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Markets

US stock markets ended the week in the way they started: with serious volatility. Opening gains quickly faded into <1% declines before a furious late-session rally hurled the likes of the Nasdaq to more than 3% higher. Solid big-tech earnings (Apple) helped counter geopolitical and Fed policy uncertainty. Core bonds parted ways. USTs gained, bull steepening the curve with changes ranging from -2.6 to 4.6 bps at the short end and -1.8 to -2.9 bps for long tenors. German yields added 0.4 bps (2y) to 1.4 bps (10y). The USD held on to its gains and in some cases (AUD, NZD) extended the bull run on Friday. The trade-weighted dollar index eked out a new recovery high at 97.27. EUR/USD stuck near recent lows around the 1.1163 support (March 2020 interim high). EUR/GBP traded similarly with the pair unable to leave the two-year lows near the 0.83 zone behind.
 
An FT weekend interview and Chinese data are talk of the town this morning. About the former: Atlanta Fed governor Bostic told the Financial Times that every option is on the table, including a 50 bps rate hike if the data warrant it. He’s the first Fed member to mention it this explicitly. On the date front, Chinese PMIs signaled further loss of economic momentum. The Caixin gauge (from Markit) for manufacturing even fell into contraction territory (49.1 vs 50 expected). A factory slowdown is not unusual in the run-up to the one-week holiday for China’s Lunar New Year. It’s testament to the overall economic easing (Covid nonetheless. Anyway, Asian-Pacific stocks kick off the week in good spirits with gains of 1%. Core bonds decline with the short end underperforming, probably in response to the Bostic interview. The dollar is catching a breath after a stellar run last week.
 
Trading in Europe and the US is bound for a slow start given the bulging economic calendar, allowing a currently optimistic sentiment and technical considerations to take the driver’s seat for now. That’s to change later this week though. The Bank of England is due for a back-to-back rate hike on Thursday. The ECB is likely to keep looking the other way even if inflation, published the day before, will remain way above target. It will probably prevent the euro a meaningful comeback, if any. We’re keen to see rates markets react though. They will probably keep the pressure high. Euro area money markets are currently discounting more than two 10 bps rate hikes by end 2022. ISM business confidence and the first payrolls report of 2022 are due in the US. Central banks in Australia and the Czech Republic fill in some of the remaining gaps.

New Headlines

Slovenian parliament will today vote on a measure which puts a retroactive cap on the FX losses suffered by borrowers in low-yielding foreign currencies like the Swiss franc. Several other CEE-countries are already dealing with this problem. Under Slovenian the proposal, which was labelled problematic for the local banking sector by a non-binding ECB-opinion, banks would need to repay for any extra costs incurred beyond 10% going back to 2004. Banks warn that costs will be much larger than the €300mn estimated by in the proposed bill. The latter also includes penalties and potential revocation of banking licenses if financial institutions fail to repay borrowers in time.
 
Eighth time is a charm. The eight ballot to find a new Italian president finally delivered an (unexpected) winner on Saturday. The outgoing president, 80-yr old Mattarella, who previously said that he was no longer the best fit and unwilling to stand for re-election, will stay on. “Duty of the nation, must prevail over my own personal choices”. Mattarella’s re-election means that the ultimate goal – keeping Draghi on as PM of the government as national unity – was reached. The presidential ballot showed how fragile the collaboration between centre-left and centre-right blocs is. They hope that Draghi will steer them through a difficult 2022 reform year, avoiding snap elections and political chaos ahead of the planned ballot in 2023.

American futures tilted higher cautiously as investors waited for key quarterly earnings scheduled for this week. Some of the top companies expected to publish their results are Amazon, Alphabet, AMD, Pentair, Meta Platforms and Electronic Arts. On Amazon, analysts expect that the company’s business did well in the fourth quarter, helped by cloud segment.

