RBA expected to hold policy, but for how long?


Up until a couple of weeks ago markets were pricing in strong odds that the Reserve Bank of Australia would cut the Official Cash Rate to 0.50% from 0.75%.

All that changed after December’s labour market data was released. Unemployment dropped for a second consecutive month, hitting the lowest levels since April 2019 at 5.1%. Unemployment decreased by 13,000, largely thanks to a 29,000 increase in the number of workers employed part-time.

While still leaving the jobless rate significantly above 4.5% – a level be RBA believes will prompt an acceleration in wage growth – the unexpectedly strong report saw markets slashing odds of further easing in February.

The Australian dollar snapped a 5-day downtrend against the US dollar, spiking to test 0.6880, but the selloff quickly resumed as the focus returned to the viral outbreak in China.

AUD/USD chart, MARKETSX, 16.00 GMT, January 29th, 2020

Bets on easing in February drop after jobs data

According to ASX 30 day interbank cash rate futures contracts for February 2020, the probability of a cut has fallen from 56% as of January 16th to 30% by January 28th.

Westpac also noted that the strong data lowered the odds of further accommodation, with chief economist Bill Evans stating:

“Prior to the release of the surprisingly strong December Employment Report we had expected the cuts to be timed for February and June.”

“Given this strength and the significance of the labour market in the mind of the RBA, we have consequently decided to push out our forecast for two further cash rate cuts from February and June to April and August 2020.”

However, Westpac believes that the recent strength in the labour market won’t last, supporting the call for further easing. Evans explained:

“The importance of the April date is that the Board will have seen another print of the national accounts for the December quarter which is likely to highlight the soft growth environment while we expect that the surprise improvement in the unemployment rate will be unravelling.”

Consensus: cuts are still coming

The general consensus is that the RBA will have to ease further as the year progresses. While some parts of the economy are stabilising, particularly the property market (which has of course been helped by 75 basis points worth of easing during 2019), others are flagging.

Construction and consumer confidence are weak, and expectations for retail sales over the Christmas period are low. Construction output has declined for five straight quarters, while consumer confidence has erased most of the rebound recorded after hitting the lowest levels since mid-2015 in October.

There are also questions over the impact of the bushfires upon monetary policy. It is believed that, despite the economic damage estimated to be in the region of $100 billion, the bushfires will have only a short-term impact and therefore may not have any bearing on monetary policy. However, if it serves to further knock consumer confidence, it could be a contributing factor in any decision to ease policy.

The Chinese coronavirus outbreak is another large unknown; Australia trades heavily with China, so talk of factory shutdowns and a reduction in consumption could hurt the Australian economy.

What will the guidance say?

It can take 12 to 18 months for the impact of monetary policy adjustments to be fully known, so the RBA is likely to claim next month that it needs more time to assess the effects of 2019’s trifecta of cuts.

But how much time? Some analysts, like Evans at Westpac, believe the RBA will tee up a cut for April, while others think we may have to wait until the second half of the year to see further easing.

Hong Kong shares dip, FOMC on tap

Morning Note

The pendulum of risk swings back and forth…Hong Kong shares sunk overnight as expected as the market played catch upon reopening after the new year holiday. The Hang Seng dipped 3% before paring losses a touch to trade 2.6% weaker.

This comes after a rebound in the US and Europe as investors decided to buy the dip following Monday’s sell off. The Dow added 187 points, after shedding 450 on Monday. The S&P 500 rose 1%. The FTSE 100 and DAX both climbed 0.9%.

Ahead of the open, futures indicate a flat open for European markets as they seek fresh direction from the Fed meeting later, developments in China with the coronavirus, and a raft of corporate earnings on Wall Street. The Dow could be particularly sensitive with Boeing, McDonald’s and Microsoft reporting. We also have Tesla and Facebook coming up – it’s a big day for earnings.

In terms of the Fed meeting today, the key thing we’re looking for today relate to balance sheet expansion – anything that suggests the free money taps could be turned off may expose riskier assets. Markets are accustomed to the Fed riding to the rescue and using monetary policy to create an easy path higher for stocks. Today’s Fed meeting will be important against this backdrop of heightened risks and we also need to look at whether the expected increase in the IOER by 0.05% to 1.6% will worry markets. As detailed in our Fed preview: Just tweaks, we expect no change to the fed funds rate and for the FOMC statement to describe policy appropriate. Market pricing indicates no chance of a cut. The emergence of the coronavirus in China will warrant a degree of caution in the outlook from the Fed, whilst there is little upward pressure on prices to suggest a shift in the FOMC’s stance. The signing of the US-China trade deal only confirms priors and doesn’t materially alter the outlook from last month.  Recent economic data only confirms momentum has slowed but remains solid. Yesterday’s December durable goods orders ex-defence were sharply lower. Easing bias still very much place. 

