Sample Category Title

The pound holds onto its gains after the PPI for October was revised upwards. As the pair approaches the August high of 1.2270, a bearish RSI divergence is a warning sign that the rally may be running out of juice. Profit-taking could be expected in this major supply area while those who hold a bearish view in the medium-term may look to sell. However, a bullish breakout could pave the way for a reversal. 1.2020 is the first support should Sterling start to drift lower and 1.1900 another level to gauge followers’ interest.

Markets

On Friday, US and European bond markets showed a divergent picture as US markets reopened after the Thanksgiving Holiday. US Treasuries continued to outperform. A disappointing US PMI released earlier last week only reinforced the view that there is a strong enough case for the Fed to slow the pace interest rate hikes to a 50 bps step at the December meeting. US yields in the 2-10-y sector eased 1-2 bps with the 30-y gaining marginally. The US 10-y closed the week at the 3.67% support (recent low). The picture in Europe was different. German yields jumped 8.3 bp (2-y) to 12.4 bps (10-y). There was not one unequivocal driver. ECB comments (Schnabel, Muller) suggested that the debate on a 50 bps or 75 bps next step isn’t really decided yet. Recent EMU eco data also were slightly better/less worse than expected (including an upward revision to German Q3 GDP to 0.4% Q/Q on Friday). The German 10-y yield closed exactly at 1.97%, returning the neckline that was broken earlier last week. Equities in the US and Europe both closed little changed. The dollar also showed no clear trend. EUR/USD finished the week at 1.0395 with recent peaks at 1.0448 & 1.0479. DXY closed the week at DXY 105.96, with recent correction lows still nearby. Similar story for the EUR/GBP cross rate (close at 0.8599; with key support at 0.8560 still looming).

This morning, the growing unrest related the new covid restrictions in China is setting the stage for a risk-off start to the new trading week as investors ponder the impact on (global) demand. Early indications on Back Friday spending in the US also show a mixed picture. Asian equities mostly trade in negative territory (Nikkei -0.4%) with Chinese indices underperforming (CSI 300 -1.15%; Hang Seng currently -1,7%). US Treasuries remain well bid with yields declining 3/5 bps currently. Despite the risk-off, USD gains remain modest. (DXY 106.25; EUR/USD 1.0365).The yen even outperforms, with USD/JPY (currently 138.3 near the 137.68 support). China/commodity related currencies underperform (AUD/USD 0.6685, USD/CAD 1.3445) as does the yuan (USD/CNY 7.20, breaking above the 7.17 ST resistance). Uncertainty on global/Chinese demand is pushing Bent oil ($ 81.5 p/b) to the lowest level since January.

Later today, the eco calendar in the US and Europe is thin. We keep an eye at speeches of ECB’ Lagarde, Fed Williams and Fed’s Bullard as the countdown the December ECB & Fed meetings has started. Core bond yields this morning feel some downward pressure due to the China related risk-off. However, the upcoming data (German CPI tomorrow, EMU CPI Wednesday, US consumer confidence (Tuesday), US manf. ISM and PCE deflator (Thursday) and the US payrolls on Friday probably are more important to shape markets view on the pace of Fed and ECB rate hikes. Breaking below 3.67%, the US 10-y yield finds next support at 3.55%. The 10-y Bund stays below the 2.0% barrier. The USD performance this  morning is far from impressive. Even so, it’s probably too early for EUR/USD to return to recent peak levels.

News Headlines

CNB governor Michl in his weekly column for Mlada Fronta Dnes reiterated that stable policy rates are appropriate because growth in the quantity of money is significantly slowing and household consumption declining. His column referred to several points raised in a speech last week where he focused on long term views one of which is that a strong koruna should become a priority for both the government and the CNB. Policy rate will stay high during his term at the helm of the CNB to encourage consumers, businesses and the state to borrow less and save money. He also called on the government to slash the budget deficit, and said wages could only grow hand in hand with productivity to help bring inflation down to the 2% target.

