The very early 2022 theme that is forming through major markets is a reaction to higher bond yields. This can be especially seen in Wall Street, where higher growth tech stocks have come under pressure, amidst a switch into value stocks (such as financials). The big tech stocks dominate the S&P 500 weightings, so this means that there has been a slight drag back on S&P 500. This risk negative theme is also leaking into forex majors, where commodity currencies are underperforming. In the commodities space, the likes of silver and copper are also slightly weaker, whilst gold is holding ground. If bond yields continue to move higher, this theme could become more pronounced.
Traders will be looking out for the ADP employment change and the potential implications for Friday’s Nonfarm Payrolls report.
- Main drivers: Market sentiment turning more cautious; Wall Street switching growth for value; OPEC+ maintains production levels for Feb; no Fed speakers scheduled; Economic calendar: ADP jobs, FOMC minutes
- A slightly cautious early feel: Indices are looking ponderous this morning, with the commodity currencies (NZD, CAD) slightly underperforming major forex; silver underperforming commodities.
- Wall Street switching: The growth heavy NASDAQ fell, whilst the value-laden Dow rallied. Higher bond yields are driving the switch. This is slightly weighing down the S&P 500. [Mild risk negative]
- Covid measures: No significant changes to the UK or French policy on Covid restrictions are expected right now, but Japan could be ready to introduce emergency measures. [Risk uncertain]
- OPEC+ maintain production: No change to the 400,000 barrels per day monthly increase in February. [Oil neutral]
- Central bank speakers: there are no Fed speakers scheduled today
- Economic Data:
- ADP Employment at 1315GMT. The private payrolls company’s US employment change is expected to drop to +400,000 in December (down from 534,000 in November)
- US Market Composite PMI at 1445GMT. The December composite is expected to be unrevised at 56.9 with the services PMI also unrevised at 57.5.
- FOMC meeting minutes at 1900GMT.
Broad outlook: The positive risk bias of early yesterday has given way to caution since the US session yesterday. Watch for a further rise in bond yields for this caution to grow.
- Forex: Higher risk majors (NZD, CAD) are slightly underperforming, with the USD also looking a shade corrective into the European session.
- EUR/USD has ticked higher into the middle of its trading range again. We look to continue to play this range, with key support at 1.1185/1.1220, and key resistance coming in around 1.1360/1.1385. The big 7-month downtrend is falling at c. 1.1440 today.
- GBP/USD broke clear of 1.3350/1.3410 over Christmas and has used this as a base of support in the recovery within the seven-month downtrend (currently 1.3640). The bulls are now testing initial resistance 1.3550/1.3570.
- AUD/USD holding above 0.7170/0.7185 was important to sustain the recovery yesterday. The uptrend comes in as support at0.7182 now. The bulls will now be looking towards a break above 0.7275 resistance area to open the next leg of the recovery.
- Commodities: near term recoveries on precious metals still look uncertain; oil looking to break higher again.
- Gold support has formed around $1800 and a mild swing back higher has set in. There is a mild positive bias but moves continue to lack conviction. The bulls will be eyeing a retest of $1831, but breakouts are not holding, for now. Support at $1789 is now an important higher low.
- Silver a choppy recovery has stalled again this morning as the market threatens to develop a near term range between $22.55/$23.45. Momentum is increasingly neutralised too.
- Brent Crude oil is looking stronger again after two strong bullish candles have come above the support from the previous breakout at $77.20. This is now key medium-term pivot support. Momentum is set up for buying into weakness and pressure on towards the next resistance at $82.80.
Indices: positive momentum has stalled on Wall Street, whilst the recovery on European indices remains on track.
- S&P 500 futures rally is just stalling slightly. However, the bulls remain in control above the 4742/4747 support. A slight stalling is also beginning to weigh on momentum but this is something to keep an eye on rather than be overly concerned by, for now. Resistance at 4808.
- DAX is still finding buyers into intraday weakness and this bodes well for further gains to test the all-time high of 16,301 again. The importance of support at 15,800/15,870 is growing. Initial support at 15,990/16,070.
FTSE 100 has picked up well from 7473 support as the recovery continues. Momentum is strong but the RSI is nearing 70 now (previous rally peak levels). Support at 7365 is now an important higher low.