Coronavirus is already bigger than SARS was in China. There are now confirmed cases of the coronavirus in mainland China, including 132 deaths, according to China’s National Health Commission (NHC). There’s mutterings the true number is much higher. The White House is said to be considering an outright travel ban between the US and China – this would have serious implications for trade and the economy.

Cases are rising but the questions over the coronavirus outbreak as it pertains to the Chinese – and therefore global – economy remain unanswered. Could it affect China’s ability to meet trade deal commitments for instance? There is a worry if things get really bad, not only do we see a material decline in Chines GDP growth, but this also creates headwinds for complying with the deal. Further deterioration in the yuan is among the most obvious concerns as we have seen USDCNH rally since the outbreak and threaten to go above the key 7 level. In terms of growth being affected in China, there is a clear risk to supply chains and contagion in the rest of the region as well as knock-on effects further afield. The most obvious risks are to consumption but a sustained lockdown in the major cities would also tend to lead to a loss of output that could be hard to claw back later in the year.

The swing in the risk pendulum favoured stocks and oil but sent gold bulls packing. Crude oil recovered the $54 handle to successfully close the gap from Sunday’s open. Sentiment remains dicey. OPEC and co are getting on the wires talking up prices, indicating they’re starting to really worry. Gold has eased off highs north of $1580 to trade around $1563.

Interestingly both gold and oil have closed their respective gaps after moving sharply at the start of the week on coronavirus fears. Markets have been swift to retrace, so we now must see whether these mark reversals or whether the pre-existing trends reassert themselves.

Sterling is steady ahead of tomorrow’s knife-edge Bank of England decision. Markets see a roughly 50% of the MPC voting to cut rates. GBPUSD is well anchored at 1.30 but whatever the outcome will slip that berth. Recent comments from several policy makers at the Bank, some softer inflation data and GDP numbers, and persistent risks to the global outlook suggest the MPC may choose to act now to cut. 

Meanwhile Britain has decided to allow Huawei to supply parts of its 5G network. This could be a mistake, and make doing a trade deal with the US harder. But it also be a bargaining chip. It also indicates the UK is prepared to forge its own course, which is no bad thing.

EURUSD has found support at 1.10 is bonding for now. USDJPY continues to languish at 109 but there’s not much conviction on either side to see 108 or 110 first.

Equities rocking as coronavirus cases jump

Morning Note

We see some relief early doors for Europe but global equity markets are still rocking, with boards lit up red as investors manage risk in the face of China’s coronavirus outbreak. There are no signs of this letting up – but at least market expectations have shifted markedly since the middle of last week to better reflect the risk of a rapid rise in confirmed cases. The problem is investors have very limited visibility of the current situation in China, have virtually zero knowledge of epidemiology and virology, and have no clue how bad it will get or lasting the impact will be. Risk models are not geared for this situation.

Nevertheless, futures today indicate a very mild rebound in Europe and the US, with the DAX seen up at 13280 and the FTSE 100 at 7444 on the open. US futures point to gains too today.  But we are not convinced this will hold – as explained in yesterday’s note, buying the dips is alive and well – I would anticipate dips to be buying opportunities for many in the market. But one feels equities face headwinds still as the peak of this health crisis has some way off still.

Those Asian markets that are open have posted steep declines on Tuesday – Singapore, Sydney and Seoul all slipping 2-3% after we saw a day of heavy selling in Europe and the US on Monday. Hong Kong markets will trade as normal tomorrow – this will be the best gauge of how much risk sentiment has been affected.

Cases of the virus are rising fast – up to more 4,500 confirmed in China now from 2,800 a day ago. The death toll has hit triple figures.

Authorities are tightening restrictions on foreign travel and on things like when workers will be allowed back to their posts after the new year holiday. For example, Shanghai is reportedly banning companies from restarting operations until Feb 9th. Foreign carmakers are pulling staff out.

We know there will be an impact on consumption, but if factories are kept shut we will also see a downturn in output in Q1. The risk for the Chinese- and by implication the global economy – is that the lockdown across much of China persists for a longer time than currently anticipated, crippling output as well as consumption.

