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Notes/Observations

Global bond yields break ever higher

BOJ takes action to back up claim that it is not following Fed, ECB

UK Construction PMI falters while housing activity contracts for 1st time in 17 months

Asia:

BOJ again conducted a fixed-rate JGB purchase operation (4th time performed): Offered to buy unlimited amount of 10-year JGBs at 0.11% (**Note: This is an attempt to control yield curve)

China PBoC skips OMO for the 7th straight session

China CASS Researchers see China keeping benchmark interest rate unchanged in near future as current inflation provides no incentive to raise rates (in line with recent reports)

Europe:

Some ECB officials reportedly would like clearer interest rate guidance on concerns that vague language will increase market volatility [**Note: Current guidance is for rates to stay at the current levels "well past" the end of the bond buying program (QE)]

ECB's Nowotny (Austria): Now in a situation where we should end asset purchase program. E CB to decide on the future of the asset purchase program by Sept. Halting asset purchase program would bring a rise to long-term interest rates

Germany CSU Scheuer (Bavaria): 'Large' barriers remain in Germany government talks as the parties close in a deadline to complete talks by Sunday

PM May advisers reportedly considering customs union deal covering trade in goods with the EU after Brexit. Possible plan would take effect after the 2 year Brexit transition period

UK and European officials said to be concerned that the March deadline to agree the crucial Brexit transition deal could slip away

Americas:

American Iron and Steel Institute (AISI) in letter to President Trump urges US to curb steel imports

Republicans and the White House are reportedly discussing a gas tax hike to fund infrastructure plan

Economic Data:

(BR) Brazil Jan FIPE CPI (Sao Paulo): 0.5% v 0.6%e

(CN) Weekly Shanghai copper inventories (SHFE): 172.6K v 164.2K tons prior

(ES) Spain Jan Unemployment M/M: +52.5Ke v -61.5K prior

(NO) Norway Jan Unemployment Rate: 2.6% v 2.7%e

(UK) Jan Construction PMI: 50.2 v 52.0e (4th month of expansion but lowest since July)

(EU) Euro Zone Dec PPI M/M: 0.2% v 0.2%e; Y/Y: 2.2% v 2.3%e

(IT) Italy Jan Preliminary CPI (NIC incl. tobacco) M/M: 0.2% v 0.3%e; Y/Y: 0.8% v 0.8%e

(IT) Italy Jan Preliminary CPI EU Harmonized M/M: -1.6% v -1.7%e; Y/Y: 1.1% v 0.8%e

Fixed Income Issuance:

(ZA) South Africa sold total ZAR875M vs. ZAR900M indicated in I/L 2029, 2033 and 2050 bonds

(IN) India sold total INR0B (nil) vs. INR110B indicated in 2022 and 2028 bonds (rejected all bids)

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx600 -0.9% at 389.8, FTSE -0.3% at 7466, DAX -1.4% at 12822, CAC-40 -1.2% at 5390 , IBEX-35 -1.3% at 10264, FTSE MIB -1.1% at 23279 , SMI -0.7% at 9229, S&P 500 Futures -0.7%]

Market Focal Points/Key Themes:

European Indices continue to trade lower with the German Dax registering another 1% plus decline as rising rates and mixed earnings continue to weigh on the market, with Bund yields touching a 2.5 year high.

Deutsche Bank weighs as the Bank posted a loss for the full year and Revenue which fell short of views. Spanish banking names Caixa Bank and Banco Sabadell also trade lower on earnings misses. In the UK Astrazeneca and BT trade lower following earnings adding to the overall negative sentiment.
US futures point to a weaker open with the Nasdaq reversing earlier gains following strong results from Apple and Amazon.

Looking ahead notable earners include Merck, Exxon and Chevron.

