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Daily Pivots: (S1) 1.4798; (P) 1.4862; (R1) 1.4986; More...

EUR/AUD's rally resumes again and intraday bias is back on the upside. Rise from 1.4281 short term bottom would target 1.5396 resistance. On the downside, however, break of 1.4663 minor support will turn bias back to the downside for retesting 1.4281 low.

In the bigger picture, down trend from 1.9799 is still in progress. Break of 1.4318 low will target 61.8% projection of 1.9799 to 1.5250 from 1.6434 at 1.3623, which is close to 1.3624 long term support (2017 low). This will remain the favored case now as long as 1.5396 resistance holds.

Daily Pivots: (S1) 0.9558; (P) 0.9586; (R1) 0.9640; More....

EUR/CHF recovered quickly after dipping to 0.9530. Intraday bias is turned neutral first. But outlook stays bearish as long as 0.9864 resistance holds Break of 0.9530 will resume larger down to 61.8% projection of 1.0512 to 0.9550 from 0.9864 at 0.9269.

In the bigger picture, long term down trend from 1.2004 (2018 high) is still in progress. Next target is 138.2% projection of 1.2004 to 1.0505 to 1.1149 at 0.9033. On the upside, break of 0.9970 support turned resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish in case of strong rebound.

EUR/USD

Neither the bears, nor the bulls managed to gain enough momentum and the EUR/USD remained locked in the zone between 0.9960 – 1.0025. The market sentiment remains negative – for a depreciation of the single European currency against the greenback, but only a confirmed breach of the critical support at 0.9960 could deepen the sell-off and head the pair towards a test of the next significant support at 0.9877. However, before a potential resumption of the downtrend is to occur, we may first witness an appreciation of the euro towards the resistance at 1.0070 – a level that may present the sellers with an opportunity to enter the market at better levels than the current ones. In case the resistance at 1.0070 is breached, then the corrective move may deepen and the pair could head towards the next key resistance at 1.0100. Today, an increase in activity can be expected around the announcement of the CPI data for the euro area at 09:00 GMT.

GBP/USD

The consolidating movement of the currency pair between the support at 142.68 and the resistance at 143.50 continued during the past trading session and the beginning of the new one. The bulls are currently in control of the market and a successful breach of the 144.93 level would likely not surprise anyone. Conversely, if the support at 142.68 is breached instead, then this would pave the way for the bears to reach the next zone at 141.64, where the bulls should intervene and fight them off.

USD/JPY

The past trading session was rather calm, and at least for now, the currency pair is managing to remain above the support at 1.1450. We may see a range move and a retracement towards the resistance at 1.1600. However, the bears seem to have permanently settled in the market, and so if the level at 1.1450 does not hold, then the next support at 1.1400 would likely be easily reached as well. A signal that the bulls may return to the market for a longer time period would be a breach of the psychological resistance at 1.1600.

EUGERMANY40

The negative expectations for a continuation of the downward movement that began in the beginning of the week have only strengthened, as yesterday the bears successfully breached the support at 12979. The forecasts for today’s trading session are for the sell-offs to continue and for the critical support at 12717 to likely be considered as the next target for the sellers. In the last trading day of the week, it is highly possible for the sellers to retain their profits, generated by the short positions taken in the beginning of week, which action will most likely hold the price of the index in the interval of 12979 – 12717, before a potential deepening of the sell-offs. There is not any major economic news expected to be announced today, thus volatility may remain low, not providing the necessary stimulus to the sellers to lead the price below the support at 12717. In case of a successful violation of the mentioned support, then we may expect a further deepening of the sell-offs and a depreciation towards the level at 12600. In an alternative scenario, in which the bulls manage to limit the decline and bounce the price back above the resistance at 13000, their next target would be the follow-up resistance zone at around 13190.

US30

In the early hours of today’s trading session, the bears prevailed and successfully breached the support at 30975, which may suggest the end of the short consolidation that began in the beginning of the week after the significant losses from Monday. Thus, the violation of this support may be considered as a confirmation signal for the continuation of the downtrend. Therefore, the forecasts for today’s session are for the sell-offs to continue heading the price towards a test of the critical support at 36000, as current market sentiment remains negative – for a further depreciation of the index. However, if the bulls prevail and manage to return the price above 30975, then we may expect a further correction towards the resistance at 31630, and if this scenario is realised, then the sellers would most probably take advantage of the situation to enter the market at better levels.

