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Notes/Observations

New Fed Chair Powell gets tested by the market

VIX saw its biggest daily climb EVER, both in percentage and absolute terms

Bonds yield lower from day-ago levels as they seemed to benefit from a flight to safety even though they are the root cause of the move

European equities move well off its opening levels but remain in negative territory

Deciding day for Chancellor Merkel in her efforts to form the next coalition government

Asia:

Reserve Bank of Australia (RBA) left its Cash Rate Target unchanged at 1.50% (as expected)

Australia Dec Retail Sales M/M: -0.5% v -0.2%e

Australia Dec Trade Balance (A$): -1.4B v +0.2Be

China PBoC again skips its Open Market Operations (OMO) fir the 9th straight session

Europe:

ECB's Draghi: euro area economy was expanding robustly with stronger growth rates than previously anticipated and significantly above potential. Monetary policy to evolve in a fully data-dependent and time-consistent manner. new headwinds have arisen from the recent volatility in the exchange rate, whose implications for the medium-term outlook for price stability require close monitoring

PM May: the UK and EU have discussed agreement on future trade as soon as possible, working towards Oct timetable

Brexit Sec Davis: our teams will work intensively to agree on Brexit implementation period by March. Confident we could reach agreement on implementation period by March. Reiterates stance that UK was leaving the customs union

EU Chief Negotiator Barnier: everyone has to play by the same rules during Brexit transition. Barriers to trade were unavoidable outside customs union - Reports circulated that Britain could be forced to accept nearly 40 EU directives during a two-year transition period after Brexit

Germany coalition govt talks extended for a second time; talks said to be continuing with an eye to conclude negotiations on Tues

Germany largest Labor Union IG Metall: Agreed to labor deal which provides for a 4.3% pay increase for workers that stretches over a 27 month period

Americas:

Fed's Kashkari (dove, non-voter): Friday's job report last week showed hint wages could be rising. Wants to see wages rise before supporting another hike

Republican House Members expect the House to vote on Tuesday on short-term measure to fund Govt through March 23rd to avert another possible shutdown

Economic Data:

(DE) Germany Dec Factory Orders M/M: 3.8% v 0.7%e; Y/Y: 7.2% v 3.1%e

(FR) France Dec YTD Budget Balance: -€67.8B v -€84.7B prior

(TW) Taiwan Jan CPI Y/Y: 0.9% v 1.0%e; CPI Core Y/Y: 0.8% v 1.2%e, WPI Y/Y: -0.7% v +0.3% prior

(CZ) Czech Dec Industrial Output Y/Y: 2.7% v 3.7%e

(CZ) Czech Dec Retail Sales Y/Y: 2.2% v 3.0%e, Retail Sales ex Auto Y/Y: 4.7% v 5.5%e

(DE) Germany Jan Construction PMI: 59.8 v 53.7 prior

(SE) Sweden Dec Private Sector Production M/M: -1.0% v -0.3%e; Y/Y: 5.3% v 4.6%e

(SE) Sweden Dec Industrial Orders M/M: -0.7 v +2.7% prior; Y/Y: 5.8% v 7.7% prior

(IS) Iceland Jan Preliminary Trade Balance (ISK): -5.4B v -26.6B prior

(EU) Euro Zone Jan Retail PMI: 50.8 v 53.0 prior

(DE) Germany Jan Retail PMI: 53.0 v 55.1 prior

(FR) France Jan Retail PMI: 51.0 v 53.0 prior

(IT) Italy Jan Retail PMI: 47.3 v 49.5 prior

(ZA) South Africa Jan Sacci Business Confidence: 99.7 v 96.4 prior

(BR) Brazil Jan FGV Inflation IGP-DI M/M: 0.6% v 0.7%e; Y/Y: -0.3% v -0.2%e

Fixed Income Issuance:

