Risk Appetite Gets Boosted Ahead of the FOMC Decision

Global equities traded in the green yesterday and today in Asia, following fresh upbeat news with regards to coronavirus vaccinations. As for today, the main event may be the FOMC’s monetary policy decision. Market chatter suggests that policymakers may increase purchases of longer-dated Treasuries in order to contain a rise in yields. Thus, for equities and other risk-linked assets to gain further, officials have to deliver more than that.

Equities Gain on Vaccine Optimism, FOMC Decides on Mon. Policy

The US dollar traded lower against all the other G10 currencies on Tuesday and during the Asian session Wednesday. It underperformed the most versus GBP, JPY, and AUD in that order, while it lost the least ground versus EUR, CHF, and CAD.

The weakening of the US dollar and the Swiss franc, combined with the strengthening of the Aussie, suggests that markets turned risk on yesterday. However, the strengthening of the Japanese yen points otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, major EU and US indices were a sea of green, with the only exception being UK’s FTSE 100, which slid 0.28%. This may have been due to the strengthening of the pound following a report that a trade deal between the EU and the UK may now be close, even as UK PM Johnson repeated that the most likely outcome is still no deal. The upbeat investor morale rolled over into the Asian session today as well.

Apart from the optimism surrounding Brexit, what may have also boosted risk appetite may is more upbeat news with regards to coronavirus vaccinations. The US expanded its roll-out of the vaccine developed by Pfizer and BioNTech, while Moderna seems ready to get approval for its own drug this week. What’s more, investors may have cheered a decision by US congressional leaders to begin a second meeting in order to finalize a spending bill, which could include a coronavirus-aid package. All this comes inline with our view for higher equites in the foreseeable future. Remember, we’ve been highlighting that, barring any side effects, the prospect of vaccinations around the globe, combined with a Biden Presidency in the US could keep the broader market sentiment supported.

As for today, the main event on the agenda is the FOMC’s last monetary policy decision for this year. The Committee’s last meeting proved to be a non-event as it took place in the midst of the US elections. Officials just decided to keep their monetary policy settings unchanged and maintained their pledge to do whatever they can to support their coronavirus-hit economy. With the virus still spreading fast, inflation running well below the 2% objective, and the Congress yet to agree on a new coronavirus-aid bill, officials are more likely than not to expand their stimulative efforts at this gathering. Market chatter suggests that policymakers may increase purchases of longer-dated Treasuries in order to contain a rise in yields. Thus, if they just do that, the market is unlikely to move much. For equities and other risk-linked assets to gain more, officials have to expand their easing efforts and signal that more may be in the works.

Nasdaq 100 — Technical Outlook

The Nasdaq 100 cash index continues to trade above a short-term upside support line draw from the low of November 10th. We can see that the price is getting close to a possible test of the all-time high area, at 12673. For now, we will take a somewhat bullish approach, because in order to get a bit more comfortable with larger advances, a break of that 12673 barrier would be needed.

If Nasdaq 100 pops above the aforementioned 12673 zone, this will confirm a forthcoming higher high, placing the price into the uncharted territory. We could then start considering a possible move towards the psychological 13000 mark.

Alternatively, if the previously discussed upside line breaks and the index falls below the current lowest point of December, at 12219, that may change the direction of the short-term trend to the downside. More bears might join in and drive the price towards the 11800 area, marked near the lows of November 13th, 19th and 23rd, where the index may stall for a bit. That said, if the sellers are still active, a further decline could bring Nasdaq 100 to the low of November 10th, at 11511.

USD/CHF — Technical Outlook

Looking at the technical picture of USD/CHF on our 4-hour chart, we can see that the pair is forming a descending triangle, which according to the TA rules, tends to break to the downside. However, in order to get comfortable with that idea, we would prefer to wait for a violation of the lower side of that triangle first, which is at 0.8850. For now, we will stay cautiously-bearish.

If, eventually, the 0.8850 support area surrenders, this will confirm a forthcoming lower low and could send the pair further south. We will then target the 0.8819 obstacle, a break of which may clear the way to the 0.8760 level, marked by the low of November 3rd, 2011.

On the upside, if the rate rises above the upper bound of the aforementioned triangle, that may spook some new buyers from entering any time soon, especially if USD/CHF breaks above the 0.8910 barrier, marked near the high of December 11th. Such a move may invite more bulls into the field, causing the pair to move higher, initially targeting the high of December 7th, at 0.8946, or aiming for the 0.8983 level, marked by an intraday swing low of December 2nd.

As for the Rest of Today’s Events

During the early EU session, we already got the UK CPIs for November. Both the headline and core rates slid by more than anticipated, but the pound did not react, confirming that GBP-traders have their gaze locked on the political landscape.

Then we get the preliminary Markit manufacturing and services PMIs for December from the Euro area, the UK and the US. Both Eurozone’s manufacturing and services indices are expected to have declined to 53.0 and 41.0 from 53.8 and 41.7 respectively, but strangely the composite index is forecast to have risen to 45.6 from 45.3. No forecasts are available for the UK data, while in the US, expectations are for declines as well.

From the US, we also get retail sales for November, with expectations pointing to a 0.3% mom slide, after a 0.3% increase in October. Canada’s CPIs for the same month are also due to be released. The headline rate is forecast to have ticked up to +0.8% yoy from +0.7%, while no forecast is available for the core rate.

Tonight, during the Asian trading Thursday, we get New Zealand’s GDP for Q3 and Australia’s employment report for November. New Zealand’s GDP is expected to have rebounded 13.5% qoq after sliding 12.2% in Q2, something that will drive the yoy rate up to -1.3% fro -12.4%. At its latest monetary policy meeting, the RBNZ kept its official cash rate and Large-Scale Asset Purchase program unchanged, and although it noted that it will launch a funding for lending program in December, Governor Adrian Orr said that domestic activity since August has been more resilient than previously assumed, which means that the chance for adopting negative interest rates may have eased. In our view, a decent rebound in economic activity may diminish the likelihood of negative rates even further.

In Australia, the unemployment rate is forecast to have held steady at 7.0%, while the net change in employment is expected to reveal that the economy has gained 50.0k jobs after gaining 178.8k in October.

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Originally published at https://www.jfdbank.com.

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