with a 0.3% gain but other than a flat day for the banks, all other sectors finished in the red. Notably, consumer staples and healthcare each fell 1.3%, telcos fell 0.9% and utilities fell 0.5%. The theme of the previous couple of sessions was reversed. Perhaps the seemingly relentless rise of US bond yields is just too much.

The US bond yield stalled last night and the US dollar index dipped for the first time in several sessions. The door was opened for commodities to take centre stage.


APEC meetings are not what we’d normally think of as market movers but aside from the attention being drawn by it being President Obama’s final outing, the attendance in Peru of Vladimir Putin and Xi Jinping has provided us with some headlines.

The Russian president sees “a high probability” of an agreement being reached in Vienna on November 30, when OPEC tries to implement a production freeze. Russia will cooperate, Putin suggested, as a production freeze “is not an issue for us”.

Those comments were worth 4.2% for the West Texas crude price, which rose US$1.92 to US$47.49/bbl.

What is good for oil is seen as good for other commodities. Meanwhile, the Chinese president used his speech in Peru to confirm China’s support for a free trade area in the Asia-Pacific. The Chinese government is pushing for a Regional Comprehensive Economic Partnership of 16 countries. The now dead-in-the-water TPP was to involve 12 countries, including the big one, the US. We might presume China sees an opportunity to further step-up its global strength as the trade wall goes up around the United States.

Free trade offers up the possibility of increased Chinese imports of raw materials, including lead, up 1% on the LME last night, aluminium and zinc, up 1.5%, copper, up 2.5%, and nickel, up 5%.

Xi Jinping did not, however, manage to light a flame under the bulks, which few disagree have run too far, too fast. The thermal coal price was steady last night and iron ore plunged US$2.80 to US$69.80/t.

The 0.3% dip in the US dollar index to 100.97 provided a green light for those commodities that did rally to do so, and also allowed gold to tick back US$3.30 to US$1211.90/oz.

And the Aussie to tick back 0.3% to US$0.7361.

Quadruple Watching

The energy sector duly led Wall Street higher last night with materials trailing in its wake. But otherwise the positive mood was market-wide. The Dow, S&P and Nasdaq all simultaneously hit new all-time highs, for the first time since August. Back in August, US small caps were underperforming. Last night the Russell 2000 index also hit a new all-time high, marking a rare quadrella.

What’s good for M&M Enterprises is good for the country. Except in this case Milo Minderbinder is Donald Trump and no one can yet identify the Catch-22.

Outside of the commodity story there was no real new news to drive Wall Street higher last night. Only the dip in the greenback after a long run higher could be seen as any particular incentive. And the ten-year bond rate stalling.

Donald Trump continues to interview prospective cabinet members but there has been no new news on that front either. Either way, US business television currently features commentator after commentator suggesting a Trump presidency cannot be anything other than positive for the stock market. They just can’t see any other scenario.

The previous couple of sessions showed signs the Trump euphoria rally might be losing steam. Not so last night.


Fresh all-time highs on Wall Street and surging commodity prices. How will this affect the Australian market today? Forget iron ore, the SPI Overnight has closed up 40 points or 0.8%.

Earnings results are due out today from CYBG ((CYB)), Fisher & Paykel Healthcare ((FPH)) and Technology One ((TNE)). There is another round of AGMs to digest including another prominent Kiwi, The A2 Milk Company ((A2M)).

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Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.

By Greg Peel

Back in The World Before Trump, the market was pricing in around an 80% chance of a Fed rate hike next month, and no further rate hike until, probably, December 2018. A hike would no doubt be off the table however, were Trump to win, given the stock market would crash.

The stock market hasn’t crashed – the bond market has. In the two days post election the US ten-year bond yield has already risen by the 25 basis points the Fed would hike, and that’s from the starting point of 80% already being priced in. Although vague at this point, Trump policies are likely to pick up the stimulus baton on the fiscal front to take the burden off monetary policy.

The Fed could justify a 50bps hike next month. Or at least a rethink its “gradual” approach. It’s a whole new world, this World of Trump.

Do US data now matter? Next week sees numbers for retail sales, inventories, industrial production, inflation, housing sentiment, housing starts and the Empire State and Philly Fed activity indices.

Does China now matter as much? Next week sees a dump of October retail sales, industrial production and fixed asset investment numbers.

Japan and the eurozone both release September quarter GDP results.