Australian retail sales disappointed in October, dropping 0.2% M/M vs a 0.5% monthly gain expected. Weakness was broad-based across industries with food retailing being the positive outlier. Higher interest rates and faster inflation are effecting Australian households. Part of tourism spending is also back done offshore as borders reopened.

Daily Pivots: (S1) 1.0359; (P) 1.0394; (R1) 1.0433; More...

Intraday bias in EUR/USD remains neutral as consolidation from 1.0481 is extending. As long as 1.0092 resistance turned support holds, further rally is expected. On the upside, break of 1.0481 will resume the rise from 0.9534 and target 1.0609 fibonacci level. However, sustained break of 1.0092 will argue that rebound from 0.9534 has completed, and turn bias back to the downside.

In the bigger picture, a medium term bottom was in place at 0.9534, on bullish convergence condition in daily MACD. Even as a corrective rise, rally from 0.9534 should target 38.2% retracement of 1.2348 (2021 high) to 0.9534 at 1.0609. Sustained trading above 55 week EMA (now at 1.0566) will raise the chance of trend reversal and target 61.8% retracement at 1.1273. This will now remain the favored case as long as 1.0092 resistance turned support holds.

Daily Pivots: (S1) 1.2060; (P) 1.2094; (R1) 1.2129; More...

GBP/USD is losing some upside momentum as seen in 4 hour MACD. But further rally is expected as long as 1.1777 support holds. Next target is 100% projection of 1.0351 to 1.1494 from 1.1145 at 1.2288 first. Sustained break there will pave the way to 1.2759 medium term fibonacci level.

In the bigger picture, rise from 1.0351 medium term bottom is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1145 support holds. Next target is 61.8% retracement of 1.4248 to 1.0351 at 1.2759. Sustained break there will pave the way back to 1.4248.

Daily Pivots: (S1) 0.9422; (P) 0.9461; (R1) 0.9499; More...

Intraday bias in USD/CHF remains neutral at this point. On the downside, firm break of 0.9355 will resume the decline from 1.0146 to 0.9287 fibonacci level. Near term outlook will remain bearish as long as 0.9680 minor resistance holds, in case of another recovery.

In the bigger picture, rise from 0.8756 (2021 low) has completed at 1.0146, well ahead of 1.0342 long term resistance (2016 high). Based on current downside momentum, fall from 1.0146 might be a medium term down trend itself. Break of 61.8% retracement of 0.8756 to 1.0146 at 0.9287 will pave the way to 0.8756. In any case, risk will stay on the downside as long as 55 day EMA (now at 0.9726) holds.

Daily Pivots: (S1) 138.49; (P) 139.04; (R1) 139.71; More...

Immediate focus is now on 137.66 support in USD/JPY. Firm break there will resume the decline from 151.93, as a correction to larger up trend, to 100% projection of 146.78 to 137.66 from 142.24 at 133.12, which is close to 133.07 medium term fibonacci level. In any case, outlook will stay bearish as long as 142.24 resistance holds.

In the bigger picture, a medium term top should be formed at 151.93. Fall from there is correcting larger up trend from 102.58. It's too early to call for bearish trend reversal. But even as a corrective move, such decline should target 38.2% retracement of 102.58 to 151.93 at 133.07, or further to 55 week EMA (now at 131.22).

Daily Pivots: (S1) 0.6724; (P) 0.6752; (R1) 0.6784; More...

Intraday bias in AUD/USD remains neutral for the moment. Outlook is unchanged too. Further rise is expected as long as 0.6521 resistance turned support holds. On the upside, break of 0.6796 will resume the rise from 0.6169 to 0.6871 fibonacci level. However, sustained break of 0.6521 will argue that whole rebound from 0.6169 is over, and bring deeper fall to retest this low.

In the bigger picture, a medium term bottom is in place at 0.6160 already. But it's too early to call for trend reversal. Nevertheless, even as a corrective move, rise from 0.6169 should target 38.2% retracement of 0.8006 to 0.6169 at 0.6871. Sustained trading above 55 week EMA (now at 0.6927) will raise the chance of the start of a bullish up trend. This will now remain the favored case as long as 0.6521 resistance turned support holds.

