Sample Category Title

Markets

European stock markets can’t escape the rot today. Main indices lose up to 2% and more. The EuroStoxx 50 trades below first support at 4231. A sustained break paves the way to the low 4000-zone. It will be a key session for US indices as well. They open around 0.5% weaker. The S&P yesterday closed below the neck line of a triple top formation at 4495. A sustained break lower gives more downward potential towards the October low of 4279 with the final target of the technical formation even at 4172. The threat in the Nasdaq is even larger. The tech index is already officially in correction mode given the 10%+ decline from the November top. The Nasdaq yesterday closed below the neckline of a huge double top formation (14175) which serves as resistance in H1 2021. A move lower suggests more downward potential towards 12552 (38% retracement since March 2020) and even the low 12 000 area (final target double top). The dominant reason for this year’s risk correction is obviously the surge in real rates because of the accelerated global push towards (central bank) policy normalization. Q4 earnings also start showing an impact of higher inflation via rising wage costs. Later this year, the impact from higher inflation and tighter monetary policies risks backfiring via more sluggish growth momentum.

The more pronounced risk correction took over from the rising yields as being the dominant factor for other action on the market place. Core bonds are against better bid from a safe haven perspective even if oil prices remain upwardly oriented. US yields drop by 3.1 bps to 5.2 bps on a daily basis with the belly of the curve outperforming the wings. The German yield curve bull flattens with yields shedding 4.3 bps (2-yr) to 6.2 bps (30-yr). 10-yr yield spread changes vs Germany widen by 3 bps for Italy and 4 bps for Greece. The Japanese yen and single currency are again G4-outperformers in the risk off climate. USD/JPY loses the 114 handle with EUR/USD trading again more comfortable in the mildly upward sloping trend channel around 1.1350. Sterling is today’s underperformer. Losses for UK Gilts are in line with the ones in Germany, but the risk-off climate and this morning’s horrible December UK retail sales clearly spooked some GBP-investors. We think that the February BoE rate hike still stands. The dismal retail sales probably are an omen for worse to come. The UK cost-of-living crisis risks intensifying in Q2 with planned tax hikes and the lifting of the gas price ceiling. EUR/GBP is short squeezed higher from 0.8317 to 0.8369. Smaller and less liquid currencies like the CEE ones all pay the price for risk aversion today. CHF is the only one that outperforms EUR and even JPY. EUR/CHF nears the sell-off low at 1.0326.
 
News Headlines

US federal agencies are being instructed to up the minimum wage for government employees to $15 per hour, American news website Axios reports, based on a statement by the Office of Personnel Management today. Last year, the Biden administration also issued an executive order that raised wages of federal contract workers to $15 an hour. While the new OPM guidance only affects an estimated 70 000 federal employees, it carries important symbolic meaning in an environment where rising wages are becoming an ever bigger issue in the much larger private sector. Data from FactSet showed that up until January 14, 60% of the S&P 500 companies in their earnings calls said labour inflation and shortages either had a negative impact on bottom lines or are expected to have one in the future.

Belgian consumer confidence slightly rose at the start of the new year. The headline indicator for the first time since October posted an increase, from -4 to -2. The improvement came thanks to better economic expectations       (-16 to -12) and less worries over the unemployment (from 12 to 6; a decline of the indicator is a positive). A less optimistic view on the financial situation (from 0 to -3) as well on the ability to save (from 12 to 10) over the next 12 months served as counterweights. This may reflect growing concern over inflation.

Daily Pivots: (S1) 1.1286; (P) 1.1327; (R1) 1.1352; More...

Intraday bias in EUR/USD remains neutral first. As noted before, rebound from 1.1185 is seen as corrective move. Break of 1.1284 will argue that larger down trend from 1.2348 is ready to resume. Intraday bias will be back on the downside for retesting 1.1185 low first. Also, in case of another rise, upside should be limited by 38.2% retracement of 1.2265 to 1.1185 at 1.1598 eventually.

In the bigger picture, there are various ways of interpreting the fall from 1.2348 (2021 high). It could be a correction to rise from 1.0635 (2020 low), 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 1.1703 support turned resistance holds. Sustained break of 61.8% retracement of 1.0635 to 1.2348 at 1.1289 would pave the way back to 1.0635.

Daily Pivots: (S1) 1.3569; (P) 1.3616; (R1) 1.3644; More...

Intraday bias in GBP/USD remains neutral and outlook is unchanged. While deeper fall cannot be ruled out, downside of retreat should be contained by 1.3489 support to bring another rally. As noted before, corrective fall from 1.4282 should have completed with three waves down to 1.3158, after hitting 1.3164 medium term fibonacci level. Above 1.3748 will target 1.3833 first. Sustained break of 1.3833 will pave the way back to retest 1.4248 high.

