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Markets

Markets on Friday again took somewhat of a biased reading, both of the developments in the Middle East and the US eco data. The air strikes of the US and the UK against Houthi targets in Yemen (temporarily) propelled Brent oil above $80 p/b. However, the impact on other markets was a bit diffuse. Higher oil prices hardly affected yields and equity markets held in positive territory. US PPIs, a series that is often ignored especially when it is published after the CPI release, again showed markets’ bullish bias towards bonds. What can’t go up, must come down. On Thursday, a higher-than-expected CPI failed to trigger a further rebound in yields. A slightly softer than expected PPI (-0.1% M/M and 1.0% y/y, vs 0.1% and 1.3% expected) this time was seen as a good enough reason for the Fed to embark on an aggressive rate cut cycle this year. In a outright steepening move, the US 2-y yield declined 10.1 bps. The 30-y finished marginally higher (+0.25 bpn). Markets again discount a 75% chance of a first Fed rate cut in March and more than 150 bps of rate cuts by the end of the year. To be honest, we don’t see how recent data (labour market data, CPI) would force the Fed for such an aggressive approach. German yields, which still had some catching up to do, also declined between 10.9 bps and (2-y) and 3.1 bps (10-y). For equity investors, softer monetary conditions still outweigh lingering (geopolitical) uncertainty. The EuroStoxx 50 gained 0.85%. US equities were little changed going into the long weekend. Still no clear directional trend in the major FX cross rates. The DXY USD index closed marginally higher at 102.4, perfectly in the middle of the ST 102/13 consolidation range. Similar story for EUR/USD (close 1.0951). The yen slightly outperformed on lower core yields (USD/JPY close at 144.88).

This morning/today trading in major markets is taking a slow start as US markets will be closed for Martin Luther King Day. Asian equities are trading mixed with Japan still outperforming (Nikkei + 0.9%). The Japanese 2-y yield revisits the 0.0% barrier as investors see ever less urgency for the BoJ to make a policy U-turn anytime soon.

Today, the eco calendar mainly contains data of secondary importance. Later this week, US retail sales (Wednesday) and Michigan consumer confidence (Friday) are interesting. China will release Q4 GDP data on Wednesday. Plenty of central bankers will also attend the World Economic Forum in Davos. Will they use the Forum to give an assessment on recent market positioning? Probably quite some clear speak from CB heavyweights is needed to amend current soft market reaction function. On FX markets EUR/USD is blocked in a tight sideways range between 1.0875 & 1.10. EUR/GBP trading might become a bit more lively compared to last week, with UK labour market data (Tuesday), inflation data (Wednesday) and retail sales (Friday) scheduled for release.

News & Views

Current vice president Lai Ching-te won the presidential elections in semiconductor-spewing Taiwan on Saturday. The ballot in these heated geopolitical times was seen as the most pivotal one in decades. Lai of the ruling Democratic Progressive Party secured about 40% of the votes. He won from opposition parties willing to restart the dialogue with China after being suspended under DPP rule for eight years. Taiwan is now gearing up for a record third straight term under the party that seeks to minimize Chinese influence. That said, Lai must look for a delicate balance in maintaining strong ties with major democracies including the US while avoiding (escalating) tensions with Beijing that could erupt into a conflict.

The Chinese central bank kept a key policy rate steady at 2.5% this morning. Expectations were for a slight cut to 2.4% after a series of disappointing data last week, including negative CPI and PPI growth and lower-than-expected credit growth. Instead, the PBOC opted for a liquidity injection that was larger than anticipated. The weak yuan is seen as deterring the central bank from going all-in with rate cuts. Combined with uncertainty over the Fed policy rate (cut in March, May or even later?) the PBOC isn’t willing to the jump the gun. USD/CNY eases marginally to 7.17 this morning. In October last year, the pair was trading around 7.3, the weakest CNY level since 2007. A senior central bank official recently did say the central bank may cut the reserve requirement ratio, probably in Q1. That would also unleash additional liquidity into the system.

Daily Pivots: (S1) 184.33; (P) 184.99; (R1) 185.51; More...

Intraday bias in GBP/JPY stays neutral and further rally is in favor as long as 182.73 minor support holds. Corrective pull back from 188.63 should have completed. Above 186.14 will resume the rebound from 178.32 to retest 188.63.

