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The US 30 index staged a major recovery in recent weeks, after touching an 18-month low on December 26. Price action is now taking place back above the 50-day simple moving average (SMA), which suggests the near-term outlook has shifted back to neutral, from negative previously.

Further advances in the index could encounter immediate resistance near the 24,830 zone, defined by the peaks of December 12. An upside break could open the way for a test of the 200-day SMA at 24,990, with the area around it encapsulating the psychological 25,000 handle. Even higher, attention would shift to 25,500, which capped the rally on November 16.

On the downside, initial support to declines may be found around the 50-day SMA at 24,275, with a bearish break seeing scope for a test of the 23,400 territory, marked by the inside swing high of December 28. Another break below that barrier could see the bears challenging 22,600, the trough of January 4.

Overall, as long as the price remains above the 50-day SMA the short-term outlook is neutral, with a break above the 200-day one required to turn it to cautiously positive.

Friday January 18: Five things the markets are talking about

Improved market and investor optimism for Sino-U.S trade talks saw global equities and U.S stock futures climb in the overnight session. In commodities, crude oil prices are leading the rally, while sovereign yields back up and safe have currencies, like the yen, edge lower on suggestions that the U.S is considering reducing some tariffs on China during the negotiations as a way of getting more in return.

There were reports overnight suggesting that Treasury Secretary Steven Mnuchin was in favor to ease China tariffs. Even though the U.S Treasury denied the reports, the fact that the idea was floated has many believing that the Trump administration is keen for trade solution sooner rather than later to aid financial markets.

More Fed ‘dovish’ rhetoric mid-week from Chicago Fed Evans has also aided-risk on trading as we close out the week. His views about being patient on further interest-rate increases, resonates with messages from his colleagues and is helping equities to close out their fourth weekly consecutive gain.

On tap: Canadian CPI (08:30 am EDT).

1. Stocks get the green light

The Nikkei rallied +1.5% this week, nearly all of it in the overnight session (+1.3%), helped mostly by the currency markets (¥109.58) as capital markets take solace in Sion-U.S trade hopes. The broader Topix rose +0.9%, with all but two of the indexes 33 subsectors trading in the ‘black.’

Down-under, Aussie stocks maintained their steady gains throughout the overnight session, which allowed the index to record its first consecutive weekly gains in eight-weeks. The ASX 200 rallied +0.5% and +1.8% for the week. In South Korean, equities pushed to session highs at day’s close, capping its second consecutive week higher. The Kospi climbed +0.8%, to trade atop of December’s high print. It rose +2.4% for the week.

In China and Hong Kong, the equity story was the same. Stocks got a boost on higher hopes for a resolution to the U.S-China trade war. In China, the Shanghai Composite Index rose +1.42%, while the CSI 300 of blue-chips closed up +1.8% – both benchmarks were up for their third straight week and saw their biggest weekly gains in two-months. In Hong Kong, the Hang Seng Index climbed +1.25%, to close the week at the highest level so far this year, and it’s up +5% in 2019.

In Europe, regional bourses trade higher across the board gains in Asia and strong U.S futures on positive trade sentiment.

U.S stocks are set to open in the ‘black’ (+0.29%).

Indices: Stoxx600 +1.0% at 354.2, FTSE +1.04% at 6,906.25, DAX +1.07% at 11,034.10, CAC-40 +1.18% at 4,850.74, IBEX-35 +1.01% at 8,998.60, FTSE MIB +0.65% at 19,596.50, SMI +0.62% at 8,968.70, S&P 500 Futures +0.29%

2. Oil climbs on OPEC output cut and easing trade tensions, gold lower

Oil prices have rallied over +1% overnight after an OPEC+ report showed its production levels fell sharply last month, easing fears about prolonged oversupply. Also aiding crude prices is trade related optimism.

Brent crude futures are up +62c, or +1.01% at +$61.80 per barrel – Brent has rallied +2% this week, its third consecutive week of gains, while U.S West Texas Intermediate (WTI) crude is at +$52.65 per barrel, up +58c, or +1.11% from Thursday’s close.