In Australia we’ll see the minutes of the November RBA meeting. They’re old hat. We’ll also see the September quarter wage price index, beginning the countdown towards our own GDP result.

And Trump or no Trump, the AGM season will roll on. Indeed, next week is one of the busiest. We’ll also see earnings results from Elders ((ELD)), Oxforex ((OFX)), Graincorp ((GNC)), James Hardie ((JHX)) and AusNet ((AST)).

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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.

By Greg Peel

Presumably by some time on Wednesday afternoon we’ll know the result of the US election, unless of course it’s too close to call. Even if a Clinton victory is clear-cut, we still don’t know whether Trump will challenge the result.

Before that we have to get through tonight’s US jobs report, but with the Fed now seemingly having made up its mind, this report does not carry a lot of weight. The only issue would be if the number came in way low.

US data is otherwise thin on the ground next week, with consumer credit and the fortnightly consumer sentiment survey the only highlights. Friday is Veterans Day which is one of those half-holidays in which banks and the bond market are closed but stocks and commodities are open. Given 11/11 this year falls on a Friday, we can assume most of Wall Street will be taking a long weekend.

China will nevertheless be back in the frame with October trade and inflation numbers.

The RBNZ holds a policy meeting on Thursday.

In Australia we’ll see ANZ job ads and the NAB business and Westpac consumer confidence surveys along with housing finance numbers.

Earnings results are due from Westpac ((WBC)), DuluxGroup ((DLX)) and Incitec Pivot ((IPL)). Commonwealth Bank ((CBA)) will provide a quarterly update ahead of its AGM.

Next week sees another solid round of AGMs.

Note that US summer time ends of the weekend so as of Tuesday morning the NYSE will close at 8am Sydney time.

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The Overnight Report: Ups And Downs

By Greg Peel

The Dow closed down 53 points or 0.3% while the S&P lost 0.4% to 2143 and the Nasdaq fell 0.5%.

Cheesed Off

The AGM season claimed another victim on the local market yesterday. Bega Cheese ((BGA)) shares fell 17%. Clearly the company was wrong in believing the Chinese market is insatiable.

Not content to continuing selling just its well-known cheese products, Bega had decided to hook up with Blackmores ((BKL)), which clearly was not content to only sell dietary supplements. The two took on the Chinese infant formula market, where already there are a crowd of A&NZ milk companies operating, and found it oversupplied.

Go figure.

The other big loser on the day is a tragic story. Ardent Leisure ((AAD)) fell 8% very late in the session so there may be more to come.

Otherwise, having surprised all and sundry by falling so heavily on Monday, the ASX200 again defied overnight futures trading in jumping back up 47 on the open before settling up 34. It was more of a step-jump than a rally, which again prompts the question what on earth was going on on Monday.

The banks clearly led the market up yesterday in what is a traditional seasonal pattern. The 0.8% sector gain reflects the fact there are three juicy dividends on offer (albeit maybe less than in previous years), and you need to get in now if you want a piece of the action. Then you sell in December and switch into CBA on the different cycle.

All sectors finished in the green yesterday bar consumer staples, thanks to Bega and friends, and energy, which dipped slightly on lower oil.

Having reset, the market will now look ahead to today’s September quarter CPI number, which will set the agenda for RBA policy and determine whether the Aussie goes higher or lower. Economists are looking for 0.5% headline growth for 1.1% year on year, and 0.4% core growth for 1.7% year on year.

Guidance Concerns

Russia is now apparently wavering on a production freeze agreement with OPEC. The WTI price thus slipped under US$50/bbl last night which was one source of weakness on Wall Street.

US consumer confidence has fallen to its lowest level since May, according to the Conference Board monthly measure. It’s not great news for retailers with the Thanksgiving shopping spree now only a month away. But it is typical of confidence to dip going into a presidential election, and the bizarre offering this time around is more reason to be cautious.

The main reason Wall Street was lower last night centred around earnings season. It is not third quarter earnings that are the issue, as they continue to point to the first positive result for the S&P500 in six quarters. It is fourth quarter guidance which, given all the uncertainty in the world at this time, has been disappointing in many cases.

Among the Dow stocks, consumer staple stalwart Proctor & Gamble has been a popular stock to hide one’s money in this year and it did not disappoint, rising 3%. But despite posting positive results, all of 3M, DuPont and Home Depot shares fell on underwhelming guidance.

