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Markets

Global core bonds gained ground today as risk sentiment deteriorated throughout the day with the Brexit vote lined up for tonight. Asian equities closed today’s session with gains, moving higher on news that the Chinese government will enhance its fiscal and monetary measures in 2019. European equities spurred higher as well but the tide turned almost right away. The German Bund profited, partly on the back of safe haven flows. Germany printed a first reading of its 2018 growth figure (1.5%), which is the weakest rate since 2013. The result was in line with market expectations but supported the risk-off moves that were already in play. The German yield curve edged lower with changes in the range of-1.3 bps (2-yr) to -2.7 bps (10-yr). US data printed weaker than expected, pushing US Treasuries further north. The US yield curve was mixed with changes varying between 1.5 bps (5-yr) to +1.1 bp (30-yr). Italy’s first syndicated deal this year (15y) was successful as it attracted more €30bn in bids, showing that investor sentiment drastically improved as the budget dispute with the EU moved to the background. The Treasury eventually printed €10 bn causing the Italian BTP future to lose some ground because of this unexpectedly high amount. The Italian 10-yr yield increased 3 bps, causing the credit spread over Germany to widen (+6 bps).

The euro staged quite a disappointing performance today. The odds for a EUR/USD rebound looked quite favorable this morning as Asian equities rebounded. EUR/USD traded in the 1.1480 area at the start of European dealings and European equities opened with severe gains. However, sentiment in European markets faltered soon sending EUR/USD back south in the 1.14 big figure. Euro selling accelerated after the publication of (unconvincing) German 2018 growth data. EUR/USD touched an intraday low in the 1.1415 area when US traders joined the action. From there, euro weakness was counterbalanced by similar USD softness as US data disappointed. EUR/USD trades currently in the 1.1440 area. A less positive equity sentiment in Europe and a decline in core yields also caused USD/JPY to reverse most of this morning’s gain. The pair trades again in the 108.40 area.

EUR/GBP developed an erratic like trading pattern near 0.89. Most investors kept sidelined eagerly awaiting the next step in the Brexit drama. The market already discounts that PM May’s Brexit deal will be rejected by a big majority. The question is : what next? Since the end of last week, sterling rebounded as a part of the market assumes Brexit will be delayed, which is seen as a ST sterling positive. However, several other options are possible. Immediately after the outcome of the vote, sterling might react to the magnitude of May’s defeat, but focus will soon turn to the next step. EUR/GBP trades close to 0.89. Cable is drifting away from recent ‘peak’ north of 1.29. Part of this move mirrors today’s overall USD rebound rather than any move in sterling ahead of the Brexit vote.

News Headlines

The Empire Manufacturing business confidence failed to meet market expectations as the headline figure tumbled to 3.9 in January vs. 10.0 expected. Forward looking sub components suggest little improvement. US PPI data also printed softer than consensus with core measures showing price stabilization whereas a 0.2% increase was expected.

JP Morgan Q4 earnings fell short of consensus as the bond-trading section’s plunge outweighed an increase in equity-trading revenue and advisory fees, resulting in the worst quarter in three years. Wells Fargo missed revenue estimates but topped profit expectations slightly thanks to effective cost control and lower taxes.

A Financial Times analysis of the Congo voting data suggests major fraud in the recent presidential elections. FT results show a 60% to 20% win by Fayulu, contradicting the authorities’ claim that Tshisekedi had won the vote.

JP Morgan fourth quarter results disappointed as profit came in at $1.98, missing analysts’ expectations of $2.20, the first miss in 15 quarters. Just like Citigroup, FICC sales and trading revenue were down sharply, a sign that the rest of the financials may see similar results. JP Morgan’s outlook was also not too bright. They see first quarter Net Interest Income flat quarter over quarter and expense to be up mid-single digits year over year.

JP Morgan stock was down over 2.6% in premarket trade but has recovered half of its losses at the open. The Dow is also off the session lows and currently trades higher by 0.3%. The dollar is mixed in early trade, slightly higher against both the euro and cable, but lower against the commodity currencies.

The Australian dollar eased on Tuesday, pressured by reduced risk appetite but remains within narrow range that extends into third day.

Recovery rally from spike low at 0.6706, posted after 3 Jan flash crash, faces strong headwinds from daily cloud (spanned between 0.7207 and 7285), as repeated attempts to clearly break into cloud were so far unsuccessful.