Analysts will watch Alphabet’s and Meta’s business because of their advertising business. The fourth-quarter is usually a good period for the businesses as companies boost their holiday marketing budget. On EA, analysts will be watching for the company’s reaction to the ongoing wave of mergers and acquisitions in the gaming industry.

The price of crude oil rose in early trading as investors watched the situation between the United States and Russia. Most Western countries have said that they will not commit their militaries to fight for Ukraine. Therefore, the main policy response to Russia will be sanctions, which will target most industries, including the oil and gas one. As such, there is a likelihood that there will be an oil supply shortage. Another major concern is in the natural gas industry. There is a likelihood that Russia will respond by cutting off gas supplies to Europe which explains why the price of natural gas has surged.

The economic calendar will have some key economic data today. On Sunday, data from China showed that the country’s manufacturing sector continued to struggle in January as the cost of doing business escalated. Later today, Eurostat will publish the latest GDP data from the European Union. Analysts expect the data to show that the bloc’s economy expanded by 4.7% in the fourth quarter. That growth will be driven by countries like France and Spain that had a strong economic growth. Other data to watch today will be the latest Germany CPI data and its import and export price index.

EURUSD

The EURUSD pair has been in a strong bearish trend over the past few days. On the daily chart, the pair managed to break below the bearish flag pattern. It also declined below the 25-day and 50-day moving averages while the Relative Strength Index (RSI) is approaching the oversold level. Therefore, the pair will likely continue falling as bears target the next key support at 1.1100.

USDCHF

The USDCHF pair continued its bullish momentum as the US dollar strength continued. The pair is trading at 0.9300, which is slightly below last week’s high of 0.9335. On the four-hour chart, the pair has moved above the 25-day and 50-day moving averages. The Relative Strength Index (RSI) has also moved to the overbought level of 70 while the Stochastic Oscillator has stated declining. Therefore, there is a likelihood that the pair will continue rising ahead of US jobs data.

GBPUSD

The GBPUSD pair has been under pressure in the past few months. The pair has formed a bearish flag pattern. It has also moved slightly below the 25-day and 50-day moving averages. The MACD has moved below the neutral level. Therefore, the pair will likely keep falling as bears target the next key support at 1.3350.

Market movers today

We kick off the week with euro area GDP figures for Q4. We expect that growth has edged out a small plus of 0.4% q/q, but the recovery pace cooled markedly at the end of 2021 in light of Omicron and supply chain headwinds, notably in Germany. We also get German CPI figures today. Here we should see a big dip in inflation as the VAT-effect falls out. Energy will continue to keep inflation elevated, though.

Overnight, The Reserve Bank of Australia is widely expected to end QE purchases, and the focus will be on forward guidance. While recent data supports the case for earlier hikes, we think RBA is unlikely to take as hawkish stance as markets are currently pricing.

Later in the week, we will focus on the ECB meeting on Thursday, where we do not expect to hear new policy signals (read more in our ECB Preview, 28 January). Bank of England will also meet on Thursday, and we look for a 25bp hike. Besides central bank meetings, we will keep an eye out for euro area inflation, several interesting Fed speeches and a jobs report from the US.

We will of course also look out for developments in the Russia-Ukraine stand-off.

The 60 second overview

Italy's presidential election: Impasse was resolved over the weekend by incumbent President Mattarella agreeing to serve another term. This gives PM Draghi the opportunity to lead his unity government until the end of the parliamentary term in 2023 and reduces the political uncertainty for businesses and markets. Implementing Italy's ambitious EUR 200bn recovery plan and structural reforms will remain the priority for the remainder of Draghi's term. That said, fragilities within the government have already become more visible during the presidential election and disagreements over spending priorities and reforms (especially on the thorny issues such as tax, pension and labour market still outstanding) will probably only intensify as the next general election approaches.