OPEC+ indicated yesterday that they had cut oil output sharply in December 2018 before a new accord to limit supply took effect on Jan. 1. This would suggest that the main producers have made a strong start to avoid creating a supply glut in 2019. In its monthly report, OPEC’s oil output fell by -751K bpd in December to +31.58M bpd, the biggest month-on-month drop in 24-months.

Note: The combination of production cuts by OPEC+, especially the Saudis, and tightening sanctions on Iranian oil exports is bringing the market close to equilibrium.

OPEC has cut its forecast for daily demand this year to +30.83M bpd, down -910K bpd from last year’s average.

Also, a surge in U.S crude output is undermining most of OPEC’s efforts – U.S output has increased by more than +2M bpd in the last 12-months to +11.9M bpd.

In commodities, palladium is holding above +$1,400 ($1,419) an ounce ahead of the U.S open after surging to record levels ($1,434.50) yesterday, amid tight supplies, while gold prices have eased as risk sentiment gets a leg-up from hopes of progress in U.S-China trade talks. Spot gold is down -0.1% at +$1,290.51 per ounce, while U.S gold futures are down -0.2% at +$1,290 per ounce.

3. Bund yields hit four-week high on “soft” Brexit hopes

In Friday’s Euro session, German Bund yields have backed up to a one-month high on renewed hopes that the U.K could avoid a messy divorce from the E.U, and perhaps hold a second referendum, raising the prospect of “no” Brexit at all. Also pushing yields higher are hopes of a more constructive stance in the Sino-U.S. trade talks.

German 10-year Bund yields have rallied to a near one-month high of +0.255%, up +3 bps on the day and nearly +9 bps this week; its first weekly rise since early November. Most of the other eurozone bond yields are also +2 to +3 bps higher ahead of the U.S open.

Elsewhere, the yield on 10-year Treasuries has gained less than +1 bps to +2.76%, reaching the highest in more than three-weeks on its fifth straight advance.

4. Big dollar supported by trade optimism

The Euro FX session has been very quiet with no new news out on Brexit and limited economic data releases.

Improved risk sentiment, backed by positive Sino-U.S trade suggestions, has the USD poised for its first weekly gain in four-weeks, backed by rate differentials – Fixed income dealers have been pricing out the ability of other G7 central banks to start raising interest rates this year.

GBP/USD (£1.2944) heads into the U.S session giving up some of its late gains. Dealers believe that the Brexit process had pivoted toward a “softer” Brexit which has been supporting the pound over the past few sessions. Techies see £1.2800 level as strong support for the time being and £1.3000 as the psychological resistance.

EUR/USD (€1.1404) continues to be locked into its €1.13-1.15 range for the time being and caught between the Fed’s recent rhetoric of reaffirmed “patience” and concerns that the Eurozone might have slipped into a technical recession.

Optimism on the Sino-U.S trade front has helped to unwind a percentage of the safe-haven trades and put pressure on the Japanese Yen. USD/JPY higher by +0.3% at ¥109.55

5. U.K retail sales fall in December

Data this morning from the ONS shows that U.K retail sales declined last month, adding to signs the economy slowed in Q4, 2018.

U.K retail sales fell -0.9% in December m/m – the slide follows strong sales growth in November (+1.3%), suggesting that “Black Friday” sales encouraged consumers to bring forward their usual Christmas purchases.

Today’s print can be offered as the latest evidence that the British economy lost steam in the final three months of last year. Economists say tighter credit conditions and uncertainty over the U.K.’s future ties to the E.U are hurting both consumer and business confidence.

Notes/Observations

• No fresh news on Brexit but process still appear morphing into a softer tone; GBP currency continues to recover
• Optimism renewed on US-China trade front aiding risk appetite

Asia:

• Japan Nov Final Industrial Production M/M: -1.0% v -1.1% prelim; Y/Y: 1.5% v 1.4% prelim
• Japan Dec National CPI hits a 7-month low (Y/Y: 0.3% v 0.3%e); CPI Ex-Fresh Food (core) Y/Y: 0.7% v 0.8%e; CPI Ex-Fresh Food/Energy (core-core) Y/Y: 0.3% v 0.3%e

Europe:

• Northern Ireland's DUP Party said to be open to a soft Brexit that kept the whole of the UK in a customs union with Brussel. Party could sign up to a Norway-style deal with a customs union if it removed the threat of the Northern Irish backstop
• Up to 20 ministers warned PM May of 'mass resignations' if she blocked them from trying to prevent a 'no deal' Brexit
• UK has not finalized most trade deals needed to replace the EU’s 40 existing arrangements with other countries for the March Brexit deadline

