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EUR/USD

Current level - 1.1320

Yesterday, the bears could not gain enough momentum and the sell-off was limited to the support at 1.1259. The pair recovered some of its losses against the dollar and, during the early hours of today`s trading, the EUR/USD is holding just above the level at 1.1316. If the bears start selling more aggressively, a breach and a new test of the mentioned support at 1.1259 will be the most likely scenario, which would strengthen the negative expectations for the future path of the EUR/USD. If the bulls prevail, a successful breach of the resistance zone at 1.1372 would continue the recovery for the common european currency against the greenback towards the target at 1.1461.

USD/JPY

Current level - 113.41

The attempt to violate the support zone at 112.75 was not successful and the Ninja continued its trading back in the zone between 113.04 and 113.79. If the bulls prevail, the expectations are for a test of the upper border, where a breach would easily pave the way towards the next target at 114.09. The first support is the zone at 113.04, but only a breach aimed towards the last level at 112.75 could lead to new losses and а future depreciation of the dollar against the yen.

GBP/USD

Current level - 1.3310

The support zone at 1.3224 successfully withheld the bearish attack and, at the time of writing, the pair is trading just above the level at 1.3285. If the bulls take control, they could test the resistance zone at 1.3352, but only a successful breach of the next target at 1.3399 could lead to a change in the current sentiment of the market participants. Worse-than-expected data in the UK for its manufacturing PMI (today; 09:00 GMT) could help the bears take control and violate the level at 1.3285. If this turns out to be the case and the support at 1.3224 is breached as well, the depreciation of the pound against the dollar would most likely continue towards the levels from November 2020 at around 1.3130.

Markets endured another night of high drama overnight thanks to the latest omicron return of serve by the CEO of Moderna, and Jerome Powell shifting to what can only be interpreted as a hawkish stance in testimony on the Hill. The Moderna CEO raised questions about the efficacy of present vaccines and omicron late in Asia yesterday, which stopped the recovery rally in its tracks. Equities tumbled in late Asia, Europe and the US, while investors poured cash into Bunds and US Treasuries, flattening the US curve, and the haven yen and Swiss franc jumped. Oil prices, perhaps the most schizophrenic market out there at the moment, collapsed once again, and we haven’t even got to OPEC+ yet.

Powell ditches ‘transitory’ label for inflation

Jerome Powell, testifying on the Hill yesterday, added to the tumult, retiring the word “transitory” as his favourite pronoun for inflation, and suggesting that the Federal Reserve could unwind monetary stimulus faster than previously announced. The abrupt change of direction caught markets off guard and deepened the malaise in equity markets, while short-dated US yields rose as long-dated ones were falling on omicron-haven inflow, the yield curve flattening substantially overnight.

Treasury Secretary Yellen, also testifying, pleaded with Congress to extend the debt ceiling, saying a recession could follow and that the government would run out of money around the middle of the month. This story has been off the news front pages for a while now and had little impact once again overnight. Markets clearly believe some sort of bipartisan deal will still occur once the chest-puffing is over.

The Powell comments would have had a far greater impact, I believe, if the Moderna omicron story had not done some of the work for markets already. In the case of bond markets, haven buyers of long-dated US yields overwhelmed any inclination by investors to sell treasuries and steepen the yield curve once again. That was also evident in European markets, where Eurozone inflation exploded higher to 4.90% but Bund yields fell. It was left to currency markets to take the strain, with the US dollar falling across the board and the euro rallying along with the haven currencies. Perhaps the most confusing move was the US dollar falling versus the EM space. I am taking the EM FX rally overnight with a massive grain of salt, and I can only surmise that month-end flows played their part.

I warned yesterday that the only winner in December was likely to be volatility as the street sells everything on any negative omicron headline, and then buys everything back on any hint that the new variant isn’t as serious as we all thought. Despite the awful New York session, the fallout in Asia and Europe may not be so bad thanks to a story out of Israel released by Italy 24 News, no less. The story quotes the Israeli health minister as saying three doses of vaccine (in Israel it is Pfizer), protects from omicron and there is no need to panic. When a politician says, “no need to panic,” I always get nervous, but, financial markets now have their hope is eternal, straw of the day, to grasp at now. Tomorrow is another day though, and I have no doubt that another headline will have the mindless herd we call the financial markets, stampeding the other way.

