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Before discussing the potential for European markets to outperform, the key question right now is when will the markets bottom out? Also: what ever happened to Turnaround Tuesday?

Well, technically, the day hasn’t ended, so there’s still hope for the bulls.

The markets turned sharply off their lows late in the day on Monday, before resuming lower in overnight trading. But so far today we are yet to any signs of a more meaningful recovery, suggesting Monday’s rebound was driven mainly by short-covering. So, are we going to remain in a more protracted downward trend, or will dip buyers step back in later?

Powell, tech earnings and the economy

Insofar as Wall Street is concerned, there isn’t going to be an awful lot to concentrate on in terms of macroeconomics today, but the Fed is meeting tomorrow. All the focus will be on whether the US central bank and its president will be able to save the markets. He could tone down his hawkishness in light of the big stock market sell-off. But how likely is that? I certainly don’t expect to see too much of a walk back from Powell on the Fed’s hawkish intentions.

Thus, if stocks were to make a comeback, it would have to be because of optimism about the economy or company earnings.

On the latter front, we do have more tech earnings to look forward to, with Microsoft and Texas Instruments to report their results after the bell tonight; Tesla and Intel to follow tomorrow night, and Apple on Thursday. These companies better deliver some positive surprises to at least slow down the tech rout.

European markets could cheer stock market bulls

Meanwhile, optimism about the economic recovery should help some of the other sectors of the stock market. I am leaning more towards Europe, because here the markets have not rallied to the level of craziness that was consistently observed on Wall Street all these years.

European markets have a lot of catching up to do in that regard. What’s more, with the ECB going to keep printing more QE money for longer, this should support the markets relatively more than on Wall Street, and other regions where such support is no longer available. Furthermore, travel restrictions continue to ease as omicron cases decline and more people get double or tripled vaccinated. There is a lot of pent up demand for holidays within Europe. Hopefully, we will see confidence returns and people start going on holidays more often this year. So, I certainly am feeling positive towards the European stock markets compared to Wall Street.

DAX testing massive support area

Speaking of European markets, the DAX is testing a massive area of support here around the 15K zone:

Will the dip buyers once again step in to defend their ground here, given the above macro considerations and the fact that the RSI is at “oversold” levels of <30 on the daily time frame? However, a closing break below this area would nullify the bullish argument until we see another reversal signal at lower levels.

Meanwhile, the major US indices have printed possible reversal signals (hammer candles on daily) but need to see some follow-through:

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The Bank of Canada (BoC) is widely expected to kick off the new year with a rate hike on Wednesday despite its muted communication over the past weeks. With inflation well above the central bank’s target and the labor market running hot, a rate increase could be justified. That said, investors have already set their positions for the announcement and the central bank will need to provide extra hawkish signals to cancel the latest pullback in the loonie. The decision will be published at 15:00 GMT.

Canadian inflation could get worse

Investors are fully convinced that the Bank of Canada will be the first to raise its interest rates by 25 basis points this year on Wednesday, and there is no fundamental excuse to entirely exclude that scenario. The headline CPI inflation unlocked a fresh 30-year high of 4.8% y/y in December, gently higher than the previous reading but still above the central bank’s range target of 1-3%.

While the rapid pickup in food prices was the key driver behind the boost, the core measures, which exclude volatile components, also climbed to a fresh high, flagging that the inflation saga is probably broadly spreading in the economy. On top of that, the Canadian Real Estate Association revealed that house prices rose for the year at a record rate of 26.6% in the same month, while the central bank’s quarterly business-outlook survey indicated last week that companies are thinking to raise wages at a faster pace than during the past year to make up for the labor shortages and maintain the existing workforce. Strikingly, they are also considering passing through to consumers the increased costs of additional investment they are preparing to undertake to meet domestic and foreign demand.

A rate hike is on the map

Hence, given the joint agreement with the government, which renewed the 2.0% midpoint inflation objective for the next four years to 2026 last month, the BoC may need to abandon its stimulus settings sooner than its US counterpart, which has switched to a more flexible average price targeting.

The central bank has already ended its quantitative easing program, and it’s currently in a reinvesting phase in which it buys only the amount of bonds needed to replace the maturing ones.

