KEY DRIVERS
- Market volatility remains high as sentiment remains bound the the prospects of the oil price and China. The key drivers of a terrible first week (primarily the decline in the oil price and concerns over China) continue to be important for traders. Despite acting as a pseudo tax cut for oil importing nations, the concerns over the implications a falling oil price has for global demand seems to be trumping the economic benefits. The actions of the PBoC continue to concern China is also still at the forefront for traders as the move towards a fully marketable and international yuan.
- Oil has dropped by as much as 20% since the turn of the year. This is not the action of a market which is especially stable and the WTI price has already had a sniff at the psychological $30 per barrel level today, and I would not rule out this being repeated. The huge concerns over the lack of co-ordination over supply (certainly not helped by the dispute between Iran and Saudi Arabia) within OPEC, are allowing production to remain around record levels. Could an emergency OPEC meeting be called? That is the rumour doing the rounds. But even if they did meet, what good would it do? More mumbled comments on production and swerves that promise to look at the situation again at the next meeting. Investment banks are extending their downside targets, I have heard Goldmans targeting $20 and some analysts in the teens. The extent of the bearishness is tremendous and the contrarian in me says that this cannot last forever, and the prospect of a short squeeze is growing ever greater.
- China is also key for traders and it seems as though how the PBoC fixes for the mid-point of the range on the yuan is key for market sentiment on that day. The continued depreciation of the yuan has an impact as being deflationary for the global economy, but also makes it more expensive for other countries to trade into China which impacts on global demand and economic activity. Risk appetite seems to have been improved as the PBoC has been more supportive for the yuan.
- This is all driving a flow (both back and forth) of safe haven trading. The chief beneficiaries of the flows into safe havens have been the yen and euro of the forex majors (both of which hold carry trade properties), gold and US Treasuries. These trades have unwound on Tuesday morning as the market sentiment has improved.
- There is an interesting split on forex majors. There are the safe haven plays that have performed relatively well (such as the yen and euro) amidst the market volatility. There are also the commodity currencies (Aussie, kiwi and Canadian loonie) which are closely tied to the prospects of both the key current risk factors (oil and China). Traders will be watching closely the China Trade Balance that is announced early tomorrow morning. Then finally there is the constant weakness of sterling which has now fallen to a 5 year low against the dollar amid the weakness of UK economic data (this time industrial production disappointed). This leaves the chances of a Bank of England rate hike massively remote for Thursday. In fact the risk could even be that the one dissenting hawk (Ian McCafferty) moves back to neutral again, which would impact even more on Cable.
- Equity markets (being of relative higher risk as an asset class) have come under significant strain already this year. The failure of the policy of using circuit breakers on Chinese equities has certainly not helped sentiment but the general flight from risk has been firmly set. Will Tuesday’s rally mark the beginning of a sustainable recovery? Technical signals on FTSE 100 and DAX are promising if the markets can hold on to their gains. I think it is a view on the outlook of oil that could be key. Earnings season begins in the US this week and through the normal course of trading this has tended to be a welcome distraction, however the prospect of declining revenue lines and outlook statements which are likely to caution over the tightening FOMC, could see Wall Street under further pressure. The DAX remains the key volatility play, outperforming on the way up but also underperforming on the way down.
- Watch for: China Trade balance, US Retail Sales and US Industrial Production
MARKETS
EUR/USD – Losing support at $1.0810 re-opens $1.0540
- There is a neutral outlook of late as the stronger dollar and desire for a safe haven have pulled the rate around. There is little chance of any decisive move for extension by the ECB so it could be down to the US economic data (and general risk appetite) to drive the Euro/Dollar forex major pair.
- The old floor at $1.0810 is again supportive, with $1.0950 a key ceiling so far in 2016 with the outlook on momentum indicators increasingly neutral.
- Watch for: China Trade balance, US Retail Sales and US Industrial Production
GBP/USD – Sell into strength
- Weak UK data and support for the dollar has driven Cable lower. What are the chances of a 9-0 vote on rates this week for the Bank of England? It would put even more selling pressure on sterling.