If we can strip out the noise, I would grasp two themes from overnight. Firstly, European inflation has joined the inflation bonfire and markets are now starting to price that the world’s government debt monetiser-and-chief, the ECB, may have to respond, hence the rally in the euro overnight. I think that is a false hope. Secondly, Chairman Powell’s comments were a decidedly hawkish change of direction and the mid-month FOMC meeting will be live for a faster taper. Distortions from omicron pushed aside, the US yield curve should steepen, and the US dollar rally will return in Q1 2022.

Back in the real world, we have had quite a bit of data out of Asia today. Australian Ai Group Manufacturing Index for November jumped to 54.8 and Markit Manufacturing PMI to 59.2. Australian Q3 GDP QoQ contracted by just -1.90%, far better than the -2.70% forecast. The data suggests that the lucky country weathered the Q3 lockdowns better than expected and is recovering in Q4 at a vigorous pace. House prices even went up in Brisbane more than they did in Sydney.

Elsewhere, November PMIs across Asia were positive. Japan’s Jibun Bank Manufacturing PMI rose to 54.5, while South Korea’s Markit Manufacturing PMI climbed to 50.9 and its trade data showed a wider surplus and rising exports and imports. Regional Markit Manufacturing PMIs from ASEAN and Taiwan showed impressive improvements into expansionary territory, with Taiwan holding steady at 53.9. Only Indonesia retreated, falling to 53.9 from 57.2, but still expansionary.

Perhaps the only blot on the copybook today has been China’s Caixin Manufacturing PMI which retreated from 50.6 in October to 49.9 in November. The fallout should be minimal as the official PMI climbed to 50.1 yesterday. It still suggests that China faces challenges regarding input costs, and energy, although the squeeze in the latter has eased somewhat. The trade surplus remains very healthy though, and the overall picture from Asia is that its post-delta recovery continues to gain momentum despite supply chain challenges. Obviously, omicron could change that picture, but it is far too soon to draw conclusions.

A number of heavyweight Markit Manufacturing PMIs, including Germany and France, are also released today, as well as the ISM Manufacturing PMI. They should hold steady in expansionary territory whilst revealing supply chain and material cost challenges under the bonnet. With omicron dominating market direction, their impact will be minimal. US ADP Employment could print above 500,000 jobs added tonight, giving weight to a stronger Non-Farm release on Friday and perhaps increasing the Fed tapering noise.

Markets

Fed Chair Powell went off-script in yesterday's testimony before the Senate Committee. Monday's pre-released official statement kept close to the official policy line, but his interaction with lawmakers delivered some fireworks. First and foremost, Powell thinks it's probably a good time to retire the word “transitory” when it comes to higher inflation. Even though prices are still expected to significantly fall back, it's the case that pricing increases have spread much more broadly in recent months. In a mea culpa, he said that the Fed missed the highly unusual, very difficult, very non-linear supply-side problems in forecasting inflation developments throughout the Covid-pandemic. Second, the balance of risks clearly shifted in Powell's view. The risk of higher inflation has increased with fallout effects on the labour market. “To get back to the kind of great labour market we had before the pandemic, we're going to need… price stability”. At the previous policy meeting, the Fed defended its gradual normalization approach in order for the maximum employment goal to be reached. The timing of this new risk assessment is especially significant as it coincides with the outbreak of the potentially dangerous Covid-mutant Omicron. Finally, Powell translated his new inflation view and associated risks into backing a faster taper process, echoing the hawkish views of some of his colleagues. “The economy is very strong and inflationary pressures are high, and it is therefore appropriate to consider wrapping up the taper of our asset purchases perhaps a few months sooner.” We argued before that the Fed could double its monthly taper efforts from January onwards ($30bn instead of $15bn), implying a potential first rate hike as early as March instead of June.