Cloud base marks strong barrier while the downside remains protected by converged 55/100SMA's at 0.7180 zone that marks the floor of near-term congestion.

Negative signals come from slow stochastic which reversed from overbought zone while momentum and RSI turned neutral after ascending in recent sessions. Break below 0.7180 would signal pullback which needs confirmation on extension below a cluster of 30/10/20SMA's (between 0.7152 and 0.7109).

Conversely, eventual close within daily cloud would generate bullish signal, with extension above 0.7231 (Fibo 76.4% of 0.7393/0.6706) needed to expose pivotal cloud top (0.7285) and confirm bullish continuation.

Res: 0.7235; 0.7285; 0.7330; 0.7393
Sup: 0.7180; 0.7152; 0.7109; 0.7033

The Canadian dollar continues to have a quiet week. In Tuesday’s North American session, the pair is trading at 1.3244, down 0.31% on the day. On the release front, there no Canadian events until Thursday. In the U.S., inflation indicators missed their estimates. PPI declined by 0.2%, missing the forecast of -0.1%. This was the weakest reading since July 2016. Core PPI dropped by 0.1%, shy of the estimate of 0.2%. There was no relief from the manufacturing sector, as the Empire State Manufacturing Index plunged to 3.9 points, down from 10.9 points a month earlier, and short of the estimate of 11.6 points.

After a dismal 2018, the Canadian dollar has sparkled in January, gaining 2.7% since the start of the year. Risk appetite has improved, which has been a catalyst for the currency’s impressive rally. However, there could be trouble ahead, as China continues to show signs of an economic slowdown. On Monday, China released dismal economic numbers, with exports down 4.4 percent from a year earlier and imports plunging 7.6 percent. The slowdown in China has taken a toll on corporate profits, with Apple and Jaguar Land Rover posting revenue warnings.

The Federal Reserve has made a U-turn on monetary policy, but by how much? There is a large discrepancy between Fed forecasts and market expectations, which could result in volatility in the currency markets, as traders try to figure out what the Fed will do in 2019. The most recent projections from individual policymakers in the Federal Open Market Committee (FOMC) stands at two rate hikes this year, but the markets are expecting the Fed to hold pat and not raise rates in 2019. Moreover, the markets have priced in a rate cut before the end of the year at 28 percent. On Monday, former Fed Chair Janet Yellen said that she expected the Fed to take a breather, saying that it’s ‘very possible’ that the Fed has made its last hike of this cycle.

Daily Pivots: (S1) 107.91; (P) 108.24; (R1) 108.50; More..

Intraday bias in USD/JPY remains neutral at this point. Outlook is unchanged as we'd expect upside to be limited by 109.46 resistance to complete the rebound from 104.69 short term bottom. On the downside, below 107.77 will turn bias to the downside for retesting 104.69 low. However, sustained break of 109.46 will dampen our view and bring stronger rebound instead.

In the bigger picture, price actions from 125.85 (2015 high) are seen as a long term corrective pattern, no change in this view. Apparently, such corrective pattern is not completed yet. Fall from 114.54 is seen as part of the falling leg from 118.65 (2016 high). Break of 104.62 will target 100% projection of 118.65 to 104.62 from 114.54 at 100.51, which is close to 100 psychological level. But in that case, we'd expect strong support from 98.97 to contain downside to bring reversal. Also, this bearish case will remain the preferred one as long as 114.54 resistance holds.

Daily Pivots: (S1) 0.9788; (P) 0.9820; (R1) 0.9840; More....

Intraday bias in USD/CHF remains neutral for the moment. As noted before, fall from 1.0128 is seen as correcting whole rise from 0.9186. Deeper fall is in favor. On the downside, break of 0.9716 will target 0.9541 cluster support (61.8% retracement of 0.9186 to 1.0128 at 0.9546). Nevertheless, firm break of 0.9963 will suggest that the pull back is completed. Near term outlook will be turned bullish for 1.0128 .

In the bigger picture, current development suggests that rise from 0.9186 has possibly completed with three waves up to 1.0128 already. Decline from 1.0128 could either be correcting this move, or reversing the trend. As long as 0.9541 support holds, we'd slightly favor the former scenario, and expect another rise through 1.0128 at a later stage. However, sustained break of 0.9541 will confirm trend reversal and bring deeper fall back to 0.9186 low.

Daily Pivots: (S1) 1.2813; (P) 1.2872; (R1) 1.2926; More....

