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• Risk sentiment in dire straits; US stocks close at fresh lows, yen shines
• Dollar drops as Fed rate-hike expectations fade even further
• Kiwi buoyant after New Zealand's business sentiment recovers

S&P 500 closes at 14-month low as fear dominates greed

Risk sentiment remained sour to start the week, in the absence of any clear catalyst, other than a flurry of headlines suggesting a US government shutdown may be on the cards this holiday season. The benchmark S&P 500 index fell by 2% to close at a 14-month low, WTI oil broke below its recent troughs, while the Japanese yen outshined all the major currencies as investors de-risked. Meanwhile, the Russell 2000 index of US small caps entered a bear market, down 20% from its highs.

Market sell-offs in December have a special twist to them, as the selling can be amplified by calendar effects. Since most funds report their performance as a yearly figure, many of them place greater emphasis on preserving any year-to-date profits via liquidating positions and limiting their exposure, as opposed to trying to expand them.

Dollar falls as investors bet market sell-off will stay the Fed's hand

Amidst this turmoil, markets are betting on an even softer Fed rate path. The probability for a hike tomorrow has declined to 63%, while 2019 rate expectations have also faded further as investors increasingly doubt whether the central bank will dare appear hawkish and exacerbate the havoc. Assuming a hike is delivered tomorrow, Fed funds futures suggest a meagre 30% chance for just one more next year. In this context, one wonders how much worse the selling in stocks would have been if rate expectations didn't fade and effectively provide a cushion for risky assets.

As for the dollar, it posted hefty losses as fading rate hike bets coupled with worries over a government shutdown outweighed safe-haven demand for the reserve currency. All eyes remain on the Fed's decision tomorrow. Given just how dovish market pricing has become, the odds for a hawkish surprise have risen materially. Investors may have gotten ahead of themselves in pricing out such a substantial degree of Fed tightening so quickly, particularly considering that US economic data outside of housing remain quite healthy.

In this respect, US building permits and housing starts for November due later today may attract attention, as weakness in recent housing indicators has been at the spearhead of speculation that the US economy is slowing down.

Kiwi propelled higher by recovering business sentiment

The kiwi dollar is outperforming on Tuesday, following the monthly ANZ business sentiment survey. Although still in negative territory, the index rose from its lows, calming some nerves that a sustained deterioration in business expectations would become self-fulfilling and lead to a slump in investment. Hence, good news for the RBNZ, though clearly not good enough to fuel speculation for any policy move anytime soon. Today, kiwi traders will keep their sights on the twice-monthly milk auction, though the nation's current account data for Q3 may also attract attention.

Day ahead: Germany's Ifo survey and Brexit developments

Besides the US housing figures, Germany's Ifo survey gauging business expectations is also due; it could shed some light on how Europe's largest economy fared heading into year-end.

In the UK, the Brexit saga continues as opposition leader Jeremy Corbyn indicated he will trigger a “no confidence” vote in PM May; not on the entire government. Although this would have minimal implications, it serves as a reminder political uncertainty remains elevated.

As for the speakers, ECB Vice President de Guindos (0815 GMT), as well as Governing Council members Rehn (0900 GMT) and Makuch (1200 GMT) will all deliver remarks.

WTI futures plummeted to a fresh 15-month low during yesterday’s session, challenging the 48.50 level. The price exited from the narrow range that was holding in the preceding three weeks, continuing the strong downside structure in the short to medium term.

Currently, the price remains below the 20- and 40-simple moving averages (SMAs) and the technical indicators hold in negative area. The RSI is flattening near the overbought levels, while the MACD is strengthening its negative momentum below the trigger and zero lines.

Further declines and a drop below the aforementioned 15-month trough could send prices towards the 47.50 support barrier, registered on September 2017. Even lower, support could occur around the 46.00 handle, identified by the lows on August 2017.

On the upside, resistance could come around the 20- and 40-simple moving averages (SMAs) in the 4-hour chart, at 51.15 and 51.50 respectively. Higher still, the 53.25 resistance would increasingly come into scope before the price retouches the 54.40 obstacle, which was acting as upper band of the trading range in the previous days.

Overall, the short-term outlook appears mostly bearish after the break of the trading range, and the medium-term one remains negative as well.

Daily Pivots: (S1) 0.7168; (P) 0.7178; (R1) 0.7188; More...