On Monday, the S&P 500 fell 50 points, or 1.57%, while the Dow fell by the same margin, shedding over 450 points. These were the biggest one-day declines since Oct 2nd. It was a brutal session in Europe too, with the DAX down 2.75% and the FTSE 100 losing 2.3%. Airlines, miners and luxury retailers suffered most.

Risk-off flows further supported government bond prices, with the yield on US 10yr debt moving back to 1.6%. Bunds are near -0.4% again. Could have further to run, particularly if markets think that slacker global growth as a result of this virus spurs central banks to be more accommodative. Likewise gold is holding gains with lower yields supportive of the bugs – steady around $1580.

Oil – ahead of their March meeting, reports suggest OPEC and her allies are examining all options – including extending and deepening production curbs – in an effort to control the slide in oil prices. For now traders are betting on weaker China growth in GDP and slacker tourism numbers in Asia to drive down demand. Libyan output remains sharply curtailed, by about 1m bpd, but this so far is providing little respite. WTI has firmed off its lows to $53.20 – bulls looking to quickly close the gap to $54 or we could get further weakness and retest of $50.

In FX, the yen has held gains but finding it harder to make much more headway. USDJPY was hovering around 109, having sunk as low as 108.7920. Key 200-day moving average support at 108.460 is yet to be tested, with the 100-day line at 108.60 also unscathed for now. The 50-day line around 109.20 is now resistance.

EURUSD is looking brittle having shed its Dec gains. A retest of 1.10 is on the cards particularly as coronavirus fears stoke bid for the relative safety of USD. Next up looks to be the key horizontal support at 1.0990, a level well-trodden in recent months. GBPUSD is a little weaker at 1.3030, having shed the 50-day line at 1.30640 which is now forming a resistance point. Sterling is likely to be well anchored around this 1.30 level until the Bank of England decision. Ahead of that is the Fed decision tomorrow night – no change expected but there could be some interesting nuggets from Powell in the presser.

China virus spread rattles equity markets, oil

Morning Note

Global stock markets started the week under a lot of pressure, as fears mount over the spread over China’s coronavirus outbreak. 

China has confirmed around 3,000 cases so far, with about 80 deaths. The authorities have extended the new year holiday by three days through to Sunday in a bid to control the spread.  

This has the potential to really rattle markets. And with stock markets having been at or very near all-time highs before all this broke, this is a perfect selling opportunity. The problem is for most investors this is just not a risk event they are prepared for – a true black swan in the making. If politics is hard to grasp for most buysiders then virology is impossible – that is enough reason to see de-risking to happen; although I would still anticipate dips to be bought. However the conviction may be lacking amid what will be a persistent worsening of the situation in terms of the number of the cases and the geography displayed by the headlines. As warned last week, this is going to get a whole lot worse before it turns. As with SARS though, I would expect a significant rebound once the – or indeed before – the worst is over. It’s worth noting that whilst the Hang Seng suffered heavy selling in the Jan-Apr period of 2003, the index finished the year up by 34% (albeit that was after three horrible years). We just don’t know enough about this.

Japan’s Nikkei 225 dropped 2% but most of Asia is shut for the holiday so trying to get a really accurate view of how sentiment is shifting is tricky – I’d think so would see some significant (3-4%) moves in Shanghai and Hong Kong today if they were not closed.   

European equities have been relatively sanguine in the sense that we’ve not seen a concerted move lower – Friday saw the major bourses add 1% each – the DAX hit a record high in the middle of it all last week. But I think as we start the week we do see some more coordinated risk-off flows as the indications that this virus has the potential to be a lot worse than SARS was in terms of the global economy.  Looking at the futures, the FTSE 100 handed back all of Friday’s rally and then some on Monday morning.

US markets had a tougher time – the S&P 500 suffered its worst week since August. But that’s only really because we’ve had such a languorous grind higher over the last six months. A second confirmed case in the US has spooked investors. Futures indicate further selling today with SPX last at 3260. Earnings this week have the potential to move the market – Apple, Tesla, Microsoft, Facebook and Amazon all due to report this week.

The big risk right now for Europe and US equity markets would be human-to-human cases within continental Europe/North America. Without that happening the focus will be more on the risk to global growth rates given the virus is hitting the drivers of global growth. 