Powell's comments marked the start of an intraday turnaround in a session dominated by risk aversion after Moderna CEO Bancel warned for a drop in vaccines' effectiveness against the Omicron-variant. The front end of the US yield curve obviously underperformed. The curve flattened in a daily perspective with yield changes ranging between +8.2 bps (2-yr) and -6.3 bps (30-yr). The German yield curve flattened as well with yields ending 1.3 bps higher at the 2-yr and 7.8 bps lower at the 30-yr. Consensus-beating record high EMU (core) CPI prints didn't prompt a significant market reaction during the risk-off sentiment. Powell's U-turn on inflation nevertheless adds ever more pressure on the ECB to prepare/present exit plans at the Dec 16 meeting. Markets over the past months stopped anticipating on any such move. The dollar erased losses, but the greenback's performance, in the end, remained disappointing. EUR/USD spiked lower from 1.1380 to 1.1240 to eventually close around 1.1340. US stock markets received a double whammy (Omicron & hawkish Powell) and lost 1.5% to 2%. Today's eco calendar contains US manufacturing ISM and ADP employment, but it seems that the die has been cast for the Dec 15 Fed meeting.

News headlines

Australian GDP fell less than expected in Q3 (-1.9% Q/Q; +3.9% Y/Y). Lockdowns weighed on activity. The setback was mainly due to a 4.8% drop in private consumption, with services spending taking the biggest hit (-5.8%). Government spending and net expect contributed positively. Inventories were a drag. The inability to spend raised the household savings rate to 19.8% in Q3, up from 11.2%. This provides a good starting point for a Q4 rebound as lockdowns are lifted. Corelogic's index of capital city home prices rose a further 1.1% M/M to 21.3% Y/Y. Yields for 2-y and 3-y Australian government bonds rose 4 and 6 bps respectively. Markets see a first-rate hike by the Summer of next year even as the RBA continues to signal no rate hike at least until 2023. AUD/USD rebounds to 0.716.

Polish inflation remained stubbornly high in November at 1.1% M/M and a 20-yr high 7.7% Y/Y (from 6.8% Y/Y), drifting further away from the NBP's 2.5% (+- 1%) inflation target. The data add pressure on the NBP to accelerate policy normalization. Policy maker Gatnar suggested that a 50 bps rate hike at each of the next two meetings might be needed. He sees risks of inflation printing above 8% in December and considers the weak zloty to be no longer in line with economic fundamentals. The zloty extended a gradual comeback, closing near EUR/PLN 4.66.

US stocks declined sharply after a hawkish statement by Jerome Powell. The Dow Jones crashed by more than 650 points while the tech-heavy Nasdaq 100 index declined by more than 300 points. The CBOE VIX index rose by more than 20%. This happened after Jerome Powell hinted that the Federal Reserve would move to unwind the quantitative easing program. He warned that the variant could lead to higher inflation as supply logjams continued. This happened after the Chief Executive at Moderna warned that the company’s vaccine could be ineffective against the variant.

Some of the worst-performing equities in the United States were those in the hospitality, aviation, and office real estate sectors. For example, Southwest shares declined by more than 2.7% while United Airlines crashed by more than 4%. Boston Properties and SL Green also declined as investors became worried that demand for office space will decline. Similarly, hospitality companies like Airbnb, Marriott, and Hilton declined by more than 5%

The economic calendar will have some key events today since it is the first day of the month. Earlier on, Australia published the latest GDP numbers. The data revealed that the country’s economy struggled in the third quarter because of the lockdowns in New South Wales. There are signs that the country’s economy is recovering as evidenced by positive manufacturing PMI data. The market will receive the latest Swiss inflation and manufacturing PMI numbers. In the United States, Jerome Powell will continue his testimony while ADP will publish its estimate of jobs numbers.

EURUSD

The EURUSD pair declined sharply after a hawkish statement by Jerome Powell. It fell to a low of 1.2645 as it erased most of the gains it made earlier this week. On the four-hour chart, the pair moved to the 25-day moving average and is below the 23.6% retracement level. The Relative Strength Index (RSI) has also moved slightly below the overbought level. Therefore, the pair will attempt to pare back some of the losses as worries about the hawkish Fed fade.

US30

The Dow Jones index declined sharply in the overnight session. It fell to a low of $34,535, which was the lowest level since October 15. On the daily chart, the pair moved below the ascending trendline. It also moved below the 25-day moving average and the parabolic SAR dots. The index seems to be forming a head and shoulders pattern. Therefore, there is a likelihood that it will drop to about $34,000 in the near term.

SPX500

The S&P 500 index declined sharply on Tuesday. It fell to a low of $4,570, which was the lowest level since November 1st. It has been struggling after it rose to a high of 4,752 recently. The index also declined to the 38.2% Fibonacci retracement level. It also moved below the 25-day moving average. Therefore, the index will likely keep falling in the near term.