It has also moved its timetable for its first rate hike in three years to the second half of 2022, with rumors pointing to an April increase, but since the omicron variant is not threatening additional lockdowns and the economy continues to create new job positions, pressing the unemployment rate to 6.0% as of December, the central bank may not wait for longer. Perhaps a rise in borrowing costs may add some pressure to bond prices, but the overall return could still advance if the money from maturing bonds can be re-invested in new bonds with higher yields.

How could the loonie react to the BoC announcement?

Turning to FX markets, the question that arises at this point is how the loonie will react if the BoC listens to market expectations and delivers a rate hike earlier than its forward guidance suggested during the previous meeting. Investors have already altered their positions amid the high risk of a rate increase. Therefore, the announcement itself may not be enough to cancel the loonie’s latest pullback against the US dollar, unless the central bank upgrades its economic forecasts and provides further reasoning to speed up its rate hike plans. Note that future markets foresee six more rate hikes to come till the end of the year. Any statements embracing further monetary tightening in the year ahead could sink dollar/loonie towards the 200-day simple moving average (SMA) at 1.2500, while a deeper decline may reach the former 1.2430 support region.

On the other hand, the BoC tends to follow the Fed’s steps and not the opposite, and that is feeding some doubts about whether policymakers will pay some extra patience, waiting for more data evidence in the next few months to confidently support any rate rise.

Should the central bank hold back, disappointing the crowd of investors who are currently betting for higher rates, the dollar/loonie could aggressively head towards the key resistance of 1.2700 and then gear up to meet the next barrier at 1.2830. Yet, whether such a rally could be sustained remains to be seen as pandemic-led supply crunches may keep oil prices elevated, overshadowing negative forces in the oil-dependent loonie. The Fed’s policy announcement later on Wednesday could also interrupt the BoC effect.

The euro has fallen below the 1.13 level in Tuesday trade. EUR/USD is trading at 1.1266 in the North American session, down 0.55% on the day.

Risk appetite down, greenback up

The US dollar is higher against all the majors except for the yen, as risk sentiment has taken a tumble. Investors have the jitters as fears of a Russian invasion of Ukraine are at a fever pitch. The US and the Europeans have vowed a harsh economic response to an attack by Moscow, but it remains uncertain if the Russians are posturing and hoping for some gestures from the West or are they planning a military campaign against Ukraine.

Another factor weighing on risk appetite is the Federal Reserve meeting on Wednesday. Although the Fed has telegraphed its rate hike plans to the markets, there is still apprehension at the recent hawkish pivot by the Fed, as the upcoming series of rate hikes could dampen investor sentiment towards the equity markets. If geopolitical tensions and the spectre of Fed tightening isn’t enough to put investors in a sour mood, then just add a disappointing start to the earnings season to the mix.

German Services and Manufacturing PMIs outperformed this week, and there was more positive news on Tuesday, as the German Ifo Business Climate Index accelerated for the first time since last June. In the words of one analyst, “there is hope again”.  The January reading of 95.7 rose from 94.8 and beat the consensus of 94.7 points. The expectations component of the index showed strong improvement, which points to optimism in the business sector, with hopes that the current woes of Omicron restrictions and supply bottlenecks will ease over the next six months.

 EUR/USD Technical

• In the European session, EUR/USD tested support at 1.1285. Below, there is support at 1.1226
• There is resistance at 1.1359 and 1.1418

Markets

Calm returned to European stock markets after a manic Monday. EU bourses recoup a modest 0.4 to 1% from the losses that mounted to more than 4%. US stocks are less lucky. The late-session turnaround yesterday proved partially futile. Wall Street opens with losses going up to 2.7% (Nasdaq). It confirms our idea that markets will probably remain on edge at least until the Fed provides them with some clarity tomorrow on how aggressively monetary support is going to be withdrawn. Aside from the Fed, the Russian-Ukraine conflict lingers too. Historical evidence suggests that it’s usually the highly uncertain pre-war period rather than an outright military conflict itself that causes most damage to (equity) markets. The German bond market yesterday outperformed the US since it missed out on the abrupt change in sentiment. Cards are dealt differently today. The US curve bull flattens with yield changes ranging from -1.6 bps (3y) to -2.7 bps (30y). Germany’s yield curve bear steepens up to 2.2 bps (30y). While there was no market impact, we do mention ECB Chief Economist Lane’s speech. The ECB’s most dovish governor may finally have altered his view on inflation. He said that it's possible that inflation stabilizes around 2% as some factors that depressed prices before the pandemic won’t return. Policies to fight very low inflation would then no longer be needed, he added. Before, Lane fenced with the ECB’s sub 2% inflation projections for 2023 and 2024 when justifying the ultra-easy policy stance.