Movers

Consumer Discretionary [Capita [CPI.UK] +3.7% (Rebound, analyst upgrade)]

Industrials [Philips Lighting [LIGHT.NL] -1% (Earnings)]

Financials [Deutsche Bank [DBK.DE] -5.7% (Earnings), Caxia Bank [CABK.ES] -4.3% (Earnings), Sabadell [SAB.ES] -3.9% (Earnings), Danske Bank [DANSKE.DK] +1.8% (Earnings)]

Telecom [ BT [BT.A.UK] -5.4% (earnings), Tele2 [TEL2A.SE] +1% (Earnings)]

Healthcare [Astrazeneca [AZN.UK] -1.6% (Earnings)]

Materials [Vedanta [VED.UK] +0.8% (Production update)]

Speakers

ECB’s Coeure (France): Next financial crisis could test ECB mandate limits if reforms are not enacted

Sweden Central Bank (Riksbank) Dep Gov Floden stated that he saw risks to rate path as inflation outlook is uncertain

Russia Central Bank: H1 GDP seen between 1.0-1.5% range

Currencies

The markets have been focusing on rising global bond yields. Dealers noted that ECB and BoJ seemed to be showing increasing uneasiness around the recent appreciation of their respective currencies ( EUR and JPY). Overall USD price action appeared that the greenback is no longer finding rate and yield differential for support

EUR/USD continued to probe the 1.25 area on removal of stimulus expectations but the pair has been unable to sustain any momentum to hold the level. ECB has upped its rhetoric on volatility recently with recent reports circulating that current vague language on its rate outlook could induce more market volatility. Technically the EUR/USD pair seems poised to move higher in coming weeks/months

BoJ offering to buy unlimited amounts of 10-year JGBs at 0.11% after JGB yields reached a six-month high of 0.10% yesterday. Dealers noted that BoJ’s commitment of keeping its 10-year yield fixed despite rising upward pressure on global yields might allow 10-year yield differentials to move against the JPY

GBP was softer after UK Construction PMI faltered and housing activity contracted for 1st time in 17 months.

Fixed Income

Bund Futures trades flat at 158.11 after initially dipping to new lows. Upside targets 159.85, while a continued move lower targets the157.75 level.

Gilt futures trade at 121.24 down 37 ticks, as UK bonds decline as yields reach highest level since Brexit vote. Support continues to stand at 121.25 then 120.75, with upside resistance at 122.75 then 123.25.

Friday’s liquidity report showed Thursday’s excess liquidity rose to €1.900T from €1.892T prior. Use of the marginal lending facility fell to €65M from €75M prior.

Corporate issuance saw 7 issuers raise $13.7B in the primary market. Lipper reports equity fund inflows of $16.2B in week ending Jan 31st. Low-risk money-market funds recorded $26B in withdrawals. High yield funds saw outflows of $1.8B in the week

Looking Ahead

(MX) US Mexico Canada meet in Mexico on trade

06:00 (EU) EU’s Oettinger on post 2020-budget

06:00 (IE) Ireland Dec Industrial Production M/M: No est v -9.4% prior; Y/Y: No est v -10.9% prior

06:00 (UK) DMO to sell combined £3.0B in 1-month, 3-month and 6-month Bills (£0.5, £0.5B and £2.0B respectively)

06:30 (IN) India Weekly Forex Reserves

06:45 (US) Daily Libor Fixing

07:00 (CL) Chile Dec Retail Sales Y/Y: 4.1%e v 5.6% prior; Commercial Activity: No est v 6.0% prior

08:00 (SG) Singapore Jan Purchasing Managers Index (PMI): 52.6e v 52.8 prior; Electronic Sector: No est v 53.2 prior

08:00 (IN) India announces upcoming Bill auction (held on Wed)

08:05 (UK) Baltic Dry Bulk Index

08:30 (US) Jan Change in Nonfarm Payrolls: +180Ke v +148K prior; Change in Private Payrolls: +181Ke v +146K prior, Change in Manufacturing Payrolls: +20Ke v 25K prior

08:30 (US) Jan Unemployment Rate: 4.1%e v 4.1% prior, Underemployment Rate: No est v 8.1% prior

08:30 (US) Jan Average Hourly Earnings M/M: 0.2%e v 0.3% prior; Y/Y: 2.6%e v 2.5% prior; Average Weekly Hours: 34.5e v 34.5 prior

