Equities Continue to Recover, BoE Hikes but Turns Cautious

EU shares traded mixed yesterday, with investors turning cautious temporarily following headlines that Russia and Ukraine remain far apart from finding common ground. However, Wall Street traded well in the green, with the appetite staying supported during the Asian session today as well. The BoE hiked rates by 25bps as expected, but the 7–1 vote suggests that policymakers have become more cautious with regards to their future moves.

INVESTORS ADD SOME MORE RISK, BOE LESS CONFIDENT ON FUTURE HIKES

The US dollar continued trading lower yesterday and today in Asia, losing ground against all but one of the other major currencies. It underperformed the most against AUD, NZD, and CAD, in that order, while it lost the least versus GBP. The greenback was found virtually unchanged against JPY.

The weakening of the US dollar and the safe-haven yen, combined with the strengthening of the risk-linked Aussie, Kiwi and Loonie, suggests that market sentiment may have stayed relatively supported. Turning our gaze to the equity world, we see that major EU indices traded mixed, but all three of Wall Street’s main indices traded in the green, with the optimism rolling into the Asian session today as well. Of the indices under our radar, only Hong Kong’s Hang Seng lost some ground.

Risk appetite may have been shaken during the European session perhaps due to fresh headlines surrounding the war between Russia and Ukraine saying that, despite some progress being made the last few days in negotiations, the two sides remain far apart. In our view, this suggests that an imminent resolution does not appear very likely at the moment, but the market reaction during the US and Asian sessions suggests that market participants are not as worried as in the previous weeks. Maybe they believe that the conflict is fully priced in, or they are optimistic that some further progress could be made in the next few days.

In any case, with the war still raging, we are still reluctant to call for a long-lasting recovery. Yes, we could see some further advances in equities in the near term, as we noted yesterday, but our overall stance remains neutral for now. And this is because of the latest official headlines pointing to some progress in peace dialogs, but as well as due to the technical pictures of some indices, which broke above key resistance zones. Otherwise, we would have maintained the view that the path of least resistance remains to the downside.

Yesterday, we also had a BoE decision, with the Bank lifting its benchmark rate by another 25bps, as it was widely expected. However, what came as a surprise was the 7–1 voting, with the dissenter calling for no increase at all. Remember that at the previous gathering, officials lifted rates by 25 bps as well, but the vote was 5–4, with the dissenters calling for a 50bps increase. Compared to that, yesterday’s decision reveals a more cautious approach by policymakers and raises questions as to whether they will indeed proceed as aggressive as the market has been pricing in heading into the gathering. A small change in the forward guidance added more credence to that view. Officials said that “some further modest tightening may be appropriate”, which appears to be softer than the previous “is likely to be appropriate”. All this explains why the pound fell at the time of the decision.

S&P 500 — TECHNICAL OUTLOOK

The S&P 500 cash index traded higher yesterday, breaking above the downside resistance line drawn from the high of January 4th. However, the advance was stopped between the 4400 and 4430 barriers, marked by the high of March 1st, and the inside swing low of February 16th. With that in mind, we would like to see a clear break above 4430, before we get confident on larger advances.

Such a break could encourage the bulls to climb towards the peak of February 16th, at 4490, or the high of February 11th, at 4525. If they are not willing to stop there, then we may experience more upside extensions, perhaps towards the 4595 zone, which acted as a ceiling between February 2nd and 10th.

On the downside, we would like to see a clear dip below 4335 before we start examining whether the bears have stolen the bulls’ swords. Such a move could confirm the index’s return back below the aforementioned downside line and may pave the way towards the 4250 barrier, marked by the low of March 16th. Another break, below 4250, could see scope for extensions towards the 4140 zone, marked by the lows of March 8th and 15th.

GBP/NZD — TECHNICAL OUTLOOK

GBP/NZD traded lower yesterday, but the slide was paused slightly above the 1.9045 territory, which has been providing decent support since March 7th. Overall, the pair has been oscillating in a trendless fashion between that barrier and the 1.9370 zone, since March 4th, and thus, despite the prevailing trend being to the downside, we will adopt a flat stance for now.

In order to start examining whether the prevailing downtrend has resumed, we would like to see a clear break below 1.9045. This will confirm a forthcoming lower low on both the 4-hour and daily charts and may initially pave the way towards the 1.8855 barrier, marked by the low of November 8th. If that barrier is not able to stop the slide, then its break may see scope for larger declines, perhaps towards the low of January 6th, 2021, at 1.8615.

We will start examining a bullish reversal upon a break above the upper end of the range, at around 1.9370. This will confirm a forthcoming higher high and may encourage advances towards the 1.955 barrier, marked by the inside swing low of December 21st, or the 1.9620 hurdle, marked by the inside swing low of March 2nd. If neither barrier is able to stop the bulls, then a break higher could open the path towards the peak of March 3rd, at 1.9790.

AS FOR TODAY’S EVENTS

During the Asian session Friday, we had another major central bank deciding on monetary policy and this was the BoJ. As it was widely expected, officials did not proceed with any bold change, and that’s why the yen did not react.

Later in the day, Canada’s retail sales for January are due to be released. Headline sales are forecast to have rebounded 2.4% mom after sliding 1.8% in December, but core sales are anticipated to have continued sliding, albeit at a slower pace. Specifically, the forecast points to a 2.0% mom slide after a 2.5% fall the month before.

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