In the bigger picture, price actions from 188.63 medium term top are seen as a correction to the up trend from 148.93 (2022 low) only. As long as 172.11 resistance turned support holds, larger up trend from 123.94 (2020 low) is still in favor to resume through 188.63 at a later stage.

Daily Pivots: (S1) 158.27; (P) 158.96; (R1) 159.37; More...

Intraday bias in EUR/JPY remains neutral for the moment. Further rise is mildly in favor as long as 157.19 minor support holds. Firm break of 100% projection of 153.15 to 158.55 from 155.06 at 160.46 will pave the way to 161.8% projection at 163.79. However, break of 157.19 support will argue that the rebound has completed, and turn bias back to the downside.

In the bigger picture, price actions from 164.29 medium term top are tentatively seen as a correction to rise from 139.05 for now. As long as 148.48 resistance turned support holds (2022 high), larger up trend from 114.42 (2020 low) could still resume through 164.29 at a later stage.

Daily Pivots: (S1) 0.8580; (P) 0.8593; (R1) 0.8601; More...

Intraday bias in EUR/GBP remains neutral at this point. Further decline is expected as long as 0.8638 minor resistance holds. On the downside, below 0.8585 will resume the fall from 0.8713 to 0.8548 support. Firm break there will target 0.8491 low next.

In the bigger picture, fall from 0.8764 is seen as another leg in the whole down trend from 0.9267 (2022 high). Outlook will stay bearish as long as 0.8764 resistance holds. Break of 0.8491 will target 61.8% projection of 0.8977 to 0.8491 from 0.8764 at 0.8464.

Daily Pivots: (S1) 1.6329; (P) 1.6372; (R1) 1.6423; More...

Intraday bias in EUR/AUD remains neutral, further further rise is in favor as long as 1.16278 minor support holds. On the upside, firm break of 1.6478 resistance will argue that whole correction from 1.7062 has completed, and target 1.6844 resistance for confirmation. Nevertheless, break of 1.6278 minor support will turn bias back to the downside for retesting 1.6127 low.

In the bigger picture, fall from 1.7062 medium term top is seen as correction to the up trend from 1.4281 (2022 low). Strong support should be seen around 1.5846 and 38.2% retracement of 1.4281 to 1.7062 at 1.6000 bring rebound. Break of 1.6844 will argue that this up trend is ready to resume through 1.7062 high.

Daily Pivots: (S1) 0.9319; (P) 0.9342; (R1) 0.9359; More...

No change in EUR/CHF's outlook as consolidation from 0.9252 is extending. Intraday bias remains neutral and outlook stays bearish with 0.9402 support turned resistance intact. On the downside, break of 0.9252 will resume larger down trend to 100% projection of 0.9995 to 0.9416 from 0.9683 at 0.9104 next.

In the bigger picture, medium term outlook remains bearish as long as 0.9683 resistance holds. Current fall from 1.2004 (2018 high) is part of the multi-decade down trend. Next target is 61.8% projection of 1.1149 (2020 high) to 0.9407 from 1.0095 at 0.9018.

• Positive price actions in Gold (XAU/USD) as it reintegrated back above its 20-day moving average.
• A continuation of the medium-term bearish trend on the US 10-year Treasury real yield below 1.82% key resistance may add further bullish impetus for Gold.
• A rise in geopolitical risk premium may also support a firmer Gold.
• Watch the US$2,015 key short-term support on Gold (XAU/USD).

Since our last analysis, Gold (XAU/USD) has traded sideways and held firm above the prior US$1,997 key short-term support and its upward-sloping 50-day moving average.

After a slew of key economic data that was released last week (US CPI & PPI for December), Gold (XAU/USD) has managed to hold above the 50-day moving average and reintegrated back above its 20-day moving average last Friday, 12 December with a daily close of US$2,049 over the 20-day moving average value of US$2,044.

There are two other intermarket positive developments on top of the sole positive price actions that may support a bullish tone in Gold (XAU/USD) in the short to medium-term time frame.

Lower opportunity cost for holding Gold

Fig 1: US 10-year Treasury real yield medium-term trend as of 12 Jan 2024 (Source: TradingView, click to enlarge chart)

The US 10-year Treasury real yield has shaped a bearish reaction right at its 1.82% key medium-term pivotal resistance and reintegrated back below the 200-day moving average.

In addition, the daily RSI momentum indicator has failed to break above the 50 level after a retest which suggests that medium-term bearish momentum is likely to have resurfaced.