Oil extended losses sustained last week as traders bet on slower China GDP growth and a hit to the global tourism industry – two of the key drivers of crude demand. Crude oil WTI sank as low as $52.50 in early trade Monday before paring losses to reclaim $53. We’ve seen further unwinding in speculative net long positioning, with the latest COT report indicating 520k net longs, vs 530k the week before. There’s a good chance we see $50 again, which is a level that would likely spark a response from OPEC when they meet in March.

Havens are well bid with gold rallying north of $1480 and the yen rallying past 109. US 10-year yields have sunk to 1.646%.  

In FX, USDJPY has recovered to 109 having sunk as low as 108.80, taking a look at the 100-day moving average. Safety flows ought to keep JPY bid. 108.50, the 200-day SMA, is the key support. Bulls looking to recover the gap and last Friday’s lows around 109.170. 

EURUSD is still on the defensive at 1.1030. Next up looks to be the key horizontal support at 1.0990, a level well-trodden in recent months. Data is light today but we do have the German Ifo survey at 9am GMT. 

GBPUSD is holding around 1.3070 having come off from its highs last week. All attention is on the Bank of England meeting on Thursday – it’s a coin flip whether they cut or not, according to market pricing. However, my inclination is that they will take this opportunity to ease.

Brexit day, Bank of England eyes cut, FAANG earnings on tap

Week Ahead


At long last, after more than three and a half years and much political and market turmoil, Britain will finally leave the European Union on Friday, January 31st at 11:00 GMT. Bongs or not, there will be celebrations and commiserations in equal measure. For the pound, the focus now is on the trade deals with the EU and the US – at Davos last week it was made clear this is not going to be easy.

Bank of England to cut?

Market pricing suggests a roughly 50/50 chance the Bank of England will cut rates by 25bps to 0.5% on Thursday. Whilst hard economic data prior to the election showed a softening in activity, surveys since the Tory win have improved.

Weak inflation – which rose just 1.3% against 1.5% in November – could swing it for the doves. CPI inflation rates are at their lowest since 2016. There is a sense the Bank doesn’t want to get behind the curve of market expectations and is seeking to get a jump on markets whilst still teeing up the cut. It would be following the Fed’s playbook in cutting early in order to prevent a downturn.

Tesla’s record run faces test

Shares in Tesla have enjoyed a remarkable run up to record highs, valuing the company at $100bn. But will the fourth quarter numbers deliver on the promise?

Influential analyst Dan Ives at Wedbush thinks the company will at least meet expectations. He says: “While Tesla shares remain on a historic rally heading into earnings, the bull party likely continues as the aggressive trajectory of Giga 3 production and demand out of Shanghai look very strong out of the gates and is the catalyst to move our price target from $370 to $550 ahead of earnings”.

Apple earnings

Apple has also been making new record highs as it gears up to report its fiscal first quarter earnings. This is always Apple’s strongest as it chalks up the holiday season and new iPhone models. We’ve had decent indications from the Services side of the business indicating that its pivot to being more of a Services business is in full swing. App store customers spent a record $1.42bn between Christmas and New Year, 16% up on last year, the company has said. Management also revealed that Apple News is drawing over 100m monthly active users across the US, UK, Canada and Australia. This is all to the good – Services margins are about double that for the rest of the business and will mean re-rating of the stock going forward.

New Fed makeup

No change expected from the Fed – don’t expect Powell to do anything other than signal he can’t imagine hiking again. A new makeup of the voting membership of the FOMC will provide some interest but is unlikely to change things materially – hawks Eric Rosengren and Esther George, along with doves Charles Evans and James Bullard, are set to depart. They will be replaced by arch dove Neel Kashkari, the more balanced Robert Kaplan and two more hawkish-leaning governors, Loretta Mester and Patrick Harker.

Key Events

(All times GMT)

09.00 GMT 27-Jan Germany Ifo Business Climate
00.30 GMT 28-Jan Australia NAB Business Confidence
13.30 GMT 28-Jan US Durable Goods Orders
15.00 GMT 28-Jan US CB Consumer Confidence
After-Market 28-Jan Apple – Q1 2020
23.50 GMT 28-Jan Bank of Japan Summary of Opinions
00.30 GMT 29-Jan Australia Inflation Rate
07.00 GMT 29-Jan Germany GfK Consumer Confidence
15.30 GMT 29-Jan US EIA Crude Oil Stocks Change
19.00 GMT 29-Jan Federal Reserve Interest Rate Decision
After-Market 29-Jan Microsoft – Q2 2020
After-Market 29-Jan Facebook – Q4 2019
After-Market 29-Jan Tesla – Q4 2019
08.55 GMT 30-Jan Germany Unemployment Rate
10.00 GMT 30-Jan Eurozone Business & Consumer Confidence Surveys
12.00 GMT 30-Jan Bank of England Interest Rate Decision & Inflation Report
13.00 GMT 30-Jan Germany Preliminary Inflation Rate
13.30 GMT 30-Jan US GDP Growth Rate (Q4)
15.30 GMT 30-Jan US EIA Natural Gas Stocks
After-Market 30-Jan Amazon – Q4 2019
10.00 GMT 31-Jan Eurozone Preliminary Q4 GDP
13.30 GMT 31-Jan US Personal Income and Personal Spending

