Market Review – Fundamental Perspective (2024)

Dollar Broadly Under Pressure ahead of Jobless Claims Numbers
The US currency remained broadly weaker versus other major currencies in thin trading ahead of New Year celebrations. Commodity currencies maintained their positive momentum as oil and other metals remained on the rise. Major European blue-chip indices were not much changed around midday. The pan-European Stoxx 600 was roughly flat, with basic materials outperforming on the back of rising commodity prices and technology once again coming under pressure; tech stocks were the worst performers within the Stoxx 600. The blue-chip Euro Stoxx 50 was down by 0.2%. Meanwhile, the UK's FTSE 100 was 0.1% up and not far below yesterday's all-time high, while the German DAX was down by 0.2% and the French CAC 40 traded lower by 0.05%. Dow, S&P 500 and Nasdaq 100 futures traded up by 0.15%, 0.1% and 0.2% respectively.
Ahead of the EIA weekly report, WTI and Brent crude were up by 0.2% and less than 0.1%, at $59.71 and $66.47 a barrel respectively. They both traded close to2-½-year high levels reached earlier in the week. Gold was 0.4% up at $1,291.83 per ounce after rising to as high as $1,293.25, this being a one-month high for the precious metal which has been benefitting on dollar weakness. Copper futures rose to touch their highest since early 2014.
Ten-year Treasury yields have recovered somewhat during today's trading after falling sharply in the two days that preceded, though they still stand at a distance to last week's nine-month high of 2.5040%. They were last at 2.4341%. The decline in long-term yields is rendering the US currency less attractive relative to counterparts, while it was not associated with a fall in short-term yields, leading to yield curve flattening and once again fueling the debate on what that could mean for the economy further ahead. Dollar/yen was 0.4% down at 112.83 after falling to a nine-day low of 112.65 earlier in the day.
The rally in metals kept supporting the aussie, while the kiwi rose in sympathy as well. Aussie/dollar and kiwi/dollar were up by 0.2% and 0.35% respectively. Both pairs recorded two-month highs earlier in the day, with aussie/dollar touching 0.7809 and kiwi/dollar hitting 0.7098.
Higher oil prices as well as rising expectations for another interest rate hike to be delivered by the Bank of Canada when it completes its meeting on monetary policy on January 17 have been supporting the Canadian dollar. Dollar/loonie was 0.4% down, trading close to 1.2601, this being its lowest since October 20 recorded earlier in the day.

Could a Strong US Jobs Report Help Boost the Struggling Dollar?
The official US jobs data for December will be reported on Friday morning by the US Department of Labor, and consensus expectations are pointing to a likely continuation of the strong job creation that prevailed through much of last year (September weather disruptions notwithstanding). Around 190,000 non-farm jobs are expected to have been added to the US economy in December following a better-than-expected showing of 228,000 jobs added in November. Given Thursday's strong ADP jobs beat for December, Friday's official non-farm payrolls could potentially surpass expectations once again.
In the run-up to Friday's jobs release, the US dollar has mostly been selling off sharply since mid-December, due in part to doubts as to whether the US Federal Reserve can keep up with its most recent outlook for three interest rate hikes in 2018, given ongoing concerns over lagging inflation.

The beginning of the new year this week continued to see overall weakness for the dollar, even despite Wednesday's hawkish-leaning release of minutes from December's FOMC meeting, in which the Fed raised its benchmark federal funds rate by 25 basis points. The minutes revealed optimistic assessments of the US economy and higher projections for GDP stemming from the anticipated effects of the new US tax policy. With respect to jobs, Fed officials were nearly unanimous in attributing the rate hike in part to continued labor market strength.
The question remains, however, as to whether the struggling US dollar will be able to make a meaningful rebound anytime soon, given a Fed that remains mostly hawkish-leaning and an outlook for continued strength in US economic growth and jobs. Friday's employment data outcome should provide some clues as to potential dollar direction and sentiment further into 2018. As there is a good possibility that the NFP jobs data could beat expectations once again, the resulting moves in the US dollar should be indicative of prevailing dollar sentiment as the new year kicks off.