(ID) Indonesia sold total IDR10.07T vs. IDR8.0T target in 6-month Islamic Bills, 2-year,4-year, 7-year and 15-yearProject-based Sukuk (PBS)

(FI) Finland opened its book to sell €3.0B in Apr 2034 bond; guidance seen -18bps to mid-swaps

(UK) DMO opened its book to sell 30-year Inflation-linked Gilt; guidance seen +0.8-1.0 bps to UKTi

(ZA) South Africa sold total ZAR3.3B vs. ZAR3.3B indicated in 2035, 2040, 2044 and 2048 bonds

(CH) Switzerland sold CHF481.0M in 3-month Bills; Avg Yield: -0.890% v -0.884% prior

(AT) Austria Debt Agency (AFFA) sold total €1.2B vs. €1.2B indicated in 2023 and 2028 RAGB bonds

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx600 -1.9% at 374.8, FTSE -2.0% at 7191, DAX -2.2% at 12409, CAC-40 -1.9% at 5192 , IBEX-35 -1.9% at 9884, FTSE MIB -1.5% at 22494 , SMI -1.9% at 8927, S&P 500 Futures +0.6%]

Market Focal Points/Key Themes: European Indices trade lower across the board but have bounced sharply off the session lows as US futures stage a sharp turn around following declines of over 3% for the major indices overnight. The Dow futures were over 800 points lower after a 1200 point fall yesterday before buyers stepped in. Earnings dominated the corporate news front with notable earnings from BP, BNP Paribas, Munich Re and Intesa. Shares of Ocado trade sharply lower after a profit miss, while AMS in Switzerland continues to outperform following their full year results trading up another 10%. In the Insurance space Munich Re trades lower after missing estimates. Looking ahead notable earners include General Motors, Emerson Electric and Centene Corp.

Movers

Consumer Discretionary [ TomTom [TOM2.NL] -4.3% (Earnings), Pandora [PNDORA.DK] -4.9% (Earnings) ]

Industrials [Assa Abloy [ASSAB.SE] +1.8% (Earnings), Babcock intl [BAB.UK] -2.1% (Trading update)]

Technology [Ocado [OCDO.UK] -6.3% (Earnings), AMS [AMS.CH] +12% (Earnings)]

Financial [ Munich Re [MUV2.DE] -4.8% (Earnings), Credit Suisse [CSGN.CH] -4.2% (XIV exposure), BNP Paribas [BNP.FR] -1.2% (Earnings), Intesa [ISP.IT] +1.6% (Earnings)]

Energy [ BP [BPP.UK] -1.4% (Earnings)]

Speakers

ECB’s Weidmann (Germany): Complacency is the biggest risk for Euro Area

Bank of France: Saw economic growth being sustained in 2018

German acting Chancellor Merkel: Ready for painful compromise in current coalition talks

France Survey of Industrial Investment: Business plan to increase investment by 4% in 2018

South Africa President Zuma said to have summoned his Cabinet for a meeting

South Africa President Zuma reportedly told ANC ruling party top 6 that he was ready for a no confidence motion

South Africa ANC's Dep Sec Duarte: national executive committee (NEC) meeting to be held on Wed, Feb 7th in Capetown; decision to be announced immediately

South Africa Parliament said to consider a delay in the State of the Union address (**Note: scheduled for Friday, Feb 9th)

Bank of Korea (BOK) Jan Minutes: One Member has called for rate hold as inflation pressures are unseen

Indonesia Central Bank: Ready with stabilization measures if needed

China PBoC reiterated its pledge to maintain prudent and neutral monetary policy and to prevent financial risks in 2018. Reiterated its aim to increase market role in forming of exchange rates and continue with interest rate reforms. To open up the bond market and improve the default disposal system

China FX Regulator SAFE: To promote capital account convertibility. To protect foreign investors legal rights and support qualified enterprises in overseas investment

Kuwait Oil official: Oil production to reach 3.2M bpd in March

US Disarmament Envoy: North Korea might now be only months away from the capability to strike the US with nuclear-armed ballistic missiles. NK posed an urgent and unpredictable threat to the US and its allies. Its illicit nuclear program must be completely eliminated

Currencies

USD remained on soft footing with the greenback unable to muster any safe-haven demand despite the pickup in global volatility.

