Last updated: May 3rd, 2017 at 09:58 pm
- Trading sentiment remains on a knife edge as volatility in the oil price throws markets around and safe haven flows fluctuate even on an intraday basis. The nervousness surrounding the direction of the oil price is difficult to get a control of, however, in markets such as these trader will often find that erring on the side of caution is taken as the safe way to be positioned. Hence why the safe haven plays such as Treasuries and gold continue to make choppy gains. Oil and the FOMC are crucial for the direction of markets this week.
- Markets continue to be thrown around by the volatility in oil. With such extreme moves continuing and huge swings even on an intraday basis, it is difficult to gauge what is going to be the serious trend now. A 25% short covering rally on oil saw some serious retracement on Monday, only for the volatile uncertainty to resume on Tuesday. This is all indicative of serious market uncertainty whether to cover short positions or to continue selling. This volatility is likely to continue with newsflow surrounding a possible OPEC emergency meeting continuing to churn the rumour mill. Furthermore, the market has the FOMC (and to a lesser extent the BoJ) to factor in, so it is likely to remain a hectic week.
- The FOMC decision on Wednesday will not contain a rate hike (no committee projections and no press conference), but the statement will be crucial. Given the market turmoil/volatility, and concerns over China that drove the FOMC to sit on its hands in September, the statement may point towards that again (something that could result in a further reduction in the Fed Funds futures. CME Fed Watch puts the chances of a March hike at less than 30% now and the June meeting is in the balance. Another dovish lean could take some of the steam out of the dollar rally. A strengthening dollar is deflationary and negative for GDP, something that the Fed is looking to avoid. The market continues to seriously question the Fed’s ability to hike rates 4 times in 2016. (The meme of Yellen below is an old one, but could it be once more quite apt?)
- There are also two other central banks set to announce monetary policy this week. The Reserve Bank of New Zealand cut rates to 2.5% in December and held a dovish bias in rhetoric. The outlook since then has been rather mixed with inflation remaining weak but signs of improvement in growth, but the RBNZ is expected to hold off from further cuts as it looks to assess the impact of the move in December. The Bank of Japan on the other hand will be looking at the recent drop in Dollar/Yen with some concern. Again there is no change expected by the market but there could easily be dovish hints designed to weaken the yen.
- China has been out of the headlines in recent days as the PBoC setting of the yuan mid-point has been far more stable. However, China is intent on a yuan depreciation and this is likely to be a short term stability. If the PBoC sees some market stability, it could use the opportunity to begin devaluing the yuan again. This would again ramp up pressure on emerging markets and help to drive safe haven flows once more.
- So in forex markets we continue to see the battle lines split between currencies deemed to be more at the safer haven end of the spectrum (primarily the yen and the euro) and those more of higher risk (commodity currencies such as the Aussie and Kiwi). Sterling is also under pressure as Mark Carney, Governor of the Bank of England, noting that the conditions for a rate hike are not in place yet. Expectation for a UK rate hike have been pushed back to 2017 now and this has weighed on Sterling. The UK GDP announcement on Thursday is unlikely to help sentiment either.
- Equity markets being a higher risk play have been especially susceptible to the volatility surrounding oil. The nascent earnings season in the US has barely been able to register currently, but once more we are looking for signs of the performance of the top line and also outlook statements talking about the impact of the stronger dollar. The traditionally massaged forecasts are running along consistent lines of around 70% companies beating on earnings expectations but only around 50% beating on revenues. Equity traders need somewhere else to focus on other than the impact of the oil price, and so far earnings season is underwhelming. Perhaps the Apple numbers will help?
- Watch for: FOMC monetary policy, BoJ monetary policy, US GDP
EUR/USD – Watch for a confirmed break of either support at $1.0810 to open $1.0710
- The jawboning of Mario Draghi has put the euro on the back foot and coming into the FOMC announcement the dollar is holding a slight bullish bias. However if the Fed factors the market turmoil into the statement then the market will take this as a dovish hint that there may not be a hike in March and the dollar could correct again. Eurozone flash CPI will add to the volatility on Friday
- The lower highs and lower lows of the past couple of months continues, with the euro pressurising the old floor around $1.0810. Although intraday moves have breached the support there is still no confirmation yet, the pressure is on. A breach of the key floor means that the January low at $1.0710 will be retested
- Watch for: FOMC monetary policy, Eurozone flash CPI, US GDP
GBP/USD – Continue to sell into strength
- Dovish rhetoric from BoE’s Carney will continue to keep sterling from a recovery, and only a dovish Fed is likely to induce a rebound on Cable now. Growth from both UK and US will add to the volatility.