Outside the Dow, Whirlpool went down one, falling 11% on weak, Brexit-impacted UK sales. General Motors suffered the same fate, and fell 4%. High flyer Under Armour fell 13% and had Wall Street wondering whether the “athleisure” bubble has now burst.

Add it all up and the Dow fell 50 points. On Monday night it rallied 70 points. With PEs looking stretched and December quarter earnings guidance failing to provide support, the upside currently appears limited. With funds managers lined up to swoop on any weakness so they can put money to work on a TINA basis, the downside appears limited.

As Gerry Rafferty would put it, here I am, stuck in the middle with you.


Forecasts this week are for a build in US crude inventories following a couple of weeks of surprise drawdowns.

Forecasts are never right.

Throw in doubt over Russia and West Texas crude is down US81c at US$49.82/bbl.

Between environmental shutdowns forced by the governments of China and the Philippines, and economy-based restrictions in Indonesia, the supply of bulks and base metals is expected to be constrained going forward. Yet there appears no constraint on Chinese demand, which is on the rise.

Last night lead and nickel rose over 1% and aluminium, copper and zinc rose over 2%.

Iron ore has jumped up US$2.90 or 5% to US$61.60/t.

We are entering one of the two holiday periods in which Indians typically exchange gifts of gold. Outside of monetary policy influences, such demand from India can be a real mover of the dial for the gold price. Last night gold rose US$9.40 to US$1273.40/oz.

The rally in gold, and indeed other commodities, may also lend itself to creeping belief the recent run-up in the US dollar has come to an end for now. The greenback has adjusted to the expectation of a December Fed rate hike and now must wait for confirmation. The dollar index has been flat for a few sessions in a row now, which suggests it might just be ready to tip over. It is little changed this morning at 98.73.

On commodity price strength, the Aussie is up 0.4% at US$0.7641.


The SPI Overnight closed down 12 points or 0.2%. Seems strange in the face of commodity price strength but the SPI’s been no sort of indicator these last few sessions.

The local CPI result is due late morning.

There’s another round of AGMs today and quarterly earnings results are due from Alacer Gold ((AQG)) and ResMed ((RMD)) and quarterly production numbers from Independence Group ((IGO)).

Wesfarmers ((WES)) will report quarterly sales figures. While Coles will be in focus as always, don’t forget Wesfarmers also produces coal.

Rudi will gear up in the afternoon to host Your Money, Your Call on Sky Business tonight, 8-9.30pm.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Overnight Report: Guarded Optimism

By Greg Peel

The Dow closed up 40 points or 0.2% while the S&P rose 0.2% to 2144 and the Nasdaq was flat.

Fun and Games

The local gaming sector has been very much in the spotlight this week. We saw the casino operators tumble earlier in the week on the news of the arrest of Crown Resorts ((CWN)) employees in China and despite a big initial plunge, and calls of oversold from analysts, Crown and its peers have seen ongoing weakness.

On the flipside yesterday, renewed talk of a merger between the old school tote betting agencies had Tatts ((TTS)) shares up 16% and Tabcorp ((TAH)) up 3% to net out to a leading 1.7% gain for consumer discretionary yesterday.

Otherwise most sector moves were fairly muted in a session that saw a bumpy rally from the open before plateauing out in the afternoon.

There was little excitement generated by China. September quarter GDP came in at 6.7% annual growth as expected and the September retail sales and fixed asset investment numbers were largely as forecast. Industrial production was slightly disappointing.

Perhaps of more interest currently is the Aussie dollar, which despite a Fed December rate hike now being widely expected just continues to track north. It’s up another 0.7% this morning at US$0.7717 which puts it around a technical level that suggests a break-up. We could be at 80 very soon.

The new RBA governor hasn’t helped by talking down the chance of another rate cut but this time around the stronger Aussie is not as ominous as it has been – not as much of a “complication” for the central bank. For this time the Aussie’s strength lends itself not to US dollar weakness thanks to a dovish Fed, crimping Australian economic growth, but to recoveries in the prices of oil, iron ore and especially coal.

So we’re seeing the Aussie run up for the right reasons, being expected improvement in the terms of trade as higher commodity prices flow through with their usual delivery lag.

So long as the Aussie doesn’t run so high as to kill off the revival in the local tourism. Tourism has been running second to a now wobbly housing sector in providing the “non-mining” offset to maintain Australia’s net positive growth. Australia now has to battle the UK as a preferred destination, where as long as you’re not a local you no longer need to mortgage your house to catch a Black Cab.