EUR/USD continued to maintain its recent range (locked between 1.2350 to 1.25). Pair aided by sentiment that euro area economy was expanding robustly with stronger growth rates than previously anticipated. Germany Dec Factory Orders reinforced this view.

GBP/USD remained on the defensive as UK ministers seemed to have differences on the Brexit strategy. Barnier said to have earned that a transition deal was subject to political risks. GBP/USD struggling to get back above the 1.40 handle. USD/JPY maintaining its 107-110 range despite the pick-up in global volatility and safe-haven demands. Pair holding around 109 just ahead of the NY morning.

Fixed Income

Bund Futures trades down 16 ticks at 158.88 as decisive mean-reversion activity yesterday sends contract back up to its short-term fair-value line at 159.40, which has caught the attention of value participants looking to engage with the bear cycle. Upside targets 159.85, while a continued move lower targets the157.75 level.

Gilt futures trade at 121.95 up 31 ticks, tentatively continuing the rebound from Friday’s low. Support continues to stand at 121.25 then 120.75, with upside resistance at 122.75 then 123.25.

Tuesday’s liquidity report showed Monday’s excess liquidity fell to €1.889T from €1.897T prior. Use of the marginal lending facility fell to €35M from €39M prior.

Corporate issuance saw 2 issuers raise $6.3B in the primary market.

Looking Ahead

(UK) EU and UK to hold next round of Brexit talks

(RU) Russia Jan Light Vehicle Car Sales Y/Y: No est v 14% prior

05.30 (UK) Weekly John Lewis LFL sales data

05:30 (EU) ECB allotment in 7-day Main Financing Tender (MRO) tender

05:30 (HU) Hungary Debt Agency (AKK) to sell in 3-month Bills

05:30 (DE) Germany to sell 0.10% Apr 2026 Inflation-Linked Bund (Bundei)

05:30 (BE) Belgium Debt Agency (BDA) to sell €1.4-1.8B in 6-month and 12-month

06:30 (TR) Turkey Jan Effective Exchange Rate (REER): No est v 84.70 prior

06:30 (EU) ESM to sell €2.0B in 3-month bills - 06:45 (US) Daily Libor Fixing

07:00 (RU) Russia announces weekly OFZ bond auction

07:45 (US) Weekly Goldman Economist Chain Store Sales

08:05 (UK) Baltic Dry Bulk Index

08:20 (BR) Brazil Jan Vehicle Production: No est v 213.7K prior; Vehicle Sales: No est v 212.6K prior; Vehicle Exports: No est v 61.1K prior

08:30 (US) Dec Trade Balance: -$52.1Be v -$50.5B prior

08:30 (CA) Canada Dec Int'l Merchandise Trade (CAD): -2.3Be v -2.5B prior

08:50(US) Fed’s Bullard (non-voter, dove) on US economy and monetary policy

08:55 (US) Weekly Redbook Sales

09:00 (MX) Mexico Jan Consumer Confidence: 87.8e v 88.6 prior

09:00 (MX) Mexico Nov Gross Fixed Investment: -2.9%e v -2.6% prior

09:00 (EU) Weekly ECB Forex Reserves

09:00 (NZ) Fonterra Global Dairy Trade Auction

10:00 (US) Dec JOLTS Job Openings: 5.961Me v 5.879M prior

10:00 (CA) Canada Jan Ivey Purchasing Managers Index (Seasonally adj): No est v 60.4 prior; PMI unadj: No est v 49.3 prior

11:30 (US) Treasury to sell 4-Week Bills

12:00 (US) DOE Short-Term Crude Outlook

13:00(PT) ECB’s Costa (Portugal) at banking summit

13:00 (US) Treasury to sell $26B in 3-Year Notes

15:00 (MX) Mexico Citibanamex Survey of Economists

16:30 (US) Weekly API Oil Inventories

Steep fall in past three days when Dow was down 12%, is taking a breather on Tuesday after hitting new 3 ½ month low at 23050, slightly below Fibo 38.2% of 17418/26683 (09 Nov 2016/29 Jan 2018 rally).

