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Relief rallies in stocks and oil fizzle fast; Bank of Canada preview

Relief rallies in stocks and oil fizzle fast; Bank of Canada preview

US trading started out strong but the relief rally coming off the long weekend didn’t last long and indices finished the day back near where they started. Morning earnings reports were mixed with positive reports from Morgan Stanley and Bank of America offset by a profit warning from Tiffany’s. Aftermarket earnings saw IBM beating the street but the reaction to Netflix’s mixed numbers may be more significant with traders responding positive to an earnings beat despite mixed subscriber numbers. The IMF cutting its global growth forecasts didn’t help the bulls cause either, partly offsetting some of the encouragement that came from yesterday’s China not as bad as feared numbers. Similarly, indications from the IEA that Iran’s return to the market could exacerbate oversupply problems while not a surprise kept the pressure on the energy sector. WTI crude oil was hit particularly hard, falling off more than Brent Crude or gasoline. This leaves markets stuck between a rock and a hard place heading into today’s Asia Pacific trading. Many markets have been getting oversold technically but haven't been able to bounce back very far either. Because of this today’s China trading action may be important in helping to determine if the recent relief rebound is sustainable and if we are entering a period of base building or if we could see another downleg. We may be moving into a consolidation phase where bears and bargain hunters battle for control over the next few days which may continue to create significant short term swing trading opportunities. Today also brings data from New Zealand and Australia so we could see some action in the dollars. Tomorrow GBP could be active again as traders continue to react to Bank of England Governor Carney’s comments that now is not the time for a UK rate hike while mulling over this month’s UK employment report. The main event tomorrow for many traders is likely to be the Bank of Canada meeting, one where the decision on interest rates appears to be up in the air. With the price of crude oil having fallen from above $40.00 at the time of the last meeting in early December to below $30.00 today, speculation had been growing in recent days that the Bank of Canada could potentially cut interest rates again at this meeting to help prop up the economy. A rate cut is not a sure thing, however, but with the loonie having become so overextended technically lately, whatever decision is reached whatever happens we could see significant trading action on the news as there are likely to be a number of traders who need to scramble to get back on side. . Those in favour of a cut may point to the potential impact of a lower oil price on the Canadian economy, in particular that it could lead to more layoffs in oil producing regions and that the economy could use a boost from a lower rate. Also, having cut rates in January and July of 2015, some may see the central bank as being due for another cut if it continues that pattern. Some may see Governor Poloz’s comments last month on negative rates as an emergency measure hinting at the potential for additional cuts. Since the last Bank of Canada meeting, employment has continued to grow and the trade deficit has improved. On the other hand, monthly GDP went negative, housing starts fell and retail sales has been soft. PMI figures also have been weakening with both RBC and Ivey under 50 and falling. Those in favour of holding may suggest, however, that the Bank of Canada has preferred to use the falling Dollar as its main tool for rebalancing the economy, and that the job gains of the last two months indicate that rebalancing is underway. (The negative impact of the oil crash hit sooner, while the benefits of the lower loonie on exports, manufacturing, shopping and travel patterns and other benefits take longer to emerge). The loonie is down 17% from a year ago and 12% from 6 months ago already, how much more stimulus would a quarter point cut really add compared with the currency decline? There are some negatives to a lower loonie, such as higher prices for imported food which can impact consumer spending and as we saw in the 1990s, the loonie could eventually reach a point where the Bank of Canada’s ability to cut rates further could be limited. Concerns about what lower rates could do to red hot housing markets in some cities may also keep the Bank on hold. A cut could also be seen as a vote of non-confidence in the economy and could raise questions about how bad things are out there. I don't like sitting on the fence but I really think there’s a 50-50 chance of a rate cut with strong cases for both sides. I do think Governor Poloz will use the statement to try to manage the reaction. If the bank cuts rates, we will likely get a neutral statement suggesting it’s going back on hold for now, if the bank holds rates we will likely get a dovish statement leaving the door open to a future cut. I also think that the decline in the loonie over the last few weeks has more than priced in a rate cut. Because of this, just as the USD had fully priced in last month’s rate hike so it didn’t go up much afterward, I think CAD has fully priced in a rate cut so it may not fall much further if one happens. If the bank doesn’t cut rates, we could see a big snap back rally with CAD so oversold technically. In other words, no matter what happens tomorrow, CAD may continue to carve out a bottom while remaining sensitive to swings in the oil prices. Corporate News Netflix $0.10 vs street $0.02, sales $1.82B below street $1.83B, net subscriber adds domestic 1.75M vs street 2.0M, international 4.35M vs street 2.87M, guides next Q EPS to $0.03. IBM $4.84 vs street $4 81 Economic News Significant announcements released overnight include: International Monetary Fund cuts 2016 world GDP growth forecast to 3.4% from 3.6% International Monetary Fund cuts 2017 world GDP growth forecast to 3.6% from 3.8% International Energy Agency global oil supply rose by 2.6 mmbbl/d in 2015, International Energy Agency global oil demand growth rate slowed from 2.1 mmbbl/d in Q3 to 1.0 mmbbl/d in Q4, 2016 demand expected to rise 1.2 mmbbl/d International Energy Agency 2016 first half forecast imbalance supply could exceed demand by 1.5 mmbbl/d on Iran return to market Germany consumer prices 0.3% as expected UK consumer prices 0.2% as expected UK core CPI 1.4% vs street 1.2% UK retail prices 1.2% vs street 1.1% UK producer input prices (10.8%) vs street (11.7%) UK producer output prices (1.2%) as expected UK ONS house prices 7.7% vs previous 7.0% Eurozone consumer prices 0.2% as expected Eurozone core CPI 0.9% as expected Eurozone construction output 2.1% vs previous 1.1% Germany ZEW current 59.1 vs street 53.1 Germany ZEW expectations 10.2 vs street 8.0 US NAHB housing market index 60 vs street 61 Upcoming significant economic announcements include: (Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montréal, 12:30 am in London and 8:30 am in Singapore) 8:45 am AEDT NZ consumer prices street 0.3% 10:30 am AEDT Australia consumer confidence previous 100.8 7:00 am GMT Germany producer prices street (2.2%) 9:30 am GMT UK jobless claims street 2.8K 9:30 am GMT UK rolling 3M jobs change street 235K vs previous 207K 9:30 am GMT UK unemployment rate street 5.2% 9:30 am GMT UK average weekly earnings street 2.1% 1:00 pm GMT Poland average gross wages street 3.5% 1:00 pm GMT Poland employment growth street 1.2% 8:30 am EST US consumer prices street 0.2% 8:30 am EST US core CPI street 2.1% vs previous 2.0% 8:30 am EST US real average weekly earns previous 1.6% 8:30 am EST US housing starts street 1,200K 8:30 am EST US building permits street 1,200K 8:30 am EST Canada wholesale sales street 0.4% 8:30 am EST Canada manufacturing sales street 0.5% 10:00 am EST Canada interest rate 0.50% no change expected 10:00 am EST Canada monetary policy report 11:15 am EST Bank of Canada Poloz press conference CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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