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Markets

Global core bonds gained ground today as the improvement in risk sentiment came to a halt overnight. Further progress in US-Sino trade talks didn’t weigh up against disappointing economic data in China and Japan, pushing Asian equities south. European indices followed the move and opened substantially lower. Weaker than expected EMU PMI’s weighed even further on sentiment. Safe haven flows were in play, with both the German Bund and US Treasuries gaining ground. Market sentiment improved slightly, with European equities erasing half of its intraday losses. Core bonds topped as well. Better than expected US Retails sales and China officially confirming it will lower import taxes on American cars weighed further on US Treasuries and German Bunds. The German yield curve steepened with changes ranging from -2.3 bps (2-yr) to +0.5 bps (30-yr). The US yield curve bull flattens. Changes range from -1.9 bps (2-yr) to -2.2 bps (30-yr). The EU still wants more concessions from Italy, after the government proposed a new 2019 budget deficit of 2.04%, down from the originally planned 2.4%. The European Commission is seeking a “final push” of around €4bn (or 0.2% of GDP). Peripheral spreads widen with Italy (+5bps) and Greece (+4 bps) underperforming.

EUR/USD traded flat ahead of EMU PMI’s. Markets held their breath after France published below 50 PMI’s (49.3), which would suggest economic contraction going forward. Euro bulls eventually threw in the towel as again weak(er than expected) German (52.2) and EMU wide (51.3, the lowest in 49 months) business confidence revealed France’s deteriorating sentiment isn’t an isolated case. At the same time, a risk-off sentiment (as fears for global growth mount following weak Chinese and Japanese data) and ironclad US November retail sales kept the dollar well bid. EUR/USD nosedived well below 1.13 to reach a session low of 1.127. The pair is currently trading at 1.128/9. The Japanese yen’s lackluster performance in today’s risk-off environment is striking. USD/JPY is filling bids at 113.6, virtually unchanged from opening levels.

Sterling started on soft footing, reversing yesterday’s gains. EUR/GBP’s sharp move south later on was inspired by euro weakness (soft PMI’s) rather than sterling strength. The rebound of the currency pair around noon was testament to markets avoiding sterling long exposure. The British PM May addressed the press shortly during the European summit but no news there. Discussions with the EU are ongoing and she is confident pushing the deal through Parliament eventually. She also confirmed the January 21 deadline for Parliament to cast a new vote. EUR/GBP is trading close to opening levels at around 0.899. Risk-off and strong US retail sales sent cable tumbling below 1.255.

News Headlines

Swedish former prime minister and Social Democratic leader Stefan Lofven lost a second crucial vote in parliament today. The rejection of Lofven as new PM keeps Sweden in a political deadlock and raises the chances of new snap elections. The Swedish krona gained little on the news.

US November retail sales were substantially stronger than expected. Headline sales rose 0.2% M/M (vs 0.1% exp.), caused by a lower oil price. Core sales (excl. automobiles, gasoline, building materials and food) jumped 0.9% M/M. The October figure was also upwardly revised. The data hints a solid impact from private consumption to Q4 growth.

Russia’s central bank raised its policy rate to 7.75%. They said the move is proactive in nature to limit inflationary risks, especially on a short-term horizon with inflation reaching the 4% inflation target soon due to a weaker rouble and a VAT increase. The bank also announced to restart purchases of foreign currency linked to oil related income.

Markit US PMI manufacturing dropped to 53.9, down from 55.3 and missed expectation of 55.1. It's a 13-month low. PMI services dropped to 53.4, down from 54.7 and missed expectation of 55.0. It's a 11-month low. PMI composite dropped to 53.6, down from 54.7. It's the lowest reading in 19-month. .

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

"The flash PMIs bring signs of the US economy ending 2018 on a softer note. With business activity expanding at the slowest rate for one and a half years, the surveys indicate that the pace of economic growth has faded to 2.0% in December, albeit closer to 2.5% for the fourth quarter as a whole.