The Nasdaq 100 tumbles as investors brace for an aggressive move by the Fed next week. The recent rally came under pressure at the origin of a sell-off in late August (12850) which coincides with the 30-day moving average. The sharp liquidation suggests that the mood has swung back to the fragile side. A breach below the psychological level of 12000 shows that the path of least resistance is down. Then July’s lows near 11400 would be the bulls’ last stronghold. 12100 is the first resistance in case of a bounce.

The Australian dollar struggles as August’s unemployment rate shows an uptick. The bounce hit resistance at 0.6910 over the 30-day moving average. A steep drop is a sign of liquidation and a lack of commitment from the buy side. The RSI’s oversold condition has led to some buying in the demand area near July’s lows (0.6680). If the pair fails to hold onto this critical level, a bearish breakout would extend losses to 0.6500 and resume the downtrend in the medium-term. The support-turned-resistance at 0.6830 is a fresh hurdle.

The US dollar recovers supported by rising Treasury yields. A previous failure to clear the July peak at 0.9870 has put a halt to the dollar’s rally, possibly triggering a consolidation phase. The latest correction found support over 0.9480 while a bullish RSI divergence showed a loss of momentum in the sell-off. A follow-up break above 0.9620 is an encouraging sign but the bulls need to lift the former support at 0.9680 before a recovery could gain traction. Otherwise, the greenback may slide to the daily support at 0.9400.

Market picture

Bitcoin has lost 1.6% over the last 24 hours to $19,777 amid renewed pressure on risk-sensitive assets. BTC remains just under the critical $20K round level, where it got support for the past three months.

Ethereum lost the speculative support it received before the move to PoS. Over the last day, Ether lost 8.6%, more than three times more than the 2.6% reduction in overall crypto capitalisation. Weakness of this kind is an almost inevitable consequence of a previous period of overperformance, much of the gains of which have yet to be erased. Trading at $1500, Ether is now almost 50% above the area of the June-July lows, while Bitcoin has rolled back to its lows of that period.

News background

Tether and Bitfinex technical director Paolo Ardoino said the move to PoS will not help the second cryptocurrency catch up to Bitcoin. The Merge will not lower transaction fees or make ETH more decentralised, nor will it increase network capacity. Ethereum cannot compete with BTC as a form of money because it has no maximum issue limit.

According to Santiment, more than 45% of Ethereum nodes launched after The Merge update are managed by just two addresses, raising concerns crypto community concerns about centralisation.

According to Chainalysis, developing countries are leading the world in cryptocurrency adoption. Vietnam and the Philippines lead the rankings due to the popularity of cryptocurrency and NFT gaming projects. Of the developed countries, only the US and China are in the top 10, ranking fifth and 10th, respectively.

Markets

Curve flattening/inversion remained the ‘by default’ option on EMU and US interest rate markets. Both EMU and US 2-y yields touched multi-year highs as markets assume that the Fed and the ECB have no choice but to continue their front-loading game. At the same time, US markets don’t completely give up the idea that there is a case for the Fed to contemplate cutting the rates by end of next year. It’s unlikely that the Fed will support that idea.

US data were mixed. Retail sales grew modestly in August. July sales were downwardly revised. Weekly jobless claims (213k) remain low and suggest demand for labour remains solid. If the Fed wants to tame inflation via a moderation in demand, there is still some work to do.

US yields rose between 6.6 bps (2-y) and 0.8 bps (30-y). The move was again fully the result of a higher real yield (10-y +8.6 bps to 1.02%). EMU (swap) yields rose 1.3 bps (10-y) to 9.2 bps (2-y). The 30-y measure eased slightly (-1.5 bps). The EMU two year yield surpassed the 2011 peak closing north of 2.50%.

ECB policy makers (except for Portuguese member Centeno) all admitted that decisive action is needed to bring inflation and inflation expectations back to more acceptable levels, supporting the ruling market trend. A persistent rise in real yields with CB’s tightening at risk of pushing the economy into recession (Cfr World Bank infra) is keeping equities in the defensive.

US indices again lost up to 1.43% (Nasdaq). Both the S&P and the Nasdaq are at risk of slipping below last technical support (at 3809 and 11545 respectively) which, if so, would open the way for a return to the June lows. The dollar remains strong (DXY close 109.74) but for now fails to force a new break higher. Markets pondering the chances of interventions in the likes of Japan and SK and EMU interest rates at least following (or even exceeding) moves in the US for now results in some kind short term (fragile) equilibrium. EUR/USD even closed marginally stronger at parity.

