Market Sentiment Softens in US and Asia

European shares continued their new year rally on Tuesday, but sentiment softened during the US session, and deteriorated even further in Asia today. Maybe the trigger for the switch was the slide in the ISM manufacturing index, or it could have been hawkish remarks by Minneapolis Fed President Neel Kashkari. Yesterday, we also had an OPEC+ decision, with the group sticking to its agreed plan.

EU SHARES EXTEND THEIR RALLY, BUT SENTIMENT DETERIORATES LATER IN THE DAY

The US dollar traded mixed against the other major currencies on Tuesday and during the Asian session Wednesday. It gained against JPY and EUR, while it lost ground versus GBP, CHF, and AUD. The greenback was found virtually unchanged against NZD and CAD.

The weakening of the yen, combined with the strengthening of the pound and the Aussie, suggests that markets may have traded in a risk-on manner yesterday and today in Asia. That said, the strengthening of the franc points otherwise. Thus, in order to clear things up, we prefer to turn our gaze to the equity world. European stocks extended their new year rally, perhaps as participants continued to cheer evidence that the Omicron coronavirus variant may be less severe than initially feared, despite cases around the globe surging to new records. That said, sentiment softened during the US session, with only Dow closing in positive waters. The S&P finished the session virtually unchanged, while Nasdaq tumbled 1.33%. Asian shares continued in a declining mode as well.

Maybe sentiment turned around after the ISM manufacturing index for December slid by more than expected, or it may have been remarks by Minneapolis Fed President Neel Kashkari, who said yesterday that he expects that the Fed will need to raise interest rates twice this year. Yes, two hikes are less than the three indicated by the latest “dot plot”, but taking into account that Kashkari has been one of the most dovish members, supporting the view that interest rates will need to stay at zero until at least 2024, this is a strong hawkish switch by him. If Kashkari now sees two hikes this year, some other, more hawkish members, may be in favor of four or more.

As for our view, we prefer to adopt a more cautious stance with regards to US equities, as rising expectations over faster hikes by the Fed may result in further retreat. Remember that higher interest rates mean higher borrowing costs for firms, but also, lower present values for high-growth companies, like tech firms, as those are usually valued by discounting expected future earnings. Yes, lately, we’ve been noting that investors may have already digested the idea of higher interest rates this year, but anything pointing to a faster rate path than already digested is possible to affect their decisions. With that in mind, we prefer to be more optimistic on European indices for now, as the ECB is on the dovish spectrum on the map of the major central banks.

Now, moving to the energy market, yesterday we had an OPEC+ meeting, with the group agreeing to stick to its planned increase in output for February, as it expects Omicron to have a short-lived impact on demand. Oil prices traded slightly higher, but not much, perhaps because this was the anticipated outcome. The Canadian dollar was found virtually unchanged against its US counterpart this morning, also reflecting that the outcome was investors’ base case scenario. However, bearing in mind that we do expect oil prices to continue trending north and the BoC to proceed with tightening its policy this year, we do see the case for the Loonie to stay supported, at least for now.

EURO STOXX 50 — TECHNICAL OUTLOOK

The Euro Stoxx 50 has been in a recovery mode since December 20th, when it hit support near the upside support line, drawn from the low of May 13th. With that in mind, and also that it is now approaching the high if November 18th, at 4415, we would like to maintain our positive stance with regards to this index.

A clear break above 4415 would take the index into territories last tested in December 2007, with the next resistance perhaps being the 4500 zone, which stopped the index from moving higher in the beginning of that December. If participants are not willing to stop there, we could see them climbing towards the 4600 zone, which is slightly above the highs of June 2007.

We will abandon the bullish case if we see a dip below 4030. This could confirm the break below the upside line taken from the low of May 13th, and could initially pave the way towards the low of July 19th, at 3900. Another break, below 3900, could extend the fall towards the 3800 zone, which provided support between March 23rd and 25th.

NZD/CAD — TECHNICAL OUTLOOK

NZD/CAD has been in a sliding mode since December 30th, when it hit resistance at the downside line taken from the high of September 20th. However, the setback remained limited near the key support barrier of 0.8625, which acted as a floor between June 3rd and October 13th. Although we saw a brief dip on December 7th, we still consider this as an important zone. Therefore, we prefer to wait for a dip below that hurdle, in order to get confident again on more declines.

If that happens, we could see the bears initially targeting the lows of December 7th and 8th again, at around 0.8550, the break of which could carry extensions towards the 0.8485 zone, marked by the low of June 2nd. Another break, below 0.8485, could extend the fall towards the low of April 23rd, at around 0.8390.

On the upside, we would like to see a strong recovery above 0.8835, the high of November 23rd, before start assessing whether the bulls have gained the upper hand. This could pave the way towards the 0.8910 level, marked by the high of October 27th, or the 0.8940 zone, marked by the high of November 8th, the break of which could carry extensions towards the peak of September 20th, at 0.9035.

AS FOR TODAY’S EVENTS

We have the final services and composite Markit PMIs for December from the Eurozone, and the US, which are expected to confirm their initial forecasts. The US ADP report for the month is also due to be released, with the forecast suggesting that the private sector has gained 413k jobs from 534k in November. However, as we noted several times in the past, we prefer to refrain from using this figure as a gauge for the NFP number, as recent history has shown that it is not very reliable.

Later in the day, we get the minutes from the latest FOMC meeting, when officials dropped the “transitory” wording with regards to inflation from their statement, and doubled the pace of their QE tapering process, which means that, conditional upon maintaining that pace for the months to come, the process will end in March. Most importantly though, the new “dot plot” pointed to three quarter-point rate increases in 2022, and three more for 2023, at a time when the financial community was fully pricing in only two lift-offs for this year. Now, given this was one of the bigger meetings, with a new “dot plot” and updated economic projections, we don’t expect the minutes to reveal any new important information. We believe that USD-traders will stay more focused on the US employment report for December, due out on Friday.

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