Sentiment under pressure again driven by declining oil


  • Just when you thought it was safe to dip back into the market, the bears bite back. Market sentiment is again under huge pressure, with safe haven flows once more in favour and recent rebounds seemingly seen as another chance to sell. The big driver once more is a declining oil price, with much attributed to the deterioration in the manufacturing PMIs and resumed decline in the price of oil. The same factors that drove market fear soaring in January never really went away and are once more bubbling back to the surface.


  • The oil price rally allowed market sentiment to improve for a few sessions, but now it looks as though this is about to roll over again. Talk of an agreement between OPEC and Russia over production limits helped to drive an oil recovery, but this all seems to be a bit fanciful and denials from officials seem to suggest the idea is a no go. Surely without the US being involved, any agreement is going to be meaningless as the US could just make up for any production restrictions.
  • Concerns over global growth may have briefly been forgotten as the oil price rallied, however with the new month comes a new set of figures, that just re-iterate the problems that are still present. Chinese growth continues to decelerate (manufacturing PMIs still languishing in contraction territory) and the US is in an industrial slowdown. The market is making its views of this well known, with the US 10 year Treasury yield back below 2.000% again and testing the August/October lows at 1.950%. Far from looking towards the FOMC’s apparent preferred four rate hikes I 2016, the Fed Funds Futures markets is struggling to price in just the one! The interest rates futures signal shows that December is now the first meeting where a rate hike is considered as above 50% (i.e. probable). Although the markets do tend to go a bit far sometimes, this is still a significant signal.
  • With this in mind, this week’s data becomes crucial. The service sector PMIs are always important but for the US and China this is especially so as the manufacturing PMIs have been so weak. If the services PMIs also disappoint then the appetite for risk and the oil price will take another dive. There is also the key Non-farm Payrolls report on Friday. Expectation is that payrolls will drop from 292,000 to 190,000 which would be a number deemed to be towards the lower limit of a solid report. However the average hourly earnings will also be watched. The employment cost index did not show any pick up in December 2015 and the core PCE was also flat at 1.4% yesterday, so inflationary forces still are yet to start rising. The average hourly earnings on Friday are also expected to confirm this. This would all suggest that Friday’s payrolls report is unlikely to do anything to push the Fed towards another rate hike in March.


  • Central Banks subsequently seem to be looking down towards further easing. Aside from the FOMC’s vice-chairman Stanley Fischer giving a rather dovish assessment yesterday, the Bank of Japan has just engaged negative interest rates. The ECB will be discussing further easing measures at its next meeting, The RBA is keeping the door open for further easing, whilst the SNB’s Jordon is also open to the use of the balance sheet if necessary believe that the Swiss Franc is still overvalued. Currency wars seem to be back in focus again. Furthermore, the manufacturing PMI data for both the UK and US showed that exports are suffering as a result of their stronger currencies. It is not in the interest of the Bank of England to sound hawkish with the Quarterly Inflation Report on Thursday.
  • So, does this mean that we will see a return to the dichotomy in trading the forex majors?  Will the safe haven plays (yen especially but also the euro) be preferred during the negative sentiment days, at the expense of the underperforming commodity currencies (Aussie, Kiwi and Loonie)? Sterling is stuck in the middle and is in a volatile consolidation of late, but as I said just now, be careful for a dovish outlook from Mark Carney on Thursday alluding to something that puts a UK rate hike to bed at least until next year.
  • The relative higher risk play in equities also means that the bears will target FTSE 100 (on any negativity over oil) and the DAX (any negativity over China).  US earnings season seems to be running along the usual theme, with just over 70% beating on earnings estimates but 50% beating on revenues. The S&P 500 earnings are only expected to decline by -5.8% (although this improves to growth of +0.5% when Energy is excluded). This is not the performance of a country exuding strong growth.
  • Watch for: China services PMI, ISM Non-manufacturing PMI, Non-farm Payrolls