A temporary top is in place at 1.2930 with today's retreat. Intraday bias in GBP/USD is turned neutral first. Further rise is in favor with 1.2709 minor support intact. Above 1.2930 will target 1.3174 resistance, which is close to 38.2% retracement of 1.4376 to 1.2391 at 1.3149. We'd expect strong resistance from there to limit upside, at least on first attempt. On the downside, break of 1.2709 minor support will argue that corrective rebound from 1.2391 is completed and turn bias back to the downside for retesting 1.2391 low.

In the bigger picture, whole medium term rebound from 1.1946 (2016 low) should have completed at 1.4376 already, after rejection from 55 month EMA. The structure and momentum of the fall from 1.4376 argues that it's resuming long term down trend from 2.1161 (2007 high). And this will now remain the preferred case as long as 1.3174 structural resistance holds. GBP/USD should target a test on 1.1946 first. Decisive break there will confirm our bearish view. However, sustained break of 1.3174 will invalidate this case and turn outlook bullish.

Daily Pivots: (S1) 1.1453; (P) 1.1467; (R1) 1.1484; More.....

EUR/USD drops further to as low as 1.1412 so far today. Breach of 1.1422 minor support argues that corrective rise from 1.1215 has completed earlier than expected. Intraday bias is back on the downside for 1.1307 support first. Break will likely resume larger down trend from 1.2555 through 1.1215 low. On the upside, above 1.1489 minor resistance will turn bias back to the upside for 1.1569 instead.

In the bigger picture, as long as 1.1814 resistance holds, down trend down trend from 1.2555 medium term top is still in progress and should target 61.8% retracement of 1.0339 (2017 low) to 1.2555 at 1.1186 next. Sustained break there will pave the way to retest 1.0339. However, break of 1.1814 will confirm completion of such down trend and turn medium term outlook bullish.

European majors are trading notably lower today. Euro is weighed down by concerns over slowdown in Germany, which might already had a technical recession in Q3 and Q4 already. Sterling also pares back some gains again traders turn cautious, ahead of the Brexit meaningful vote. Commodity currencies are relatively resilient but they're just bounded in tight range. There was some optimism earlier after China pledged to strive for a strong start in 2019. But such optimism quickly faded. Dollar is trading mixed while US government shutdown is extending its record run.

Technically, EUR/USD's breach of 1.1422 minor support suggests that recent rebound has completed earlier than expected. More downside is now mildly in favor for 1.1307 support. Ideally, that should be accompanied by stronger rebound in USD/CHF to 0.9963 resistance. Another development is EUR/JPY and GBP/JPY struggled to stay above 124.61 and 139.88 resistance respectively, and retreated. We'd continued to expect strong resistance from these levels to complete the rebound in the two Yen crosses.

In other markets, at the time of writing, FTSE is down -0.01%, DAX is down -0.21%, CAC is up 0.08%. All three major European indices are in tight range. German 10-year bund yield is down -0.021 at 0.210. Earlier in Asia, Nikkei rose 0.96%, Hong Kong HSI rose 2.02%, China Shanghai SSE rose 1.36%, Singapore Strait Times rose 1.22%. Japan 10-year JGB yield closed down -0.0123 at 0.013.

Empire State manufacturing dropped to lowest well over a year

Empire State manufacturing index dropped sharply to 3.9 in January, down from 10.9, and missed expectation of 11.6. That's also the lowest level in "well over a year" since mid-2017. Also, the headline index has already fallen a cumulative 18 pts since November. Additionally, firms were "less optimistic about the six-month outlook than in recent months."The index for future business conditions fell thirteen points to 17.8, and the indexes for future new orders and shipments also declined.

Also from the US, in December, headline PPI dropped -0.2% mom rose 2.5% yoy, versus expectation of 0.0% mom, 2.5% yoy. PPI core dropped -0.1% om, rose 2.7%, versus expectation of 0.2% mom, 2.7% yoy.

UK May pledges to respond to Brexit vote results quickly

All eyes are now on the Brexit meaningful vote in the Commons today. There is no exact time set, but it's believed to be somewhere between 1900-2100 GMT. Ahead of that Prime Minister Theresa May's spokesman reiterated the stance that "the prime minister said the government is the servant of the people and she believes passionately that we must deliver on the result of the 2016 referendum". And, "she added that after the vote has taken place, she would respond quickly to the result."

