Financial markets traded in a risk-off mode yesterday, perhaps due to Trump’s warnings over another government shutdown, increased concerns over the performance of the Chinese economy, as well as reduced expectations of a US-China trade breakthrough. As for today, the UK Parliament will vote over PM Theresa May’s new Brexit proposal, as well as amendments put forward by lawmakers.
Trump, Caterpillar, Nvidia, and Huawei Weigh on Risk Sentiment
The dollar traded higher against most of the other G10 currencies on Monday. It gained the most against AUD, CAD and NZD, while it slightly underperformed against JPY and EUR. The greenback traded virtually unchanged against CHF.
The weakening of the commodity-linked currencies and the strengthening of the safe havens suggest that market sentiment switched back to risk-off yesterday. Indeed, this is also evident by the performance of the equity market. Major EU and US indices were a sea of red yesterday, with the negative sentiment rolling into the Asian session Tuesday.
In our view, there was not a single trigger for the subdued risk appetite, rather a blend of catalysts. Although the markets cheered headlines over the reopening of the US government on Friday, President Trump said on Sunday that the chances for Congress to find a deal in order to avoid another shutdown in three weeks were low. He also added that he may declare a national emergency in order to get funds for building a wall along the Mexican border. Data showing that profits of Chinese industrial firms contracted for the second consecutive month in December also weighed on risk appetite as it enters the basket of evidence that the world’s second largest economy is losing momentum.
Later in the day, Caterpillar reported weaker-than-expected earnings and guidance, citing tariffs and the slowdown in China as the major factors behind its results, while Nvidia Corp cut its fourth-quarter revenue estimate by half a billion due to weak demand for its chips in China. The announcements come just a few weeks after Apple cut its revenue forecasts also due to the weak performance of the Chinese economy and suggest that the US-China standoff may have affected more companies.
As if all this was not enough, investors’ morale took another hit overnight, following reports that the US Justice Department charged Huawei Technologies and its CFO with a series of federal crimes, a move which may have poured cold water on expectations that China and the US could resolve their trade differences soon. The news come just a day ahead of China’s Vice Premier Lui He trip to the US for a two-day round of trade negotiations, and it remains to be seen whether the new developments over the Huawei case will affect the talks.
S&P 500 — Technical Outlook
The S&P 500 index continues to trade below its medium-term downside resistance line, taken from the high of the 3rdof October, even though since the end of December the index was on steep uprise. It looks like the momentum has slowed down a bit, even before the index reached the above-mentioned downside line. That said, although yesterday’s strong drop might have made the bulls worry a bit, still, there could be a chance to see a small push towards that downside resistance line for a quick test. But as long as it remains intact, we could aim lower again.
As mentioned before, if the S&P 500 pushes back up again and tests the medium-term downside resistance line, but fails to overcome it, this could be a sign for the bears to try and take advantage of the higher price, in order to drive the index back down. If such a scenario occurs, we would still like to see a price-drop below the 2600 level for a better confirmation of the downside idea. This is when we will target the 2567 obstacle, a break of which could lead the S&P 500 towards the 2522 support area, marked by the low of the 7thof January and the high of the 28thof December.
On the other hand, a break above the aforementioned downside resistance line could automatically place the index above its newly-established resistance zone at 2675. After that, we may aim for the 2719 obstacle, which if broken, could invite even more buyers to the table. The price-acceleration may continue further and reach the 2747 resistance barrier, marked near the highs of the 14th, 16th, 19thand the 28thof November.
GBP Pulls Back Ahead of UK Parliament’s Votes on Brexit
The pound traded lower against most of the other G10 currencies yesterday. It gained only against AUD, while it traded virtually unchanged against CAD and NZD. The currencies that managed to gain the most against sterling were JPY, EUR and CHF.
After it bottomed on the 2nd of January, the British currency staged a remarkable recovery, mainly driven by increasing expectations that a no-deal Brexit could eventually be avoided. That said, investors may have chosen to lock some profits yesterday, as today, the UK Parliament will vote over PM Theresa May’s new Brexit proposal, as well as amendments put forward by lawmakers.
