06/01/2015: Weekly Trading Notes

KEY DRIVERS

  • The oil price decline has been driving sentiment again today.
  • Investor “fear” spiking with index volatility gauges remaining elevated (VIX Index above 20 again). This is also driving investors into safe havens such as Treasuries (US 10 year yield is now falling back towards 2.00% again) and the Japanese yen. The US yield curve has flattened significantly in recent days which shows the extent of the investor concern.
  • Draghi continues to talk up the use of QE. Speculation will go into overdrive next week if the European Court of Justice decides the ECB’s European Stability Mechanism (ESM) not illegal. The inflation data for Germany indicated that Eurozone CPI could continue to fall further from last month’s 0.3%. Consensus expects it to be 0.0% and on the cusp of technical deflation.
  • The snap election in Greece on 25th January could return Syriza (anti-austerity party) to power. The European politicians and economists have been quick to note that the Eurozone is much more stable now than it was 2 years ago (bank balance sheets significantly better shape) and a “Grexit” would not impact too significantly.
  • Non-farm Payrolls will begin to dominate as the week goes on. The US economic recovery has been the one guiding light and if Payrolls and also average hourly earnings remain positive this could help to settle nerves.
  • Watch for: Eurozone CPI, Non-farm Payrolls

Volatility

MARKETS

EUR/USD – Outlook remains negative, sell into strength 

  • The prospect of ECB QE and political turmoil in Greece is keeping the pressure on the euro. This is likely to remain in place at least until 22nd January (when the ECB next meets), whilst the Greek elections on 25th Jan will also have an impact. Expect volatility to build in the run up.
  • A breach of $1.2000 was a key psychological move, and as I write this the crucial June 2010 low at $1.1875 is hanging on by a thread. Breaking that low would open $1.1640 (Nov 2005 low), but the breaching of such a massive floor in the price could prove to be a key blow.
  • Watch for: Eurozone CPI, Non-farm Payrolls

GBP/USD – No let up to the selling as $1.4810 looms large

  • Selling pressure remains strong and the disappointing Services PMI for the UK has been a crucial factor in this continuing today. This now puts pressure on expectations for UK GDP growth and suggests that the UK economic recovery is not as strong as previously thought. It also all but guarantees that the Bank of England will not move on rates this month and this would also help to fuel sterling selling.
  • Cable continues to fall and a breach of minor support at $1.5100 would now open $1.4810 which is the July 2013 crucial low. Technical outlook is extremely weak with momentum very bearish.  Use any rallies as a chance to sell. Big downtrend resistance for a technical rally comes in at $1.5550.
  • Watch for: Bank of England monetary policy and Non-farm Payrolls

USD/JPY – Flight to safety driving the pair lower but should be another chance to buy ultimately

  • The big flight into safe haven assets in recent days has driven appetite for the yen and dragged Dollar/Yen lower.
  • A close below 118.84 would confirm a near term correction is on. Momentum indicators remain broadly in bullish configuration but suggest a near term correction is looming. However there is good support 117.50/118.00 which could be around where the medium term bulls start to support again.
  • The longer the desire for safe haven assets goes on the lower Dollar/Yen will move.
  • Watch for: Signs of an improvement in risk appetite, Non-farm Payrolls

 

Gold – Key moment as the big downtrend is tested again

  • Gold has benefitted from the safe haven asset flows of the past few days. This has allowed the yellow metal to string 3 positive trading days together which is the first time this has happened since early October.
  • The big downtrend is being tested (currently around $1216). Momentum indicators are beginning to improve slightly and the bulls will be growing in confidence after breaching resistance at $1212.80. The big near term resistances are at $1238.20 and the crucial October high at $1255.
  • Watch for: Risk sentiment remaining weak will help to drive gold higher, Non-farm Payrolls

 

Indices – Indices remain under pressure with the oil price tending to drive sentiment

The indices are becoming increasingly choppy and trading as if range-bound. The volatility indices (such as the VIX) are crucial aspects to the sentiment. Volatility remaining elevated does not bode well for equity markets pushing consistently higher.

  • S&P 500 is holding on to the old key breakout level at 2019. This is the top of a support band 1973/2019.
  • DAX looks corrective again despite the rebound today. Key support needs to hold at 9150.
  • FTSE 100 remains bogged down by energy plays. Technical momentum sell signals will not help sentiment.

 

WATCH OUT FOR THIS WEEK

Wednesday 7th January

  • Eurozone – CPI Inflation
  • US – ADP Employment
  • US – Trade Balance
  • US – FOMC meeting minutes

Thursday 8th January

  • UK – Bank of England monetary policy
  • US – Weekly Jobless Claims

Friday 9th January

  • China – CPI Inflation
  • UK – Manufacturing Production
  • US – Non-farm Payrolls
  • US – Unemployment
  • US – Average Hourly Earnings

NEXT WEEK

Tuesday 13th January

  • UK – CPI Inflation

Wednesday 14th January

  • Eurozone – European Court of Justice ruling on the legality of the ESM
  • US – Retail Sales

Thursday 15th January

  • Australia – Unemployment
  • US – Weekly Jobless Claims
  • US – PPI Inflation
  • US – Philly Fed Manufacturing Index

Friday 16th January

  • Eurozone – CPI (final)
  • US – CPI
  • US – University of Michigan Consumer Sentiment (prelim)

 

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