Macro: US private consumption moderated in December (-1.0% m/m) driven by lower goods consumption. The normalizing goods demand could help alleviate some of the global inflation pressures, although the current level still stands around 5.2% above counterfactual pre-covid trend (down from +15% last March). Over the weekend, China's official Manufacturing PMI's new export orders index remained weak at 48.4 (from 48.1), still signalling contraction in export demand. This week, the US jobs report will be the key US data release to follow, we expect to see around 200k new jobs as faster recovery is unlikely before labour force participation begins to pick up. Omicron likely delayed the recovery in January, as U.S. Census Bureau's Household Pulse survey data indicates that almost 8.8m Americans were unable to work in early January due to Covid-related sick leave or taking care of others who were infected (up from around 3.0m in December).

French election: The French economy continued its outperformance at the end of 2021, with GDP standing 0.9% above pre-pandemic levels, in contrast to a short-fall of 4% in Spain and 1.5% in Germany. A strong recovery in consumer spending and business investment helped France weather the economic fall-out from the Covid-19 pandemic better than other euro area peers. The strong economy remains one of the main selling points for Emmanuel Macron's re-election bid and our base case is for him to secure another term as President. However, as the surprise potential at French elections remains high, we see scope for a higher election risk premium to be priced in fixed income markets, whereas the election impact on EUR/USD should be muted (read more in Research Euro Area - French presidential election: Macron encore? 31 January).

Equities: Equities in a big turn-around on Friday led by the tech sector flying after some solid earnings results. US outperformed Europe by 2.5% due to the turn-around but even more interestingly, tech was up by almost 3.5% while energy and materials were down. As a result, we had the first day in a while where pure optimism took over and hence cyclical growth outperformed. In US Dow +1.7%, S&P 500 +2.4%, Nasdaq +3.1% and Russell 2000 +1.9% Positive sentiment is continuing in Asia this morning as the Lunar New Year starts and therefore some Chinese markets are closed for holiday. European and US are higher as well.

FI: We have a week with several central meetings including the ECB meeting on Thursday as the main event. We expect that ECB will stress that they will not hike in 2022. Hence, if ECB is able to convince the market that they are not going to hike it should be positive for the front end. More support may also come from the EU and German inflation data, which is expected to decline due the base effect from the German VAT.

FX: Friday was a quieter day after the sharp move lower in EUR/USD on Thursday. EUR/USD is now trading closer to 1.11 than 1.12 vs. close to 1.15 in the middle of January. EUR/GBP is trading close to 0.83 ahead of the Bank of England policy announcement on Thursday.

Credit: Credit markets saw further weakness on Friday, with iTraxx Xover widening almost 6bp (to 285bp) and Main 1.7bp, closing in 59bp (its highest level since November 2020). HY bonds sold even more off, with HY bonds widening 9bp and IG 2bp.

Gold price failed to clear the $1,850 resistance and corrected lower against the US Dollar. The price broke the $1,825 support level to move into a short-term negative zone.

Besides, there was a break below the $1,800 level and the 50 hourly simple moving average. However, the bulls are now protecting the $1,780 support zone. An immediate resistance on the upside is near the $1,795 level.

There is also a key bearish trend line with resistance near $1,795 on the hourly chart. The next main resistance could be near the $1,800 level, above which the price could rise towards the $1,820 level.

An initial support on the downside is near the $1,780 level, below which there is a risk of more downsides. In the stated case, the price could start a steady decline towards $1,750 on FXOpen.

Daily Pivots: (S1) 1.1121; (P) 1.1148; (R1) 1.1173; More...

Intraday bias in EUR/USD remains mildly on the downside for the moment. Current down trend should target 61.8% projection of 1.1908 to 1.1185 from 1.1482 at 1.1035. Break will target 100% projection at 1.0759. On the upside, above 1.1243 minor resistance will turn intraday bias neutral first. But recovery should be limited well below 1.1482 resistance to bring down trend resumption.

In the bigger picture, the strength of the the decline from 1.2348 (2021 high) suggests that it's not a corrective move. But still, it could be the fourth leg of a sideway pattern from 1.0339 (2017 low), or resuming long term down trend. In any case, outlook will now stay bearish as long as 1.1482 resistance holds. Next target would be 1.0635 low.

