Equities pulled back, while safe havens gained after US Treasury Sec. Mnuchin said that tariffs on Chinese imports will stay in place until the second phase of the deal. Today, the two nations are expected to sign the first part, but bearing in mind that this is largely priced in, we believe that attention will fall on the text, as well as to any clues on how they intend to move forward. Among the G10 currencies, the franc was the main gainer, getting also boosted by the US’s decision to add Switzerland to its currency manipulators’ watchlist.
The dollar traded lower or unchanged against the other G10 currencies on Tuesday and during the Asian morning Wednesday. It underperformed against CHF, GBP, JPY and slightly against NOK, while it was found virtually unchanged against EUR, AUD, and CAD. The greenback gained only against NZD and SEK.
The strengthening of the safe-havens CHF and JPY suggests that risk appetite was hurt at some point yesterday. While the majority of major EU indices traded slightly in the green, in the US, both the S&P 500 and Nasdaq slid 0.15% and 0.24% after hitting new all-time highs. The DJIA also hit a new record and slid, but managed to maintain gains of 0.11%. Sentiment was dented somewhat more during the Asian morning today, with both Japan’s Nikkei 225 and China’s Shanghai Composite sliding 0.45% and 0.54% respectively.
It seems that investors adopted a more cautious stance ahead of the signing of a “Phase One” traded deal between the US and China, which is expected later today, with comments by US Treasury Secretary Steven Mnuchin late in the US session encouraging some more profit taking in the equity world. The Treasury Secretary said that the US will maintain tariffs on Chinese imports until the second phase of the deal.
Judging by the latest rally in stock markets, we believe that the signing of the first phase is largely priced in. Thus, signatures and handshakes may support somewhat sentiment, but not much. Investors may pay more attention to the content of the deal, as well as on any signals with regards to how the world’s two largest economies will move forward. US President Trump has recently said that he will travel to Beijing for talks over the second phase of the deal, and anything suggesting that this may be the case could work in favor of risk assets. However, we remain reluctant to call for a long-lasting recovery, as the road towards a final accord may not be “paved with rose petals”, and Mnuchin’s remarks enhance to our view.
Now, the big disappointment today would be not signing the interim deal, something that is not a totally unlikely scenario in our view, given that in the past, we saw things falling apart in the last minute. Remember that back in May, it was reported that the two sides were very close to reaching common ground, but the expected deal was scrapped after China deleted from the draft some of its commitments.
The S&P 500 corrected lower yesterday, after the cash index hit a new all-time high, near the 3296 mark. Overall, the index is still trading well above its short-term tentative upside support line drawn from the low of December 3rd. That said, given yesterday’s slide, we might see a follow-through of the same move, which could lead the price a bit lower, to test one of its key support areas. But let’s not forget that, overall, the broader direction is to the upside, and thus we will remain somewhat bullish for now.
If the price suddenly falls below the 3260 hurdle, this could open the door for that deeper correction mentioned above, which might lead the S&P 500 to the 3260 zone, marked by the low of January 10th. If that area does the same trick and hold the index from moving lower, this may attract the bulls back into the field and the price could get lifted to the 3275 hurdle again, a break of which may open the way to the 3286 barrier, marked by the today’s high on the cash index. If the buying is still strong, this could help the index to overcome that barrier and target the all-time high, which is at around 3296 level.
Alternatively, if the previously-discussed 3260 support area fails to withstand the bear pressure, its break may lead the index to an even larger correction to the 3252 hurdle, which is an intraday swing low of January 8th. For us to get comfortable with further declines, we would like to see a price-drop below that hurdle, which may attract even more sellers and help them push the S&P 500 even lower. We will then aim for the 3237 obstacle, a break of which might set the stage for a test of the 3222 level, marked by an intraday swing low of January 8th. Not far from there, the index could test the aforementioned upside line, which may provide additional support.
