What we are looking for
- USD initial gains (JPY aside) have unwound: With risk appetite hit by the Bank of Japan, the USD was an initial mild outperformer on major forex (ignoring huge JPY strength). However, as the European session got going, the USD slid back.
- JPY strengthening significantly: The JPY has jumped overnight on the announcement from the BoJ to widen its yield curve control band. This has rippled through markets.
- Indices falter again: There is a risk-negative bias to market sentiment and indices are suffering. US futures are off earlier session lows but are still over -0.5% lower. European indices are showing further losses in early moves.
- Commodities are mixed: Precious metals are finding support this morning, with silver even outperforming gold slightly.
- Data traders: USD traders may get some volatility out of any significant surprises from Building Permits and Housing Starts. EUR traders will be watching Eurozone Consumer Confidence.
The Bank of Japan has shocked markets with a tweak to its yield curve control. It has widened the band reportedly in an attempt to breathe new life into a dormant bond market. Even though the BoJ has also increased its monthly purchases of Japanese Government Bonds (JGBs) to 9 trillion yen (from 7.3 trillion), the move has come as a surprise. It is seen as the first step towards normalisation, a testing of the waters. The 10-year JGB yield has spiked higher by 20 basis points to just under +0.50%.
The broad impact is to drive a negative bias to risk appetite. This means that outside of JPY strength, there is selling pressure on commodity currencies such as the AUD, NZD and to a slightly lesser extent the CAD. The main impact is seen through a further decline in equity markets this morning. The prospect of a Santa Claus rally looks ever more remote.
It is a day of US housing data and Eurozone confidence on the economic calendar. US Building Permits and US Housing Starts are both expected to have reduced by just under -2% in November. Eurozone Consumer Confidence is expected to have picked up slightly again, for the third straight month.
Market sentiment has soured again: Commodity currencies are falling and equity markets are selling off. The JPY is a massive outperformer.
Treasury yields have spiked higher: With the move from the BoJ, US Treasury yields have pulled decisively higher. The US 10-year yield spiked +13bps higher but has since moderated slightly.
Bank of Japan widens its yield curve control band: The BoJ has held its benchmark interest rates steady with the deposit rate at -0.10%. However, in a surprise move, it has modified the band used for its yield curve control. It has extended the band from plus/minus 0.25% to a new wider range of plus/minus 0.50%. According to the BoJ, the reason was to “improve market functioning and encourage a smoother formation of the entire yield curve”. The JPY has strengthened by over +2% overnight.
Interest rates held in China: The People’s Bank of China has held interest rates steady, with the 1 year Loan Prime Rate at 3.65% and the 5 year Loan Prime Rate at 4.30%. This was as expected.
Cryptocurrencies are volatile but higher: Cryptos have spiked around overnight, initially falling but have now recovered well. Bitcoin is +1.2% at $16790 with Ethereum +2.6% at $1206.
- US Building Permits (at 13:30 GMT) Permits are expected to have reduced to 1.483m in November (from 1.512m in October)
- US Housing Starts (at 13:30 GMT) Starts are forecast to fall to 1.400m in November (from 1.425m in October)
- Eurozone Consumer Confidence (at 15:00 GMT) Confidence is forecast to have improved slightly to -22.0 in December (from -23.9 in November)
Major markets outlook
Broad outlook: Markets are trading with a negative risk bias. Safe havens are performing better than higher-risk assets.
Forex: Everything is weaker against the soaring JPY. However, AUD and NZD are the main underperformers.
- EUR/USD has breached the five-week uptrend (a warning sign for the bulls) but is still holding on to the support of the previous breakout now around 1.0585/1.0595. Momentum remains positively configured with the daily RSI holding above the high-50s. Given the strength of momentum and the uptrend, until otherwise, we still look to use near-term weakness as a chance to buy. The importance of the support band 1.0450/1.0500 is growing. Resistance at 1.0735 ahead of the key May highs of 1.0785.
- GBP/USD has broken the six-week uptrend. However, now it will be the reaction to the first higher low of the recovery (at 1.2100) that will be key now. A brief intraday breach has not been held but will be a warning for the bulls. A decisive closing breakdown would turn the market decisively corrective, opening 1.1900 as the next key support. Recent days have seen intraday gains sold into with a run of negative daily candles. Initial resistance is 1.2240 under 1.2300. The reaction high at 1.2446 is now a key high.
- USD/JPY has ended two weeks of consolidation with a sharp downside break to four-month lows. The configuration of momentum remains negative, but the RSI is still only in the low 30s and has further downside potential. The previous supports between 133.60/134.50 are now a basis of overhead supply and resistance. The next support band of the August lows 130.40/131.70 are set to be tested.
Commodities: Precious metals have rebounded well once more, but oil is still looking vulnerable to selling pressure again.
- Gold has recovered well from selling pressure last week, picking up from $1773 in recent sessions. The move has progressed further this morning and is eyeing a test of the resistance between $1808/$1814 and then the recent rebound high of $1824. We see $1765 as the first key higher low of the recovery, whilst the rising 21-day moving average (c. $1777) is a good basis of support.
- Silver has rebounded well from the support of the old breakout band c. $22.00/$22.50. A “bull hammer” candle on Friday has helped to swing the market back higher and the move is accelerating higher today. With the RSI positively configured above 50, weakness remains a chance to buy. The move above initial resistance at $23.42 has re-opened the $24.12 high again.
- Brent Crude oil remains correctively configured within the six-week downtrend. With the bull failure faltering around the resistance of the old support band of $81.40/$83.55, along with the resistance of the falling 21-day moving average and the downtrend, we continue to see near-term gains as a chance to sell. A move below initial support at $78.50 could see the market re-opening the lows again at $75.50.
Indices: Equity markets remain corrective following last week’s breakdown of key support, with rallies seen as a chance to sell.
- S&P 500 futures have turned corrective on the decisive move below the key support at 3912. This breakdown completed top on a close below 3912 which implies a move towards 3720. An intraday rebound this morning looks likely to be short-lived, with resistance mounting overhead. The initial resistance is 3855/3899 and then the neckline resistance barrier is between 3912/3945. The next support is at 3750.
- German DAX has turned corrective with a completed top pattern on the decisive close below 14125. The implied target is back towards 13700/13800, but it is interesting that with the spike low early this morning, there has been a drop to 13692 before a sharp intraday rebound. Reaction to this rebound will be key, with resistance initially 13999/14040 before the bigger resistance around 14125/14195. A break below 13600 would be bearish now.
- FTSE 100 has completed a top pattern with a decisive break below 7437 in a move that implies c. -200 ticks of downside target towards 7240. The early risk sell-off has seen a drop to support at 7304 but this has held. This was an important higher low of the rally, so we need to see how the market now develops. The RSI is corrective below 50 and increasingly, and for now, near-term rallies are a chance to sell. There is initial resistance c. 7395/7440.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
All trading carries risk.