The negative sentiment that has been a feature of trading major markets in 2022 (born out of the sharp rise in bond yields) continues to dominate. The growing downside pressure is being most felt on Wall Street, with European markets a little more protected due to the lack of weighting in tech stocks. The US dollar felt the benefit of soaring yields yesterday but is lacking the follow-through today. This is allowing commodities and major forex currencies to build support again.
UK inflation has soared to levels not seen since 1992. This adds further pressure on the Bank of England to hike rates. The focus is also on inflation in Canada today, along with some US housing data.
Main drivers: Market sentiment remains negative; US yields continue higher; UK inflation spikes higher; Economic calendar: Canadian CPI and US Building Permits/Housing Starts
Sentiment remains negative: With bond yields continuing to rise sharply, the sell-off in bonds is impacting major markets. Equity markets are especially feeling the pressure, with the high growth tech giants of Wall Street being hit hard. Forex is relatively sedate though this morning as the recent USD rebound has begun to stall.
US Treasury yields continue higher: The 10 year Treasury yield continues to rise sharply, hitting 1.90% this morning. That is +10 basis points this week. [Risk negative]
US dollar again struggling: Despite yesterday’s rebound, the USD is not following this up with further strong gains today. This is despite the continued spike higher in yields and the risk negative bias across markets. This adds to the questions surrounding the strength of the dollar.
UK inflation jumps higher than expected: UK CPI hits 5.4% in December (higher than the 5.2% expected). Core CPI rising to 4.2% (3.9% expected) also adds to the inflationary picture. This adds further pressure to the Bank of England and increases the likelihood of a second rate hike in February. [GBP supportive]
Evermore pressure on UK PM Johnson: Speculation grows that his MPs are set to trigger a leadership election. [GBP immune, for now, potentially higher volatility ahead]
Oil pipeline explosion in Turkey: Further issues impacting oil supplies as the state pipeline operator in Turkey cuts the oil flow after an explosion. [Oil supportive]
Central Bank speak: No speakers scheduled for today
- Canada CPI (at 1330GMT). Core CPI is expected to remain at +3.6% in December (+3.6% in November)
- US Buidling Permits and Housing Starts (at 1330GMT). Both are expected to fall slightly. Buidling Permits are expected to drop to 1.701m (from 1.712m) with Housing Starts down to 1.650m (from 1.679m)
Broad outlook: A negative bias to indices. Forex pairs are showing USD slipping back once more, something that is also helping to support commodities.
Forex: Mild USD underperformance today, although little decisive direction across major pairs.
- EUR/USD the recent pullback has been far sharper than expected, breaching support at 1.1360. How the market responds to the overnight support at 1.1315 will be key now. Losing this level and retreating to the next support at 1.1270 would suggest EUR is not ready to recover. Breaking back above 1.1360/1.1385 re-engages the bulls.
- GBP/USD has held the support at 1.3570 (just), but the bulls need to react soon. A move below 1.3490 would increase corrective momentum. If support can form, we look to use this weakness as a chance to buy. Resistance at 1.3750 is growing before the next key barrier of the October high of 1.3835.
- AUD/USD is hanging on to support around 0.7185. The outlook remains positive within an uptrend channel but support needs to form quickly to maintain this. The higher low at 0.7129 is a key support to prevent a renewal of the negative outlook. Resistance is growing at 0.7265/0.7315.
Commodities: precious metals are decoupling with silver strong but gold struggling. Oil is still at multi-year highs.
- Gold has struggled under the resistance at $1830/$1832 in recent days as a series of lower daily highs has formed. A move above $1823 is needed to break this slide back. Initial support at $1806 to protect $1800 and perhaps a retreat to $1782. Momentum backs the continuation of the range and indecision.
- Silver is breaking higher after clearing the key resistance at $23.25/$23.45 yesterday. Technicals are increasingly positive for recovery and the old resistance becomes a basis of support now. The next resistance is $23.72 and then around $24.00.
- Brent Crude oil has just pulled back slightly this morning from a multi-year high of $89.10. We continue to look at near-term unwinding moves as a chance to buy for the continuation of the five-week uptrend. Initial support at $86.65.
Indices: Wall Street is lower again (although off earlier session lows). European markets are also off earlier lows.
- S&P 500 futures have broken the long-term primary uptrend channel support. Further weakness to test 4491/4520 cannot be ruled out. Reaction to the overhead supply now between 4572/4605 will indicate the next move. Needs above 4671 to signal a sustainable recovery.
- DAX has fallen below 15,800 to leave 15,800/15,870 as a basis of resistance in the market completing a near-term top pattern. The implied downside towards 15,300 could now be seen in the coming weeks. Initial support at today’s low of 15,623.
- FTSE 100 has again rebounded off an old breakout level, with the support band 7513/7540 a near-term basis of support. We look to see how sustainable this move is, but we are still happy to buy into weakness. Resistance at 7635 is growing.