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by Charalambos Pissouros

Markets Switch Back to “Risk on” as US-Iran Tensions Ease

The financial world turned back to “risk on” yesterday, as tensions between the US and Iran subsided. US President Trump responded with sanctions instead of military action, while Iran’s foreign minister that their strikes “concluded” the response to the US attack. Barring any new flare-ups, risk sentiment may remain supported, but investors may adopt a somewhat more cautious stance ahead of tomorrow’s US employment data.

Equities Rebound, Safe Havens Slide, as Middle East Concerns Subside

The dollar traded higher or unchanged against all but one of the other G10 currencies on Wednesday and during the Asian morning Thursday. The greenback gained against JPY, CAD, CHF, and EUR, while it was found virtually unchanged against GBP, AUD, NZD and NOK. It slightly underperformed only versus SEK.

USD performance G10 currencies

From “risk off” back to “risk on”. It seems that market sentiment has taken another 180-degree turn yesterday, with investors abandoning safe-haven assets and adding back to their risk exposure. Indeed, most major EU bourses rebounded, and Wall Street indices traded in the green, with both the S&P 500 and Nasdaq hitting new record highs. The sanguine appetite rolled over into the Asian session today as well, with Japan’s Nikkei 225 and China’s Shanghai Composite gaining 2.31% and 0.91% respectively.

Major global stock indices performance

It seems that investors’ fears over further escalation in Middle East have eased as both the US and Iran softened their stance over the matter. This was also evident by the further tumble in gold and oil prices. Following the Iranian attacks to US bases in Iraq, US President Donald Trump said that there were no casualties and made no new threats with regards to a military response. Instead, he announced economic sanctions on Iran, though no details were mentioned. On the Iranian side, the nation’s foreign minister said that Wednesday’s strikes “concluded” the response to the killing of their commander, suggesting that if the US refrains from lunching new attacks, they would not retaliate further.

The market reaction following the Iranian attacks suggested that there were fears for further escalation. Even we said that the risk remained high. However, we also noted that for market appetite to return, the two sides may have to resolve the issue in peace and avoid fueling fears of a full-blown war. Yesterday's news suggest that those may be the intentions of both nations, at least for now. Barring any new flare-ups, investors may continue adding to their risk exposure for a while more, with the prospect of a “Phase One” US-China trade deal being signed soon providing additional support.

That said, we expect them to be somewhat more cautious ahead of tomorrow's NFP report, which could well impact morale. Yesterday, the ADP report showed that the private sector in the US gained 202k jobs in December, more than November's upwardly revised 124k and more than the 160k forecast. This increases the chances for a strong NFP number on Friday, but let’s not forget that the correlation between the two time-series at the time of the release has been low recently. Taking into account data from January 2011, the correlation now stands at 0.41%.

ADP vs NFP employment reports

In any case, following the better-than-expected ISM non-manufacturing PMI for the month, a strong report may ease further concerns with regards to the US economy, and may boost US equities more. The greenback is likely to gain as well as this could prompt investors to push back their expectations with regards to another cut by the Fed. According to the Fed funds futures, investors are nearly fully pricing in such a move to come in October.

DAX – Technical Outlook

The German DAX cash index surged yesterday, after it hit support at the upside support line drawn from the low of August 15th. The rebound also came from slightly above the 12950 zone, which has been acting as the lower end of a sideways range that’s been containing most of the price action since November 1st. Now, the index appears ready to challenge the upper end of that range, at around 13460, but we prefer to wait for a move above that hurdle before we get confident on a trend continuation.

A decisive break above 13460 would confirm a forthcoming higher high on the daily chart and may signal the resumption of the prevailing medium-term uptrend. This could pave the way towards the record high of around 13600, hit on January 23rd, 2018, the break of which would drive the index into unchartered territory, with the next psychological resistance perhaps being the 14000 area.

Looking at our daily oscillators, we see that the RSI rebounded back above its 50 line and now points up, while the MACD lies slightly above both its zero and trigger lines. This suggests that the index has started gaining upside speed again and supports the case for further advances.

In order to abandon the bullish case, we would like to see a dip below 12950, the lower end of the range. This would also bring the index below the aforementioned upside line and may allow declines towards the low of October 31st, at around 12800. Another break, below 12800, could extend the slide towards the 12600 territory, defined as a support by the low of October 18th, as well as by the inside swing high of July 25th.

German DAC cash index daily chart technical analysis

AUD/JPY – Technical Outlook

AUD/JPY skyrocketed yesterday, after it hit support slightly above the 73.65 zone, and managed to return back above the upside support line drawn from the low of November 14th. Now, the rate appears to be headed towards Monday’s and Tuesday’s highs, at around 75.27, where a break may increase the chances for larger bullish extensions.

A clear and decisive break above the 75.27 zone, could allow the bulls to drive the battle towards the 75.60 zone, the break of which may allow the rally to continue towards the 75.90 zone, marked by an intraday swing high formed on January 2nd.

Our short-term oscillators support the notion for this exchange rate to continue drifting north for a while more. The RSI stands slightly above 50 and points up, while the MACD, although negative, lies above its trigger line and appears to be headed towards zero.

On the downside, we would like to see a strong break below 74.45 before we start examining whether the bears have gained the upper hand. This would drive the pair back below the pre-mentioned upside line and could pave the way towards the 73.90 zone, which provided strong support between November 27th and December 10th. If that zone is not able to halt the decline either, then we could see extensions towards the 73.65 territory. That zone acted as a decent support between November 19th and 22nd.

AUD/JPY 4-hour chart technical analysis

As for Today’s Events

At the beginning of the week, we had the ECB minutes on today’s schedule, but it seems that they have been pushed to next week. In any case, we get the Eurozone unemployment rate for November, which is expected to have remained unchanged at 7.5%.

Later in the day, we get the US initial jobless claims for last week, where expectations are for a small decline, to 220k from 222k the week before. From Canada, we have housing starts for December and building permits for November. Housing starts are anticipated to have increased to 210.0k from 201.3k, while building permits are forecast to have rebounded 1.0% mom after sliding 1.5% in October.

As for tonight, during the Asian morning Friday, we get Australia’s retail sales for November, which are expected to have increased 0.4% mom after stagnating in October.

We also have several speakers on today’s agenda. We will get to hear from BoE Governor Mark Carney, BoC Governor Stephen Poloz, Fed Vice Chair Richard Clarida, Minneapolis Fed President Neel Kashkari, Chicago Fed President Charles Evans, and ECB Governing Council member Jens Weidmann.



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