The yen shined bright on FX markets. Japan’s currency gains against all G10 peers. EUR/JPY is testing yesterday’s intraday lows around 128.37. A solid dollar limits the damage for USD/JPY to 113.88. The trade-weighted greenback rises back north of 96(.18) for the first time since early January. EUR/USD (1.127) takes a technically exacerbated hit. It dives below the lower bound of the upward sloping trend channel (daily support level stood at 1.1292). Sterling rebounds and undoes a technical break higher in EUR/GBP. The pair is currently changings hands at 0.836, down from 0.84 in early morning trading. Still no sign of a political premium in sterling, not even now the UK police began formally investigating allegations concerning “partygate”. In Central-Europe, the Hungarian forint outperforms peers today. The Hungarian central bank raised the monthly policy rate with a more-than-expected 50 bps to 2.90% in a catch-up move with the one-week deposit rate (4%). It aggressively jacked up that de facto main policy rate over the past months to support the forint and counter spiraling inflation. Showing its determination on bringing inflation under control, the MNB also raised the ceiling on the interest rate corridor to 4.9% from 4.4%, allowing it to increase the one-week deposit rate even further. EUR/HUF eases from an intraday high of 362 to 358.93 currently.

News Headlines

UK borrowing in the first nine months of the fiscal year 2021/22 came in at £146.8 bln, National Statistics data showed. This was £12.9 bln below the October forecast by the OBR. A bigger than expected rise in tax receipts compensated for a £21bln increase (+69%) of interest rate costs over the same period. Receipts from VAT, corporate taxes and stamp duties related to property transactions were all higher. The better than expected budget data might give UK Finance Minister Sunak room to take measures to ease the pain from a rising cost of living especially as the energy bill of UK consumers is expected to rise sharply in April. The government also can consider to delay/amend a planned rise in payroll taxes at that time.

Confidence among Belgian businesses in January eased further from 3.6 in December to 2.7 in January, the lowest level in since March of last year. The National Bank still describes the decline as ‘only very slight’. Confidence in manufacturing declined to 0.8 from 3.1. The assessment of the industrial sector on employment and demand recovered a bit, but deteriorated on total order books and stock levels. Trade (-4.8 from -3.5) and the building industry (0.2 from 1.2) turned less positive but business related services improved from 10.1 to 16.1 thanks to expectations for general market demand and regarding their own business.

US Conference Board Consumer Confidence Index dropped from 115.2 to 113.8 in December, above expectation of 112.3. Present Situation Index rose from 144.8 to 148.2. Expectations Index dropped from 95.4 to 90.8.

"Consumer confidence moderated in January, following gains in the final three months of 2021," said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.

"The Present Situation Index improved, suggesting the economy entered the new year on solid footing. However, expectations about short-term growth prospects weakened, pointing to a likely moderation in growth during the first quarter of 2022. Nevertheless, the proportion of consumers planning to purchase homes, automobiles, and major appliances over the next six months all increased."

"Meanwhile, concerns about inflation declined for the second straight month, but remain elevated after hitting a 13-year high in November 2021. Concerns about the pandemic increased slightly, amid the ongoing Omicron surge. Looking ahead, both confidence and consumer spending may continue to be challenged by rising prices and the ongoing pandemic."

Full release here.

The Swiss franc is down sharply on Tuesday, with USD/CHF climbing above the 92 line for the first time in two weeks. In the North American session, USD/CHF is trading at 0.9184, up 0.58% on the day. Investors will be keeping an eye on Swiss Economic Expectations which will be released on Wednesday. After a dismal reading of -10.8 in November, we may see a rebound in the December data.

Swiss franc down sharply

The Swiss franc kicked off the New Year with sharp losses, and the currency has been marked by considerable volatility in January. The US dollar has risen against the major currencies this week, with the exception of the Japanese yen. The Swiss franc is a traditional safe-haven asset, but with tensions at a fever pitch on the Ukraine-Russia border and stocks market falling, jittery investors have been seeking safety with the US dollar.

US stock markets have been dropping and that has been sweet news for the US dollar. All three major US futures indices were down on Tuesday, as earnings have disappointed and the Fed is set to embark on at least four rate hikes this year. If the selloff continues on Wall Street today, the US dollar could add more gains.