These observations suggest that the price actions of the US 10-year Treasury real yield may trend lower towards the next medium-term support of 1.38% which in turn lowers the opportunity cost of holding long positions in Gold.

Rising geopolitical risk premium

Fig 2: World Geopolitical Risk Index as of Dec 2023 (Source: Macro Micro, click to enlarge chart)

Secondly, rising geopolitical risk premium as hostilities escalate in the Red Sea shipping route while Yemen’s Houthi rebels are showing no signs of backing down from their series of attacks since late October 2023 that targeted Southern Israel and ships in the Red Sea that were linked to Israel in the ongoing Israel-Hamas war.

The current uptick in geopolitical tension from the Middle East region is also reflected in the Global Geopolitical Risk Index (GPR) compiled by US Federal Reserve economists Dario Caldara and Matteo lacoviello. The GPR Index has been trending up since September 2023 with its current December 2023 reading of 125.47, the highest level since March 2022’s reading of 167.29 during the onset of the Russian invasion of Ukraine.

Potential bullish range breakout for Gold

Fig 3: Gold (XAU/USD) medium-term trend as of 15 Jan 2024 (Source: TradingView, click to enlarge chart)

Fig 4: Gold (XAU/USD) minor short-term trend as of 15 Jan 2024 (Source: TradingView, click to enlarge chart)

The price actions of Gold (XAU/USD) have staged a “V-shaped” bullish reversal in the latter half of last week right at the lower boundary of the medium-term ascending channel in place since the 6 October 2023 swing low that is acting as a support at US$2,015 coupled with a bullish momentum condition flashed out by the daily RSI momentum indicator at around the 50 level.

In the shorter term as seen on the 1-hour chart, it has staged a clearance above the upper boundary of a former minor descending channel in place since 28 December 2023, and the 20-day moving average.

The next intermediate resistance to watch will be at US$2,090; a 6-week range resistance since 4 December 2023. A clearance above it sees the next intermediate resistance coming in at US$2,117.

On the flip side, failure to hold at the US$2,015 short-term pivotal support negates the bullish tone to expose the medium-term support zone of US$1,990/1,975 (also close to the 200-day moving average).

In focus today

Today, the US election year kicks off with the Iowa Republican Caucuses. Prediction markets see Trump as the clear favourite to win the Republican candidacy, and he is projected to win over half of all votes in Iowa according to the latest polls. The Iowa caucuses are often seen as a bellwether for the rest of the spring, and either of Trump's closest challengers, Ron DeSantis or Nikki Haley, would likely have to come up as a close runner-up to maintain their hopes of clinching victory in the end.

In the euro area, we receive the November industrial production figures. The industry has been stuck in contractionary territory in 2023. Recently, soft indicators like the manufacturing PMIs and leading indicators from Asia have started to show a bottoming out in manufacturing activity. It will be interesting to see if the hard data confirms this. However, the risks are tilted towards another benign euro area print as data released last week showed German industrial production falling 0.7% m/m in November.

We also receive German GDP figures for 2023. The figures will show how the economy ended 2023 in Q4 where activity likely declined judging by data released on industrial production as well as soft indicators. The release includes the 2023 data and not the official seasonally adjusted real q/q growth rate for Q4 - this is scheduled in two weeks.

In Sweden, we expect the December inflation data to show a decline in primarily CPIF inflation, which likely has temporarily dropped below the 2% target. That said, core CPIF excl. energy is expected to continue to undershoot the Riksbank's November forecast as we forecast CPIF and CPIF excl. energy to print 1.9% y/y and 5.0% y/y, respectively, which is -0.2 and -0.6 percentage points below Riksbank's dittos. We note that December inflation in Denmark and Norway suggest lower prints on food, clothing, transportation services and recreation than what is assumed in our forecast, which may suggest a downside risk to the overall forecast.

For the remainder of the week focus we will look out for inflation data from the UK and Japan. We also have several central bank speakers on the wire.

The World Economic Forum in Davos also kicks off Monday. The WEF runs till Friday 19 January.

Economic and market news

What happened overnight

Chinese central bank surprises with unchanged rates: PBOC surprisingly kept rates on hold this morning in contrast with ours and consensus expectations of a 10bp cut. The central bank has signalled further easing recently but apparently not already today. It may also be a signal they will prefer to reduce the reserve requirement ratio (RRR) instead and we will be looking out for that in the coming weeks. They normally do not change the RRR rate at the same time as the rate decisions so it could happen any time in our view. The CNH strengthened slightly after the rate announcement this morning but USD/CNH is unchanged from the levels Friday afternoon around 7.18.

