Main market themes
- The US market ended the week on a soft note and global rates were lower, with traders worried about the escalation of the deadly Wuhan Coronavirus.
- Currency movements remained well contained, with JPY slightly outperforming alongside the USD on Friday night, however, we have witnessed a number of Sunday gaps in FX and equity market futures, as markets respond to growing concerns regarding the Coronavirus.
- Markets are focused on news around the deadly Coronavirus that began in China and is gradually spreading across Asia and with cases now being reported in the US, Europe and Australia. The number of cases is rising exponentially, with confirmed and suspected patients now well into the thousands and over 56 deaths. Travel restrictions were imposed in China ahead of the Lunar New Year celebrations and TV reports show empty shopping malls and streets.
- There will clearly be a significant economic impact, centred in China. A key question is the time it will take for the virus to be contained and one can only speculate at this stage. Commodity markets have been hardest hit, with copper prices down 6% last week and Brent crude down over 6% for the week, as traders price in a period of weaker demand.
- Even the seemingly bullet-proof US equity market got a taste of the action, with the S&P500 down 0.9% on Friday and down over 1% for the week, its largest weekly fall since August. US equities have been well overdue for some consolidation after its strong run, and the fear of a viral pandemic has provided a good excuse for some profit taking.
- With risk sentiment souring, global bonds were well bid on Friday, seeing European rates fall across the board and the US 10-year Treasury rate down 5bps to 1.68%, its lowest close in over three months. The concern about the virus outbreak dominated market movements and key economic data releases took a back seat.
- Flash PMI data for Germany was stronger than expected across both the manufacturing and services sectors, supporting the view that the worst is over for the country’s beleaguered manufacturing sector, paving the way for improved growth momentum across the economy. The improvement for the euro area was held back by soft data for France.
- The UK PMIs were even better, suggesting some recovery in growth that had been held back by uncertainty about Brexit and the general election. The US PMIs aren’t as closely followed, given the longer history of the ISM indicators, but the data show that other countries are catching up to the US in terms of economic performance, with US growth slowing at a time when other countries are showing improved growth momentum.
- EUR and GBP strength after the PMI releases proved temporary, with USD strength on the risk-off sentiment the winner on the day, accompanied by JPY strength. However, overall currency movements were well contained, with USD indices up less than 0.2% for the day.
- CFTC data for the week showed overall positioning in the USD improved after six successive weeks of (overall) long liquidation. Aggregated positioning in the major currencies reflected a build on USD longs of USD861mn to (a still relatively low) USD3.1bn. If the increase in exposure to the USD caught the market mood, the breakdown in positioning in the individual currencies suggests that speculative accounts have perhaps had a tough few days.
- Mark Carney holds his last MPC press conference as BoE Governor on Thursday at 12:30GMT, the day before the UK formally leaves the EU. He will explain what still appears to be a finely balanced monetary policy decision which will be announced at midday. Market probability attached to an interest rate cut to 0.5% (the same rate when Carney began as Governor) had reached as high as 76%, according to Bloomberg calculations, in the aftermath of last week’s monthly GDP, inflation and retail sales figures. But there has been a reassessment of risks last week, following firmer labour market and survey data. At the time of writing, the probability attached to a rate cut has fallen to just below 50%.
- The US Federal Reserve’s policy announcement (Wed) will probably engender far less ‘excitement’ than the BoE decision. FOMC members have said the economy is in a ‘good place’ following the three rate cuts last year. No policy change is expected this week. US Q4 GDP (Thurs) is expected to be broadly similar to Q3.
Today’s Options Expiries for 10AM New York Cut (notable size in bold)
- EURUSD: 1.0895 (EUR404mn); 1.1015 (EUR250mn); 1.1090 (EUR210mn)
- GBPUSD: 1.3100 (GBP218mn); 1.3155 (GBP243mn)
- USDJPY: 109.00 (USD805mn); 110.50 (USD289mn)
- AUDUSD: 0.6765 (AUD791mn)
EURUSD (Intraday bias: Bearish below 1.1065)
From a technical and trading perspective, as 1.1065 contains upside corrections look for a test of bids and stops below 1.10, a failure below 1.0980 will be a bearish development exposing the 1.0870’s autumn low. On the day only a close back above 1.1075 would suggest that the symmetry & equidistant swing support will stem the downside pressure.
GBPUSD (Intraday bias: Bearish below 1.31)
From a technical and trading perspective, Friday’s key day reversal pattern has yet to garner follow through selling pressure this morning, as such a retest of 1.31 as resistance seems likely, if this level caps upside attempts look for a breach of Fridays lows into New York trading setting up a test of bids towards 1.30 and stops below. On the day a close above 1.31 will likely frustrate fresh shorts leading to further consolidation ahead of Thursday asymmetric risk event.
USDJPY (intraday bias: Bearish below 109.60)
From a technical and trading perspective, as anticipated sentiment and momentum divergence has been addressed with the breach of 109.80/60 as this levels caps upside attempts now look for a move to test bids at 108.60 and stops below. On the day only a close back above 109.60 would suggest a potential Island Reversal pattern, trapping overnight shorts who sold into the gap lower.
AUDUSD (Intraday bias: Bearish below .68500)
From a technical and trading perspective, the overnight gap through the ascending trendline support suggests the potential for further downside to test equidistant swing support sited towards .6750 as long as .6850 caps upside attempts. On the day only a close above the pivotal .6850 would suggest a false downside break.
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