13/01/2015: Weekly Trading Notes

KEY DRIVERS

  • The oil price decline has been impacting sentiment driving flows into safer haven assets (ie. US Treasuries, yen and gold). There is no sign of support yet for the price of oil with the supply glut continuing, but also consistent signals of demand issues too.
  • Volatility indices also remain elevated with equity markets spiking around on a daily basis (see strong moves on DAX and S&P 500).
  • Talk of QE continues, with a possible implementation of QE done through a country’s contribution of capital into the ECB. (eg. Germany pays in 17.9% of the total contributions and France contributes 14.2% into the ECB, while Cyprus pays in 0.15%). This would determine the proportion of sovereign debt the ECB purchases.
  • We still await the European Court of Justice decision on the legality of the ECB’s European Stability Mechanism (ESM). Wednesday’s announcement will not be the final ruling but the market will look for any opinion that could dent the prospect of QE
  • Disinflation and deflation continues to dog market sentiment
  • In Greece, before the election on 25th January, Syriza (anti-austerity party) leads by 3 points in the polls, on 30% versus New Democracy on 27%.
  • Watch for: the ECJ ruling, final Eurozone CPI and US CPI

Volatility sign

MARKETS

EUR/USD – Outlook remains negative, sell into strength 

  • The prospect of ECB QE and political turmoil in Greece continues to keep the euro anchored at multi year lows. The ECJ news could remove another hurdle in the way of implementing QE this week but the ECB meeting next week is going to become the big focus with the prospect of further easing. The Greek elections on 25th Jan also loom on the horizon.
  • A failure to break back above $1.1875 which was the old critical floor is telling as the Euro remains under pressure. A technical rally appears to have already run out of steam and the bears look ready to move back in again. Below $1.1750 opens a retest of $1.1640 seems likely but also further downside in due course.
  • Watch for: News from the ECJ, final Eurozone CPI, US CPI

GBP/USD – Resistance at $1.5200 holding back a technical rally

  • An extremely weak UK CPI reading (at +0.5% versus +0.7% expected) shows the disinflationary pressure is still prevalent. Mark Carney is trying to maintain talk of rate normalisation. Watch out for the US inflation data on Thursday (PPI) and Friday (CPI) as a disappointing reading in the States could drive further volatility.
  • Cable reacted well to the inflation data as the dust settled, but there is considerable resistance around $1.5200 near term. A consistent failure to breach this could result in the bulls tiring and further selling pressure. Key support remains around $1.5030, but I expect this to be breached and a test of $1.4810 key low in due course.
  • Watch for: US PPI and US CPI

USD/JPY – A near term correction would still represent a medium term chance to buy

  • A resumption of the flight into safe haven assets has ensured demand for the yen. General risk appetite is being depicted in the Dollar/Yen pair.
  • A sequence of lower highs (latest at 119.30) shows a corrective outlook near term. The question is where the correction will get to for the medium term buying opportunity. My impression is that risk appetite is still fairly cautious and this could help to pull Dollar/Yen lower towards 117/117.50 support area.
  • If risk appetite improves then Dollar/Yen will pick up.
  • Watch for: Signs of an improvement in risk appetite, US CPI

 

Gold – A change of outlook and looking to buy into corrections now

  • Gold has benefitted from the safe haven asset flows – but it is also beginning to decouple from the negative correlation with the US dollar.
  • This means that the long term downtrend in place since October 2012 has been broken. Also resistance at $1238.20 has been breached. The absolute confirmation of a positive medium term outlook would come on a move above $1255.20 which is the key October high. There is support in the band $1280/$1230 near term. Key support is now at $1204.50.
  • Watch for: Risk sentiment remaining weak will help to drive gold higher

 

Indices – Indices remain extremely volatile

Indices are anything but settled at the moment, with sharp moves in both directions. The onset of earnings season could give Wall Street a lift, whilst the DAX traders will look towards the ECB for monetary easing support. FTSE is still a big laggard due to its weighting in oil majors.

  • S&P 500 has posted a higher low at 1992 now and with bullish technical configuration could be set for a retest of the high at 2094 again.
  • DAX has broken out of a near/medium term triangle and is now on for a retest of the all-time high at 10093. Talk of QE will continue to fuel the fire for the bulls.
  • FTSE 100 remains bogged down by the weighting of oil majors and mining stocks. Technically the triangle remains intact so consolidation continues..

 

WATCH OUT FOR THIS WEEK

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)

 

NEXT WEEK

Tuesday 20th January

  • China – GDP    
  • Eurozone – German ZEW Economic Sentiment
  • New Zealand – CPI

Wednesday 21st January

  • Japan – Monetary Policy + BoJ press conference
  • UK – Unemployment and average earnings
  • UK – Bank of England meeting minutes
  • US – Building Permits
  • Canada – BoC monetary policy

Thursday 22nd January

  • Eurozone – ECB monetary policy & press conference
  • US – Weekly Jobless Claims

Friday 23rd January

  • China – Flash Manufacturing PMI
  • Eurozone – Flash Manufacturing PMI
  • US – Flash Manufacturing PMI
  • US – Existing Home Sales

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