EUR/USD – Remains stuck in the range $1.0800/$1.0990      

  • Although volatility may be elevated this week with a slew of tier one data, the euro generally remains supported by the safe haven flows arising from a weaker oil price.
  • Play the range between $1.0800/$1.0990. With volatility continuing to decline (ever tightening Bollinger Bands) the coiled spring is tightening, however for now there is no sign of a breakout. There is a very marginal bearish bias still.
  • Watch for: China services PMI, ISM Non-manufacturing PMI, Non-farm Payrolls

GBP/USD – Volatile recovery is underway although a dovish Carney could put the skids under the bounce

  • A positive beat on UK Manufacturing is encouraging but concerns over exports suggests a strong pound is still hurting growth, could Mark Carney take account if this in the Quarterly Inflation Report presser? Any dovish hints that push out rate hike expectations (that are now around Q2 2017) will hit Sterling. The raft of tier one US data will also impact so it could be a volatile week for Cable.
  • Even before the raft of data the volatility has been high on Cable, with wild swings on a daily basis. The net impact is so far positive as the sell-off is retraced, but there is still a feeling that this is just a rally that will be sold into. Next resistance around $1.4500.
  • Watch for: UK services PMI, ISM Non-manufacturing PMI, BoE QIR, Non-farm Payrolls

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

  • Negative rates from the BoJ is the latest move to try and weaken the yen, something which has added over 200 pips. But the yen is still a safe haven and any decline in the oil price could see increased demand for the yen again and retrace some of the move. Volatility should continue throughout the week with a slew of key data releases.
  • The market is still settling but the overstretched near term position could see a technical retracement, with the spike high lending resistance at 121.68. Supports come in at 120 and 119.
  • Watch for: China services PMI, ISM Non-manufacturing PMI, Non-farm Payrolls

Gold – The uptrend channel continues to pull gold higher

  • There seems to be less of a correlation between safe haven flows and gold for now as gold continued to rally despite an improvement in market risk last week, and also has not been sold off as risk appetite has waned once more.
  • Technicals remain bullish for the continuation of the uptrend channel (the bottom of the channel is currently around $1116). A bounce towards an old floor at $1142 is possible. The key support band is in at $1110 now.
  • Watch for: China services PMI, ISM Non-manufacturing PMI, Non-farm Payrolls

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

  • OPEC’s oil production continues to climb (up from 32.38m barrels per day in December to 32.42m in January) both of which are well above previous production limits of 31.5m, so there is no sign of any slowdown in production yet. With no sign of any production limit agreement with Russia the fundamentals for oil remain very weak and sentiment is once more under pressure.
  • A correction back to the psychological is on and a loss of the support at $29.25 would re-open the $26.20 low on WTI. The technical are deteriorating now with momentum signals turning bearish again. Volatility remains high and resistance is now at $34.80.
  • Watch for: China services PMI, ISM Non-manufacturing PMI, Non-farm Payrolls

Indices – The oil price remains the key driver of equity markets   

  • S&P 500 – A rebound to 1950 resistance seems to be hitting the ceiling again and the bears could take this as another opportunity. With momentum indicators unwound the downside potential has been renewed and this would be a bearish sign. Key near term support at 1872 protects the 1812 spike low.
  • DAX Xetra – The DAX will be volatile to the China data in the coming days, and on a technical basis, if the market closes below support at 9600 it would be very bearish once more and could quickly induce a move back to the lows at 9325.
  • FTSE 100 – Bear market rallies tend to undershoot their targets and with FTSE adding around 450 points from the low the rally seems to have fallen over again. This is a real concern for the bulls and having unwound momentum to renew downside potential the outlook is a real concern again.



Tuesday 2nd February

  • New Zealand – Unemployment

Wednesday 3rd February

  • China – Services PMI
  • Eurozone – Services PMI
  • UK – Services PMI
  • US – ADP Employment report
  • US – ISM Non-Manufacturing PMI
  • US – Crude Oil inventories

Thursday 4th February

  • UK – Bank of England monetary policy + minutes and Quarterly Inflation Report
  • US – Weekly Jobless Claims
  • US – Factory Orders

Friday 5th February

  • US – Non-farm Payrolls
  • US – Average Hourly Earnings and Unemployment



Monday 8th February

  • China – Trade Balance
  • China – Bank Holiday all week

Tuesday 9th February

  • UK – Trade Balance
  • 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)