In the bigger picture, strong support was seen from 38.2% retracement of 1.1409 to 1.4248 at 1.3164. The development suggests that 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) 113.89; (P) 114.22; (R1) 114.47; More...

Intraday bias in USD/JPY stays on the downside for 113.47. Break will resume the fall from 112.52 structural support. Considering bearish divergence condition in in daily MACD, further break of 112.52 will confirm that it's already in correction to the up trend from 102.58. Deeper decline would be seen to 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. However, firm break of 112.52 support will dampen this bullish case and we'll assess the outlook based on subsequent price actions later.

Daily Pivots: (S1) 0.9148; (P) 0.9164; (R1) 0.9190; More....

USD/CHF drops notably today but stays above 0.9090 support. 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.

The markets are set to end the week with a pessimistic tone. Major European index are trading in deep red while US futures point to a weak open. In the currency markets, Swiss Franc is the strongest one for today, followed by Euro and then Yen. Aussie and Kiwi are the worst ones, but Sterling is not too far away after poor retail sales. Loonie is mixed after retail sales missed, still supported by resilient oil prices.

Technically, Euro appears to be recovering except versus Swiss Franc. A focus will be on 0.8377 resistance in EUR/GBP. Break there will indicate short term bottoming ahead of 0.8276 long term support. If that happens, the subsequent rebound could be strong and quick. That might help EUR/USD defend 1.1284 near term support too.

In Europe, at the time of writing, FTSE is down -1.29%. DAX is down -2.19%. CAC is down -1.93%. Germany 10-year yield is down -0.045 at -0.069. Earlier in Asia, Nikkei dropped -0.90%. Hong Kong HSI rose 0.05%. China Shanghai SSE dropped -0.91%. Singapore Strait Times closed flat. Japan 10-year JGB yield dropped -0.008 to 0.137.

Canada retail sales rose 0.7% mom in Nov, to drop -2.1% mom in Dec

Canada retail sales rose 0.7% mom to CAD 58.1B in November, below expectation of 1.0% mom. The increase was led by higher sales at gasoline stations (+4.9%), building material and garden equipment and supplies dealers (+3.0%) and food and beverage stores (+1.0%). Sales increased in 6 of 11 subsectors, representing 63.8% of retail trade. Core retail sales—which exclude gasoline stations and motor vehicle and parts dealers—increased 0.5%. According to advance estimate, sales decreased -2.1% mom in December.

Also released, new housing price index rose 0.2% mom in December, below expectation of 1.2% mom.

UK retail sales dropped -3.7% mom in Dec, well below expectations

UK retail sales dropped sharply by -3.7% mom in December, much worse than expectation of -0.6% mom decline. Overall retail sales volume was still 2.6% higher than their pre-coronavirus February 2020 levels. For the year, sales volume dropped -0.9% yoy, below expectation of 4.2% yoy. Between 2020 and 2021, volume of retail sales rose by 5.1%, which is the strongest since 2004.

Japan CPI core unchanged at 0.5% yoy in Dec

Japan CPI core (all item ex-food) was unchanged at 0.5% yoy in December, below expectation of 0.6% yoy. But that's still the second increase in a row, and the fastest pace in nearly two years. All item CPI accelerated from 0.6% yoy to 0.8% yoy. All item ex-food, ex-energy CPI dropped from -0.6% yoy to -0.7% yoy.

In the minutes of December BoJ meeting, a board member said, "we're seeing signs of change in the price-setting behavior of Japanese firms, which had been said to be cautious about raising prices for fear of seeing sales volume fall,."

Another member noted, "it's unlikely Japan will see wages rise as sharply as in the United States. But there's a significant chance both economic growth and inflation could overshoot expectations,"

Earlier this week, BoJ raised 2022 and 2023 core CPI projection. But it also indicated there is no rush to change the ultra-loose monetary policy.

New Zealand BusinessNZ PMI rose to 53.7, return to growth

New Zealand BusinessNZ Performance of Manufacturing Index rose from 51.2 to 53.7 in December. Looking at some details, Production rose from 53.0 to 56.3. Employment rose from 48.5 to 52.0. New orders rose from 55.4 to 57.5. Finished stocks rose from 48.7 to 52.0. Deliveries rose from 43.9 to 50.0.

BNZ Senior Economist, Doug Steel stated that "in the final quarter of 2021 the PMI averaged 53.2, indicating a return to positive manufacturing GDP growth after a sharp negative in the prior quarter."

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.9148; (P) 0.9164; (R1) 0.9190; More....

USD/CHF drops notably today but stays above 0.9090 support. 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.

