Bears are roaring loudly as riskier plays nosedive


  • Financial markets are under huge pressure as the bears are roaring. Anything assets deemed to be of higher risk appetite are being hit, whilst safe haven plays are performing strongly. This is not a great environment to be bullish right now. It is also difficult to see a sustainable improvement coming through. Overstretched market conditions can drive a near term retracement, however, the outlook for markets remains weak and there is little to be positive about that could drive a turnaround.


  • The Federal Reserve hikes rates for the first time in nine years in December. However, in her first Congressional testimony since the hike, Janet Yellen is likely to be given a significant grilling over whether the Fed made a massive policy error. Market sentiment has taken a significant nose-dive since the December FOMC meeting, and hindsight is a wonderful thing, but the facts are that the Fed moved to increase interest rates whilst pretty much the rest of the work continues on the path of loosening monetary policy. The dollar strength driven through 2015 as the market was guided down a path towards Fed tightening has driven dollar strength that has certainly contributed to the current state of the markets. Yellen will need to do some tough defending on the rate hike, but equally the market will be looking for signs of a dovish retrenchment on rates. This could help to support market sentiment, at least in the short term.
  • I am trying to think of catalysts that could help induce a market bottom. Dovish hints from Yellen could be one, whilst the market needs a notable low in oil to be seen, alongside a signal that global growth is not about to fall off a cliff.
  • The selling pressure seemed to hit global banks the hardest yesterday as concerns over the impact of the proliferation of negative interest rate policy curtailing profitability and failing global growth leading to bad debts. Credit Default Swaps on banks (the insurance product taken out in the event of a failed repayment) have soared. CDS prices pushing higher are a sign of global financial stress. German finance giant, Deutsche Bank has even felt the need to put out communication that claims they would be able to cope. Although the banks are better capitalised than they were moving into 2008, this could be a case of the market convincing itself that there is a problem. This impacts on confidence and right now, confidence is on short supply.
  • Subsequently we are seeing the classic safe haven plays all doing very well. The yen strength has pulled Dollar/Yen lower by as much as 700 pips in the past 7 days and the impact of the BoJ move to negative rates is a long distant memory. Gold has broken out to 8 month highs, whilst the yield on the US 10 year Treasury is at a one year low. My big barometer for market fear is Dollar/Yen decisively breaking to a two year low below 115.50. The move has been made on an intraday basis but a two day close below such a key support would be a hugely significant break and signal real problems for risk. What could the BoJ do then? Also what does it mean for Abenomics and the “second arrow”?
  • The oil price has long been a key driver and right now the price is hanging on to the support around the band $29.25/$30 on WTI, which is range that is preventing a retest of the January low $26.20. If this support continues to hold then the outlook will gradually start to improve and this could still be a driver of support for market sentiment, however right now the bears remain in control and rallies are being sold into.
  • There is very little economic data to get too interested in this week which is why Janet Yellen’s Congressional testimony is so important, however the market will certainly sit up and take notice of the US Retail Sales on Friday. With some weak year on year comparisons for January 2015 dropping out this month, hitting the 0.0% ex-autos month on month expectation would be a positive this month and would represent retail sales at their best year on year reading since Q4 2014. Could this help to stabilise sentiment? The trouble is that good news is being taken badly by markets that are fearful of further US rate hikes. Oh for a return to “normal” trading conditions where we can take good news as good for the market.
  • Watch for: Janet Yellen’s testimony, US Retail Sales



EUR/USD – Consolidation above $1.1050/$1.1100      

  • Will Janet Yellen calm market fears over the Fed hikes? As central banks around the world compete in various rounds of “currency wars” in a race to the bottom, a dovish Congressional testimony would help to curb US dollar strength. This would though be supportive of EUR/USD.
  • The upside breakout above $1.1050/$1.1100 has changed the game for EUR/USD and the outlook for the pair is now far more positive. A recent consolidation is using the old pivot band as a basis of support and looks set to be a platform for a rally back towards the range highs $1.1460.
  • Watch for: Janet Yellen’s testimony, US Retail Sales

GBP/USD – The support band $1.4350/$1.4450 is now pivotal medium term

  • Aside from the UK Industrial data (which is around 12% of the economy), it is all about Yellen and US Retail Sales this week. Sterling continues to be seen as a more risky play than the dollar and is therefore underperforming as market sentiment comes under pressure. A dovish Yellen could help to support Cable this week
  • An improving outlook for Cable has been reversed but the support band $1.4350/$1.4450 is now key for the next run for the market. A downside breach would put the bears back in control for $1.4235 and potentially $1.4150 again. However if the support can hold up then this would be a good sign of market sentiment improvement once more and the rally can continue.
  • Watch for: Janet Yellen’s testimony, US Retail Sales