This morning, Asian equites remain under pressure losing op to 1.0%/1.5%. Chinese August eco data including production, retails sales and unemployment all printed better than expected, but didn’t help to change investors’ mood. The yuan weakens further north of USD/CNY 7.0. USD/JPY is trading little changed near 143.4. US yields are still drifting higher.

Later today, the final EMU August inflation and US consumer confidence of the University of Michigan probably take center stage. Final CPI data usually are no market mover, but an upward revision (if any) might only reinforce the rise in short-term yields. In the Michigan consumer confidence survey, the market focus shifted from the activity-related subseries to inflation expectations. The later are expected to confirm recent topping pattern. Even so, we don’t expect it the really affect pre-Fed market positioning in a profound way. The dollar for now is holding a consolidation pattern, but recent/cycle highs stay within reach.

News Headlines

South Korea is reviewing contingency plans to stabilize the South Korean won. USD/KRW tested a 13-year high (low for the won) at 1400 in Asian dealings this morning. At the start of the year, the SK currency was trading below 1200. Finance minister Choo Kyung-ho joined peers in Japan in stepping up verbal interventions. He told parliament that the ministry is closely monitoring the market situation and said authorities would take measures if necessary. The Bank of Kora recently warned that the won’s fall has been too fast relative to economic fundamentals. The central bank raised rates by 25 bps to 2.5% in August and signaled more tightening. However, the aggressive US Fed path still favours the dollar over the won with the former also under pressure from ballooning/record trade deficits amid surging energy and commodity prices.

The World Bank warned for a “devastating” recession next year as central banks raise rates at a speed not seen in decades. It called on monetary authorities in big economies to coordinate their actions in order to reduce the overall amount of tightening. At the same time, more action is needed to boost production to ease price pressures rather than all the focus being on curbing spending. The World Bank said core inflation was still likely to run above 5% next year, adding that if this persuaded central banks to become even more aggressive, global economic growth would drop to just 0.5% in 2023.

US railroad companies and the unions representing their workers reached a tentative agreement early Thursday to prevent a rail strike in the US. Unions have to vote now.

The deal includes a pay increase of 7% this year, as well as retroactive increases for the previous two years, and two more raises in 2023 and 2024 of 4% and 4.5%. Plus, an annual $1,000 ‘service recognition bonus.’ (I am not sure Powell was enchanted to hear the salary rises, when he fights so hard to bring inflation down, but hush!)

Of course, avoiding a rail strike is good news, but not good enough to give a smile to investors. The markets remain too focused on inflation.

The S&P 500 closed the session more than 1% lower, and just a point above the critical 3900 support. The fact that the US retail sales, and last week’s jobless claims – which both hinted that the US economy remains relatively resilient to the Federal Reserve (Fed) rate hikes - didn’t help keeping the Fed hawks at bay.

US sales at restaurants and bars last month beat last year's August by a strong 10.9%. And sales, overall, rose by a solid 18.5% for the first eight months of the year compared to the same period last year. Those are not the numbers that you want to hear if you are called Jerome Powell, and you are trying to cool down demand to cool down inflation.

As a result, the US 2-year yield spiked to 3.90%, the highest levels since 2007, as strong data further spurred the hawkish Fed expectations. The mortgage rates in the US toped 6% for the first time in 14 years. The US dollar consolidated a touch below the 110 level, the higher yields sent the equities lower, and gold dived to $1660 per ounce.

We will likely close this week on a sour note. Next on the economic calendar are the final European CPI read, which will confirm that inflation spiked to 9.1% in August, and the University of Michigan Consumer Sentiment, which will hopefully not print a significantly positive number, because the Fed hawks got strong enough the week before the Fed decision.

Rectifying a beginner’s mistake

Good news for inflation is, recession worries will likely continue weighing on energy prices, and pull at least some pressure off the Fed’s shoulders.

Yesterday, the barrel of American crude took a good 4% dive. But this time, it wasn’t just the recession talk, it was because the Americans rectified a beginner’s mistake that they have made earlier this week, saying that they will refill their strategic oil reserves if prices fall below $80 per barrel.

Obviously, if you want to refill your reserves at a good price, you don’t tell the world your intension to start buying at say, $80, because if you do so, smart people will also position with you, and build a support near the $80, to make sure that the price doesn’t go below that level. So, if you are the US, and you want to see oil prices come down, you just… keep it shut, and say, as they did yesterday, that there is no particular price trigger to refill the US reserves, and the purchasing won’t happen before the end of fiscal year 2023.