Economic Indicators Update

Canada retail sales rose 0.7% mom to CAD 58.1B in November, below expectation of 1.0% mom. The increase was led by higher sales at gasoline stations (+4.9%), building material and garden equipment and supplies dealers (+3.0%) and food and beverage stores (+1.0%).

Sales increased in 6 of 11 subsectors, representing 63.8% of retail trade. Core retail sales—which exclude gasoline stations and motor vehicle and parts dealers—increased 0.5%.

According to advance estimate, sales decreased -2.1% mom in December.

Full release here.

• Why is everything selling off?
• Gold testing key level
• Crude oil topping out?

Thursday’s rug pull was very significant and marked yet another setback for the bulls on Wall Street who have had a nightmare start to the new year. Mind you, crypto investors just cannot catch a break with prices breaking further lower today due to the general risk-off environment across the financial markets. Even the mighty crude oil has reversed, while gold hangs in the balance as investors weigh the prospects of tighter monetary policy against positive influences on the metal such as high levels of inflation and haven flows.

Why is everything selling off?

The number on reason behind the risk off tone is surging inflation and the prospects of faster-than-expected monetary policy tightening. The era of ZIRP is beyond us as central banks now start to withdraw support. Investors now have to rely on solid company fundamentals than chasing momentum. Most companies and sectors remain significantly overvalued, as Netflix investors have found out. With inflation eating into disposable incomes, it is possible that investing could take a hit while certain group of investors cash out to release funds for real-world purchases. Volatility is here to stay, especially if the 200-day moving average also breaks on the S&P 500:

Gold testing key level

Although off its best levels, gold is still up for the second week, suggesting investors have been seeking protection against surging inflation and as excessive risk taking in equities and crypto came to an end.

I think the markets have priced in a hawkish Fed meeting already and gold has been able to shrug off the recent strength in yields. So, a potential breakout from the current ranges should not be too surprising. It would help if the Fed were to talk down the prospects of an even faster tightening cycle.

As we mentioned the possibility earlier in the week, gold turned lower from around $1845 resistance, but it is now testing the breakout area around $1830, which needs to hold to validate Wednesday’s sharp breakout. Given how gold has been able to climb higher in the past couple of weeks, it is possible we could see renewed strength come in later today, especially if investors dump equities again.

Crude oil topping out?

Crude oil prices have fallen back from their recent highs alone with risk assets following the sharp reversal on Wall Street Thursday. The daily chart of Brent shows an inverted hammer on Thursday, while the weekly shows the significance of the $86.50ish level, which was significant resistance in the past. Although we have broken above this level, failure to hold that breakout could ignite a sharp sell-off.

Market sentiment deteriorates as yields remain elevated

The US stock futures’ negative correction develops lower, with the tech-heavy Nasdaq 100 affected more, falling 4.6% yesterday. The first gain in US crude oil inventories in eight weeks in yesterday’s data release may have added to bearish sentiment in markets.

Despite this week’s disappointing US jobless claims, linked to the omicron variant, which rose 286 k versus an expected 225 k, and the correction in the US stock futures - in an environment of elevated yields - the market story is likely to remain the same with the Fed moving forward with removing accommodation and delivering expected interest rate hikes.

The USD/JPY pair currently at 113.84 per dollar failed to return above the 114.00 mark, and the USD/CHF pair now at 0.9125, fell around half a basis point today, both together indicating that demand for havens has picked up.

The shift into havens may have caused a drop in the 10-year Treasury yield, currently at 1.84%. That said, interesting enough, gold lost some of its shine surrendering around $10 to slip to $1833/oz.

Yields continue to keep the reserve currency somewhat stable with the dollar index currently around 95.60 after recently failing to improve beyond the 96.00 level. The euro has creeped slightly up to $1.1340 on the back of modest weakness in the greenback.

UK consumers lose confidence, weak retail sales hurt the pound

The pound has slid beneath the January 18 trough of $1.3572 after UK retail sales fell 3.7% m/m in December 2021, coming in worse than an anticipated drop of 0.6% and following two-months of strong growth in retail sales. The drop in sales in December may be related to the fact the public did their holiday shopping earlier this year and the strains to movement from the omicron variant.

Moreover, UK consumer confidence in January fell to -19 from December’s figure of -15. Concerns centre around fears of high utility bills and inflation, which is hurting households.

Sterling is standing at around $1.3565 presently.

Antipodean currencies

The kiwi at $0.6725 is on the back foot and is about to test the December 2021 low of $0.6700. However, the aussie is faring better and is flirting with the $0.7200 mark after oil stabilized and China increased its asset purchases. Australia’s largest exporter has stepped up its policy easing efforts to cushion a slowing economy, after worries intensified last year on whether the economy in China would be able to weather the storm from weak consumer spending, restrictions and a property sector blip.

