The Fed minutes for the December meeting have thrown a cat amongst the pigeons. A key hawkish surprise (the potential for balance sheet reduction sooner than previously thought) has driven bond yields sharply higher. This has caused key selling pressure on the NASDAQ and S&P 500., with a knock-on impact seen in European markets this morning. A risk negative bias to trading across markets is seen, with the US dollar and (even more so) the Japanese yen outperforming major forex. Commodities are also falling sharply. The higher that bond yields go, the more that this selling pressure will take hold. The economic calendar is packed with services PMIs today, with the US ISM data the highlight later.
- Main drivers: Market sentiment turns sour; Fed minutes hawkish; China Caixin Services PMI better than expected; no Fed speakers scheduled; Economic calendar: UK Services PMI, ISM Services
- Selling pressure increases: Bond yields are rising (US 10 years above 1.71% is a 10 month high). The sharp sell-off on bonds (rising yields) has significantly hit Wall Street indices, with a big risk negative move across major markets.
- China Caixin Services PMI beat forecast: the unofficial service sector survey improves to 53.1 (from 52.1 last month). The Caixin Composite PMI also increased to 53.0 (from 51.2) [Risk supportive]
- FOMC minutes hawkish: There were two key takeaways from the minutes of the December meeting. Firstly that rates lift-off could be sooner and faster than previously thought (this is already known). However, the surprise was that the Fed balance sheet could be reduced “relatively soon” following the beginning of the rate hikes. This was a hawkish surprise [Risk negative, USD supportive]
- Suggestions that the Bank of Japan could raise its inflation forecast: Sources in Japan suggest that the 2022 FY forecast for CPI could be increased from +0.9% to over +1%. The Japanese 10-year JGB yield has jumped this morning.
- Central bank speakers: there are no Fed speakers scheduled today
- Economic Data:
- UK Services PMI (final) at 0930GMT. The forecast is for no change from the December flash reading of 53.2 (final November was 58.5). This would leave the final Composite PMI at 53.2 (down from the final November reading of 57.6).
- German inflation at 1300GMT. Inflation for December in the Eurozone’s largest economy is expected to drop slightly to 51.1% (from 5.2% in November).
- ISM Services at 1500GMT is expected to fall to 66.9 (from 69.1 in November). As with the manufacturing data we are also looking for the change in services prices paid too.
Broad outlook: The caution that had been growing through markets yesterday morning has been driven towards negative risk sentiment dominating major markets.
- Forex: Big risk negative bias. The US dollar and the safe-haven Japanese yen is the big outperformer today. The AUD and NZD are sharply lower, with GBP and CAD also weaker.
- EUR/USD after rising yesterday has again fallen back into the middle of the trading range once more. We remain very neutral on the pair and 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. 1.1438 today.
- GBP/USD recovery has been hit as the market has fallen sharply back from just shy of 1.3600. The recovery uptrend has now been broken and the key focus turns to the higher reaction low at 1.3430. The near term outlook is in a state of change and whilst the volatility remains high, we have our outlook under review.
- AUD/USD has broken the recovery uptrend. Losing support at 0.7170/0.7185 with the significant increase in selling pressure has changed the outlook. This band now becomes a basis of resistance overhead. The market now looks on course to test the 0.7080 key higher low.
- Commodities: sharp selling pressure on precious metals, but oil is holding up well.
- Gold recovery has been seriously questioned as a sharp turn lower from $1830 has broken back under $1800 this morning. A close below $1800 would confirm the deterioration and suggest the recovery is over, for now. Key support is then at $1785/$1789 and a break would re-open $1750/$1760.
- Silver with an alarming decline the recovery is now over. A move below $22.17 support would be the next domino to fall and re-open the crucial support at $21.40 again. Initial resistance $22.60/$22.70.
- Brent Crude oil has ridden out the storm so far and is performing well. Momentum is set up for buying into weakness and pressure on towards the next resistance at $82.80. Support is growing at $79.60/$80.20. Initial resistance at yesterday’s high of $81.62.
Indices: selling pressure on Wall Street has continued into European markets this morning, although they are off their session lows.
- S&P 500 futures have fallen sharply below the support band 4711/4742 which is now a basis of resistance for intraday recoveries. There has been a very minor sense of support forming at 4668 but there is no real suggestion that the bulls are in any condition yet to mount a recovery. Next support 4620/4645.
- DAX has sold off from a test of the 16,301 all-time high. A shooting star (negative one-day candlestick pattern) now dominates the daily chart. However, the market has picked up off earlier session lows at 15,965 and important support at 15,800/15,870 is intact.
- FTSE 100 has pulled back from 7540 with the Wall Street decline, but the reaction today has been encouraging. Using the breakout support band at 7365/7401, the market has already rebounded strongly intraday. FTSE 100 retains a positive outlook if the volatility begins to subside.