Bears are pausing on strongly oversold daily studies but recovery is so far holding below broken base of thick daily Ichimoku cloud (spanned between 23923 and 24482) which marks strong resistance and expected to maintain strong bearish pressure while recovery attempts stay below it.

The main question now is whether current pullback is just stronger correction of broader uptrend (which was so far contained by strong Fibo 38.2% support) or it is signal of reversal, which hasn’t been seen since 2008.

Weekly studies show room for further downside and extension of current pullback which may stretch towards psychological 20000 support at weekly 200SMA (18877) in extension).

Expect immediate bearish pressure to remain intact while recovery attempts stay below daily cloud, with stronger corrective action of 26683/23050 pullback to be signaled on sustained break above daily cloud which would also sideline the risk of further fall.

Res: 23923, 24212, 24482, 24930
Sup: 23652, 23500, 23205, 23050

Don't Panic, Buy the Dip

Investors are getting way ahead of themselves in the current “risk off” environment. The end of “goldilocks” theory, which is driving sell everything mentality, does not have a structural support we would need for the pullback to snowball into an extended correction. Markets are pricing in a USA growth slowdown while inflation should continue to rise. “Stagflation” environment generalize weighs on stock prices. However, the thinking that decelerating activity outlook in 2H would pressure elevated EPS, is only marginally accurate.

While the US might be in late stage business cycle, a majority of the worlds, Europe, japan and China are in an early to mid-stage cycle. Our view that weakness in the US will be supported by economic strength elsewhere. In regards to worries over central banks tighten we suspect that fears of the ECB , SNB and BoJ exiting policy earlier than expected is unfounded (option pricing in steep drop in USDCHF and USDJPY on the near term seem just reactionary) . The Fed took years to evolve tightening cycle likely other central banks will emulate this gradual approach. Global loose monetary policy will continue from a relative position in 2018. And this factor support further risk taking.

Crypto sell-off exacerbated by regulation uncertainties

The crypto market sank deeper on Tuesday as the future of cryptos remains foggy. Bitcoin broke its 200dma, which stands at $6,275, to the downside and even fell below the $6,000 threshold during the Asian session. The total market capitalization of crypto assets fell more than $100 billion over the last 24 hours to reach $280 billion dollar. Since the all-time high of early January, more than $550 billion of value went up in smoke. On average, this correspond to a decrease of $18 billion everyday over the last 30 days.

As usual, the fear that South Korea and China, considered as the most crypo-enthusiast countries, will ban crypto-currencies has made investors nervous. This tension increase another notch this week as the Chinese government is on the cusp to block domestic access to foreign exchanges and websites that provide ICO investments. Meanwhile, South Korea's Finance Minister not only confirmed that there will be no ban on cryptocurrency but said that “blockchain is an important technological breakthrough” and that the ministry “will impose strict regulation for negative use cases of cryptocurrencies”.

Finally, the hearing of CFTC's Giancarlo and SEC's Clayton before the Congress could be the final in the coffin for the crypto-market. The two tops market regulators are calling – according to the document that contains the prepared remarks - for a federal oversight for crypto trading platforms. According to the document, there is no discussion of banning cryptocurrencies, but rather to regulate it. Given the fact that neither the SEC, nor the CFTC, has clear oversight of crypto exchanges, this leave investors in the dark as they don't know what fate has in store for them.