• Equity markets rose during the first week of 2018
  
• US nonfarm payrolls came in below consensus at 148k
• Talks of a cabinet reshuffle by PM May in focus over the weekend

Global equity markets rallied last week during the first week of trading of 2018. US and European indices gained around 2% after economic data provided more evidence that the ongoing economic expansion is still strong and widespread.
US nonfarm payrolls came in below consensus last Friday at 148k (consensus: 190k) due to weakness in the retail sector. USD initially fell on the release in response to the headline number but it recovered later in the afternoon as the remainder of the report was relatively strong.
GBP traded in a tight range against USD and EUR last week and Brexit negotiations have taken a step back from the news headlines for now. Talk of a cabinet reshuffle by PM May starting today was the main focus over the weekend and this week is expected to be relatively quiet amid a light events/data calendar.
GBPUSD support comes in at 1.3500 ahead of 1.3300 with resistance in the 1.3615-60 area. In EURGBP, 0.8700-0.8900 is the broader range.
Preliminary Grand Coalition talks in Germany begin today where the CDU and the SPD will try to iron out differences on fifteen key themes such as migration and EU policy. The SPD will hold a conference on 21 January to decide if the preliminary talks justify the beginning of formal talks or if an attempt to join forces with CDU should be abandoned.
US CPI (Friday) and the ECB minutes from its December meeting (Thursday) will be in focus this week in an otherwise light event and data calendar.
In emerging markets, we get inflation data in India (Friday) and the ANC’s National Executive Committee meeting (Wednesday) but the market reactions to these events are likely to be contained to local markets.

• Equity markets continue to grind higher
  
• Justine Greening quits after the UK cabinet reshuffle
• PBoC said to remove “counter-cyclical factor” from CNY fixing according to reports

Most markets were relatively unchanged yesterday in a quiet day for economic data. The S&P 500 rose by ~0.2% and Asian equity markets are generally higher as of midday local time today.
JPY strengthened overnight amid speculation that the BoJ has taken another step towards policy normalization by reducing purchases of bonds with 10+ years maturities.
PM May’s cabinet reshuffle did not go as smoothly as the PM had wanted after both Health Secretary Jeremy Hunt and Education Secretary Justine Greening initially rejected the proposed moves. Hunt will instead remain in his current role whilst Greening quit the Government altogether.
The outcome of the reshuffle raises concerns over May’s credibility and calls into question her ability to tackle the ongoing Brexit negotiations.
According to Bloomberg reports, China’s central bank has changed the way it calculates its daily CNY fixing thereby effectively removing the “counter-cyclical factor” which was seen as a tool for the bank to be more ‘hands on’ with the fixing.
USDCNH and USDCNY rose on the report as it could mean a higher fixing in the near-term
Recent economic data from Germany has been mixed as November factory orders came in weaker than expected at 0.4%, but industrial production and export numbers beat their estimates.
While this could be the first sign of an economic impact from Germany’s political uncertainty, the drop in yesterday’s factory orders is small and the global economic recovery should continue to support the German economy.

UK Industrial, Manufacturing Rebound Expected to Continue in November
A weak pound and stronger global growth, particularly in the Eurozone, is driving up demand for British exports, which are boosting the UK's manufacturing sector even as domestic demand falters amid the Brexit uncertainty. Industrial and manufacturing figures out on Wednesday are expected to show output picked up in November after stalling in October.
Industrial production grew at an annual rate of 3.5% in October - the highest since December 2016, while manufacturing output was up 3.9% - also the highest since the end of 2016. Month-on-month, the figures were less impressive with no change in industrial output and manufacturing activity up just 0.1%. This would explain the expected slowdown in annual growth in November, with industrial output forecast to ease to 1.8% and manufacturing to 2.8%. However, monthly growth is expected to pick up to 0.3% for both indicators.
UK industrial output lagged the Eurozone's for much of 2017 but has been strong enough to become the bright spot of the British economy, with annual growth overtaking the dominant services sector in August. Slowing consumption, mainly as a result of a squeeze on households' disposable income from rising inflation and subdued wage growth, is weighing on services activity. Meanwhile businesses have been holding back with their investment decisions despite the upturn in the global economy as key issues about the UK's post-Brexit relationship with the EU remain unresolved.
The divergence in the fortunes of UK and Eurozone manufacturers was evident in the IHS Markit manufacturing PMI prints for December. The Eurozone's manufacturing PMI hit an all-time high of 60.6 in December, while the UK's reading missed expectations to drop 56.3 from 58.2 in November. Although this still represents a solid figure, it does underline that the British economy is growing below potential and not fully benefiting from the uptick in world growth. The outlook for the UK will likely remain clouded until at least the outline of a post-Brexit trade deal is agreed.

