Russian military forces continue their invasion across Ukraine. The response of the West still seems to be limited to sanctions, and even then certain moves such as banning Russia from access to the SWIFT banking system are being resisted. For financial markets, one key factor to look for in the coming days is whether and to what extent markets pull back on expectations of the Federal Reserve tightening of monetary policy. This could be key for the next stage of market reaction.
In major markets, we are seeing something of a risk recovery this morning. European indices are trading higher and currencies are bouncing against the USD. However, whether this is something more than a dead cat bounce remains to be seen.
On the data front today, inflation is in focus again for the US. Surprises in the core PCE data are rare, so any upside surprise would cause volatility for USD positions. However, markets remain focused on Ukraine still.
Sentiment tentatively rebounds: European indices are higher and major forex trades with a mild positive risk bias. However, US futures are falling away again and commodities such as gold and oil are higher again.
Treasury yields are a shade lower: US 10 year yield is c. -2bps lower. However, shorted dated yields (that reflect rate expectations)are holding up. The 2-year yield is c. -1bp. [Risk neutral to slightly negative]
Russia n forces continue to advance in Ukraine: The US expects the Ukrainian capital of Kyiv to fall to incoming forces within days.
Sanctions on Russia: A range of sanctions from Western countries have been placed on Russia. It is unclear how Russia will respond to this at this stage
Fed speakers talk about Ukraine: Waller (very hawkish, voter) has talked of the potential for +100bps by mid-year and +50bps in March. However, he also said that it is possible a more modest tightening is appropriate given the Ukrainian situation. Mester (hawkish, voter) also said it would be a consideration to determine the pace of tightening. [Potentially USD negative]
Cryptocurrency rebounds: Bitcoin is still reacting with risk assets. A rally late last night, but consolidating this morning around $38,500.
- US core PCE (at 1330GMT). Consensus is looking for a slight increase in January to 5.0% (from 4.9% in December).
- US Durable Goods Orders (at 1330GMT). Core durables (ex-transport) are expected to be +0.4% in January.
- Michigan Sentiment (at 1500GMT). Final sentiment is expected to be unrevised at 61.7.
MAJOR MARKETS OUTLOOK
Broad outlook: Market sentiment has tentatively rebounded this morning. Indices are higher and USD weaker. However, precious metals and oil are still ticking higher.
Forex: USD is easing back, but interestingly the EUR continues to be an underperformer. AUD is the main outperformer.
- EUR/USD rebounded from the range floor around 1.1108 but is slipping back again this morning. It looks to be a theme of underperformance for EUR now. Initial resistance at 1.1228 under the more considerable 1.1270/1.1280 resistance.
- GBP/USD has been choppy since rebounding from 1.3272 yesterday. An early rally today is tailing off again. A close under 1.3357 (old Jan low) would suggest continued deterioration. Resistance at 1.3367.
- AUD/USD is the main outperformer today and has not tailed off too much in its early rebound. The outlook is highly uncertain in the middle of the range above support now at 0.7085/0.7095. Initial resistance at 0.7210.
Commodities: Precious metals have rebounded from the sharp spike back lower late yesterday. Oil has also found support to move higher again.
- Gold has seen huge swings in the past 24 hours. Spiking to $1974 and then sharply lower to $1877. The price has rebounded again but is just beginning to tail off around $1921 support. Above $1927 would re-open the way higher. Good support now between $1877/$1886.
- Silver has also been extremely volatile in the past 24 hours. However, it has found support around a 3-week uptrend and is consolidating this morning. Initial resistance at $24.50. A drift back under $24.15 would test the support band at $23.84/$24.00.
- Brent Crude oil has seen big swings but has rebounded off $96.46 to back above $100. There is though resistance that has formed around $100.75 this morning as the market looks to settle down slightly. The breakout at $99.00 is proving to be an initial basis of support.
Indices: Equities have sold off hard early this morning. A minor recovery has been seen in the past couple of hours, but it is too early to suggest real support has formed.
- S&P 500 futures rebounded off the 4101 low from yesterday but have started to find resistance around 4250/4260 today. The technical outlook of the 4-hour chart suggests this is still just a technical rally within a bear phase and looks susceptible to renewed selling pressure.
- DAX has rebounded from 13,797 at yesterday’s low, but the recovery is already losing its way today. Initial resistance is subsequently around 14,310/14,350. There was a minor higher low at 13,985 which if breached re-opens yesterday’s low. Initial resistance at 14,230.
- FTSE 100 is consolidating after a rebound from 7169 yesterday. Whilst FTSE 100 seems to be the outperformer on indices, a recovery is still struggling under resistance at 7311/7334. Initial support at 7247.