EU Centeno: Anything is better than a no-deal Brexit

Eurogroup head Mario Centeno tried to sound softer on EU stance on Brexit agreement today. He indicated that should the deal is voted down by UK Parliament today, there are room for more talks and adjustments to avoid a no-deal Brexit.

He said "we will see the result (of the vote) today and we can adjust our trajectory". And, "we can open all the dossiers … We need to take informed decisions with total calm and avoid a no-deal exit. Practically anything is better than a no-deal exit."

ECB Draghi: Euro produced two decades of price stability

In a speech titled "20th anniversary of the euro", ECB President Mario Draghi hailed that with the Single Market, " we have a powerful engine of sustainable growth to underpin our living standards". And the Euro has "safeguarded the integrity of the Single Market."

In addition, he said euro has "produced two decades of price stability also in countries where this was a long lost memory." And that "fostered people's confidence", with such " firms invest and create new jobs."

Draghi also said "today most challenges are global and can be addressed only together". Such "togetherness" magnifies the ability of individual countries to retain the sovereignty over the relevant matters. And, together "we have a voice in the regulation of international financial market".

German economy grew 1.5% in 2018, slowest since 2013

The German Federal Statistical Office said the German economy grew 1.5% in 2018 as a whole. And that was above the 1.2% average growth rate of the last 10 years. It's the ninth year of growth in a row. But Destatis noted that "growth has lost momentum". German economy grew 2.2% in both 2017 and 2016, and 1.7% in 2015. And the pace was slowest since 2013.

Positive contributions came mainly from domestic demand. Household final consumption expenditure rose 1.0%. Government final consumption expenditure rose 1.1%. But both were notably slower than growth rate back in the past three years. Exports grew 2.7% while imports grew 3.4%.

The Economy Ministry said the slowdown was due to weaker global economy, car industry's sales problem, outbreak of flu and strikes. It's optimistic that the economy will likely expand at the start of 2019. However, Euro drops notably today on worries that Germany was in a technical recession with contraction in last Q3 and Q4.

Also from Eurozone, trade surplus widened to EUR 15.1B in November, above expectation of EUR 13.2B.

China pledges to strive for good start in Q1

Stocks in Asia surge on hope that China would launch more stimulus measures to support the slowing economy. Chinese Premier Li Keqiang pledged to work to give the economy a strong start to achieve 2019 economic targets. There is no detail on the plan so far.

Li was quoted by State TV saying "we should strive for a good start in the first quarter to create conditions for completing the key full-year development targets and tasks." And, "our country's development environment is becoming more complex this year, there are more difficulties and challenges and the downward pressure on the economy is increasing,"

It's reported that the Chinese government is planning to lower growth target to 6-6.5%, down from expected 6.6% in 2018.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1453; (P) 1.1467; (R1) 1.1484; More.....

EUR/USD drops further to as low as 1.1412 so far today. Breach of 1.1422 minor support argues that corrective rise from 1.1215 has completed earlier than expected. Intraday bias is back on the downside for 1.1307 support first. Break will likely resume larger down trend from 1.2555 through 1.1215 low. On the upside, above 1.1489 minor resistance will turn bias back to the upside for 1.1569 instead.

In the bigger picture, as long as 1.1814 resistance holds, down trend down trend from 1.2555 medium term top is still in progress and should target 61.8% retracement of 1.0339 (2017 low) to 1.2555 at 1.1186 next. Sustained break there will pave the way to retest 1.0339. However, break of 1.1814 will confirm completion of such down trend and turn medium term outlook bullish.

Economic Indicators Update

The US 100 stock index (NASDAQ 100) has reversed back to the upside, hitting the 50-day simple moving average (SMA). Currently, the price is hovering around the 38.2% Fibonacci retracement level of the downleg from 7700 to 5845, near 6555.

Momentum indicators in the daily chart though are currently supporting that positive momentum is likely to strengthen in the short-term. Specifically, the RSI is picking up speed above 50 and the MACD continues to distance itself above its red signal line.

Should the price decisively close above the roof of 6635, bulls could extend the bullish movement towards the 50.0% Fibonacci region of 6775. Further advances above this level, could then target the area around the 6870 resistance.

On the other side, a decline could meet the 23.6% Fibonacci mark of 6286, before moving even lower towards the next significant obstacle of 6120, taken from the latest lows. A break below this level could send the index until the 14-month low of 5845.

The recent bullish action turned the very short-term picture more positive, however, in the bigger view the index remains strongly bearish.