The FTSE 100 struggles with doubts about vaccine efficacy against the omicron variant.

A drop below the daily support at7190triggered a sharp liquidation. Then a short-lived rebound has met stiff selling pressure at 7170. The index is hovering above the origin of the October rally at 6945.

The bulls will need to clear the resistance before they could hope for a recovery. Otherwise, a bearish breakout would send the price to test the triple bottom (6830) from the daily timeframe. And that is the key to the uptrend’s integrity in the medium term.

The Australian dollar bounced back on upbeat GDP in Q3. The break below 0.7170 has negated October’s rally.

A bearish MA cross on the daily chart confirms that sentiment has turned sour. The Aussie is heading to October 2020’s low and the psychological level of 0.7000. An oversold RSI has prompted sellers to start to cover in that congestion area.

0.7190 is a resistance from the previous demand zone and trend followers are likely to sell a rebound. Buyers will need to take out those offers to ease the pressure.

The Canadian dollar edged higher after Q3’s GDP beat expectations. A bullish MA cross on the daily chart indicates a bullish bias in the US dollar’s favor.

The break above the resistance at 1.2770 suggests that the bulls retain control of the direction. An overbought RSI has tempered the bullish fever temporarily, which may be an opportunity for buyers to accumulate.

September’s high at 1.2900 is the next target. A bullish breakout could trigger an extended rally towards 1.3100. 1.2730 is now fresh support.

Market movers today

• Today, ISM manufacturing and the ADP jobs report is released in the US.
• We get PMIs out of Norway and Sweden and in Sweden, Riksbank's Breman also speaks (see more in Scandi section below).

The 60 second overview

New Fed call: We changed our Fed call yesterday on the back of Fed Chair Jerome Powell's hawkish U-turn in recent days. On Monday, Powell argued that new COVID-19 outbreaks (and perhaps also the new omicron variant) are inflationary in nature. Yesterday, Powell argued that it is time to "retire" the transitory term and that it could be appropriate to increase the tapering pace so that the QE bond buying ends "a few months" earlier. We now expect the Fed to announce an increase of the tapering process from USD15bn per month to USD25bn per month starting from January. If so, the QE programme will end in April. This would make the Fed able to hike three times in 2022 with our base case being in June, in September and in December. We discuss in more details in Fed Research: Say farewell to team transitory - tightening sooner and faster.

Volatile markets: The combination of the Omicron fears and the hawkish comments from Powell weighed on risk appetite yesterday. US equites fell and the US curve flattened strongly. In FX space EUR/USD reversed some of the recent gains and risk sensitive currencies such as NOK and SEK came under pressure. However, note that these immediate moves have to a certain degree reversed overnight. US equity futures have moved into green, 10Y US yields have moved slightly higher, EUR/USD has edged higher and Scandies have seen some support. The market volatility this week underlines the market uncertainty that the combination of Omicron, Fed rhetoric and recent data surprises like European inflation creates. It all points to continued volatility in December where many investors furthermore close their books for the year, which can amplify market moves.

Recent Omicron news: Yesterday, Oxford University said that "there is no evidence so far that Omicron is any different" with respect to protection against severe disease for the AstraZeneca vaccine (see Reuters), something Ugur Sahin (co-founder of BioNTech) later repeated (see WSJ), so both AstraZeneca and Pfizer/BioNTech are sounding less concerned than the Moderna CEO did. Protection against severe disease is the most important feature of COVID-19 vaccines although it still makes sense for vaccine producers to update the vaccines from a risk-management perspective, while we are waiting for the lab study results. EMA says that it could approve an updated vaccine in three-four months from now if needed, see Reuters. Israeli Health Minister Nitzan Horowitz said that "there is already room for optimism and there are initial indications that those who are vaccinated with a vaccine still valid or with a booster will also be protected from this variant", The same article in The Jerusalem Post mentions 93% efficacy against serious symptoms at least for those vaccinated with a booster. Merck says that it expects it COVID-19 drug to be effective against omicron.