USD/JPY – Safe haven flows could retrace the BoJ yen weakness   

  • The safe haven demand for the yen is as strong as ever now and the volatility in the moves suggests that the market is under significant strain now. Perhaps the Bank of Japan will try to step in now the yen is at a 2 year high (ie. Dollar/Yen at a 2 year low) but the market is seriously questioning the ability of the BoJ to affect the yen now.
  • A two day close below 115.50 would confirm a big 2 year top pattern and open huge potential downside. The next realistic support is down at 110 so the sell-off could be huge. The extreme nature of how the yen is moving now means that volatility is extremely high, which is something that is seen when the yen pushes a strong trend.
  • Watch for: Janet Yellen’s testimony, US Retail Sales

Gold – Gold looks strong but increasingly overstretched near term, watch for Yellen!

  • The safe haven demand for gold has seen the precious metal add $130 since the beginning of the year. If the market stress continues there is no reason why safe haven flows will not continue to push gold higher. However could accommodative comments from Yellen change this outlook?
  • The way that gold is accelerating higher is clearly strong for the bull trend but is also suggestive that the market is becoming increasingly stretched. The analogy is of an elastic band that is liable to snap back if the turn happens. Right now there are a few signs of excessive positioning (RSI above 80 and trading outside Bollinger Bands), but a breakout above $1200 is a key move. The initial support band is around $1140, watch for near term signals for signs of a turnaround.
  • Watch for: Janet Yellen’s testimony, US Retail Sales

Oil – Holding the support above $29.25/30 looks to be increasingly important

  • There is still no sign of production limits (to help curb supply) or any indicators that would suggest a demand improvement, so gold is struggling to detach from a sell into strength mind-set.
  • Technically the outlook remains corrective but the support at $29.25/$30 is holding and this could become increasingly key for the medium term outlook. Psychologically holding above $30 will be seen as progress for the bulls.
  • Watch for: Janet Yellen’s testimony, US Retail Sales

Indices – Massive selling pressure across equities with key levels of support being broken   

  • S&P 500 – Rallies are being sold into, momentum is bearishly configured and downside potential is still present. The key support around 1815 marks a key line of support used to hodl up 3 big sell-offs in the past 2 years. A breakdown opens 1740 but more importantly would complete a massive top pattern. This is beginning to look scary! Needs a move at least above 1947 to avert the medium term bearish sentiment.
  • DAX Xetra – The DAX breaking 9308 opens a full retracement to 8355. Sell rallies into strength and the 9308 now becomes new resistance. The fact that the DAX is underperforming the FTSE 100 on the selling days shows the detrimental impact of being an exporter heavy index, but also big German banks (c. 15% weighting)
  • FTSE 100 – Could it be that having exposure to oil is helping the FTSE100 outperform the DAX? Perhaps, but this is not preventing a downside break of key supports. The 5640 support is now under threat whilst the 5600 support is also within sight. A breach opens 5230. The old support around 5768 is now resistance. Needs above 6115 to improve the outlook materially.



Tuesday 9th February

  • US – JOLTS jobs openings

Wednesday 10th February

  • UK – Industrial Production
  • US – Janet Yellen testifies to House Financial Services Committee
  • US – Crude Oil inventories

Thursday 11th February

  • US – Weekly Jobless Claims

Friday 12th February

  • Eurozone – Flash GDP
  • US – Retail Sales
  • US – University of Michigan Sentiment (prelim)



Monday 8th February

  • Japan – GDP (Q4 Prelim)
  • China – Trade Balance
  • US – Public Holiday (President’s Day)

Tuesday 9th February

  • UK – CPI
  • Eurozone – German ZEW Economic Sentiment
  • US – Empire State Manufacturing
  • US – NAHB Housing Market Index

Wednesday 10th February

  • UK – Unemployment & Average Weekly Earnings
  • US – Building Permits & Housing Starts
  • US – Industrial Production & Capacity Utilization
  • US – FOMC Meeting Minutes

Thursday 11th February

  • Australia – Unemployment
  • China – CPI & PPI
  • US – Philly Fed Manufacturing Index
  • US – Weekly Jobless Claims
  • US – Crude Oil inventories

Friday 12th February

  • UK – Retail Sales
  • US – CPI
  • Canada – CPI
  • Eurozone – Consumer Confidence