Oil prices rose slightly this morning with Brent having gained around 0.20% trading at USD78.45/barrel.

What happened over the weekend

Taiwan election points to status quo: As expected, the independence-leaning DPP secured the presidency for the third time in a row as their candidate Lai Ching-te won by a 6.7 percentage points margin to KMT's Hou Yu-ih. However, Lai's victory was smaller than his predecessor Tsai Ing-wen and DPP lost the majority in the parliament. Hence Lai is ruling with a weaker mandate than Tsai Ing-wen. Lai's victory was also secured by keeping a more moderate tone on independence than before he became presidential candidate suggesting that he is unlikely to increase confrontations with China. It also reflects a mood among the Taiwanese where polls show a clear majority in favour of the status quo - and more so over the past year, see also Research China - Taiwan election points to status quo, but not further escalation, 15 January. The market reaction to the election this morning has been very muted.

On Friday UK monthly GDP November figures came out slightly better than expected at 0.3% m/m (consensus: 0.2%, prior: -0.3%). A slight rebound, as expected following the upbeat PMIs the past months which showed composite and services in expansionary territory. The 3m/3m was however lower than expected at -0.2% after downward revisions almost across the entire board for October.

Oil prices initially rose after the US and UK had conducted airstrikes against the Houthis in Yemen with Brent briefly trading north of USD80.5/barrel but settling at USD78.29/barrel. Between Friday and Saturday, the US conducted another air strike against the Houthis. US president Biden later said the US had delivered a private message to Iran regarding the Tehran-backed Houthis and their attacks on commercial ships in the Red Sea.

US PPI numbers for December came in at -0.1% m/m and 1.0% y/y, which was lower than expected (consensus: 0.2% m/m and 1.4% y/y). November PPI was revised down to -0.1% m/m from being unchanged, hence headline PPI m/m dropped for the third consecutive month in December. Core PPI for December stood at 0.2% m/m and 2.5% y/y.

The 10y UST was down by 3.6bp by end of Friday's session, as investors digested the week's inflation numbers.

In the equity space Microsoft seized the throne from Apple as the largest public company by market cap. Microsoft had briefly overtaken Apple in Thursday's session, however this marks the first time Microsoft stands as number one by closing bell since November 2021. Microsoft which gained 1.00% in Friday's session now has a market cap of USD2,887bn, whereas Apple which gained 0.18% in Friday's session has a market cap of USD2,875bn.

Geopolitics: On Friday, we published a note discussing the tensions in the Red Sea. For now, we are not overly concerned that the events would affect global markets. Although freight rates have increased significantly over the past few weeks, energy markets remain calm. In a late business cycle environment, supply side issues are not as inflationary as in an environment where the economy is booming. We do acknowledge though that the situation warrants close monitoring. Risks rise in a scenario where the war in Gaza expands. Lebanon's involvement would raise the risk of Iran also drawing in, and such a scenario could be a game changer for the energy markets, for inflation and for the major central banks. Read more on Research Global: Tensions rise in the Red Sea - should we worry? 12 January.

Equities: Global equities were higher Friday and last week despite a lacklustre start to the US earnings season. As always, US banks were the first ones to report and the combination of both disappointing earnings and for some weaker than expected guidance dragged down banks and made US indices underperform. The energy sector was the best performer after oil price rose as a result of the US and British attack on Houthis. Asian markets are mixed this morning. Japanese indices are continuing higher on the back of further yen softening. European and US futures are mostly higher this morning.

FI: Global yields in the front end went sharply lower on the back of the US PPI miss, which added to easing expectations from central banks. The 2y US yield ended 10bp lower, which took the Schatz (Germany) 7bp lower along the way. Markets are now pricing 154bp of rate cuts for the rest of the year, which is 14bp more than on Thursday last week. This weekend, ECB Chief Economist pushed back on the expectations for a rate cut in Spring, but saying that by June, ECB will have the important wage data for Q1, which will only become available by the end of April.