• Speculation on China reducing US Treasury purchases triggered a bond sell off
  
• GBP underperformed despite strong economic data
• CAD and MXN sold off on NAFTA headlines

US equity markets fell slightly yesterday and the S&P dropped by around 0.1% thereby breaking its winning streak since the beginning of 2018. The US 10y yield reached a nine-month high after reports that China may slowdown its purchases of US Treasuries which weighed on USD.
Overnight, Chinese sources claimed that the reports from the previous day were inaccurate which triggered a retracement of bond yields and USD.
GBP underperformed yesterday despite industrial production for November printing higher than expected at 2.5% y/y (Consensus: 1.8% y/y). The news headlines on Merkel coming out in opposition to a bespoke trade agreement post-Brexit was the main source of GBP weakness.
GBPUSD support comes in at 1.3475 ahead of 1.3300 with resistance at 1.3620-60. EURGBP support comes in at 0.8800 with resistance at 0.8925.
CAD and MXN sold off overnight against USD after Reuters reported that Canadian officials see the probability of the US pulling out of NAFTA as more likely. Market sensitivity to NAFTA headlines has increased ahead of the upcoming negotiation round on January 23-28.
The Bank of Israel and the Bank of Poland left rates unchanged as expected. The NBP struck a dovish tone in the press conference, highlighting disinflation risk in 2018.
The minutes from the latest ECB meeting will be released today at 12.30 and investors will be looking out for any further clues around the growing dissenting views within the committee.

Fed's Dudley 'Warns Of Overheating Risks'
US FED's William Dudley spoke on Thursday at the Securities Industry and Financial Markets Association in New York. 'Over the longer term I am considerably more cautious about the economic outlook,” said Dudley, 'Keeping the economy on a sustainable path may become more challenging,” due to the risk of 'overheating'. He made the point that there is a strong case to keep gradually raising rates and that the forecast for 3 rate hikes this year is a reasonable starting point. He said it could go faster or slower depending on data and he wants to achieve 2% inflation before shifting goal higher. He also said that 'Tax cuts will come at a cost, pose challenges for Fed.' Tax cuts, he said, made him considerably more cautious about the longer-term economic outlook and the cuts give a short-term boost to the economy but pose serious long-term risks. He expects 2.5% to 2.75% GDP growth, inflation hitting 2% in the medium term and unemployment down below 4% in 2018. Eurozone Industrial Production w.d.a. (YoY) (Nov) was released with a number of 3.2% from a consensus of 3.0% and a prior of 3.7%, revised up to 3.9%. Industrial Production s.a. (MoM) (Nov) was 1.0% v an expected 0.8%, from 0.2% previously, which was revised up to 0.4%. EURUSD moved marginally lower on the data to 1.19387.
Eurozone ECB Monetary Policy Meeting Accounts were published at 12:30 GMT on Thursday. The ECB said they could consider a 'gradual shift' in guidance from early 2018. Inflation was an ongoing concern to the ECB and 'the relative importance of guidance on rates will increase as inflation rises.' They said that a transition to a broader forward guidance, comprising various dimensions of policy stance was warranted and they would revisit the whole issue in early 2018. On the policy side, they had ' increased confidence that inflation pressures would take hold ' and further easing of financial conditions are not regarded as warranted. They saw comfort in wage dynamics but inflation is still a concern. EURUSD soared higher from 1.19364 to reach a high of 1.20587.

• EURUSD and GBPUSD rally above 2017 highs
  
• In Germany, preliminary coalition talks concluded on Friday
• A quiet day for data with US markets closed for Martin Luther King Day

European equity markets retreated as the EUR extended a rally to the strongest level in more than three years. Meanwhile, the USD headed for a fourth day of losses against major G10 peers, whilst crude oil extended a rally on OPEC cuts. The Chinese yuan touched a two-year high after the People’s Bank of China raised the currency’s fixing to the strongest since May 2016.
In Germany, the preliminary talks between the CSU, CDU and SPD concluded with an agreement on Friday. Whilst this acts as the first step on the road to the Grand Coalition, a number of hurdles remain including the SPD party members vote on the final agreement on the 21 January.
A vote in favor would mean that formal ‘Grand Coalition’ talks could begin. If party delegates vote against the agreement, a change in SPD leadership could be a possibility.
US consumer prices surprised to the upside in December on Friday, as core CPI rose 0.3% m/m and headline CPI rose 0.1% m/m. Barclays Research thinks the report helps “…to confirm FOMC members’ suspicions that disinflation from 2017 will likely prove temporary…” and is consistent with our outlook for further normalization of Fed policy. We continue to expect four 25bp rate increases in 2018, with the next hike at the March meeting.
Friday’s US inflation print was not enough to sustain a USD rally, with EURUSD pushing higher on positive news from Germany’s coalition discussions after rallying on the ECB’s hawkish rhetoric last week. EURUSD broke through 1.2100 resistance (Bloomberg 2017 highs), which will act as key support now, as the pair trades above 1.2200 this morning. GBPUSD broke above 1.3660 resistance (Bloomberg 2017 highs) with momentum driven primarily by a soft USD and further catalyzed by headlines around a ‘soft Brexit’ over the weekend .
GBPUSD support now comes in 1.3660 (Bloomberg 2017 highs) ahead of 1.3600 and 1.3450, with resistance at 1.3800 and 1.4000. Meanwhile, EURGBP remains 0.8800-0.8925 range bound.
A plethora of central banks will meet this week and most we expect to remain on hold. We expect the Bank of Canada to hike by 25bp on Wednesday, in line with market pricing, but think the Bank of Canada will have a hard time delivering the three hikes that are priced for 2018.

