The focus is once more back on the pace and direction of US bond yields. Yields started moving higher again on Friday and after Monday’s US public holiday they have jumped higher once more today. This is hitting risk appetite across the board, with the high growth, tech-heavy NASDAQ under mounting pressure. There is a degree of USD support but the focus is more on the underperformance of the pro-cyclical Aussie and Kiwi currencies. We are also seeing oil breaking to new multi-year highs after a series of terrorist attacks on targets in the middle east arising from the conflict in Yemen.
The Bank of Japan has signaled no change to policy whilst UK unemployment has been marginally better than expected. The German ZEW and New York Fed manufacturing are on the calendar later.
Main drivers: Markets has turned sour again; US bond yields spike higher again; BoJ reaffirms dovish stance; UK unemployment slightly lower than expected; Oil breaks out; Economic calendar: German ZEW;
Sentiment turns negative: US bond yields are spiking higher once more. This is causing high growth equities (NASDAQ especially) to come under selling pressure again. Value stocks are outperforming. Higher yields and risk aversion are hitting higher risk forex, with AUD and NZD underperforming. CAD is outperforming on stronger oil.
US bond yields jumping higher again: Yields spiked higher on Friday and have continued higher again today. The 10-year yield decisively above 1.80% is at a two year high. [Risk negative, USD supported]
Bank of Japan remains dovish: It is no great surprise that the BoJ has maintained the rate at -0.1% and a 10-year yield target of 0%. However, it expects rates to remain at current or lower levels. This is a dovish surprise if anything as there had been reports of the BoJ potentially discussing how soon a rate increase could be seen. [JPY marginally negative]
Oil breaking out: Brent Crude Oil has broken out to its highest level since October 2014. The move is not only due to technical factors, but also on newsflow too, with oil facilities in UAE hit by drone attacks from the Houthi in Yemen. There have also been threats of further attacks. WTI oil is yet to break above its equivalent resistance (of $85.41) [Oil strong]
Central Bank speak: No speakers scheduled for today
- German ZEW Economic Sentiment (at 1000GMT). January sentiment is expected to improve to 32.0 (from 29.9 in December)
- Empire State Manufacturing (at 1330GMT). The New York Fed’s manufacturing index is expected to fall to 25.7 in January (from 31.9 in December)
Broad outlook: A negative bias is evident mostly across major indices. Forex pairs are also showing a marginal USD positive bias within the risk-off sentiment.
Forex: Risk negative, with USD outperformance. The main movers are the underperforming AUD and NZD with the best performer being the CAD.
- EUR/USD has now pulled back to the breakout support around 1.1360/1.1385. This is an important moment as the bulls will be looking to build support around here. Building support and turning back higher would continue the recovery. Initial resistance at 1.1434 and then 1.1482 and then at 1.1525.
- GBP/USD has now retreated to break the uptrend (around 1.3650) however, support at 1.3570/1.3600 is key and is a prime buy zone now once support has formed. We look to use supported weakness as a chance to buy. Initial resistance around 1.3750 before the next key barrier of the October high of 1.3835.
- AUD/USD has retreated once more to test the old pivot band. Support is now around 0.7185. The outlook remains positive support now needs to form quickly to maintain this. The higher low at 0.7129 is key support. Resistance is growing at 0.7265/0.7315.
Commodities: precious metals tailing off back from resistance again, oil at multi-year highs.
- Gold has been consolidating under the resistance at $1830/$1832 but now is beginning to tail off again. Buyers have been consistently returning around $1821/$1815 near term, however, if this breaks then $1800 and perhaps a retreat to $1782 could be seen again. Momentum backs the continuation of the range.
- Silver is holding ground but under the key resistance at $23.25/$23.45. We are neutral whilst this resistance holds, but favour pressure on the resistance. Initial support at $22.60/$22.70.
- Brent Crude oil has broken to new highs not seen since 2014. Weakness continues to be bought into and there is little reason not to back continued buying pressure along with the five-week uptrend. Initial support at $85.60.
Indices: negative sentiment is hitting Wall Street especially (due to the high tech weighting). European markets are also being hit, with DAX feeling the pressure.
- S&P 500 futures negative sentiment is weighing on the market and the primary uptrend channel (of almost 15 months, currently at 4595) is now being seriously tested again. Initial support at 4604 with 4572 a key reaction low. Initial resistance at 4671 will grow in importance.
- DAX has fallen sharply this morning. A close below 15,800 would be a key negative signal, which would be confirmed on a move below 15,720. It would also mean that 15,800/15,870 becomes a basis of resistance too.
- FTSE 100 has joined other indices and fallen sharply this morning. It is now back into the support band 7513/7540. We wait to see how this move develops but this could be a chance to buy on the formation of support. Resistance at 7635 is growing.