09:00 (MX) Mexico Dec Leading Indicators M/M: No est v 0.02 prior

10:00 (US) Dec Factory Orders: 1.5%e v 1.3% prior, Factory Orders Ex Transportation: No est v 0.8% prior

10:00 (US) Dec Final Durable Goods Orders: No est v 2.9% prelim; Durables Ex Transportation: No est v 0.6% prelim; Capital Goods Orders (Non-defense/ex-aircraft): No est v -0.3% prelim; Goods Shipment (Non-defense/ex-aircraft): No est v 0.6% prelim; Durables Ex-Defense: No est v 2.2% prelim

10:00 (US) Jan Final University of Michigan Confidence: 95.0e v 94.4 prelim

10:00 (DK) Denmark Jan Foreign Reserves (DKK): No est v 468.4B prior

11:00 (EU) Potential sovereign rating after European close [Netherlands and Cyprus Sovereign Debt to Be Rated by Moody's; Israel Sovereign Debt to be rated by S&P and Sweden Sovereign Debt to be rated by Fitch

13:00 (US) Weekly Baker Hughes Rig Count data

13:30 (US) Fed’s Kaplan (moderate, non-voter) in TX

15:30 (US) Fed’s Williams (moderate, voter) in SF

Today, the attention among traders, investors, and policymakers is on the Bureau of Labor Statistics, which is expected to release the jobs numbers for January at 12:30 PM GMT.

The numbers will give investors a general feeling about the status of the U.S economy, a month after the administration signed the tax reform bill.

Expectations are for the Non-Farm Payrolls (NFP) to increase to 184K from last month's disappointing numbers of 148K. On Wednesday, Automatic Data Processing (ADP) released its own data, which showed the economy created 234K jobs in January, beating analysts' expectations by 48K.

In addition, the bureau will release the unemployment rate, which is forecasted to remain unchanged at 4.1%. A surprise decline in this number could increase the hopes of the rate declining to below 4.0%.

With the country at full employment, the headline unemployment rate and NFP will not matter. Instead, they will pay close attention to wage growth and participation rate. Wage growth to remain steady at 0.3% and the participation rate to remain at 67.9%.

Following the tax reform package, hundreds of large firms and thousands of small firms have pledged to increase hourly earnings, give one-time bonuses to employees, or invest in training.

In the meantime, the dollar has recovered from some of the losses we saw yesterday with the dollar index up by 27 basis points.

Earlier this morning, from the UK, we received January's construction PMI data of 50.2, which was lower than expectations of 52.0. In response to the data, the pound lost 40 basis points against the dollar. However, this could reverse or continue when the jobs numbers are released out of the US later today.

Another focus is on crude oil, which has recovered yesterday's losses. These losses came after the EIA reported inventory buildup of more than 6.8 million above the analyst expectations. In days to come, we might see more buildup as the maintenance season for the refineries approach. In that line, Goldman Sachs released a report forecasting that Brent could reach $82 in the next six months.

EUR/USD

This week, the dollar weakness has continued against the Euro, having lost 55 basis points. Today however, in anticipation of better jobs and wage growth numbers, the dollar has gained a few points against the Euro. Traders will watch out for two areas. First, they will look for the 1.2473 level, which forms an important support. On the other side, they will look at the weekly or three year high of 1.2512.

GBP/USD

This week, the GBP/USD pair has recovered from the weekly low of 1.3979 level to a high of 1.4287. Today, the pair has lost 36 basis points following disappointing construction PMI data and in anticipation of the US jobs numbers. The pair is currently trading at the 23.6% Fibonacci retracement level. A breach below this area could see the pair test the 38.6% level, which forms an important support level.

AUD/USD

The Australian dollar has lost 152 basis points against the dollar following the disappointing CPI data released on Wednesday. The pair appears to be establishing a double bottom at the 0.7978 level. Whether the downward trend continues or a reversal is established will depend on the U.S. jobs numbers later today.

