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Tuesday January 16: Five things the markets are talking about

Are investors getting ahead of themselves on the number of Bank of Canada rate hikes in 2018?

A small percentage of Canada 'bears' believe there's a strong possibility that Governor Poloz could surprise Wednesday (10 am EDT) with a 'dovish' view of economy. For sure, employment data has been strong, but the NAFTA dissolution risk has not dissipated either.

There is a possibility that tomorrow's BoC statement could emphasizes their cautious outlook, which will only drive two-year bond yields lower and cause weakness in the recent high flying loonie (C$1.2442).

Elsewhere, the 'mighty' USD has strengthened a tad, rebounding from its lowest close in three-years as the JPY and EUR both fell in the overnight session. Euro and Asian stocks have advanced, some to new record highs, along with government bonds, while it is a mixed picture across commodities.

1. Global equities on the rise

In Japan, the Nikkei hit its highest level since 1991 as the dollar weakening is temporary halted. The Nikkei ended +1% higher, while the broader Topix was up +0.55%.

Down-under, Australia's S&P/ASX 200 slid -0.4%, though, with mining companies falling as metals prices lost some of the dollar-driven gains they made in yesterday's session.

In Hong Kong, the benchmark Hang Seng Index rose to a record closing high overnight, led by index heavyweight Tencent Holdings. At close of trade, the index was up +1.81%, while the Hang Seng China Enterprises index rose +2.54%.

In China, stocks rallied on Tuesday, with the blue-chip index closing at a 30-month high, led by a surge in real estate firms, and this despite poll backing investor expectations that growth in China will slow in 2018. At the close, the Shanghai Composite index was up +0.79%, while the blue-chip CSI300 index was up +0.81%.

In Europe, regional indices are trading higher across the board, with the DAX outperforming following weakness yesterday, after higher closes in Asia and stronger indicated opens in the U.S.

Futures on the S&P 500 Index have increased +0.5% to a new record.

Indices: Stoxx600 +0.4% at 399.6, FTSE +0.2 at 7782, DAX +0.8% at 13302, CAC-40 +0.4% at 5531, IBEX-35 +0.6% at 10530, FTSE MIB +0.6% at 23690, SMI +0.2% at 9560, S&P 500 Futures +0.5%

2. Oil prices near three-year highs, gold lower

Crude oil prices have dipped a tad ahead of the U.S open, but remain near their three-year highs.

Oil production curbs in OPEC nations and Russia, as well as strong demand thanks to healthy economic growth have driven up recent prices.

Brent crude futures fell -54c, or -0.77%, to +$69.72 per barrel. Brent hit +$70.37 yesterday, a high from December 2014, when markets were at the beginning of a three-year decline.

U.S West Texas Intermediate (WTI) crude futures are at +$64.18 a barrel, down -12c, or -0.19%. WTI hit a December 2014 peak of +$64.89 a barrel in earlier trading.

Growing signs of a tightening market has boosted confidence among traders and analysts that prices can be sustained near current levels. Other factors, including political risk, have also supported crude.

Gold prices have eased from their four-month peak as the 'big' dollar fights back. Spot gold is down -0.1% at +$1,341.28 an ounce, after touching its strongest since Sept. 8 at +$1,344.44 the session before.

3. Euro QE premiums fading lifts Bund yield

Are forward Eonia (Euro overnight index average) rates reflecting a too aggressive path of interest rate hikes by the European Central Bank (ECB)? Currently, the Eonia curve reflects a +70% probability of a +10 bps rise in the deposit rate in December 2018. It also has fully priced in a +15 bps rise in Q1, 2019 and expects an additional +10 bps rise in Q3, 2019. If the ECB ends its net asset purchases in September 2018, and assuming that “well past the horizon of the net asset purchases” means six-months later, the first rate rise would not follow until March 2019.

Many expect the 10-year German Bund yield to rise to +1.0% by the end of 2018, as it gradually removes the embedded premium related to the ECB's quantitative easing (QE) program.

Overnight, Germany's 10-year yield sank -2 bps to +0.57%. The yield on 10-year U.S notes fell -1 bps to +2.53%, the lowest in more than a week, while in the U.K, the 10-year Gilt yield decreased -2 bps to +1.305%, the largest pullback in a fortnight.

4. Dollar finds a toehold

The U.S dollar's weakness is trying to find a reprieve in early January trading. The greenback's global supremacy is being challenged by the Chinese yuan as the pricing medium for energy and other commodities, while domestically; the USD is also facing political headwinds as U.S GOP leaders face their most difficult government shutdown deadline to date.

Overnight, the EUR/USD (€1.2231) has retraced from recent three year high just under the €1.23 area. The German SPD party is showing divide on alliance with Merkel – Germany Berlin SPD chapter is said to reject coalition talks with Merkel bloc citing results of the exploratory talks.

