27/01/2015: Weekly Trading Notes

KEY DRIVERS

  • The ECB QE and Greece have been top of the list of drivers for markets, however now attention will turn towards the US again with the Fed announcing monetary policy and also US growth data. There will also be a n eye on the key forward looking PMI data next Monday
  • The oil price has looked to stabilise in the past two weeks. This remains a tentative support but for now it is holding. This has helped volatility in general market sentiment to calm down. and for now
  • ECB QE should help to maintain positive European equities sentiment in the medium/long term, but near term there is the prospect of a technical correction.
  • ECB QE has been the main driver behind equities positivity as most other factors are relatively negative. S&P cutting rating on Russia to negative highlights the difficulties the country still faces. US earnings season is rather lacklustre  so far, the impact of falling oil, the UK growth data has disappointed. There are a number of reasons to induce a bout of profit-taking.
  • The US dollar has pushed significantly higher in recent weeks, but looks rather stretched and has corrected in front of the FOMC. However I would expect the FOMC to do very little in terms of changes to the statement in tomorrow’s release. With the Fed effectively now last man standing in terms of monetary tightening  I  see further dollar strength on tomorrow’s meeting.
  • Watch for: the FOMC monetary policy, US growth data and the forward looking PMIs

Yellen

MARKETS

EUR/USD – Outlook remains negative, sell into strength 

  • ECB QE should continue to drive euro weakness in due course. The inflation data for both Germany and the Eurozone is expected to continue to decline this week, whilst I would anticipate that the FOMC stands pat and changes little if anything to the statement. The only concern is that there is a short squeeze as traders cover short positions. However in light of the likely further downside, expect the short covering rally to be short-lived.
  • A near term technical rally has set in which could drag the euro higher towards $1.1460 however the rallies will be eyed as little more than another chance to sell.  This is helping to unwind overstreched momentum indicators.
  • Watch for: FOMC, German CPI, Eurozone CPI, US GDP

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

  • Weak UK CPI and a miss on the UK GDP does not bode well for rate hikes, nor does the recent news that the 2 hawks on the MPC have upped sticks and headed for the hills. The FOMC will be key on Wednesday night, if the Fed stands pat then the dollar strength could resume.
  • A sharp 2 day rally has simply unwound the stretched outlook. Interestingly the 21 day moving average c. $1.5200 is the basis of resistance still. The bear market rally is in process but the divergence of monetary policy should continue to dive further downside and retest the $1.4810 low.
  • Watch for: FOMC, US GDP

USD/JPY – Neutral outlook with the pair stuck in a near term band 117.20/119

  • The unwinding of the dollar strength has pulled the pair lower, but there should be a stabilising in front of the FOMC, which I would then expect to drive subsequent dollar strength. Any deterioration of risk appetite could also be a drag on Dollar/Yen
  • Neutral across the board on technical indicators. Playing the hourly RSI is a way to trade the near term range 117.20/119. A decisive break either way would be a key near term move.
  • Watch for: FOMC, US GDP

 

Gold – Look to buy into corrections towards $1255 now

  • Gold appears to have been able to rally alongside the dollar which is an odd scenario as there is usually a fairly strongly negative correlation, it will be interesting to see how long this counter-correlation move lasts for.
  • The break above $1255 was a key medium term move and although the price has become a touch stretched which has led to a correction threatening any move back towards $1255 would be seen as a medium term buying opportunity.
  • Watch for: Possible profit talking on FOMC

 

Indices – Indices remain extremely volatile

Indices are moving on a variety of different factors. The S&P is being held back by a disappointing start to earnings season. The DAX is moving on the QE story (but has seen some overbought profit-taking). Volatility has tended to calm down as the oil price has settled in the past couple of weeks, but if oil breaks lower again it could quickly spike again.

  • S&P 500 outlook remains strong above 2000, but the medium term outlook is increasingly choppy. Needs an improvement in earnings season to help drive a breakout above 2094.
  • DAX breakout on QE has implied a target of 10,957 but an overbought correction has set in. The initial support comes in around 10,454.
  • FTSE 100 continues to struggle with vertigo as it approaches 6905. The RSI also struggles around mid-60s too. The support band 6753/6773 is being tested and a breach would open 6651.

 

WATCH OUT FOR THIS WEEK

Wednesday 27th January

  • Australia – CPI
  • US – FOMC monetary policy
  • New Zealand – RBNZ monetary policy

Thursday 15th January

  • Eurozone – German flash CPI
  • US – Weekly Jobless Claims
  • US – Pending Home Sale
  • Japan – CPI

Friday 16th January

  • Eurozone – CPI (flash)
  • Canada – GDP
  • US – GDP (Q4 2014 Advance)
  • US – University of Michigan Consumer Sentiment (revised)

 

NEXT WEEK

Monday 2nd February

  • China – HSBC Manufacturing PMI
  • Eurozone – Manufacturing PMI
  • UK – Manufacturing PMI
  • US – ISM Manufacturing PMI

Tuesday 3rd February

  • Australia – RBA monetary policy
  • UK – Construction PMI

Wednesday 4th February

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

Thursday 5th February

  • UK – Bank of England monetary policy
  • US – Trade Balance

Friday 6th February

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

 

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