Equities: Equities sustained the declines on Tuesday, driven by hawkish tone from the Fed and gloomy vaccine outlook from Moderna. However, this was not a full risk-off session as cyclicals generally held up the best, especially long duration/growth. Tech, autos and retail were among the best sectors, while telecom and utilities sold off -3% each. S&P500, Dow and Russell 2000 closed down -1.9%, Dow -1.9% and Nasdaq -1.6%. The sentiment is reversing in Asia this morning though and US futures have turned positive.

Oil. Oil prices fell to new low yesterday with Brent dropping below USD71/bbl. Oil prices are under pressure from the combination of new travel restrictions, release of strategic reserves and a hawkish Fed. OPEC+ meets tomorrow and may provide some much needed support. Short-term, the sell-off looks overdone in our view.

FI: There was a dramatic flattening of the US Treasury curve yesterday on the back of the comments from Fed chairman Powell at a testimony in the US Senate. Here he said that they will speed up the tapering as the rise in inflation may not be transitory. Furthermore, there no indication that the new variant of the corona virus would change this view. Hence, the 2Y-10Y and 2Y-30Y US curve flattened some 13-14bp.

FX: We focus on the narrative where 1) reopening/catch-up effects are fading, 2) the end to fiscal stimulus and 3) the beginning of monetary tightening. The market response to this is to add up on financial resilience. Being long dollar will remain an integral part of that cross asset rotation. Thus, we recommend selling the rally in EUR/USD.

JPY strengthened significantly amid the Omicron news on Friday. Yesterday, we saw another move lower in USD/JPY to 113 levels as a reaction to lower US yields and oil. Short term, USD/JPY is exposed to a bounce back in risk appetite, but we still see further downside potential to the cross, as the global economy moves from reflation mode and in to a period with slower growth and less inflation.

Credit: Following Monday's stabilization in credit markets, sentiment turned again and credit was under pressure yesterday. iTraxx Xover widened almost 9bp and Main almost 2bp. HY bonds widened by 2bp while IG managed to tighten 1bp.

Nordic macro

Sweden: Two things on the agenda today; manufacturing PMI (Nov) and a speech by Riksbank Breman. Since the minutes of the November RB policy meeting have not been published yet, the speech will be a presentation of the monetary policy report. Regarding PMI there will of course be a lot of attention to supplier deliveries which appear to be off peak but remain at historically very stretched levels indeed. For instance, Volvo Cars reported yesterday that demand was strong in Q3 but production low due to supply shortages. Interestingly, the CEO said that the situation has improved somewhat of late.

Norway: The Norwegian manufacturing PMI appears to have peaked, although it is still well above normal levels. We have seen European manufacturing indicators improve slightly in November, probably thanks to a slight easing of capacity constraints. We therefore expect the PMI to increase moderately to 59.0.

Daily Pivots: (S1) 149.62; (P) 150.63; (R1) 151.51; More...

Intraday bias in GBP/JPY is turned neutral with current recovery. On the downside, break of 149.70 will resume the fall from 158.19 to 100% projection of 158.19 to 152.35 from 154.70 at 148.86 next, which is close to 148.93 key structural support. Decisive break there will carry larger bearish implication and target 161.8% projection at 145.25 next.

In the bigger picture, the break of medium term channel support, and bearish divergence condition in week MACD are raising the chance of medium term topping at 158.19. Firm break of 148.93 support will argue that GBP/JPY is at least correcting the whole rise from 123.94 (2020 low). In this case, deeper fall would be seen to 38.2% retracement of 123.94 to 158.19 at 145.10. Nevertheless, strong rebound from 148.93 will retain medium term bullishness for another rise through 158.19 at a later stage.

Daily Pivots: (S1) 127.76; (P) 128.19; (R1) 128.72; More....

For now, further fall is still expected in EUR/JPY with 129.58 resistance intact. Corrective pattern from 134.11 should target 126.58 medium term fibonacci level next. On the upside, however, break of 129.58 resistance will indicate short term bottoming, and turn bias back to the upside for rebound back to 55 day EMA (now at 130.13) first.

In the bigger picture, as long as 38.2% retracement of 114.42 (2020 low) to 134.11 at 126.58 holds, up trend from 114.42 is still in favor to continue. Break of 134.11 will target long term resistance at 137.49 (2018 high). However, sustained break of 126.58 will raise the chance of medium term bearish reversal. In this case, deeper decline would be seen to 61.8% retracement at 121.94, and possibly below.