"Importantly, although growth remains relatively robust, momentum is being lost and is likely to continue to fade as we move into 2019. New order inflows hit the lowest since April of last year and expectations regarding future business growth have slipped to the lowest for two-and-a-half years.

"The surveys reveal greater caution in relation to spending amid uncertainty about the economic outlook, linked in part to growing geopolitical concerns and trade wars."

"The weaker picture of current and future business growth has curbed appetite for hiring. Jobs growth inched down to the lowest for one and half years but remains consistent with non-farm payrolls rising in December by around 180,000.

"Price pressures have meanwhile cooled as lower oil prices feed through, yet rising tariffs remain a concern for many companies, keeping input cost inflation above the survey's long-run average."

Full release here.

Daily Pivots: (S1) 113.30; (P) 113.50; (R1) 113.82; More..

With 113.14 minor support intact, intraday bias in USD/JPY remains on the upside for 114.03 resistance. Break there should resume rebound from 111.37 and target 114.54 key resistance next. On the downside, below 113.14 minor support will turn bias the downside for 112.23 and below. Overall, price actions 114.54 are seen as a consolidative pattern. In case of deeper fall, downside should be contained by 38.2% retracement of 104.62 to 114.54 at 110.75 to bring rebound. Larger rise from 104.62 is expected to resume later.

In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.76 support holds. However, decisive break of 109.76 will dampen this bullish view and turns outlook mixed again.

Daily Pivots: (S1) 0.9915; (P) 0.9935; (R1) 0.9958; More...

USD/CHF's rebound from 0.9862 extends today. Break of near term falling trendline resistance put focus on 1.0008 resistance now. Break will indicate that pull back from 1.0128 has completed. Intraday bias would be turned back to the upside for retesting 1.0128 first. On the downside, in case of another fall, strong support should be seen from 0.9848 key support to bring rebound.

In the bigger picture, rise from 0.9541 could have topped at 1.0128. But as long as 0.9541 support holds, we'd still expect rise from 0.9186 to resume at a later stage. Break of 1.0128 will target 1.0342 key resistance. However, break of 0.9514 will pave the way back to 0.9186 low.

Daily Pivots: (S1) 1.2616; (P) 1.2651; (R1) 1.2694; More...

GBP/USD was rejected by 4 hour 55 EMA and dropped sharply But it's staying in range above 1.2476 and intraday bias remains neutral first. Another 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.

Daily Pivots: (S1) 1.1328; (P) 1.1361; (R1) 1.1391; More.....

EUR/USD drops sharply today and focus is now on 1.1267 support. Break 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.

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.

Yen and Dollar are the strongest ones today as global stock markets are back in selloff mode. Sentiments turned sour after weaker than expected Chinese sales and production data. Adding to that, Eurozone came showed further decline in growth momentum, verifying ECB's concerns. China's concessions on retaliation tariffs on US autos are a positive news, but couldn't turn things around.

Dollar is gaining a bit extra advantage after slightly better than expected retail sales data. But that's just a matter of 0.2% growth versus 0.1%. DOW futures are pointing to lower open, and we'll see if selling would intensify onwards. Staying in the currency markets, New Zealand and Australian Dollar are the weakest ones on risk aversion naturally, in particular on Asian slowdown. Sterling is the third weakest today on Brexit worries. Euro isn't too far away though.

In other markets, FTSE is currently down -0.66%, DAX is down -0.65% and CAC is down -1.05%. German 10 year yield is down -0.024 % 0.262. Italian 10 year yield is up 0.006 at 2.975. Earlier today, Nikkei closed down -2.02%, Hong Kong HSI closed down -1.62%, China Shanghai SSE dropped -1.53%. Singapore Strait Times dropped -1.09%. Japan 10 year JGB yield dropped again by -0.0191 to 0.035.

Technically, AUD/USD is finally moving away from 0.7199 support, confirming near term reversal. Retest on 0.7020 low should be seen next. Steep selloff is seen in EUR/USD and EUR/JPY and they are likely having downside breakout finally. 1.1267 support and 124.79 support should be watched closely to confirm.