Americas:

• Treasury Sec Mnuchin said to support lifting China trade tariffs to break stalemate, but Trade Rep Lighthizer is pushing back against easing tariffs
• Treasury spokesperson: "Neither Secretary Mnuchin nor Ambassador Lighthizer have made any recommendations to anyone with respect to tariffs or other parts of the negotiation - CNBC
• Senior admin official: President Trump has no interest in making tariff decisions now, focused on Jan 30th meeting with China Vice Premier Liu He
• US State Dept orders all employees expected to report to work next week despite shutdown; taking steps to make additional funds available to pay employees during shutdown

Macro

• (UK) United Kingdom: Germany 's foreign minister Maas said in a TV interview that “in the end, it will be about the question whether to reopen the deal which needs the approval of all 27 member states, which means that everyone has to join in. This is what needs to be discussed now.” However, Maas also made clear that the UK cannot expect substantial further concessions on the Irish border backstop. It all means that we will have to await for a consensus to develop from London on the way forward.
• (US) United States: The probability of an interest rate hike from the Fed is now lower than that of a rate cut in 2019. It appears the market still sees some chance for a rate hike in H1, but government shutdown could be an excuse for the FOMC to pause.

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 +1.0% at 354.2, FTSE +1.04% at 6,906.25, DAX +1.07% at 11,034.10, CAC-40 +1.18% at 4,850.74, IBEX-35 +1.01% at 8,998.60, FTSE MIB +0.65% at 19,596.50, SMI +0.62% at 8,968.70, S&P 500 Futures +0.29%]

Market Focal Points/Key Themes:

• European Indices trade higher across the board following gains in Asia and strong US futures on positive trade related sentiment as Treasury Secretary Mnuchin looks to life Chinese tariffs to get a trade deal.
• On the corporate front low cost airline Ryanair trades lower after cutting its full year outlook on lower fares. Casino, Beter Bed and Hellofresh are notable gainers after earnings and outlook, while Sophos trades lower by over 20% after warning on billings, with Takaway.com, Telecom Italia and Virbac among other notable decliners.
• Renault trades higher after reports global sales higher year over year, Euskatel also rises on M&A talk.
• In the US both American Express and Netflix trade lower in the premarket on Revenue misses and weaker outlook and Tesla trades lower after announce prelim Q4 GAAP profit which will be lower q/q.
• Looking ahead notable earners include Schlumberger, Citizens Financial, VF Corp, Kansas City Southern and State Street.

Equities

• Consumer discretionary: Ryanair [RYA.UK] -1.5%, EasyJet [EZJ.UK] -2% (Ryanair profit warning), Casino Guichard-Perrachon [CO.FR] +6% (preliminary earnings), Takeaway.com [TKNY.NL] -4% (offering), HelloFresh [HLG.DE] +13% (positive profit alert), Oriflame Cosmetics [ORI.SE] -12% (earnings)
• Industrials: Vinci [DG.FR] +1.5% (said to partially reduce tolls)
• Technology: Sophos [SOPH.UK] -23% (trading update), Siemens [SIE.DE] +1%, Alstom [ALO.FR] -1% (reportedly Siemens is against further concession towards EU commission on Alstom deal)
• Telecom: Telecom Italia [TIT.IT] -8.5% (preliminary earnings)

Speakers

• German Foreign Min Maas stated that was scarcely conceivable UK exit deal would be reopened; had made it clear that the UK Parliamentary vote had not changed anything about that
• German Bundesbank and China PBoC sign MOU on cooperation; Governors discussed the economy and Brexit
• Sweden Parliament approved Lofven as the new Prime Minister (as expected)
• China FX Regulator SAFE reiterated stance that Forex market to remain stable in 2019 with the Current account balance to remain within a reasonable range
• OPEC-Non-OPEC Joint Ministerial Monitoring Committee (JMMC) called on all participating nations to redouble efforts to ensure Oil market remains in balance in 2019
• IEA Monthly Oil Report maintained 2019 global oil demand growth forecast at 1.4M bpd. Global oil supply declined by 950K bpd in Dec ahead of the planned OPEC+ production cuts. It saw oil demand growth defying economic slowdown for now

