The confluence of event risks this week has provided a sufficiently compelling trigger for overbought stock markets to ease, though it's difficult to carry off arguments that this will be a protracted consolidation.
Trump could indeed pepper his State of the Union address (9pm EST/3am GMT) with more of the kind of invective that his base is accustomed to hearing, instead the ‘lite’ version at Davos. Judging by past events, after the headlines, impact should be short-term, and neutral.
Splits within the FOMC on inflation could widen with unforeseen impact on the rate path. Though potential for disruption is considerably moderated till at least the autumn by the need for policymakers to ensure an uneventful handover for the new chair.
Friday’s payrolls could deliver another below 1-year average tally, like December’s. Even if seen, the balance of evidence remains on the side that the U.S. labour market is tightening, not weakening.
U.S Trade Representative Lighthizer has had many opportunities to signal a definitive end of the road for NAFTA yet has not taken them, despite rejecting Canada’s proposals on Monday. Talks will continue in February.
The dam has burst on Treasury yields, allowing the 10-year yield to reach highs last notched in April 2014. Reaction in riskier assets remains psychological. Re-correlations between surging yields and the dollar have been intermittent. It’s the broken milestone—and perhaps the pace— that has caught speculative attention. Inflation expectations are building whilst President Trump could begin to pinpoint infrastructure plans as soon as Wednesday. The temptation to interpret the yield swell negatively could evaporate in reaction to strong payrolls, or another set of underpinned economic readings.
Stock markets take a break
Stock markets’ downwards momentum was not spent at the time of writing. U.S. index futures were lower, in tune with falls across Europe and the FTSE. A 340 point drop in Japan slightly underperformed the wider APAC region’s 1.1% fall. The context is that MSCI APAC has risen some 6.5% this month, and the Nikkei has added 2.3%. Whether or not Europe’s participation in the pullback intensifies will depend on outcomes from pivotal corporate reports over the next few days, including those from Unilever (LON:ULVR), Vodafone (LON:VOD), and a clutch of European banks and pharmas.
The FTSE could in fact find the going improves soon as sterling fatigue sets in further.
The government’s leaked economic impact analysis on Brexit will no doubt echo in Westminster this week, though the lack of a surprise factor doesn’t seem enough to end the pound’s up leg for most of January.
The $1.40 marker is being tested now. Failure for buyers can be called if GBP/USD closes under $1.3985, last week Monday’s close. With downward momentum accelerating, established support at $1.3835 would then be in play. EURGBP has bounced back into its mid-Dec. to mid-Jan 88p-89.28p range. It will eye 8.24p highs from 21st January before the upper bound.
The euro also rallied against the dollar, making support at $1.2356 in the hourly chart visible to the naked eye. Even so, the down wave from last week’s $1.2536 ‘Draghi high’ is just as unmistakeable.
Those missions into low-liquidity conditions outside USD/JPY’s 114-108 range last week served a purpose. The yen is back for a second look, though the dollar’s fight has returned somewhat. Current dollar support weakens under 108.5.
Economic releases
The immediate remaining macroeconomic focus on Wednesday should be Germany’s preliminary CPI for January at 1pm GMT. Slack appearing in European sentiment surveys this morning could weigh on a monthly result that is forecast to be 0.6% lower and a yearly one that consensus pegs at 1.7%. Negative outcomes will nix the euro’s 16-pip bounce. U.S. consumer confidence at 3pm will also draw attention, though it will be 23:00 GMT before the next readings capable of shifting the dollar appear: Japan’s industrial output.
Wednesday’s slate contains a UK GfK release at midnight, Aussie CPI half an hour later, an official Chinese factory PMI also early on, then EU inflation, ADP payrolls, and Canadian GDP during the day.
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