The markets are anxiously awaiting the FOMC meeting on Wednesday, with the Fed set to embark on a series of rate hikes throughout 2022 and possibly into 2023 as well. The likelihood of a hike in March stands at 94%, according to FedWatch.

There has also been some speculation that the Fed might depart from incremental hikes of 0.25% and announce a dramatic 0.50% move. This would show that the Fed is serious about curbing inflation and help restore credibility after the Fed stuck to its script that inflation was transitory for far too long.

USD/CHF Technical

• USD/CHF is testing resistance at 0.9165. Above, there is resistance at 0.9210
• There is support at 90.92 and 90.64

FOMC minutes attract attention

The two-day FOMC meeting begins today and concludes tomorrow with a decision as the global economy is feeling the pain of omicron variant. The Federal Reserve is widely expected to maintain its hawkish stance as it prepares the market for liftoff at its next meeting.

Anyone hoping for some form of Fed Put this week will likely be disappointed. The Federal Reserve's top aim right now is to keep inflation under control. Because the economy is on the verge of reaching full employment and inflation remains persistently high, the Federal Reserve cannot help the equities market at the same time.

The US dollar index moved higher today, posting a two-week high around 96.20, as investors sought safe-haven currencies amid Russia-West tensions over Ukraine and awaited the result of the Fed meeting. Dollar/yen is hovering above 114.00, while euro/dollar is tumbling below 1.1300. US stock futures suggest a negative open after a green day on Monday. Sterling held at a three-week low of 1.3435 against the dollar as investors remained wary of risk assets in the face of rising tensions in Ukraine and expectations of a Federal Reserve rate hike.

Russian-Ukrainian relations

The Russian-Ukrainian border remains tense. 8,500 American troops have been placed on high alert for possible deployment to reinforce NATO forces in Eastern Europe. "It is pretty evident that the Russians have no intention right now of de-escalating," U.S. officials said, but Russia said it has not heightened tensions. Biden enjoyed a conversation with European leaders, including French President Macron and German Chancellor Scholz, as diplomatic efforts continue. "Total unanimity with all the European leaders," Biden noted. We get the distinct impression that this tale is far from over and that the current impasse will last for some time.

BoC rate hike on Wednesday

The Bank of Canada will host its first policy meeting of 2022 on Wednesday. In the previous week, bets on a rate hike have increased in intensity, and a 25-basis-point increase is currently nearly 85% priced in. Expectations of an early action were bolstered by recent CPI data showing annual inflation hit a 30-year high of 4.8% in December. Dollar/loonie is moving slightly up today near 1.2650.

Australia’s inflation jumped to 7-year high annually

Australia’s inflation rose to its highest annual rate since 2014 in the December quarter, driven by gasoline and housing expenses, stoking market speculation of an early rate hike. The CPI grew 1.3% in the fourth quarter and 3.5% for the year. Aussie/dollar remains above 0.7100 but with a negative bias.

Daily Pivots: (S1) 113.63; (P) 113.82; (R1) 114.16; More...

Intraday bias in USD/JPY remains neutral at this point. As noted before, considering bearish divergence condition in in daily MACD, it's probably already in correction to whole up trend from 102.58. Break of 113.47 will target 112.52 support first, and then 38.2% retracement of 102.58 to 116.34 at 111.08. For now, risk will stay on the downside as long as 115.05 resistance holds, in case of recovery.

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 110.91) holds.

Daily Pivots: (S1) 0.9114; (P) 0.9136; (R1) 0.9164; More....

USD/CHF's rebound from 0.9090 extends higher but stays in established range. Intraday bias remains neutral first. On the downside, firm break of 0.9084 support will argue that choppy rise from 0.8925 has completed. Fall from 0.9471 might be ready to resuming. Further decline would be seen back to 0.8925 support first. On the upside, above 0.9276 will target 0.9372 resistance instead.

In the bigger picture, the corrective structure of the rebound from 0.8925 argues that fall from 0.9471 is not complete yet. It could either be the second leg of pattern from 0.8756 (2021 low), or resuming larger down trend from 1.0237 (2018 high). We'd pay attention to the downside momentum and assess the odds later. But for now, medium term outlook will be neutral at best as long as 0.9471 resistance holds.