- The downtrend continues and the recent technical rebound has again been sold into. The resistance is now strengthening at $1.4350 and there is no sign yet that a rally would be seriously bought into other than a short covering move.
- Watch for: FOMC monetary policy, UK GDP, US GDP
USD/JPY – The floor at 116.46 now needs to hold to prevent 115.50
- The pair is likely to remain volatile, with both central banks reporting and US growth data on the agenda this week. The deterioration in oil drives a stronger yen, so oil has to also be watched.
- The crucial floor of the August low at 116.46 has held up again three tests in the past seven sessions. The latest move comes with an improvement in momentum. A break above 118.35 would once more be important, with confirmation of a recovery coming with a close above 118.75.
- Watch for: Oil price, FOMC monetary policy, BoJ monetary policy, US GDP
Gold – Closing above $1112 implies bull control and drives buying into weakness
- Can the safe haven flows continue to pull gold higher? It seems that the fate of the oil price is again key for the direction of gold.
- A breakout to an 11 week high on gold needs to hold, however the longer the safe haven sentiment continues the longer gold will retain its sequence of higher lows which are netting gains for the precious metal.
- Watch for: Oil price moves, FOMC monetary policy, BoJ monetary policy, US GDP
Oil – A close back above $30 would help confidence
- Will there be an emergency OPEC meeting? It seems that it is unlikely, with Iraqi officials noting a meeting as unlikely given the absence of any production agreements. The oil inventories in the US have driven significant volatility in recent weeks.
- The short covering rally has left a legacy of huge volatility which is still yet to settle down. The threat of another sharp sell-off has been averted for now with an intraday rally back above $30 but this is a key psychological level that needs to be held on to. The technical outlook remains selling into strength and there needs to be a move above $32.80 to break this outlook.
- Watch for: China news and the FOMC
Indices – Question marks still remain over these technical rallies
- S&P 500 – Amidst the volatility and sharp moves higher and lower on the S&P the outlook remains under pressure and rallies are still a selling opportunity. Apple earnings could drive a much needed improvement, however a move above 1950 is needed to suggest the bulls are serious about a recovery.
- DAX Xetra – The DAX is still struggling to break above the resistance of the old key supports with the short covering rally falling over at 9838. However, all rallies will be considered to be just unwinding the bear market for a while. Having said that though a move above the reaction high at 10,164 would improve near to medium term sentiment.
- FTSE 100 – Although I know that sentiment continues to be driven by oil, the optimist in me looks at recent trading and notes that the old 5768 key support is now playing a key role as a pivot. Could the market be close to a reversal pattern? Above 5930 completes a head and shoulders bottom and would imply 6190.
WATCH OUT FOR THIS WEEK
Tuesday 26th January
- US – Case Shiller House Price Index
- US – Consumer Confidence
- US – Richmond Fed manufacturing
Wednesday 27th January
- Australia – CPI
- US – New Home Sales
- US Crude Oil Inventories
- US – FOMC monetary policy
- New Zealand – RBNZ monetary policy
Thursday 28th January
- UK – GDP (Q4 preliminary)
- US – Durable Goods Orders
- US – Weekly Jobless Claims
- US – Pending Home Sales
- Japan – CPI
Friday 29th January
- Japan – BoJ monetary policy
- Eurozone – Flash CPI
- Canada – GDP
- US – GDP (Q4 Advance)
- US – Michigan Sentiment (revised)
Monday 1st February
- China – Manufacturing PMI
- Eurozone – Manufacturing PMI
- UK – Manufacturing PMI
- US – ISM Manufacturing PMI
Tuesday 2nd February
- Australia – Reserve Bank of Australia monetary policy
- 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