Natural gas futures also sold off in the US on news that the rail strike would be averted, as a potential strike would’ve threatened the deliveries of other energy sources, like coal for example. The European nat gas futures were also slightly down.

The mix of strong US dollar, and soft oil sent the USDCAD to above 1.3250. The EURUSD struggles near parity, as Cable keeps pushing lower below 1.15.

It’s nothing to do with the markets, but let’s have a quick laugh before we go: Vladimir Putin and Xi Jinping said they could ‘inject stability and positive energy to a world in chaos’.

Hallelujah.

Market movers today

The US releases consumer confidence from University of Michigan for September. It has rebounded a bit in recent months from low levels. Focus will also be on the inflation expectations index on 5-10 year horizon, which reached 3.1% a couple of months ago but has since fallen back to 2.9%. It still suggests inflation expectations are anchored.

In the euro area we get final CPI for August, which provides more details on sub-components. It will likely confirm that a peak in underlying inflation pressures is not yet in sight.

UK releases Retail Sales.

The 60 second overview

Markets: After taking a breather on Wednesday, risk markets returned to a negative mode on Thursday. The S&P500 index fell to three-month lows with tech and growth-related stocks underperforming and the rise in short-dated yields deepened the curve inversion. In the euro area, the EUR 2y30y spread is trading at 46bp, levels similar to June 2008 just three months before the Lehman crash.

Fed preview: In our Research US: Fed preview - Fast pace hiking cycle continues, 16 September, we repeat our call for a 75bp hike by the Fed next week. The market is more upbeat and sees a possibility of a 100bp hike. In our view, recent inflation data does not warrant such a large hike, and the fact that real yields are rising and financial conditions have tightened, implies Fed's hawkish post-Jackson Hole communication is working as intended. While we keep our call of the third consecutive 75bp hike next week, we also find a chance of a fourth 75bp hike in November, and potentially a fifth 75bp hike in December, and a terminal rate well above 4% next year likely. We currently forecast a total of 125bp of hikes for rest of the year but we plan to review our forecast after next week's FOMC meeting.

Russia-China relations: Presidents Vladimir Putin and Xi Jinping met in Uzbekistan yesterday, the first in-person meeting for the two after Russia launched its attack on Ukraine in February. In a sign that the war is creating some fractions in the friendship between the two nations, Putin acknowledged China's 'concerns' about the war in Ukraine. China continues to provide diplomatic support for Russia but the post-meeting comments alleviated concerns that China would step up its support and potentially face US sanctions as a result. While fostering closer economic and strategic ties with Russia, China seems determined to withhold material support to Russia and opposes any escalation that might further destabilize the world economy.

Equities generally lower for another day, as growth cyclicals continue to weigh on indices. Inflation (and not recession) continues to be the main theme for markets. Yield sensitive sectors such as tech or real estate continue to underperform while banks and health care beats. With banks outperforming it is clear that investors are still believing in a muddling-through scenario in terms of growth. Interestingly, mainly large cap growth (FANMAG) is selling off, while small caps are faring better. S&P500 -1.1%, Nasdaq -1.4%, Dow -0.6% and Russell 2000 -0.7%. Risk-off mode continuing into this session according to US futures and Asian markets. The digesting of the US CPI print is the best explanation for the market narrative, while macro data yesterday was overall supporting both camps.

FI: Market attention was all on the 75bp pass-through taking effect Wednesday as we got the first release of the €STR fixing (which showed a full transmission as €STR rose 74.5bp), while the repo market is yet to show full transmission, and speculation arise if that may even come. GC repo rates still need to show another 10-20bp of pick-up for a full transmission. The suspension of the government deposit cap of 0% did not seem to have alleviated the concerns of pass-through.

FX: Cyclically sensitive currencies continue to trade on the back-foot while the USD has been a clear recent winner. That said, the EUR has kept up well in recent sessions with EUR/USD still hovering around parity. EUR/NOK has approached 10.20 while EUR/SEK is back above 10.70. GBP has also traded poorly as of late with EUR/GBP back above the 0.87 mark.

Credit: Investment grade credit markets were in a wait-n-see mode on Thursday and Itrax main widened just slightly (0.9bp) to close at 107.6bp. The high yield market, as measured by Itrax Xover, was somewhat more volatile and widened 7.2bp to close at 531.6bp.