Sterling off highs despite PMI Boris Bounce


Sterling rallied into the PMI release but eased back a touch despite the survey figures being a little better than expected. GBPUSD broke the Wed peak at 1.31524 but came back down to under 12.3140 following – we are talking very, very minor moves here let’s be clear. Bulls are struggling to hold 1.3150 but they may well rally the troops and if reclaimed later today then we could look for a push towards 1.31690, the Jan 8th high, to open up from upside. Looks very well supported at 1.31 for now.

Yes the PMIs bounced back – with the Composite PMI rising to a 16-month peak at 52.4 from 49.3 in December – but this was entirely to be expected and reflects businesses letting out a collective sigh of relief after the Conservative Party victory in the December election as it heralded an end to the paralysis over Brexit and killed off the prospect of a radical Jeremy Corbyn-led government. Businesses ought to be a damn sight more confident as a result – it does mean that we’re out of the woods . Ultimately, whilst clearly diminishing the case for a cut, I don’t see these PMI surveys as being enough to prevent the Bank from cutting – I think they have already decided on this.

The harder data we’ve seen has been a lot less auspicious. GDP is weak and inflation has come off sharply, albeit the base effect is at play. Inflation rose just 1.3% against 1.5% in November. Core CPI was a meagre +1.4% last month, vs 1.7% expected. CPI inflation rates are at their lowest since 2016. It is worth remembering that this data is backward looking and before the Tory victory, but this only adds to the sense that the BoE has a narrow window of opportunity to cut this month, based on the premise that it feels like it got a little behind the curve globally last year as its hands were tied by Brexit.

The Bank doesn’t want to get behind the curve of market expectations, and is seeking to get a jump on markets whilst still teeing up the cut. It would be following the Fed’s playbook in cutting early in order to prevent a downturn. This is the key thing to remember – the Bank does not want to let a weaker economy fester.  

Whilst there may be lots of arguments against a cut, the coordinated dovish commentary from about half of the MPC over the last fortnight appears no accident. Harder data has turned notably softer and the BoE doesn’t want to risk allowing weakness to become entrenched.

Stocks soften on China virus fears + trade doubts, Oil sinks, ECB on tap

Morning Note

Asia has been sharply weaker overnight as fears over the coronavirus weigh on investors. Wuhan is in lock down – about time too, but coming as it does at the start of the New Year holiday, it’s a big problem for the authorities. Shanghai’s A50 slipped 3%, with the Hang Seng down 2%. Markets seemed to largely shrug this off yesterday but as I said in Monday’s note, it’ll get worse before it is sorted.

European shares are weaker at the open. Luxury and airlines are most exposed to the virus, as consumer sentiment and tourism suffers in China and around the region. The DAX has skidded a  further 0.4% lower to 13,450. The FTSE 100 was softer by around the same margin.

It was a strange old day yesterday as we saw record highs for the S&P 500 and Nasdaq but the bulls couldn’t maintain any momentum. The Dow eased a shade lower with Boeing down again. The DAX also notched a record intra-day peak but failed to hold on, closing 0.3% lower at 13,515. The FTSE 100 was 0.5% down at 7571, languishing on pound strength. 

Whilst it may seem odd to talk about what’s dragging on the market when we’re at record highs, there’s no doubt bulls are just a little timid right now to really blow this higher. And given the recent ramp, the market is ripe for a pullback.

First the coronavirus has everyone a little on edge, and is a clear and obvious drag for airlines etc. Chinese bourses and Hong Kong are most exposed to the risk, but there is definite risk of contagion.

Two, the rhetoric on trade we’re hearing from Mnuchin and Trump at Davos is as belligerent as ever, while Von Der Leyen is hardly striking an emollient tone over British hopes for a quick and easy deal with Europe. Divergence from EU rules means, er, trade not an equal terms. It’s unavoidable.