• EURUSD rallies on hawkish comments from ECB’s Hansson
  
• MPC member Tenreyro says Bank of England has “ample time” before it needs to raise interest rates
• Focus today on inflation in the euro area (Germany, Italy, Ireland), the UK, and Poland

Global equities and fixed income saw a subdued session yesterday, with the US closed for Martin Luther King day. In FX, USD weakness and CNY strength were the major themes in a quiet session, as the CNY strengthened after the Bundesbank said that it would add China’s currency to its reserves. JPY halted a five-day advance amid a warning from Japan’s finance minister about excessively rapid moves in the currency market.
EURUSD extended its gains to just shy of 1.2300 on comments from ECB Governing Council member Hansson yesterday. Hansson, a well-known Hawk, considers the recent EUR appreciation as no threat to the inflation outlook and said the central bank could end its bond purchase scheme after September if the economy and inflation develops as expected. This comes after minutes of the ECB’s December meeting suggested growing appetite for revising the bank’s communication stance, fueling expectations that the ECB may withdraw its record policy stimulus sooner than expected.
USD demand from Corporates and leveraged accounts faded the EURUSD move quickly, whilst a breakdown of coalition talks in Germany took EURUSD lower on London open after the SPD voted against starting formal coalition talks with the CDU with a 21-8 majority. EURUSD supports is at 1.2200 and 1.2155 whilst resistances remains at 1.2300 and 1.2350.
In the UK, newly appointed MPC member Tenreyro commented that the Bank of England has “ample time” before it needs to consider raising interest rates after its first hike in more than a decade in November. However, Tenreyro also said it was possible that productivity growth - a key driver of the overall economy which can also help keep a lid on inflation - could be stronger than the Bank of England has predicted, which could provide the basis for further hikes.
GBP strengthened yesterday and GBPUSD traded above 1.3800, but stopped ahead of resistance at 1.3835 (pre-Brexit lows).
Focus turns to UK inflation data today were we are broadly in line with the consensus, forecasting inflation of 3.0% y/y and 2.5%y/y for headline and core inflation, respectively.

Cryptocurrency Bloodbath: Bitcoin Below $12K
Today's small gain in the dollar or the fall in the pound following the publication of UK inflation data was nothing compared to the sell-off in crypto currencies. Bitcoin was down some 15% while Ripple had shed 30% at one stage. Cyptos have been held back in recent days amid increasing levels of scrutiny from regulators, most notably in South Korea, where the government is planning to clamp down on trading in virtual currencies. The justice ministry is apparently working on a bill to ban cryptocurrency trading through exchanges. If the bill is eventually passed by the National Assembly it would be very bad news given that South Korea is the world's third-largest market for cryptocurrencies. The uncertainty is weighing on investor sentiment. However suggestions that this is the start of the demise of cryptos is very premature.
Financial heavyweight Warren Buffet has already warned that "cryptocurrencies will come to a bad end", and very early signs can be reflected in Bitcoin's bearish price action today. One has to ask if Bitcoin is currently in the process of flickering violently before it burns out?
This uncertainty is reflected in price action, with Bitcoin trading near the lower end of its wide range. The key support that needs to hold on a closing basis is at 11400, a level which previously support and resistance. If BTC/USD breaks below this level then it could very easily drop to the next psychologically-important level of $10K next. Below that, the next support comes in at 8350, which was previously a resistance level. Meanwhile resistance comes in at 12800, last week's low, followed by 13430, the low of the doji candle from Monday. If these levels break then Bitcoin will likely go above this week's opening price level of 13648, which, if realised, would be a bullish outcome, particularly if the most recent swing high at 13495 is also taken out.