More Earnings Surprise

As the reports continue to flow, the surprise continues to be to the upside in this US earnings season.

Last night Morgan Stanley posted the last of the Big Bank reports and as has been the case with all of its peers, posted a beat. Smaller regional US banks have also been trotting out better than expected numbers. And last night was the turn of the first of the big oil services companies to report – companies that have suffered greatly through the oil price plunge just as has been the case for their peers downunder.

They, too, posted earnings beats. And it’s not just earnings. The seemingly entrenched post-GFC trend of lower revenues looks like it might be turning around. Net S&P500 earnings growth has swung to the positive at a 0.2% run-rate when an overall decline of 2% was forecast. Revenues are up a net 2.5%.

The other major driver on Wall Street last night was yet again oil. The Saudis continue to talk up the willingness of OPEC and non-OPEC members to join in a production freeze but in the meantime, the tipsters had expected a small rise in US crude inventories last week but instead there was a large drawdown. Thus WTI is up 2%.

Talk now is of oil trading in a US$50-60/bbl range going forward rather than the US$40-50/bbl range assumed previously. That’s enough to ensure positive cash flow for many a global oil & gas producer.

Yet despite an air of greater confidence creeping in, Wall Street is struggling to get excited. Dow up 40 is really neither here nor there when earnings reports are surprising and oil is looking strong.

Aside from calls of over-stretched valuations, Wall Street is no doubt looking ahead to all the near-term uncertainties – the election, the OPEC meeting, the Fed meeting. Not a great time to be rushing in if things don’t turn out as hoped.

And it is October after all. On that note, Happy Anniversary to those who remember.

This morning’s aftermarket earnings reports included American Express (Dow), the shares of which are currently up 5% and EBay, down 6%, and Barbie’s thrilled with a 5% jump for Mattel.


West Texas crude is up US98c at US$51.38/bbl.

The trend (or lack thereof) continues for base metals. Aluminium and nickel are down 1% and lead and zinc are up 1%.

Iron ore was unchanged at US$58.00/t.

The US dollar index was again flat, at 97.88, but gold continues to claw its way back. It’s up US$6.80 at US$1268.80/oz.


The SPI Overnight closed up 7 points.

Today sees the local jobs lottery and just after that release, there’s another one of those debates. The last, thank God.

There hasn’t been much discussion about it but the ECB holds a policy meeting tonight. Taper talk?

It’s a very busy day on the local corporate calendar today.

All of Fortescue Metals ((FMG)), Rio Tinto ((RIO)), South32 ((S32)) and Woodside Petroleum ((WPL)) post quarterly production reports.

Brambles ((BXB)) and Westfield ((WFD)) are among those providing quarterly updates.

Amcor ((AMC)) and, coincidentally, Crown Resorts are among those holding AGMs followed by BHP Billiton ((BHP)) tonight in London.

Ten Network ((TEN)) will release its earnings result.

Rudi will travel to Macquarie Park to appear on Sky Business, 12.30-2.30pm.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Monday Report

By Greg Peel


It was a choppy session on Friday on the local bourse leading ultimately to a flat close. A fairly tight range belied some notable moves in sectors nevertheless.

Winners on the day included industrials (0.7%), utilities (0.7%), telcos (0.3%) and consumer staples (0.3%) while losers included the banks (-0.3%) and materials (-0.5%). Energy closed on a rare 0%. Here we see further evidence of a reversal of the theme of the past few weeks in which overbought yield stocks have been sold off on Fed rate rise expectations and undervalued cyclicals have come back to the fore.

It has been a substantial sell-off in yield stocks, and thus no surprise some consolidation has eventuated. But interestingly the initial trigger for the reversal of prior rotation was China’s trade data last week which surprised to the downside, reigniting China slowdown fears and perhaps raising doubts of a Fed rate hike being “baked in”. Friday’s Chinese data release paints a different picture.

China’s CPI rose 1.9% year on year in September having risen only 1.3% in August, beating expectations of +1.6%. But the big news is the PPI, which rose 0.1% to mark its first gain in five years. In August the PPI was down 0.8% and September forecasts had a 0.3% drop.