Brexit to one side, British and French digital tax plans are the next front in the Trump trade wars and could threaten to undo some of the recent gains in US and European equities. Trump will hit Britain with punitive auto tariffs if the govt goes ahead with a digital services tax disproportionately targeted at US tech giants. The same goes vis-a-vis a French tax. 

Balancing the three competing aims of Britain, the US and the EU will require Bismarck-like skill by Boris Johnson. 

Three, valuations need earnings growth to justify stocks at this level. On that front, doubts are surfacing over Q4 profit margins although S&P 500 companies are generally beating expectations and growing revenues. But it could be four straight quarters of profit margin compression – that should make investors a little more cautious. Growth in Europe remains anaemic.

Tesla keeps squeezing the shorts without mercy. Shares rose another 4% – earnings due next week. Analysts are rushing to update forecasts and price targets. There’s a lot riding on these numbers – Tesla misses it could be a bloodbath.

Oil has continued to slide after snapping key support yesterday. WTI broke at $58 and kept falling until it found some tentative support at $55.60. I remarked last Tuesday that oil had a $55 handle written all over it – the bearish momentum is very powerful but we are approaching a more stable support zone and the market is close to showing overbought conditions on the 14-day RSI, which last time this occurred was a trigger for a rally. Brazilian output has risen to an all-time high. This is important as it shows that the fears over non-OPEC+ production ramping higher in 2020 – US, Brazil, Norway etc – is being evidenced and this will make impotent any reactive measures by OPEC and its allies. Effectively all OPEC is doing is ceding market share. Prices of WTI broke down through important long term averages yesterday and this could herald a further retreat, though $55 is likely to offer an area of stabilisation. We have seen net oil long positioning rather stretched, exacerbating this decline as speculative net longs are forced to liquidate. Worries over the potential impact of the coronavirus on China/Asia growth are a factor but largely I see this as over-extended longs having stops triggered.

Brexit – the government’s withdrawal agreement bill has passed! Roll on trade negotiations…it’s not going to be easy and the pound will act as a barometer of success. Headline risk will reappear for the pound.

Sterling is a tad firmer this morning after retreating from yesterday’s highs in overnight trade. GBPUSD knocked on 1.3150 twice and twice come down to rest on 1.3120. A third push to 1.3150 may be on but ran out of momentum this morning early doors at 1.31450. The chart pattern has a bullish and flaggy look about it. Near term a lot rests on the Bank of England policy decision next week, though we may start to notice trade play an increasing role in sterling’s moves as we enter negotiations with both the EU and US.

USDJPY has been weaker overnight, slipping its 110 berth to drop below the 200-week moving average at 109.50 to test important horizontal support. The chart suggests a bullish flag as long as this level holds.

EURUSD is treading water around 1.11080 as traders await the ECB meeting.

ECB Preview: Strategy review in focus


  • Guidance seen unchanged
  • Inflation pick up
  • EURUSD weaker, long-term uptrend barely holds

No major changes, review in focus

The European Central Bank meeting on Thursday is likely to produce some clues about future monetary policy direction, but nothing concrete. The focus will be on the strategy review as it gets underway, which is buying new boss Christine Lagarde some breathing space. She’s only in her second press conference so expect some further honing of communication skills. 

The focus of the strategy review this week will revolve around its scope and the timescale. Of particular interest of course is the mandate relative to price stability and its inflation target. We’d expect this ultimately to result in the ECB taking a more symmetrical approach to inflation. 

Given there are no fresh economic projections and the focus is on the review, guidance is not expected to alter materially. As I say, the review is a good way to buy time as the ECB remains in a holding pattern due to a) Lagarde’s own inexperience, b) the uncertainty over the economic outlook for the EZ and the world, and c) since Draghi embarked on an aggressive cut and QE restart as his parting gift, allowing Lagarde plenty of time to sit on her hands. 

The easing in trade tensions lately should support the ECB’s December view that ‘the risks surrounding the euro area growth outlook … remain tilted to the downside but are ‘somewhat less pronounced’. Of course whether the trade deal holds is another matter – but I would anticipate the signing of the phase one agreement to be reflected in Lagarde’s commentary.

However, ultimately with the market still expecting further easing from the ECB this year, we will need a clearer handle on where Lagarde is steering this ship soon enough.