After the deal agreed with the EU was rejected massively by UK MPs, PM Theresa May promised to be “more flexible” in future talks with them over how the nation will depart from the EU. That said, Jeremy Corbyn, the leader of the Labour party, said he will not join talks unless May rules out a no-deal Brexit. Last Wednesday, headlines suggested that the Labour party is “highly likely” to support Yvette Cooper’s amendment, which includes a nine-month extension to the Article 50, while the following day, new reports noted that Northern Ireland’s DUP decided to support May if her new plan includes a definitive end date to the Irish backstop.
All this background suggests that everyone agrees a chaotic departure needs to be avoided, and thus the question is whether May’s plan will receive adequate backing, and if not, which amendments will pass. In our view, given that May’s new plan is not much different than the deal already defeated, we see it unlikely to succeed today, but Cooper’s amendment could get through. Even if May’s flexibility leads to finding common ground with MPs, we doubt that she will find the EU on the same page. EU officials have been adamant that the accord agreed with May is the only possible deal, with EU Chief Negotiator Michel Barnier reiterating that position on Wednesday. Therefore, we believe that all paths lead to extending Article 50 at the moment.
But what about a second referendum? Corbyn has proposed an amendment which includes that option, but with pro-EU Conservative MPs indicating that they will not support it, not to mention hardliners, something like that is unlikely for now. We believe that the probability for such a scenario will start increasing if the EU does not accept a Brexit-delay proposal, or if, during such an extension, EU and UK officials still struggle to reach consensus.
As for the pound, although it could continue correcting lower heading into the event, passing any amendments that reduce further the likelihood of a chaotic withdrawal may keep the losses limited, allowing the bulls to jump in back to the game at some point. Now in case none of the amendments nor May’s plan receives backing, the pound could extend its losses as something like that will bring us back to square one. Although everyone agrees that a no-deal Brexit should be avoided, with the clock ticking towards the 29thof March, signs of no progress may revive fears over a disorderly divorce.
GBP/CHF — Technical Outlook
For the whole of January, GBP/CHF was moving in the upwards direction, but during the last few days, the rate-acceleration has slowed down a bit. This caused a break of the short-term upside support line taken from the low of the 10thof January. Our oscillators also support the slowing down in momentum, which could lead to a decline. That said, the drop could be seen as a correction, as GBP/CHF is still trading above another short-term tentative upside support line drawn from the lowest point of January.
A confirmed break below the 1.3021 hurdle, marked by yesterday’s low, could lead to a further decline, where the next potential area of support may be seen around the 1.2955 zone. That zone held the rate from dropping lower on the 24thof January. If the bears remain in control, then the 1.2955 obstacle could just be taken as a temporary pit-stop for them to refuel and drive GBP/CHF lower, where the pair could test the 1.2910 level, marked by the low of the 23rdof January.
Alternatively, if GBP/CHF suddenly makes a push back above the upside support line, this may force the bears to start abandoning the field, as the chance for the bulls to step might increase. But in order to get comfortable with examining higher levels, we would need to see the pair breaking above last week’s high, at 1.3125. This way the rate could get lifted towards the 1.3170 obstacle, which if broken, could push the pair further up. The next potential area of resistance to watch out for could be near the 1.3265 barrier, which held the rate down on the 16thof July.
As for the Rest of Today’s Events
The calendar appears light in terms of economic releases. The only ones worth mentioning are the US Conference Board consumer confidence index for January and the API (American Petroleum Institute) weekly report on crude oil inventories. The CB index is forecast to have declined to 124.7 from 128.1, while as it is always the case, no forecast is available for the API report.
As for tonight, during the Asian morning Wednesday, we get Australia’s CPIs for Q4. The headline CPI rate is forecast to have declined to +1.7% yoy from +1.9% in Q3, while the trimmed mean rate is forecast to have held steady at +1.8% yoy. Both rates are expected to stay below the lower end of the RBA’s 2–3% inflation target range, as well as below the Bank’s projections for the second half of the year, which are also at 2%. Combined with the decision of the National Australia Bank to increase mortgage rates, weak inflation prints could delay the RBA from hiking even further. According to the central bank’s latest quarterly Statement on Monetary Policy, the benchmark cash rate is expected to increase in 2020.
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