US oil stockpiles rise and loonie awaits retail sales

WTI oil futures have stabilized slightly north of the $84.00 per barrel mark. The black liquid fell $4.20 dollars to $82.80 per barrel in the Asian trading session from a fresh 7-year high of $87.00 per barrel. Yesterday’s crude oil inventories in the US increased by 515,000 barrels the week ending January 14, up for the first time since November 2020 and countering the expectations of a 938,000 barrel drop.

Nonetheless, oil retains a bullish tone - not far off the $100.00 per barrel mark as per some analysts - caused by strong demand and supply constraints in the market. The rising energy prices pose a conundrum for central banks who are currently juggling inflation and economic growth.

The USD/CAD pair is holding marginally above the C$1.2500 mark, with the Canadian dollar showing some resilience even as oil took a blow yesterday.

The loonie is firm ahead of upcoming Canadian retail sales, which are due at 13:30 GMT.

At 15:00 GMT, consumer confidence in the eurozone will be released, while Treasury Secretary Yellen is due to speak at 16:30 GMT.

A turbulent end to the week with widespread selling as underlying anxiety in the markets once again takes hold.

The hope going into earnings season was that companies were going to settle the nerves. That we were about to get a reminder of the strength of the economy and the resilience we've seen over the last couple of years. Instead, the results have been rather disappointing.

The banks didn't give us much to cheer about and if the Netflix results are anything to go by, big tech may also underwhelm. The subscriber numbers were a real blow and investors are being forced to adjust to the reality that there is nowhere near the momentum that the last couple of years was expected to generate. Immense competition in the space and higher costs are also major headwinds.

And that negativity, on top of everything else, is taking its toll across the broader markets as investors are starting to realise that earnings season may not be the game-changer they hoped it would be. From the perspective of Netflix, I do wonder whether the response is overblown with the 20% decline in premarket trade taking the price back to pre-pandemic levels. But that is a reflection of the mood in the markets right now.

And it could get much worse. The Nasdaq has broken through some key technical support levels including the 200-day moving average for the first time since April 2020. The party isn't over for big tech but unless they give us something to cheer about next week, they could be in for a rough ride in the coming weeks.

Retail Sales don't change the outlook for UK interest rates

UK retail sales fell 3.7% in December, well below forecasts, as consumers likely pulled forward festive shopping in anticipation of supply shortages. While the number was well short of expectations, no one was falling off their chair in shock at the release. It was expected that spending in December would disappoint as a result of omicron and earlier Christmas shopping so traders were always going to allow for a large margin for error.

The fact remains that the data changes nothing with regards to how the BoE will act this year and a rate hike next month still looks a near cert. The pound is a little lower today but that is no reflection on interest rate expectations. Four hikes are still heavily priced in this year.

How long until oil bulls jump back in?

Oil prices are slipping more than 1% at the end of the week, pulling back a little further from the highs just short of $90. The decline came shortly after the EIA inventory data on Thursday, which showed a surprising rise against expectations of a 2.1 million barrel decline. The White House also looking to apply further pressure in response to higher prices may be contributing to the pullback, although as we've seen before, their power appears quite limited.

Obviously, that's no game-changer but it came at a good time when crude was running into resistance at $90 and losing momentum. It's a big psychological barrier as once that goes, people are just counting down the days until we have triple-figure oil. It's a big deal, but one we'll have to wait a little longer for. The question is how long until traders jump back in. Given the fundamentals, I don't think we'll be waiting too long.

Can gold propel higher after the breakout?

Gold is marginally lower on Friday but finding support around $1,830 where it experienced significant resistance in recent weeks. The break above this level was big for the yellow metal and could propel it higher in the coming weeks. That starts though with holding above $1,830, as confirmation of the breakout will be a big confidence boost for gold bulls.

The move suggests gold is once again playing the role of the inflation hedge and a safe haven in these unstable markets. A lot of tightening is priced into the markets but inflation is running hot and there doesn't appear to be much confidence that it will be enough. It's no wonder there's so much anxiety out there.

Bitcoin slips below key psychological support

Bitcoin is getting pummelled, hit by another wave of risk aversion in the markets that's pushed the price below $40,000 and probably exacerbated the move in the process. The price is more than 6% lower on the day but more than 10% from yesterday's highs. It doesn't look good for cryptocurrency.

And it comes at a time when Russia has proposed banning the use and creation of cryptocurrencies which will come as a blow as it's currently the world's third-largest crypto miner. It had little impact on price though as we've seen how quickly the industry can adapt to these blanket bans in the past.