FX: Despite elevated geopolitical risks with the air strike in Yemen by the US and UK on Friday, market sentiment is positive - also helped by soft US December PPI figures on Friday. EUR/USD is still range trading in the mid 1.09-1.10 level, while USD/JPY declined below 145. EUR/GBP had a fairly quiet session on Friday, staying just below the 0.86 mark. EUR/NOK and EUR/SEK are hovering just below 11.25, bringing NOK/SEK near parity.

The US stock markets ended last week on a cautiously positive note. Friday’s producer price inflation came as a certain relief to inflation worries as the latest data showed an unexpected contraction in the monthly figure. The jump in oil prices, following the US and UK airstrikes in areas in Yemen controlled by the Houthis, which sent the barrel of American crude to past the $75pb level, didn’t last long. The barrel of US crude starts the week below the $73pb level. The risks are tilted to the upside as conflict news continues to flow in this Monday. Rishi Sunak will address Parliament as his government is ready to intensify strikes on Houthi targets. Yet there is a strong barricade into the $74/75pb level in the US crude and near $80pb level in Brent, as the rising global supply, increasing competition to OPEC and the globally weak economic outlook weigh heavier and convince the bears to sell every geopolitically supported rallies.

Rising tensions in the Red Sea and the rising shipping costs are a boon for shipping companies like AP Moeller-Maersk that see their stock prices being pushed higher. Bank stocks on the other hand traded mixed on Friday as the first Q4 earnings from some US banking giants were mixed. JP Morgan for example had a blast last year. The banking crisis that hit the smaller, regional banks drove capital to big banks like JP Morgan, and combined with the rising interest rates, JP announced the most profitable year of its history. The bank posted more than $250nb net interest income last year – its 7th consecutive quarter of record net interest income (NII). Together, the 4 major US banks made $80bn more last year than in 2021. Wells Fargo beat estimates but its prediction of 7-9% fall in NII next year sent the stock price more than 3% lower on Friday, while BAC fell 1% after missing estimates.

Despite a mixed set of results and record NII, the big banks share the same forecast for next year: their net interest income will fall next year as the Federal Reserve (Fed) is expected to cut interest rates.

Elsewhere

The People’s Bank of China (PBoC) held its policy rate steady this Monday - defying the expectation of a 10bp cut - while pumping more cash into the financial system to reverse the selloff and boost asset prices, and eventually growth. But in vain. The Chinese CSI 300 index barely reacted to the news after China posted a third negative CPI read on a yearly basis. China is still expected to hit its official 5% target this year, but the confidence crisis and the slump in property prices are not going to reverse overnight. Outlook for Chinese equities is not bright.

Taiwan’s stock exchange, on the other hand, which diverged positively from the mainland stocks last year, had a cheery start to the week after the ruling DPP’s Lai – who is pointed at as a ‘separatist’ by Beijing - won presidency and his party lost its legislative majority. The latter was seen as a good compromise for relations between China and Taiwan – as the outcome was clearly not over-provocative for Beijing. The Japanese Nikkei 225, on the other hand, hit the 36K mark on the back of a softer yen, and waning expectations that the BoJ will be normalizing at a decent speed this year.

In the FX, the US dollar kicks off the week on a slightly negative note, the AUDUSD struggles to find buyers near the lower bound of its October to now ascending channel, as the PBoC could’ve been more supportive. The EURUSD couldn’t clear the 1.10 resistance last week, and the failure to break above the crucial psychological could weaken the euro bulls’ hands this week. Across the Channel, Cable remains cautiously bid after Friday’s GDP printed a better-than-expected growth number. The UK will release its latest inflation report on Wednesday. UK inflation is expected to have further eased from 3.9% to 3.8% in December, and core inflation is seen slipping below the 5% mark. A softer-than-expected set of inflation figures could prevent Cable from making a sustainable move above the 1.28 level.

Daily Pivots: (S1) 1.3362; (P) 1.3387; (R1) 1.3431; More...

Intraday bias in USD/CAD stays neutral first. But further rise is mildly in favor as long as 1.3339 minor support holds. Decisive break of 38.2% retracement of 1.3897 to 1.3176 at 1.3451 will pave the way to 61.8% retracement at 1.3622. On the downside, however, break of 1.3339 will turn bias back to the downside for 1.3176 low instead.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern only. While fall from 1.3897 could still extend through 1.3091, strong support should emerge above 1.2947 resistance turned support to bring rebound. Overall, larger up trend from 1.2005 (2021 low) is still expected to resume at a later stage.