AUD/USD formed a temporary low at 0.7151 and recovered. Intraday bias is turned neutral first. But upside of recovery should be limited by 0.7246 resistance to bring fall resumption. Below 0.7151 will extend the fall from 0.7393 to retest 0.7020 low. Nevertheless, break of 0.7246 resistance will delay the bearish case and turn bias back to the upside. Rebound from 0.7020 could then probably head to 38.2% retracement of 0.8135 to 0.7020 at 0.7446 before completion.

In the bigger picture, a medium term bottom is in place at 0.7020 ahead of 0.6826 key support (2016 low). Stronger rebound could still be seen to correct the whole fall from 0.8135 high. But we'd expect strong resistance from 0.7500 support turned resistance to limit upside. Medium term fall from 0.8135 should resume later and extend to take on 0.6826 low at a later stage, after the correction from 0.7020 completes.

• Rates: US Treasuries rally on market jitters ahead of Fed
  Global core bonds were mixed yesterday. Ongoing growth concerns and slumping oil prices caused US equities to slide to a multi-month low. US Treasuries heavily outperformed German Bunds. With only secondary housing data in the US and IFO Expectations in Germany, risk sentiment will remain in today’s driver’s seat ahead of tomorrow’s Fed meeting.
• Currencies: Diminishing interest rate support prevents USD to play its safe haven role
  Yesterday, the dollar lost modest ground intraday. Overall uncertainty caused investors to question the Fed’s rate hike intentions for next year. Interest rate differentials narrow in the disadvantage of the dollar. Today, USD traders will further countdown to tomorrow’s Fed decision. Will the USD gradually stop losing interest rate support?

The Sunrise Headlines

• Wall Street has put up another dismal performance, suffering 2%+ losses. Nasdaq now joined the Dow Jones and S&P 500 in the red for the year. Asian stock markets slide as well, with setbacks ranging between -1% and -2%.
• UK Labour leader Corbyn suggested a motion of no-confidence in PM May, but was rapidly rebuffed by back benching Tories and the DUP who said to be unwilling to vote with Labour, even as they oppose May’s brexit deal.
• The NAHB housing market index dropped unexpectedly from 60 to 56 in December, the weakest level since 2015 and providing more evidence that borrowing costs and property prices are cooling the US housing market.
• Chinese President Xi offered no specific new measures to boost the economy at a high-level conference. China Daily earlier reported that individual income tax cuts will be a priority for the Chinese government next year.
• Chinese US Treasuries’ holdings fell a fifth month straight in October, by $12.5bn to $1.14tn and equalling mid-2017 levels. Total foreign holdings dropped by more than $60bn, the largest decline since November 2016.
• WTI crude closed below $50/barrel for the first time since October last year. Rumours suggest a big jump in US inventories ahead with others worrying about OPEC’s ability to stick to next year’s production cut agreement.
• Today’s economic calendar contains US housings starts and building permits and German Ifo Business sentiment. New Zealand confidence data beat consensus this morning, lifting NZD/USD from 0.68 to 0.6850.

Currencies: Diminishing Interest Rate Support Prevents USD To Play Its Safe Haven Role

USD losing interest rate support

Uncertainty on the global economy continued to haunt (equity) markets yesterday. US equities were hit hard and investors questioned the path of further Fed rate hikes in 2019. Poor US data, including a substantial further decline in NAHB housing confidence added to uncertainty. US yields nosedived. Sentiment on markets outside the US also turned further negative, but the loss of interest rate support this time prevented the dollar to fulfil its safe haven role. The US currency underperformed the euro and the yen. EUR/USD closed the session at 1.1348 (from 1.1306). USD/JPY finished at 112.83 (from 113.39). The risk-off trade spreads further to Asia overnight, even as losses are smaller than in the US yesterday. In a long-awaited speech, Chinese president XI Jinping confirmed the need for further reforms but didn’t provide much info on new initiatives to address the current slowdown or on the US-China trade relations. The dollar maintains yesterday’s decline. EUR/USD hovers in the 1.1340 area. The yen profits (albeit modestly) from a safe haven bid. USD/JPY trades in the 112.60 area. The yuan (USD/CNY 6.8970 area) trades little changed despite the risk-off. The kiwi dollar was supported by strong domestic confidence data. NZD/USD rebounded to the 0.6850 area after recent setback. Later today, the German IFO business confidence will be published. In the US, housing starts and permits are scheduled for release. On both sides of the Atlantic, markets look for clues on a potential further slowdown. Recently, the repositioning on US markets was at least as violent as was the case in most non-US markets. Question is whether the USD will lose further interest rate support going into tomorrow’s Fed policy meeting. We expect the Fed to remain much more positive on the economy (and on policy normalisation) compared to current market pricing. In theory, this should support the USD. However, at least until now, the market wasn’t inclined to embrace a (modestly) positive US eco scenario. The dollar traded rather neutral and didn’t profit from safe haven flows. More technical trading in the EUR/USD 1.12/1.15 trading range might be on the cards going into the Fed rate decision. EUR/GBP didn’t go anywhere yesterday and meandered in the high 0.89 area as the political stalemate on Brexit persists. An attempt of labour to trigger a no confidence vote failed. UK PM May indicated that she will continue negotiations with the EU going into early next year. This might bring some temporary calm for sterling. Still we avoid sterling long exposure.