Currencies/ Fixed Income

• FX markets were relatively quiet with little fresh news out on Brexit and limited economic data releases. The USD was poised for its first weekly rise on over a month as rate differentials. Dealers noted that doubts emerged of the ability of other major global central banks such as the ECB to start raising interest rates this year.
• GBP/USD was retracing some of its recent gain and trading around the 1.2930 areas. Overall dealers believing that the Brexit process had pivoted toward a softer Brexit which has aided the GBP currency in recent sessions. The 1.2800 level was seen as support for the time being and 1.3000 as psychological resistance.
• EUR/USD continued to be locked in a 1.13-1.15 range for the time being and caught between the Fed’s recent rhetoric of reaffirmed patience and concerns that the Euro Zone might slip into a technical recession.
• Optimism on the US-China trade front helped to unwind some safe-haven flows and out pressure on the Japanese Yen. USD/JPY higher by 0.3% at 109.55

Economic Data

• (CH) Swiss Dec Producer & Import Prices M/M: -0.6% v -0.1%e; Y/Y: 0.6% v 1.0%e
• (RU) Russia Narrow Money Supply w/e Jan 11th (RUB): 10.42T v 10.75T prior
• (CN) Weekly Shanghai copper inventories (SHFE): No est v 98.0K tons prior
• (EU) Euro Zone Nov Current Account Balance: €20.3B v €26.8B prior
• (PL) Poland Dec Sold Industrial Output M/M: -11.5% v -9.6%e; Y/Y: 2.8% v 5.0%e; Construction Output Y/Y: 12.2% v 15.1%e
• (PL) Poland Dec Employment M/M: 0.0% v 0.0%e; Y/Y: 2.8% v 2.8%e
• (PL) Poland Dec Average Gross Wages M/M: 6.2% v 7.4%e; Y/Y: 6.1% v 7.3%e
• (PL) Poland Dec PPI M/M: -0.9% v -0.5%e; Y/Y: 2.2% v 2.5%e
• (IT) Italy Nov Current Account Balance: €B v €6.1B prior
• (GR) Greece Nov Current Account Balance: -€1.4B v -€0.9B prior
• (UK) Dec Retail Sales (Ex Auto/Fuel) M/M: -1.3% v -0.8%e; Y/Y: 2.6% v 3.8%e
• (UK) Dec Retail Sales (Including Auto/Fuel) M/M: -0.9% v -0.8%e; Y/Y: 3.0% v 3.6%e

Fixed Income Issuance

• (ZA) South Africa sold total ZAR650M vs. ZAR650M in I/ L 2029, 2033 and 2046 bonds
• (IN) India sold total INR120B vs. INR120B indicated in 2021, 2027, 2032, 2035 and 2047 bonds

Looking Ahead

• 06:00 (PT) Portugal Dec PPI M/M: No est v -0.6% prior; Y/Y: No est v 3.6% prior
• 06:00 (UK) DMO to sell €4.0B in 1-month, 3-month and 6-month bills (£0.5B, £2.0B and £1.5B respectively)
• 06:30 (IN) India Weekly Forex Reserves w/e Jan 11th: No est v $396.1B prior
• 06:45 (US) Daily Libor Fixing
• 08:00 (RU) Russia Nov Trade Balance: $18.2Be v $19.7B prior; Exports: $38.4Be v $41.3B prior; Imports: $20.9Be v $21.6B prior
• 08:00 (UK) Baltic Dry Bulk Index
• 08:00 (IN) India announces upcoming bill issuance (held on Wed)
• 08:30 (CA) Canada Dec CPI M/M: -0.4%e v -0.4% prior; Y/Y: 1.7%e v 1.7% prior; Consumer Price Index: 133.0e v 133.5 prior; CPI Core- Common Y/Y: 1.9%e v 1.9% prior; CPI Core- Median Y/Y: 1.9%e v 1.9% prior; CPI Core- Trim Y/Y: 1.9%e v 1.9% prior
• 08:30 (CA) Canada Nov Int'l Securities Transactions (CAD): No est v 4.0B prior
• 09:05 (US) Fed’s Williams (moderate, voter) speaks on Economic Outlook and Monetary
• 09:15 (US) Dec Industrial Production M/M: 0.2%e v 0.6% prior; Capacity Utilization: 78.5%e v 78.5% prior; Manufacturing Production: 0.3%e v 0.0% prior
• 10:00 (US) January Preliminary University of Michigan Confidence: 96.9e v 98.3 prior
• 10:00 (CO) Colombia Nov Industrial Production Y/Y: 4.3%e v 5.8% prior
• 10:00 (CO) Colombia Nov Retail Sales Y/Y: 7.1%e v 6.5% prior
• 11:00 (US) Fed’s Harker (dove, non-voter) at symposium on prosperity
• 13:00 (US) Weekly Baker Hughes rig count data