Note: The recent EUR rise seems to have been accepted by the ECB. Hansson's comments that “Euro appreciation no threat to inflation outlook” came just as the market had pushed the currency to the highest level since the ECB began its QE.

GBP/USD (£1.3755) consolidated in the session after testing above 1.38 on Monday following reports late last week that Netherlands and Spain were open to a deal for Britain to remain as close as possible to the trading bloc. Intraday focus was on last months U.K inflation data (see below).

Elsewhere, the yen (¥110.72) has temporarily halted its five-day increase amid a warning from Japan's finance minister about excessively rapid moves in the currency market.

Bitcoin (BTC) has slumped again, down -16% to +$12,255, the lowest level since Dec. 5 as China escalates its crackdown on crypto trading.

Note: BTC earlier was down by more than -40% percent from its record high in mid-December. Rival cryptocurrencies has also tumbled, with Ripple diving as much as -28%.

5. U.K inflation eased in December, but topped BoE target

Data in the U.K this morning showed that annual inflation eased a tad last month, but exceeded the Bank of England's (BoE) target for the eleventh consecutive month, highlighting the ongoing squeeze on consumers pressured by the pound's steep fall after the Brexit vote in 2016.

Consumer prices rose +3% on the year in December, compared with a rise of +3.1% a month earlier.

Digging deeper, there are mixed signals on inflationary pressures in the wider economy: prices charged by companies at the factory gate rose +3.3% on year in December – a faster annual rate than the previous month. Companies' raw-material costs rose only +4.9% on year to mark the slowest pace of growth since July 2016, which was a month after U.K's Brexit vote.

Note: The December print was fuelled by increases in prices of food, alcohol, tobacco and furniture.

Bitcoin is suffering these past few days. The technical structure has shown a tremendous positive short-term momentum so far. Hourly support area located around 10775 (22/12/2017 low). In the short-term, the technical structure suggests a continued bearish momentum. Expected to show further decline.

In the long-term, the digital currency has had an exponential growth. There are decent likelihood that the asset will reach $40'000 in 2018.

Crude oil is continues to head higher. Hourly resistance is given at 64.89 (15/01/2018 high). Strong support is given at 55.82 (07/12/2017 low). Expected to keep increasing as demand seems very strong.

In the long-term, crude oil has recovered after its sharp decline last year. However, we consider that further weakness are very likely. For the time being the pair lies in an upside momentum. Strong support lies at 35.24 (05/04/2016) while resistance can now be found at 55.24 (03/01/2017 high).

Silver has collapsed after setting hourly resistance is given at 17.46 (16/10/2017 high). Expected to show continued bearish pressures.

In the long-term, the trend is rater negative. Further downsides are very likely. Resistance is located at 25.11 (28/08/2013 high). Strong support can be found at 11.75 (20/04/2009).

Gold continues to push higher. Hourly support is given at 1306 (04/01/2018 low). Resistance is located at 1345 (15/01/2018 high) and the commodity is now targeting strong resistance at 1357 (08/09/2017 high).

In the long-term, the technical structure suggests that there is a growing upside momentum. A break of 1392 (17/03/2014) is necessary ton confirm it, A major support can be found at 1045 (05/02/2010 low).

EUR/CHF is trading slightly higher. Hourly resistance is given at 1.1832 (15/01/2018 high). Expected to show continued short-term increase.

In the longer term, the technical structure has reversed. Strong resistance is given at 1.20 (level before the unpeg). Yet, the ECB's QE programme is likely to cause persistent selling pressures on the euro, which should weigh on EUR/CHF. Supports can be found at 1.0184 (28/01/2015 low) and 1.0082 (27/01/2015 low).

EUR/GBP is trading higher. The pair is trading between support at 0.8689 (08/12/2017 low) and resistance is located at 0.9046 (14/09/2017 high). Expected to show further increase.

In the long-term, the pair has largely recovered from recent lows in 2015. The technical structure suggests a growing upside momentum. The pair is trading above from its 200 DMA. Strong resistance can be found at 0.9500 (psychological level).

AUD/USD's upside pressures are growing. Hourly resistance is now given at 0.7979 (15/01/2018 high). Support stands at 0.7808 (09/01/2018 low). The road is wide open for further upside.

In the long-term, the trend is turning positive. Key supports stands at 0.6009 (31/10/2008 low) . A break of the key resistance at 0.8164 (14/05/2015 high) is needed to invalidate our long-term bearish view.

USD/CAD has bounced back after the pair reached hourly support at 1.2356 (05/01/2018 high). Expected to show renewed short-term weakness.

In the longer term, the pair has broken longterm support that can be found at 1.2461 (16/03/2015 low). Strong resistance is given at 1.4690 (22/01/2016 high). The pair is likely to head further lower.

USD/CHF is trading lower. Hourly support given at 0.9700 (02/01/2017) has been broken. Expected to show further short-term downside moves.

In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.