- Breaking the $1.4563 April low opens $1.4345 initially but more than likely a move to the 1010 crucial low at $1.4230. The momentum indicators are strongly negative, but increasingly oversold. The downside potential has to be limited down at these levels and the prospect of a technical rally is growing. For this reason I am staying tight with stops on short positions.
- Watch for: China Trade balance, BoE monetary policy, US Retail Sales and US Industrial Production
USD/JPY – The resistance at 122.20 is increasingly key
- Classic safe haven flows mean that the yen has remains strong early in 2015. The outlook for this continuing will be if general risk appetite remains under pressure.
- A huge sell-off means the yen is within touching distance of the August spike low at 116.46. However this marks the top of a crucial 110 pip band of support. Much as is with Cable, the momentum indicators look very oversold and there is the prospect of a technical rally. The overhead resistance in the band 118.50/118.75 is sizeable now and a breach would be a significant development in a recovery.
- Watch for: China Trade balance, US Retail Sales and US Industrial Production
Gold – Possible base pattern formation
- The safe haven flows have continued to support gold and the near term prospects could hinge on the concerns remaining. The performance of gold in recent weeks amidst a general trend of a strengthening dollar have been heartening for the gold bugs and once the dust settles in this period of trading it could be the grounding for improved prospects (or at least a let up in the selling).
- The completed pattern above $1089 implies a recovery towards $1130. The neckline support of the breakout is a buying opportunity, with the bulls in control above $1089, moving more neutral on a breakdown, and turning negative again below $1077. Momentum is increasingly positive medium term but near term there is a battle to hold on to the gains.
- Watch for: China Trade balance, US Retail Sales and US Industrial Production
Oil – Possible base pattern formation
- Concerns over demand (i.e. the prospects of China) also little prospect of a co-ordinated reduction in supply by OPEC have driven oil lower, whilst oil inventories remain a source of volatility.
- An absolutely disastrous start to 2016 has seen oil drop as much as 20% and moving to 11 year lows on both WTI and Brent Crude. Can $30 tempt the bulls back in?
- Watch for: China Trade balance, US Retail Sales and US Industrial Production
Indices – Big support levels are now in view
- S&P 500 – The bulls need Q4 Earnings Season to be a bit of a doozy but I fear that could be wishful thinking. The S&P 500 continues to trade on a lofty 25x Cyclically Adjusted Price Earnings valuation and is expensive historically. I sound like a broken record but focus on revenue growth rather than the magically manipulated earnings line. Can a bounce from 1901 be a low? Key support is 1867/1872.
- DAX Xetra – The market is export focused and hence why it is so driven by sentiment on China and also oil. Can we trust an inverted hammer candlestick signalling a bottom? Bulls will hope so. Key support at 9810.
- FTSE 100 – The Footsie has held on to the December low by its fingernails and formed what could be a bullish key one day reversal (as things stand today). Is this the bottom near term?
WATCH OUT FOR THIS WEEK
Wednesday 13th January
- China – Trade Balance
- US – JOLTS job openings
- US Crude Oil Inventories
Thursday 14th January
- Australia – Unemployment
- UK – BoE Monetary Policy
- US – Weekly Jobless Claims
Friday 15th January
- US – Retail Sales
- US – New York Fed manufacturing
- US – PPI
- US – Industrial Production/Capacity Utilization
- US – University of Michigan Consumer Sentiment (prelim)
NEXT WEEK
Monday 18th January
- US public holiday – Martin Luther King Day
Tuesday 19th January
- China – GDP
- China – Industrial Production
- China – Retail Sales
- UK – CPI
- Eurozone – German ZEW Economic Sentiment
- New Zealand – CPI
Wednesday 20th January
- UK – Unemployment and Average Weekly Earnings
- US – CPI
- US – Housing Starts and Building Permits
- Canada – BoC monetary policy
- US Crude Oil Inventories
Thursday 21st January
- Eurozone –CPI (final)
- Eurozone – ECB Monetary Policy
- US – Philly Fed manufacturing
- US – Weekly Jobless Claim
Friday 22nd January
- Eurozone – Flash Manufacturing PMI
- UK – Retail Sales
- Canada – CPI
- US – Flash Manufacturing PMI
- US – Existing Home Sales
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