Massive anti-Covid protests in the biggest Chinese cities marked the weekend. Despite rising Covid cases and renewed Covid measures, thousands of Chinese citizens gathered to show their discontent with Xi Jinping’s Covid zero strategy, that nailed millions at home for months, without any progress.

As a result, three years have gone by since the pandemic started, and the health risks in China are higher than ever. Due to extremely strict lockdown measures, the Chinese population had no chance to develop collective immunity, the vaccination rate is low, and the vaccines are not efficient.

The new Covid variants are less deadly, but they spread more rapidly. And experts say, if China reopened tomorrow, Covid would spread like wildfire and kill thousands, simply because people are not immune enough and the health system is not ready for the shock.

This means the Chinese reopening won’t be a piece of cake; it looks like the Chinese economy may further suffer, either from endless and pointless lockdown measures, or from a severe health crisis.

Weak sentiment on China COVID-19 worries 

The week kicked off on a bad mood in the Asian markets. Australian and Chinese stock markets were painted in red. The Hang Seng index dived more than 2% in Hong Kong, and crude oil has already lost more than 3% at the time of writing.

Uncertainty around the Chinese reopening sent the barrel of US crude below the $75/76 support, and the next natural target for the oil bears stands at the $70 psychological support.

One factor that could slow down bleeding in oil is the upcoming OPEC meeting, scheduled for December 4. OPEC could use the Chinese excuse to further restrict outlook and hope to throw a floor under the crude selloff.

But the bears have the upper hand right now, and any price rallies should bump into solid resistance within the $77/80 range.

Record Black Friday sales hammer the idea of a consumer-led recession in the US 

Had there been no protests in China, I would’ve started writing about the record Black Day sales in the US this year, that should hammer the joy around a potential Federal Reserve (Fed) pivot on softening US economy.

But the US shoppers spent more than $9 billion in online sales on Friday, and Cyber Monday is also expected to be a record-breaking one, with more than $11 billion to be spent.

This is not exactly what you expect to hear when you think that the US will enter a consumer-led recession in couple of weeks from now.

The strength of the latest retail sales data, combined to Black Friday figures may revive the Fed hawks this week, especially if the US jobs data, and the latest GDP update print strong numbers.

On Wednesday, the US Q3 growth could be revised slightly higher, and due Friday, the nonfarm payrolls are expected to print 200’000 job additions in November. It’s still a lot.

The US dollar kicked off the week on a bullish note. The EURUSD slipped below the 200-DMA, near 1.0380. The S&P500 index closed last week at the highest levels since mid-September, and stands a couple of points from the year-to-date descending channel top, which could bring topsellers in, especially if strong data revives the idea that the Fed has no reason to stop hiking its interest rates.

Market movers today

We have no tier-1 data today but will get euro M3 growth, Norwegian retail sales and some Fed speakers tonight.

This week focus turns to Euro Flash CPI for November on Wednesday, which will be important for the size of the ECB hike at the 15 December meeting, see Weekly Focus - Euro inflation key to size of next ECB hike, 25 November.

US payrolls on Friday will be important for the Fed's rate decision on 14 December. We expect US job growth to decline from 261k to a still decent 220k (consensus 200k). US ISM manufacturing, core PCE inflation and house prices are also due this week.

The 60 second overview

New Global Outlook: This morning we published Big Picture - Recession with different undercurrents in which we present new forecasts for the global economy. Various shocks challenge the global economy, with different undercurrents driving the economic outlook across regions. The euro area and the US are headed for recession, while the Chinese growth engine is sputtering. However, the outlook starts to brighten in 2024, once China leaves its zero-Covid behind and the US economy exits from its downturn. Inflation pressures will slowly recede, allowing central banks to gradually exit their tightening mode and rate cuts could return to top the central bank agenda in early 2024. Risks primarily stem from renewed geopolitical tensions, energy shocks and a return of the pandemic through new variants.

