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by Charalambos Pissouros

Market Euphoria Continues, USD supported by Solid Data

Markets continued trading in a risk-on mode on Wednesday and during the Asian morning today. The trigger was reports that China has found a drug to treat people infected with the coronavirus. Despite the WHO playing down reports, appetite remained supported as China decided to halve tariffs on some US goods. US indices, as well as the dollar, may have also received support by better-than-expected data, with focus now slowly turning to tomorrows NFPs.

Investors Keep Cheering on Reports of Virus Cure and China’s Move to Cut Tariffs

The dollar traded higher against the majority of the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained versus CHF, JPY, EUR, GBP and NZD in that order, while it underperformed versus NOK, AUD, SEK and CAD.

USD performance G10 currencies

Judging by the pattern of the FX-performance table, it seems that market participants were happy to increase their risk exposure for another day. Indeed, turning our gaze to the equity world, we see that major EU and US indices kept sailing north, with Nasdaq hitting a new all-time high, while the S&P 500 and the DJIA fell just shy of their own records. That said, their cash indices did hit new records, suggesting that the actual indices may open with a positive gap into unchartered territory today. The optimism rolled over into the Asian session today as well, with both Japan’s Nikkei 225 and China’s Shanghai Composite gaining 2.38% and 1.72% respectively.

Major global stock indices performance

Apart from China’s policy steps to relieve pressure on its economy from the coronavirus, what may have allowed investors to cheer more may have been rumors that China has found an effective drug to treat people infected by the coronavirus. Although the World Health Organization played down the reports, equities were served with another booster after China said that it will cut tariffs on some imported goods from the US by 50%, starting on February 14th. This is probably aimed at improving negotiating conditions for a “Phase Two” trade accord between the world’s two largest economies, or it may have been an act to offset some of the blow China’s economy may be dealt with.

In any case, it still appears somewhat strange how easily investors have stopped being afraid of the virus’s effects. The virus continues to spread at an exponential pace, with the death toll rising to 565 and the confirmed cases surging to 28280. If the rumors over the treatment were confirmed, we would be very happy to stand on the same side, but with the WHO playing them down, we prefer to adopt a more cautious approach. Instead of calling for a resumption of the prevailing long-term uptrend, we prefer to take things day by day. For now, investors may stay willing to increase their risk, but if incoming data start suggesting that the economic impact from the coronavirus is larger, and may last for longer, than initially believed, everything may be literally turned upside down, with investors massively exiting risk positions and seeking shelter in safe havens.

FTSE 100 – Technical Outlook

After rebounding from its medium-term upside support line drawn from the low of October 3rd, the FTSE 100 pushed sharply to the upside and continues to move in the northern direction together with the rest of the major indices. In addition to that, the index formed somewhat of an inverted head-and-shoulders pattern and broke its “neckline” at 7442. This morning, the cash index is already above the high of January 29th, at around the 7515 mark, which just helps the bulls to feel more confident with themselves. Given the steep uprise, although there is a chance to see a small correction lower, still, we will take a somewhat bullish approach, at least for now.

A further push higher could bring the price to the 7584 obstacle, a break of which might send the index towards the 7642 barrier for a quick test. That barrier marks the high of January 24th and could provide some initial resistance, from where the FTSE 100 may correct a bit lower. That said, if the price continues to trade above the 7513 hurdle, which is yesterday’s high, this could attract the bulls back into the game and lift the index higher. We will once again consider a possible test of the 7642 zone, and if broken, this may lead to a test of the 7689 level, marked by the highest point of January.

Alternatively, if the price suddenly falls back below the so-called “neckline”, at 7442, this might temporarily spook the buyers from the field and allow more sellers to join in. In order to get a bit more comfortable with further declines, we would also like to see a drop below the 7397 zone, which is yesterday’s low. If such a move happens, we will then aim for the 7364 hurdle, marked by the inside swing high of February 3rd, which may provide some support for the pair. From there, we could see a small pullback, but if the bears are still feeling strong, that pullback could be short-lived and we may see another fall. If the FTSE 100 easily bypasses the 7364 obstacle, this would confirm a forthcoming lower low and the pair might then target the 7307 level, marked by an intraday swing low of February 3rd. Slightly below it lies the low of February 3rd, at 7284, and the aforementioned upside line, which might also provide some additional support for the price.