China’s producer price index had been in the negative since 2012 but recent months have shown it quietly beginning to graft its way back. Last month saw a turning point, which goes some way to relieving fears of Japanese-style entrenched deflation becoming the long term story for China – the twenty-first century’s version of the Japanese economic miracle.

The inflation data provide a little bit of confidence heading into this week’s major data event on Wednesday, which sees September industrial production, retail sales and fixed asset investment numbers along with the September quarter GDP result. Forecasts are for GDP growth to hold steady at 6.7%.

Yellen Gets Hot

While tradition has the Alcoa result signalling the beginning of any US quarterly earnings season, most now consider the real kick-off to be on the subsequent Friday, when all of JP Morgan (Dow), Citigroup and Wells Fargo report. A good result from the banks provides some confidence for the rest of the season.

All three reported earnings beats on Friday night, mostly due to elevated trading volumes in the fixed income market. US bank shares have been in a bit of a push me-pull you lately, on strength from Fed rate hike expectations on the one hand and weakness on European bank fears, Deutsche Bank in particular, on the other.

Friday night also saw all-important US retail sales numbers which showed a 0.6% gain in September. This was a tad shy of 0.7% expectations but not enough to alter any assumptions regarding Fed policy. The US PPI also continues to creep higher, rising 0.3% on the core in September to be 1.5% higher year on year.

Fed watchers may have been jolted, nonetheless, by comments made by Janet Yellen in a speech on Friday night, in which she suggested that in order to reverse the effects of the GFC recession it might be best to run “high pressure” economy with a tight labour market. The way to run a hot economy is, of course, to not fight heat with rate hikes.

December off again? No. Yellen’s supposed paradigm shift simply plays into what she and fellow FOMC members have been stressing for some time – subsequent policy tightening will be very gradual. While central bank preference is to get ahead of any potential inflation spikes, the implication is that a bit of inflation is a good thing in the post-GFC world.

This is longer term good news for the US stock market, and as such the Dow was up as many as 160 points early on. But just as Thursday’s 180 point fall was pared back to only a 45 point fall, Friday’s 160 point gain was ultimately pared back to only a 39 point, or 0.2%, gain. The S&P closed flat at 2132 and the Nasdaq closed flat.

The US dollar index, on the other hand, rose another 0.6% to 98.10. The dollar is quietly becoming what the RBA might call a “complication”, but that’s what you get with a rate rise. Friday’s retail sales and PPI data no doubt helped pushed the greenback along.

And having slipped back on last week’s weak Chinese trade numbers, Friday night saw the US ten-year yield pop up 6 basis points to reclaim 1.79%.


The stronger greenback is acting as a drag on commodity prices but demand-supply equations remain the dominant theme.

West Texas crude closed down US16c on Friday night and at once stage dipped below 50, which is one reason Wall Street came off the boil.

Aluminium and copper both fell 1% on the LME but nickel and zinc each rose 0.5%.

Iron ore rose US20c to US$56.80/t.

Gold fell US$5.70 to US$1251.80/oz.

The strong greenback should be good news for the Australian economy by pushing down the Aussie and thus supporting the non-mining economic revival. But it is mining that is enjoying a revival at present – particularly coal – hence the Aussie is up 0.6% at US$0.7610.

The SPI Overnight closed down 9 points on Saturday morning.

The Week Ahead

China’s GDP result, as noted, will take centre stage, but US earnings season will dominate the week as the results start to come thick and fast, including from many Dow components.

There are also a lot of US data releases to mull over this week. Tonight it’s industrial production and the Empire State activity index, Tuesday it’s housing sentiment and the CPI, and Wednesday brings housing starts and the Fed Beige Book. Thursday sees leading economic indicators, existing home sales and the Philadelphia Fed activity index.

The ECB will hold a policy meeting on Thursday night amidst rumours, since quashed but not with any conviction, that QE tapering is being considered.

The minutes of the September RBA meeting are out tomorrow ahead of September jobs data on Thursday.

The local stock market calendar is beginning to fill up once more and this week sees a rush of resource sector production reports alongside various corporate quarterly updates and a building number of AGMs.

Today’s highlights include production reports from Evolution Mining ((EVN)) and Whitehaven Coal ((WHC)) and a quarterly result from James Hardie ((JHX)).

Rudi will appear on Sky Business on Thursday, 12.30-2.30pm, and again on Friday, through Skype-link, to discuss broker calls at around 11.05am.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

For further global economic release dates and local company events please refer to the FNArena Calendar.

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