The DAX index has posted sharp gains in the Friday session. Currently, the index is at 11,046, up 1.17% on the day. Bank and auto shares have climbed sharply, with BMW, Daimler and Deutsche Bank all registering gains of over 2% on Friday. In economic news, there is only one release. The eurozone current account surplus narrowed to EUR 20.3 billion, down from EUR 23.0 billion. This was well off the estimate of EUR 24.1 billion.

Is the eurozone headed for a recession? Growth forecasts have been revised lower for the three largest economies in the bloc (Germany, France and Italy). The U.S-China trade war, which shows not signs of being resolved anytime soon, has taken a bite out of the eurozone export and manufacturing sectors have slowed. If the trade war worsens or the U.S. economy slows down in 2019, the eurozone could lapse into a recession. Given these weak economic conditions, the ECB, which finally terminated its massive stimulus program last month, is unlikely to raise interest rates before the fourth quarter of 2019. Just a few months ago, analysts were predicting a rate hike in the third quarter. Lower rates should be bullish for the equity markets, which will be more attractive to investors than the bond markets.

Another week has meant more gains for the streaking DAX index. The DAX is on track to post gains for a third successive week, and has enjoyed a stellar January, with gains of 5.3 percent. On Friday, the DAX pushed above the 11,000 level for the first time since early December. Investors remain hopeful that trade tensions between the U.S. and China will ease, with senior Chinese and U.S. officials meeting for another round of trade talks on January 30. The tariff spat has triggered a slowdown of the Chinese economy, and there are concerns that U.S growth will slow if the sides don’t resolve the conflict.

Euro has been unable to gain traction against major G10 peers suggesting mounting downside risk. The rationale seems clear for bearish sentiment. Incoming economic data, led by weakness in Germany has been troubling. Brexit chaos has highlighted growing risk of populism while China failure to stabilized growth despite heavy policy actions indicates export markets are declining. As we have noted in our “2019 Perspective” the gap between EU and USA has become extreme. Whether it is equity valuations or PMIs, the US has outperformed the EU. The factors caused repricing Euro lower. Yet the winds of change are blowing created an opportunity to go long EURUSD.

After continued acceleration US growth appears to be decelerating which will tighten the growth gap. The political division and partial government shutdown is having a clear effect in eroding growth (estimated between 0.5 to 0.75% slowing in annual GDP). Should the effect of divided nation start to damage consumer confidence this will become a significant issue. Treasury yields meanwhile, have settled into a narrower trading range between 2.65% and 2.75% the fall in US yields aided undercut the USD. EU PMIs have bottomed indicated stabilization, helped by competitive EUR pricing, while EU is still enjoying strong labor market allowing for consumer spending insulating GDP. Fiscally the environment is starting to loosen with Germany’s CDU has indicated that tax cuts are coming on top for Frances reversal of tax hike (due to yellow jackets protests). On the monetary policy front while M. Draghi recent comments have been dovish we suggest he has been focused on the near term and mid-term the ECB is on track to hike interest rates in September. In the US, expectation for additional rate hikes are waning as Fed Evans stated that this would be a good point for the Fed to pause. Tightening of yield spread differentials would certainly help the Euro as European investors, overweighed US assets, repatriate capital.

Elsewhere, news that Germany and China signed agreements to reinforce synchronization in banking, finance and capital markets, and promised to broaden and liberalize economic relations. China’s weak outlook mean the news has a lower impact but remains significant to help Germany’s economic fatigue. Whenever, FX markets become to one side it time to review the rationale. At this point we suspect the negativity around the Euro is accurately priced in and a reverse of bears trend is likely as negatives fade.