Back to the currencies, apart from the subdued risk appetite, the Swiss franc may have received support from the US’s decision to add Switzerland to its watchlist of currency manipulators. The reasoning is that the SNB sells the franc in order to offset safe-haven flows from trade disputes or other geopolitical risks. However, the SNB denied that its interventions were intended to give its nation a trading advantage, rather to safeguard inflation and its export-dependent economy from an overvalued currency.
CHF sight deposits at local banks, which is a gauge of SNB interventions, have declined recently suggesting that the Bank has been keeping its hands off the intervening button and the US’s decision may discourage Swiss officials further from stepping into the FX market. This could prompt traders to increase their franc exposures and test how high they can drive it before the SNB eventually decides to act.
USD/CHF is still trading below its short-term downside resistance line taken from the high of December 6th. But recently, the pair got held by its key support area between the 0.9646 and 0.9665 levels. In order to examine further declines, we need to see a rate-drop below the lower end of that support area, hence why we will take a cautiously bearish approach for now.
If eventually we do see that break below the 0.9646 zone, which is the lowest point of December, this would confirm a forthcoming lower low and the pair could drift further down, possibly aiming for the 0.9623 hurdle. That hurdle marks the low of September 26th of 2018 and it could initially provide a bit of support, which may allow the rate to rebound slightly. That said, if USD/CHF struggles to get back above the 0.9665 barrier, this may lead to another round of selling, which could bring the rate back to the 0.9623 obstacle. If this fails to withhold, its break could open the door for a move to the 0.9580 level, marked by the low of September 24th, 2018.
For us to consider the upside, ideally, we would like to see a break of the previously mentioned downside line and the rate rising above the 0.9736 barrier, which is the high of January 13th. This move might bring more buyers back to the table, who could help the pair to move to the 0.9762 obstacle, a break of which might clear the path to the 0.9795 level, marked by the low of December 25th.
During the European trading, we get Sweden’s CPIs for December. Both the CPI and CPIF rates are expected to have remained unchanged at +1.7% yoy and +1.8% yoy respectively, but as usually, we prefer to pay more attention to the core CPIF rate, which excludes energy. In November, that rate ticked up to +1.8% yoy from +1.7%.
At its December gathering, the Riksbank hiked rates to 0%, noting that since the prior meeting, developments have been broadly in line with its expectations, and that the rate is expected to remain untouched in the coming years. However, they added that if the economic outlook and inflation prospects were to change, monetary policy may need to be adjusted. If indeed inflation rates stay unchanged as expected, this would confirm officials’ view that rates are likely to stay stable for the foreseeable future.
From Germany, we get the annual GDP for 2019, which is expected to have slowed to 0.60% from 1.60% in 2018, while from the Eurozone as a whole, we have the industrial production for November, which is forecast to have rebounded 0.4% mom from -0.5%, driving the yoy rate up to -1.1% from -2.2%. The bloc’s trade balance is also coming out, with the surplus expected to have declined to EUR 17.0bn from 28.0bn.
The UK CPIs for December are also coming out, with both the headline and core rates expected to have remained unchanged at +1.5% yoy and +1.7% yoy respectively, below the BoE’s target of 2%. Combined with Monday’s soft data, inflation below the BoE’s objective may prompt policymakers to bring their hands closer to the cut button.
From the US, we get the PPIs for December. The headline rate is forecast to have risen to +1.3% yoy from +1.1%, while the core one is anticipated to have held steady at +1.3% yoy. The New York Empire State manufacturing index for January is also coming out and is expected to have risen somewhat to 3.55 from 3.50. The Beige Book is due to be released as well.
With regards to the energy market, the EIA report on crude oil inventories for last week is coming out. Expectations are for a 0.474mn barrels slide after a 1.164mn barrels increase the week before. That said, bearing in mind that yesterday, the API report showed a 1.100mn increase, we would consider the risks to the EIA report as tilted to the upside.
We also have three speakers on today’s agenda: Philadelphia Fed President Patrick Harker, Dallas Fed President Robert Kaplan and ECB Governing Council member Jens Weidmann.
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