Challenges: economy still spluttering 

Flash PMIs due on Friday will tell us more. A mild pick-up is seen, with the latest ZEW numbers showing a glimmer of hope, but the EZ is far from out of the woods. German growth has slowed to a six-year low. Green shoots seem few and far between. Even the UK (despite Brexit, if you care to add as an adjunct) is seen growing faster than any G7 European nation in 2020. Signs that PMIs are basing, but little recovery seen – the bottoming phase may linger.  

Inflation picked up in December, with annual headline inflation rising to a six-month high of 1.3%. Core inflation was steady from Nov at 1.3% also. Welcome news for the ECB, particularly the hawks on the council, but it’s too early to call this a material or sustained uptick. Lagarde is sure to be asked about this. Her answer will be of particular interest – and offering some scope for EURUSD volatility – as it could signal whether the ECB is about to raise its inflation forecasts.

EURU/USD: Uptrend in jeopardy 

The broad uptrend since last September remains in force, but near-term downtrend threatens to snap the bulls’ resolve. Following the swing high at the end of last year at 1.12390, the pair has trended lower to break down below the 50-day and 200-day moving averages, as well as snap the trend support around 1.1090 (red line). Key MA support on the 100-day line, which was touched and reject on Dec 20th is formed around 1.1070. The low of Dec 20th also offers some horizontal support close to this level at 1.10660. So, this region will be a key test as we get into the ECB meeting and the flash PMIs on Friday. 

DAX hits all-time high

Morning Note

The DAX opened at all-time high having missed a record close yesterday by a hair’s breadth. The index rallied to 13,630 as other European bourses enjoy a firmer open. German companies are among most exposed global trade worries, and therefore those enjoying the biggest bounce since US-China relations improved at the back end of last year, resulting in this month’s trade deal.

Markets are largely shrugging off coronavirus concerns today after feeling a bit under the weather on Tuesday.

US stocks edged away from all-time highs as traders returned from the long weekend to the coronavirus outbreak in China and the start of Donald Trump’s impeachment trial. The Dow was down 150pts on the day, or a drop of 0.5%, while the S&P 500 slipped 0.25%. The first coronavirus case in the US was recorded, raising fears of the virus spreading. Airline, casino and cruise company shares were worst hit. 

Boeing took a nosedive, weighing heavily on the Dow, as it emerged the firm won’t get regulatory approval to fly the grounded Max 737 at least until the middle of the year. Reports that pilots have totally lost trust in Boeing are a further worry. Shares were halted limit down, slipping 5.5% before closing down 3.3%.

Donald Trump’s impeachment trial has begun with several wins for the Republican Party as Senate majority leader Mitch McConnell held his troops in for action to repel repeated Democrat sallies. The Dems made an early breach in the GOP wall by forcing McConnell to allow more time for opening arguments, but thereafter the defences held as a series of votes were passed on party lines 53-47. Dems don’t need many GOP Senators to waver, but for now it seems the citadel is safe. Key will be Republican aims to prevent witnesses being called. For now the Democrats’ chances of winning look like a forlorn hope.

Asia has broadly rallied overnight. The Hang Seng recovered from its worst day in months to rise 1.2%. 

European indices climbed off the lows struck in the morning to pare losses on the day but were still broadly weaker. The DAX was the best of an ugly bunch, eking the slenderest of gains – and moving to a near record close. The FTSE 100 edged 0.5% lower as the pound rallied, weighing on the international facing stocks.

In FX, the pound is on a firmer footing as markets dial back expectations the Bank of England will cut rates. GBPUSD has held gains above 1.30 at 1.3050 where it’s wrestling with the 50-day moving average and the long-term 23.6% Fib resistance around 1.30540. If these are breached we may consider a move back to the key double Fib level at 1.31450, a previous support zone. If the Bank does not cut then this is where we would expect GBPUSD to move back to, although last Friday’s swing high at 1.31180 needs to be cleared first.

We need the flash PMI releases on Friday to really tell us what the Bank is likely to do. These are undoubtedly set to rebound, as they will reflect renewed business optimism in the wake of the Conservative election win. The sudden absence of the Corbyn risk to businesses will see a rebound in sentiment – the Boris Bounce in action. However, is that enough for the MPC? 

EURUSD failed to break through at 1.11 and was looking weak at 1.1080. The pair seems happy to tread water cautiously ahead of tomorrow’s ECB meeting. USDJPY rallied to take 1.10 again.

Gold and oil doing precious little. Gold has been bounced back to support at $1550 having attempted to make a run at $1570 and running out of steam around $1568. Oil has come back to $58, again aiming to recover the 50% Fib level of the rally from the Oct low to the recent high around $58.30.