Chinese protests widen over zero-Covid policy: Protests spread to more big cities across China after mourning ceremonies over a fire that killed 10 people in Xinjiang turned into protests against the government and the zero-Covid policy. Normally protests in China are aimed at local governments but a crowd in Shanghai directed their protest against the Communist Party and Xi Jinping. The protests come as the recent tweaks in the zero-Covid policy seems to have backfired as it led to rising cases across the country that subsequently triggered new restrictions being implemented. We do not expect China to abandon zero-Covid policy before a vaccination campaign has been rolled out but if protests widen, we could very well see some relaxation and an earlier exit from the zero-Covid policy than our baseline scenario of second half of 2023. The Communist Party's mouthpiece People's Daily reiterated the need for "timely detection and control of infected persons" but refrained from using the 'dynamic zero-Covid policy' phrase. Xinhua, another key news outlet for CCP, called on the country to stick "unswervingly" to the principle of putting the people's lives first" and prevent a domestic rebound, phrases that are associated with the zero-Covid policy.

The challenge for China's government now is that it is unlikely it can ease rules without seeing sharply higher cases and more difficulties in reining in outbreaks. It seems to be closer to a cross roads where it has to choose between allowing the virus to spread more or implement tighter restrictions which could lead to even more protests.

Oil prices lowest since January: The rising uncertainty in China led to another drop in oil prices, with the spot Brent price falling below USD80 for the first time since January.

Equities: A quiet session on Friday and equities little changed and without a clear direction. US saw a small preference for defensive sectors on Friday but with minuscular differences between sectors. The lower conviction in markets comes from lower support from positioning: VIX ticked slightly higher on Friday close to the important 20-level. Previous bear market rallies this year have always ended when VIX hit 20. Dow +0.45%, S&P500 (0.03%), Nasdaq (0.52%), Russell 2000 +0.30%.

FI: The hit to risk sentiment sent US bond yields lower in Asian trading falling to 3.63%, the lowest in close to two months. We are likely to see German yields open lower as well reversing some of the increase on Friday.

FX: CNH declined overnight following the Chinese protests. USD/CNH jumped from 7.19 to 7.26 on the open. The cross came back down to 7.21 during the night, though. The development in protests and the government's response will be key to watch over the coming week. The multi-week rally in EUR/USD, which brought the cross to new five-month highs, has taken a breather and is back below 1.04. USD/JPY testing lows around 138.50. After a 30-figure drop EUR/NOK is off lows at 10.30. EUR/SEK starts the week around 10.85.

Credit: The credit market ended the strong performance last week on a more tempered note, with iTraxx main widening 1.5bp to 89.1bp and Xover widening 10.4bp to 452.0bp. Primary activity also took a breather with only minor local currency deals being announced. As we are approaching the December lull, we remain optimistic that we will see a good deal of primary activity in the coming couple of weeks ahead of investors closing down for the year.

Nordic macro

Norway releases retail sales, which is expected to decline -0.5% m/m. Later this week we get preliminary GDP and NIER confidence indicators out of Sweden while Norway releases unemployment numbers.

Daily Pivots: (S1) 1.3332; (P) 1.3366; (R1) 1.3414; More....

Intraday bias in USD/CAD stays neutral for the moment. On the upside, firm break of 1.3494 will indicate that correction from 1.3976 has completed at 1.3224, ahead of 1.3207 cluster support (61.8% retracement of 1.2726 to 1.3976 at 1.3204). Intraday bias will be turned back to the upside for 1.3807/3976 resistance zone. However, on the downside, sustained break of 1.3204/7 will carry larger bearish implication and target 1.2952 support next.

In the bigger picture, as long as 1.3222 cluster support (38.2% retracement of 1.2005 to 1.3976 at 1.3223) holds, larger up trend from 1.2005 (2021 low) is still expected to resume through 1.3976 high at a later stage. However, firm break of 1.3222/3 will indicate that the trend might have reversed. Deeper fall would be seen to next cluster support at 1.2726 (61.8% retracement at 1.2758).