EUR/USD: a loss of interest rate support prevents to dollar to play its traditional safe have role

Daily Pivots: (S1) 1.3380; (P) 1.3401; (R1) 1.3430; More...

USD/CAD recovers further today but it's, after all, still bounded in range below 1.3444. Consolidation might extend and intraday bias remains neutral. Near term outlook remains bullish as long as 1.3160 support holds, and further rally is expected. On the upside, break of 1.3444 will extend the larger up trend from 1.2061 for 1.3685 fibonacci level next. However, break of 1.3160 will indicate near term reversal and bring deeper decline.

In the bigger picture, up trend from 1.2061 (2017 low) is still in progress and should target to 61.8% retracement of 1.4689 (2016 high) to 1.2061 at 1.3685. However, such rise is not clearly impulsive yet. And it could be the second leg of the long term corrective pattern that started at 1.4689. Hence, even in case of further rally, we'd be cautious on loss of momentum and topping above 1.3685. Nevertheless, in any case, outlook will stay bullish as long as channel support (now at 1.2969) holds.

XAUUSD (1248.76): Gold prices turned bullish on Monday. The sharp rally came following President Trump's comments on the Fed rate hikes. However, with price action reaching the 1248 handle, we expect the price to post a modest correction to the downside. The support at 1242 remains key to the downside. If gold prices break past the 1248 level of resistance that is currently being tested, a near-term target of 1250 can be further achieved. However, further gains are unlikely to come by unless support is firmly established at 1242.25 handle.

GBPUSD (1.2627): The GBPUSD currency pair was seen gradually drifting higher. Price action remains subdued below the resistance level of 1.2683. A near-term rebound back to this resistance level could see the price being tested more firmly compared to the initial test at the resistance level. Further downside in the GBPUSD can be expected if price breaks past the previously established low. However, we expect some consolidation to take place that could keep the GBPUSD trading flat for the moment.

Daily Pivots: (S1) 1.1313; (P) 1.1336; (R1) 1.1372; More.....

EUR/USD rebounds further today but stays in range of 1.1267/1472 and intraday bias remains neutral. On the downside, break of 1.1267 will suggest that larger decline is resuming and target 1.1251 low next. Decisive break there will confirm this bearish case. EUR/USD should drop through 1.1186 fibonacci level to 61.8% projection of 1.2555 to 1.1300 from 1.1814 at 1.1038 next. However, break of 1.1472 resistance will indicate near term reversal and turn focus back to 1.1814 resistance.

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.

EURUSD (1.1351): The EURUSD managed to maintain gains on the day as price action rebounded off the support level. The intraday rally sent the common currency to retest the falling trend line once again. However, we expect this short-term bullish momentum to fade as the EURUSD maintains its range. A breakout from the falling trend line will no doubt see price action testing the resistance level once again at 1.14350.

Daily Pivots: (S1) 1.2574; (P) 1.2611; (R1) 1.2650; More...

No change in GBP/USD's outlook. Consolidation from 1.2476 is extending and intraday bias remains neutral. Stronger recovery cannot be ruled out, but upside should be limited by 1.2811 resistance to bring fall resumption. On the downside, break of 1.2476 will extend larger down trend from 1.4376 to 61.8% projection of 1.4376 to 1.2661 from 1.3174 at 1.2114. However, firm break of 1.2811 will be an early signal of trend reversal and turn focus back to 1.3174 resistance.

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 now target a test on 1.1946 first. Decisive break there will confirm our bearish view.