Asian shares in disarray over SARS-like virus, yen rallies

Morning Note

Shares in China and Hong Kong fell amid fears over the spread of the coronavirus just as the new year holidays begin. The worry is this is another SARS, an outbreak that saw thousands infected and led to hundreds of deaths. It also led to billions of dollars of losses and hit Chinese GDP growth by up to one percentage point. If that happened again the IMF’s latest forecasts would not stand up, and we’d see a sharp contraction in many leading indicators of the global economy.

We don’t know how bad this will be, but with authorities confirming the disease can spread between humans, it’s wise to be on guard for this outbreak to get worse before it gets better. And there is a real fear that as millions of people travel long distances for the holidays the disease could spread far and wide. Markets are worried about this spreading to more cities. Australia has quarantined a man returning from the city of Wuhan, who is believed to carry the disease.

Hong Kong could be a real problem if it reaches there – the SARS outbreak led to sharp declines on the Hang Seng in the Jan-Apr 2003 period.

Shanghai fell almost 2%, while Hong Kong dipped close to 3% lower. A downgrade by Moody’s of Hong Kong on Monday hasn’t helped.

US markets will reopen after the holiday. Futures were in water-treading mode after Friday’s rally capped a strong week for the major indices. Netflix Q4 numbers are on tap later – with EPS seen at $0.5 on revenues of $5.45bn, and net subscriber additions of 7.6m, with 7m, from RoW and 0.6m from the US. The key question is to what extent competition is starting to bite – either in the Q4 numbers themselves or in the guidance (see Netflix preview: Content to be primus inter pares?)

Europe was flabby without the US liquidity with the DAX the only bright spot, eking out a gain of 0.17% to 13,548. Bulls continue to target all-time highs at 13,600 but the consistency with which this level has proved too strong to overcome is a concern. If it blows I’d expect momentum to grind out more record highs. The FTSE 100 retreated to 7,651.

European shares are catching a bit of a cold from Asia, but I’d anticipate very limited contagion as long as the coronavirus remains a purely Asian problem. DAX dipped to 13,470, with the FTSE moving under 7600 before paring losses. France and the US have agreed a truce over the planned digital tax, but risks remain.

The risk-off contagion spread to other markets with a notable divergence in FX, as the yen rose and the yuan fell. USDJPY has slipped its 110 berth to at 109.950, but remains supported above the 200-week moving average at 109.70. USDCNH jumped through 6.9. As we’ve noted before, there may be side effects on the US-China trade pact if the yuan takes a 7 handle.

Overnight the Bank of Japan offered no surprise as it left rates unchanged, and improved its growth outlook. Better growth prospects, the signing of the US-China trade deal and a weaker yen means the central bank need not rush into more stimulus. The BOJ kept its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0%.

Elsewhere, we’re looking to UK wage data today as another possible guide to what the Bank of England might do on Jan 30th. Earnings are seen up 3.4% in the three months through Nov, with unemployment is forecast at 3.8%.

Whilst there may be lots of arguments against a cut, the coordinated dovish commentary from half the MPC in the last fortnight is no accident. Data has turned notably softer and the BoE doesn’t want to risk allowing weakness to become entrenched. As noted in last week’s note on this, BoE: Stitch in time saves 9, there is a sense the Bank doesn’t want to get behind the curve of market expectations, and is seeking to get a jump on markets whilst still teeing up the cut. It would be following the Fed’s playbook in cutting early in order to prevent a downturn. This is the key thing to remember – the Bank does not want to let a weaker economy fester.  And whilst there is no trade deal with the EU, the MPC has been largely released from the shackles of Brexit uncertainty following the Conservative victory last month. Political risk has hobbled the MPC but this has diminished greatly and now is the window – before a possible clash with the EU in the spring that would make policy changes more political in nature – to get a cut in the bag to juice the economy. 

GBPUSD is holding 1.30 again having traded weaker yesterday. This level is the magnet until either the Bank decision next week or the gilt market moves early and gives a clear signal about what’s coming. EURUSD is little changed at a little below 1.11.

Gold was also a touch higher at $1566, catching some mild bid on the risk-off moves and as the yield on US 10s slipped below 1.8%.

Crude oil closed the gap within a few hours of trading yesterday, having spiked higher due to production outages in Libya and Iraq it failed the test at the 50-day moving average. At send time WTI was just holding on to $58, aiming to recover the 50% Fib level of the rally from the Oct low to the recent high around $58.30.



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