FTSE 100 cash index 4-hour chart technical analysis

US Data Support Greenback Ahead of NFPs

Apart from the headlines over the virus and the tariffs, US indices may have been aided by domestic data as well, and this is also evident by the dollar’s relative strength against most the other G10s. Yesterday, the ADP reported that the private sector has gained  291k jobs, much more than December’s downwardly revised 199k. This may have raised speculation that the NFP, due out tomorrow, may also exceed its 160k forecast by a large margin. At this point though, we need to repeat for the umpteenth time that the ADP is far from a reliable predictor of the NFP number. Taking data from back in January 2011, the correlation of those two time-series at the time of the release (no revisions are taken into account) is standing at 0.41.

ADP vs NFP at the release

We also got the ISM non-manufacturing PMI for January, which beat estimates of ticking up to 55.0 from 54.9, and instead rose to 55.5, as well as the final Markit services and composite PMIs for the month, which were revised upwardly, with the composite index rising to 53.3 from 52.7 in December. Combined with the ISM manufacturing index, which surprisingly exited the contractionary territory, the PMIs suggest that the US economy may have entered the new year at a better footing that it finished 2019.

US GDP vs ISM weighted composite (3-month average)

The icing on the cake though may be tomorrow's employment report for January, where a decent report may allow market participants to push further back the timing of when they expect another 25bps rate decrease by the Fed. According to the Fed funds futures, they are still pricing in such a cut in September.

Fed funds futures market vs FOMC interest rate expectations

With regards to politics, US President Donald Trump was acquitted in the US Senate impeachment trial, but the event passed largely unnoticed by the markets as, given the Republicans' majority in the camper, this was largely expected.

USD/CHF – Technical Outlook

From around the beginning of January, USD/CHF continues to move within a short-term range, roughly between the 0.9630 and 0.9762 levels. Recently, after rebounding from the lower side of that range, the pair has moved closer to testing the upper bound. Although there is slightly more positivity in the bull-bloc, we need to see a strong break above the 0.9762 barrier, before examining a possible further uprise. This is why, for now, we will stay neutral, but keep a close eye on the upper bound of the range.

If, eventually, we do see a strong move above the 0.9762 barrier, this would confirm a forthcoming higher high and more buyers may see it as a good opportunity to step in. That’s when the pair may drift to the 0.9797 area, a break of which could clear the path to the 0.9831 level, marked near the highs of December 20th and 24th.

On the other hand, if the rate slides back below the 0.9713 hurdle, which is the high of January 31st, it would be also placed back below its 200 EMA on the 4-hour chart and more bears could try to join in. If so, this may lead to a test of the 0.9678 obstacle, which if broken could set the stage for fall to the 0.9630 level. That level is the low of the aforementioned range.

USD/CHF 4-hour chart technical analysis

As for Today’s Events

On today’s agenda, we have the US initial jobless claims for last week, which are expected to have ticked down to 215k from 216k the week before. We also have the preliminary Unit Labor Costs index for Q4, which is expected to have slowed to +1.4% qoq from 2.5% qoq in Q3.

With regards to the energy market, an advisory committee for the OPEC+ group is set to meet for a fourth day to discuss whether cutting production further is needed to support oil prices after the tumble caused by concerns over the coronavirus.

As for tonight, during the Asian morning Friday, we get Japan’s household spending data for December, China’s trade balance, and the RBA’s Statement on Monetary Policy, where the Bank’s updated economic forecasts are included.

We also have five speakers on the calendar: During the European morning, we will get to hear from ECB President Christine Lagarde and Vice President Luis De Guindos. Later in the day, Dallas Fed President Robert Kaplan will speak, while during the Asian day tomorrow, RBA Governor Philip Lowe and Fed Board Governor Randal Quarles will step up to the rostrum.

Disclaimer:

The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. The Group of Companies of JFD, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyses and must therefore be viewed by the reader as marketing information. JFD prohibits the duplication or publication without explicit approval.

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