British pound losing momentum as May plan B worries

After facing a tough defeat in front of the UK parliament and surviving a vote of no confidence, PM May continues struggling to make her points among the assembly. The recent statement made by Labour party leader Jeremy Corbyn that a second Brexit referendum would be a good resolution confirms that PM May continues to face disagreements.

Indeed, the position maintained by PM May, which favors the maintenance of current 29. March 2019 deadline while not considering the idea of a second referendum and of a comeback into closer association with the EU, is pausing problems for investors, as the future direction of the divorce and the British pound remains largely unknown. For now, it seems that investors are supporting a bullish bias over the pound, which clearly made decent gains against major currencies (Week-to-date EUR/GBP: -1.36% and GBP/USD: +0.70%). However, under current circumstances, and considering the short amount of time given to PM Theresa May to provide the House of Commons with a decent plan B (deadline on Monday), it appears that the postponement of current Brexit due date through the extension of Article 50 remains the single, realistic solution for now to dismiss the risk of a hard Brexit. Would it be a GBP positive? Difficult to say. But to be brief, it seems that current GBP move remains highly risky, since the future European Parliament elections from May 2019 could play a key role in current situation.

GBP/USD is currently valued at 1.2944, approaching 1.2850 short-term

The pair extends recovery to new two-week high at 109.59 on Friday after bullish signal was generated on Thursday’s close above 109.15 pivot (daily Kijun-sen / 50% retracement of 113.70/104.59).

The greenback was boosted by better than expected US jobless claims data, despite US government’s shutdown and improving daily techs.

Bulls pressure weekly cloud base (109.68) and eye psychological 110 barrier, as the pair is on track for strong bullish weekly close and also formation of reversal pattern on weekly chart.

Huge option expiries today add to market signals, but could drive the price in either direction.

Weekly close above broken 109.15 barrier is needed to keep bullish bias.

Res: 109.68, 110.00, 110.26, 110.57
Sup: 109.15, 108.71, 108.07, 107.76

The British pound is now testing towards key intraday support against the US dollar after fading lower from the psychological 1.3000 level during the European trading session. The 1.2930 level is former resistance now turned key intraday support, a sustained move below this level may accelerate technical selling towards the 1.2890 level. If the 1.2930 support level is defended, we may see a further attempt to break the key 1.3000 level.

The GBPUSD pair bullish while trading above the 1.2930 level, key technical resistance is found at the 1.3000 and 1.3095 levels.

If the GBPUSD pair falls under the 1.2930 level, key support is found at the 1.2890 and 1.2810 levels.

The euro continues to consolidate around the 1.1400 level against the US dollar, with the pair trading in an increasingly narrow range. The Average True Range indicator has slumped lower across the four-hour time frames, highlighting the lack of direction and volatility in the EURUSD pair at present. The MACD indicator on the mentioned time frame is gradually correcting from oversold conditions.

The EURUSD pair is bearish while trading below the 1.1400 level, key technical support remains at the 1.1360 and 1.1300 levels.

If the EURUSD pair moves above the 1.1410 level, buyers may be encouraged to test the 1.1430 and 1.1460 resistance levels.

During the previous trading session, the rate was resisted by the 55-hour simple moving average to push the rate to the 1.3600 level as it was expected. On Friday morning, the European Single Currency was trading between the monthly pivot point and the weekly S1 at the 1.1395 mark.

Most likely, the 55-hour simple moving average will continue retracing the rate to push it to the 1.1340 level during the day.

On the other side, the weekly S1 at the 1.1390 could support the currency exchange rate to break the resistance of the monthly pivot point at 1.1408.

During Thursday's trading session, the currency exchange rate broke the upper boundary of the medium pattern line at the 1.2908 mark. Note, due to that fact, the pattern was corrected!

In regards to the near-term future, most likely, the British Pound will continue appreciating against the US Dollar towards the 1.3000 level. Besides, the 55-hour and the 100-hour SMAs will support the surge during the day.

However, the British Pound could depreciate against the US Dollar at any time due to uncertainty with the Brexit deal. Stay tuned to the latest news!