European economy is improving, though inflation target is still expected

Monday was Draghi's meeting at Strasburg. We've had a rather positive signal from the President of the ECB, who confirmed that the economy is growing, but that inflation is still expected. No duration as to when the QE program stimulus in the economy is planned to be interrupted was mentioned (officially up until September 2018). As European January Core CPI Y/Y ended the year at 1.30% (December 1.40%) and EU 10Y Bond yields are maintained at 0.736%, there is clear signs that EU equities have not ended their rally.

Yesterday was a tough day for equities who lost more than 4% in the US and Asia, while the EU remained robust and barely lost 1.26%. In the context of strong risk-off and US Government Bonds yields at 4 years high, we've surely assisted to a big shift in US investors' portfolio allocation.

Accordingly, in the context of a weaker greenback, we see that EU inflation will be partially suppressed and Bond yields maintained at these rates, supporting continuous stimulus in the economy. For these reasons, investing in European market remains attractive for investors in the coming periods.

Crude oil is showing signs of recovery after trading lower the previous day. Strong support is given at 60.93 (05/01/2018 low). Expected to keep increasing as demand remains strong.

In the long-term, crude oil has recovered after its sharp decline last year. However, we consider that further weakness is very likely. For the time being the pair lies in an upside trend since June 2017. Support lies at 42.20 (16/11/2016) while resistance point is located at 77.83 (20/11/2014). Crude oil is trading largely above its 200 DMA.

Silver is bouncing up but trades below 17. The short-term technical structure is turning negative. Hourly resistance lies at 18.21 (08/09/2017 high). The technical structure suggests further short-term increase.

In the long-term, the trend remains negative/ sideways. Further downside is very likely. The pair is trading slightly above its 200 DMA. Resistance is located at 21.58 (10/07/2014 high). Strong support can be found at 11.75 (20/04/2009).

Gold is trading higher following yesterday's sideways trading. Hourly support at 1'331 (23/01/2018 low) is now broken and further support remains at 1'323 (12/01/2018 low). The technical structure suggests further short-term upside moves.

In the long-term, the technical structure suggests that there is a growing upside momentum. A break of 1'392 (17/03/2014) is required to confirm it. A major support can be found at 1'045 (05/02/2010 low).

Bitcoin is trading lower. Hourly support at 5'605 (13/11/2017 low) approaches while resistance is located at 12'130 (18/01/2018 high). The short-term technical structure suggests further decline.

In the long-term, the digital currency has had an exponential growth but also presented important downturns. There is decent likelihood that the currency could stabilize between 7'000 - 12'000 in 2018. Bitcoin is trading slightly above its 200 DMA (6'000 range).

EUR/CHF buying pressure continues. Hourly resistance is given at 1.1685 (26/01/2018 high). Expected to show further short-term upside moves.

In the longer term, the technical structure has reversed. Strong resistance is given at 1.20 (level before the unpeg). Yet, the ECB's slowing QE program is likely to cause buying pressures on the euro, which should weigh in favour of the EUR/CHF. Supports can be found at 1.0184 (28/01/2015 low) and 1.0082 (27/01/2015 low).

EUR/GBP is trading higher and heads towards hourly resistance at 0.8929 (12/01/2018 high). Hourly resistance at 0.8846 (19/02/2018) is now reached. The technical structure suggests further short-term upside move.

In the long-term, the pair has largely recovered from lows in 2015. The technical structure suggests an upside momentum. The pair is trading above the range of its 200 DMA. Strong resistance can be found at 0.9500 (psychological level).

AUD/USD is slowly recovering from its recent decline. Support at 0.7849 (12/01/2018 low) is now broken. The technical structure suggests short-term increase.

In the long-term, the trend is turning positive, yet fails reaching key resistance at 0.8164 (14/05/2015 low). Key support stands at 0.6009 (31/10/2008 low). A break of the key resistance at 0.8164 (14/05/2015 high) is needed to invalidate our long-term bearish view.