Daily Pivots: (S1) 1.3363; (P) 1.3398; (R1) 1.3430; More...

Further decline is expected in GBP/USD with 1.3523 minor resistance intact. As noted before, rebound from 1.3158 has completed at 1.3748 already, and down trend from 1.4248 is not over yet.. Retest of 1.3158 low should be seen next. On the upside, though, above 1.3523 minor resistance will turn bias back to the upside for retesting 1.3748.

In the bigger picture, as long as 38.2% retracement of 1.1409 to 1.4248 at 1.3164 holds, up trend from 1.1409 (2020 low) is still in progress. On resumption, next target will be 38.2% retracement of 2.1161 to 1.1409 at 1.5134. Nevertheless sustained break of 1.3164 will argue that whole rise from 1.1409 has completed and bring deeper fall to 61.8% retracement at 1.2493.

Daily Pivots: (S1) 0.9291; (P) 0.9310; (R1) 0.9331; More....

Intraday bias in USD/CHF remains mildly on the upside for retesting 0.9372 resistance first. Break will resume the choppy rise from 0.8925 to 0.9471. On the downside, below 0.9243 minor support will turn intraday bias neutral first. Overall, choppy rise from 0.8925 would still extend higher as long as 0.9090 support holds, even in case of deep retreat.

In the bigger picture, medium term outlook will be neutral at best as long as 0.9471 resistance holds. Larger down trend could still extend through 0.8756 (2021 low). However, firm break of 0.9471 will argue that the trend has already reversed and rebound the rally from 0.8756 with another impulsive move.

Daily Pivots: (S1) 115.01; (P) 115.35; (R1) 115.58; More...

Intraday bias in USD/JPY remains mildly on the upside for retesting 116.34 high first. Decisive break there will resume larger up trend for 118.65 long term resistance next. On the downside, below 114.46 minor support will mix up the near term outlook and turn intraday bias neutral again.

In the bigger picture, no change in the view that rise from 102.58 is the third leg of the up trend from 101.18 (2020 low). Such rally should target a test on 118.65 (2016 high). Sustained break there will pave the way to 120.85 (2015 high) and raise the chance of long term up trend resumption. This will remain the favored case as long as 55 week EMA (now at 111.07) holds.

Daily Pivots: (S1) 0.6961; (P) 0.7003; (R1) 0.7039; More...

Intraday bias in AUD/USD is turned neutral first, as it recovered after breaching 0.6991 key support. On the downside, sustained break of 0.6991 will confirm resumptions of whole down trend from 0.8006. Next target is 100% projection of 0.7555 to 0.6992 from 0.7313 at 0.6750. However, break of 0.7089 minor resistance will mix up the near term outlook.

In the bigger picture, focus remains on 0.6991 key structural support. Sustained break there will argue that the whole up trend from 0.5506 might be finished at 0.8006, after rejection by 0.8135 long term resistance. Deeper decline would then be seen back to 61.8% retracement of 0.5506 to 0.8006 at 0.6461. Meanwhile, strong rebound from 0.6991 will retain medium term bullishness. That is, whole up trend from 0.5506 is still in progress.

Daily Pivots: (S1) 1.2720; (P) 1.2759; (R1) 1.2804; More...

Intraday bias in USD/CAD is turned neutral with current retreat. But further rise is expected as long as 1.2558 support holds. Break of 1.2795 will target 1.2812 and then 1.2963 resistance. However, break of 1.2558 minor support will turn bias back to the downside for 1.2448 instead.

In the bigger picture, focus stays on 38.2% retracement of 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022. Sustained break there should confirm that the down trend from 1.4667 has completed after defending 1.2061 long term cluster support. Further rise would then be seen towards 61.8% retracement at 1.3650. However, rejection by 1.3022 will maintain medium term bearishness. Break of 1.2005 will resume the down trend from 1.4667 and that carries larger bearish implications too.