Released from the US, retail sale rose 0.2% mom in November versus expectation of 0.1% mom. Ex-auto sales rose 0.2% mom, matched expectations.

China announced to suspend retaliatory tariffs on 211 items of US autos and parts for 3 months

China Ministry of Finance announced to suspend retaliation tariffs on US autos and parts for 30 days, as a result of the meeting between Xi and Trump in Argentina. The statement noted that important consensus was reached between the two heads of state. And in order to implement the consensus, China will suspend the additional tariffs imposed this year on 211 items for three months from January 1 to March 31, 2019. The lists include 25% tariffs on 28 items in list 1, 25% tariffs on 116 items in list 2, and 5% tariffs on 67 items in list 3.

Also from China, retail sales rose 8.1% yoy in November, below expectation of 8.8%. Industrial production rose 5.4% yoy, below expectation of 5.9%. Fixed assets investments rose 5.9% ytd yoy, matched expectations.

Eurozone PMI composite dropped to 49-month low, underlying growth rate slowed across Eurozone

Eurozone PMI manufacturing dropped to 51.4 in December, down from 51.8, missed expectation of 51.9. It's a 34-month low. PMI services dropped to 51.4, down from 53.4, missed expectation of 53.4. It's a 49-month low. PMI composite dropped to 51.3, down from 52.7, a 49-month low.

Chris Williamson, Chief Business Economist at IHS Markit said in the release that "While some of the slowdown reflected disruptions to business and travel arising from the 'yellow vest' protests in France, the weaker picture also reflects growing evidence that the underlying rate of economic growth has slowed across the euro area as a whole."

And, "While GDP growth in the fourth quarter as a whole is indicated at almost 0.3%, the surveys point to quarterly GDP growth momentum slipping closer to 0.1% in December alone. Forward-looking indicators such as new orders and future expectations remaining subdued suggest that demand growth is stalling, adding to downside risks to the immediate outlook.

Germany PMI manufacturing dropped to 51.5, down from 51.8, missed expectation of 51.7. It's a 33-month low. PMI services dropped to 52.5, down from 45.5, missed expectation of 53.5. It's the lowest in 7 months. PMI composite dropped to 52.2, down from 52.3, a 48-month low.

France PMI manufacturing dropped to 49.7 in December, down from 50.8, and missed expectation of 50.7. It's the worst reading in 27 months. France PMI services dropped to 59.6, down from 55.1 and missed expectation of 54.8. It's the lowest level in 34 months. PMI composite dropped to 49.3, down from 54.2. It's a 30-month low and the first contraction reading in 2 1/2 years.

Comments from ECB de Guindos, Vasiliauskas and Nowotny

ECB Vice President Luis de Guindos defended the central bank's decision to ended the asset purchase program this month, without any further stimulus exit said. He said that "We're in a dark room that sometimes gets a bit darker, and when you are in a dark room you have to be very cautious and try to keep your optionality at the maximum level,"

Governing Council member Vitas Vasiliauskas warned of growing risks in 2019. He said "next year the balance of risk is more likely to turn in a negative direction but for the moment, because risks and economic data are quite mixed, yesterday's meeting still described the risk outlook as balanced,"

Another Governing Council member Ewald Nowotny said the central bank should ends the negative deposit rate policy as son as possible. He said, "My personal view is that specifically this rate, that is this phenomenon of negative interest rates, should be reconsidered as soon as economically possible." He added, "It is also a specificity of the ECB. The U.S. never had a negative rate."

Japan tankan capex surged, PMI manufacturing improved

Economic data released from Japan today are not bad. Based on the results of the Tankan survey, it's unlikely for BoJ to ease monetary further. Yet, it's not time for the central bank to start stimulus exit too.