It has been an uneventful week for the euro, and the trend continues in the Friday session. Currently, the pair is trading at 1.2478, down 0.21% on the day. On the release front, Eurozone PPI slowed to 0.2%, shy of the estimate of 0.4%. In the US, the focus is on employment reports. Wage growth is expected to edge downwards to 0.2%. The markets are forecasting that nonfarm payrolls will jump to 181 thousand. The unemployment rate is expected to remain pegged at 4.1%. We’ll also get a look at UoM Consumer Sentiment, which is expected to slow to 95.0 points.

With the eurozone economy continuing to perform well, there has been speculation that the ECB could wind up its asset-purchase program (QE) in September and shift to a normative policy, and perhaps raise interest rates. However, Mario Draghi and other ECB members have taken pains to reiterate that the Bank is in no rush to end QE. On Wednesday, executive board member Benoit Coeure joined the chorus, saying that although QE “will not last forever” policymakers were in agreement “that we have to be patient and prudent because we are not yet where we want to be in terms of inflation”. Investors would be well advised to keep a close eye on eurozone and German inflation numbers, as asset purchases could be extended beyond September if inflation remains well below the ECB target of around 2.0%.

There were no dramatic announcements from the Federal Reserve on Wednesday, and EUR/USD showed little movement in the Wednesday session. The Fed held the course on monetary policy, with the benchmark rate remaining between 1.25%-1.50%. In the rate statement, policymakers said that they expected the economy to continue to expand at a moderate pace and that the labor market would remain strong in 2018. What was more noteworthy was that the Fed predicted that inflation would rise to the Fed’s 2 percent target this year. This marks an upgrade in the inflation forecast, as the December statement said that inflation was expected to “remain somewhat below 2 percent.” Higher inflation is likely to open the door to tighter monetary policy, and the Fed appears on track for three, or even four rate hikes in 2018, assuming that the US economy remains strong. This policy meeting was the last under Janet Yellen, as Jerome Powell will take over as Fed chair on February 3. The slightly hawkish tone of the rate statement has raised the odds of a rate hike to 83% when the Fed next meets in March.

The Australian dollar tested 20SMA support at 0.7981 on Friday’s renewed attempt through 0.80 support zone, after Thursday’s dip to 0.7987 was short-lived. Near-term structure is negative, as the pair is holding in red for the fifth consecutive day and favoring further downside. South-heading daily RSI is currently at 55 zone a showing a plenty of room for extension of corrective pullback from 0.8135 peak. Close below cracked support at 0.8010 (Fibo 38.2% of 0.7807/0.8135 upleg) will be initial bearish signal while close below 20SMA (0.7981) is needed to confirm bearish scenario and open way towards 0.7918 (rising 30SMA) and 0.7892 (Fibo 38.2% of 0.7500/0.8135 rally). Broken 10SMA now acts as solid resistance at 0.8045 and expected to keep the upside protected and maintain negative near-term bias. US NFP data are eyed for fresh signals.

Res: 0.8010, 0.8045, 0.8067, 0.8100
Sup: 0.7971, 0.7932, 0.7918, 0.7892

Crude oil is showing signs of recovery and is approaching 66. 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 trading slightly lower. Hourly support is at 16.75. The short-term technical structure remains positive as long as silver remains above 17. Hourly resistance lies at 18.21 (08/09/2017 high).

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 sideways after reaching 1348 this morning. Hourly support is at 1'331 (23/01/2018 low) while additional support is given 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. Recent shortfall broke supports at 9'185 (17/01/2018 low) and 8'339 (21/11/2017 high) while resistance is located at 12'130 (18/01/2018 high) and is distanced. 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 9'000 - 12'000 in 2018. Bitcoin is approaching its 200 DMA (2K+ gap).

EUR/CHF is trading higher. 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 bouncing upward and trade now above 0.877 range, distancing hourly support at 0.8687 (25/01/2018 low). Hourly resistance is given at 0.8846 (19/02/2018) while further resistance remains at 0.8929 (12/01/2018). 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 below the range of its 200 DMA. Strong resistance can be found at 0.9500 (psychological level).