• Large manufacturing index was unchanged at 19 versus expectation of a drop to 17.
• Large manufacturing outlook dropped notably by -4 to 15, missed expectation of 16.
• Large non-manufacturing index rose 2pts to 24, above expectation of 21.
• Large non-manufacturing outlook also rose 2pts to 24, above expectation of 20.
• Large all industry capex rose 14.3% in Q4, beat expectation of 12.7%.

PMI manufacturing improved to 52.4, up from 52.2 and beat expectation of 52.3. Markit noted that "new order growth accelerates despite exports declining to sharpest extent in over two years". However, "business confidence drops for seventh straight month to lowest since October 2016".

Joe Hayes, Economist at IHS Markit, said in the release that "Japan's manufacturing sector closed 2018 with a strong finish." But the data also "bring some cautious undertones to the fore,". In particular "Export orders declined at the fastest pace in over two years, while total demand picked up only modestly. Confidence also continued to fall, a seventh straight month in which this has now occurred." He added "the prospects heading into 2019 ahead of the sales tax hike still appear skewed to the downside."

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1328; (P) 1.1361; (R1) 1.1391; More.....

EUR/USD drops sharply today and focus is now on 1.1267 support. Break 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.

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

WTI oil price is a tad lower on Friday, holding within narrow range under one-week high at $53.24, posted after 3.1% rally on Thursday. Oil was boosted by optimistic forecasts from International Energy Agency for supply deficit expected in Q2 2019, against its previous report which showed expectations of surplus for the whole 2019. Fresh positive sentiment pushed the price from dangerous zone, as pullback after recovery stall approached psychological $50 support, however, near-term price action remains within $50/$54.54 congestion and suggesting that extended consolidation could be expected, as oil is on track to leave the third straight weekly Doji candle. Positive signals come from Thursday's break and close above converging 10 SMA $52.16) and 20SMA ($52.35), with today's action remaining above and may generate fresh bullish signal on repeated close above MA's and potential formation of 10/20SMA bull-cross. Weaker momentum on daily chart and mixed signals from other indicators, support scenario for extended sideways mode.

Res: 53.24; 54.54; 55.34; 55.89
Sup: 52.16; 50.60; 50.00; 49.40

The New Zealand Dollar has plummeted about 101 base points against the US Dollar since the previous trading session. The currency pair breached the lower boundary of a descending channel pattern at 0.6800 during the Asian session on Friday.

Given that a breakout had occurred, it is possible that bearish traders could push the Kiwi towards a low level of 0.6752 during the following trading session.

Although, a support level formed by the weekly S2 at 0.6770 might hinder the currency exchange rate from edging lower today.

Worries on global slowdown dominates the markets today. It started with weaker than expected Chinese data which prompted selloff in Asian stocks. Poor Eurozone PMI composite, which dropped to 49-month low, could have intensified selling. But sentiments somewhat stabilized slightly after China announced to suspend retaliatory tariffs on US autos and parts for three months. Still, European indices are in deep red.

In the currency markets, New Zealand and Australian Dollar are the weakest ones for today, breaking yesterday's lows against most other major currencies. Sterling is the third weakest after UK Prime Minister Theresa May got nothing but vague assurances from the EU regarding Irish backstop. Yen and Dollar are the strongest ones.

For the week, Dollar is the strongest, followed by Canadian and Aussie. Sterling remains the weakest on Brexit, followed by Kiwi and then Euro.

In European markets, at the time of writing:

• FTSE is down -0.78%
• DAX down -1.02%
• CAC down -0.99%
• German 10 year yield is down -0.0248 at 0.261
• Italian 10 year yield is up 0.007 at 2.975
• German-Italian spread is at 271, positive development

Earlier in Asia:

• Nikkei dropped -2.02% to 21374.83
• Hong Kong HSI dropped -1.62% to 429.56
• China Shanghai SSE dropped -1.53% to 2593.74
• Singapore Strait Times dropped -1.09% to 3077.09

Japan 10 year JGB yield dropped -0.019 to 0.035. It's a bit early to tell. But based on current momentum 2018 low at 0.017 is within reach. Sentiments had a big turn since October.