Wall Street Ends Lower as Georgia Runoff Election Looms

Equities turned south during the US session yesterday, perhaps due to the persistent surge in coronavirus cases, as well as due to the uncertainty surrounding the runoff election in the US state of Georgia, which will determine who controls the Senate. The pound was the main loser among the G10 currencies as PM Johnson ordered a nationwide lockdown, while oil prices slid after the OPEC+ group failed to reach consensus on output.

US Equities Slide on Georgia Election Uncertainty and Virus Surge

The US dollar traded mixed against the other G10 currencies on Monday and during the Asian session Tuesday. It gained against GBP, CAD, and SEK in that order, while it underperformed versus CHF, NOK, NZD, and EUR. The greenback was found virtually unchanged against AUD and JPY.

The strengthening of the Swiss franc and the weakening of the oil-related Loonie suggest that markets traded risk-off. However, the strengthening of the Kiwi 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 indices traded in the green, with investors perhaps keep cheering the passage of the US spending package and the beginning of the coronavirus vaccinations. UK’s FTSE 100 was the main gainer, but this may have been due to the fact that the pound was the main loser among the G10 currencies. Sterling came under selling interest after UK PM Boris Johnson ordered a nationwide lockdown in a new effort to slow a fast spreading of the coronavirus variant. This overshadowed headlines that, on Monday, Britain began vaccinating its population with the vaccine developed by Oxford University and AstraZeneca.

Market sentiment took a 180-degree spin during the US session, with all three of Wall Street’s main indices falling on average 1.40% each. This may have been due to the persistent surge in coronavirus cases, as well as due to the uncertainty surrounding the runoff election in the US state of Georgia, which will determine who controls the Senate, as there are two seats to be voted for.

Georgia has not elected a Democrat senator in 20 years, and if either or both Republican incumbents win, their party would retain a narrow majority. However, if Democrats win both seats, each party will have 50 seats, giving the tiebreaking vote to Vice President-elect Kamala Harris. With that in mind, a Democratic sweep could raise speculation that President-elect Biden’s fiscal agenda will pass much more easily, which could mean higher stimulus spending. Therefore, the dollar is likely to continue to slide, while equities are likely to continue marching north. The opposite may be true if Republicans retain control, but we expect any declines to be short-lived, as market participants are still happy with the passing of the latest spending bill.

Overall, we stick to our guns that the path of least resistance for equities and other risk-linked assets may be to the upside, while safe havens are likely to come under renewed selling interest. We repeat that the coronavirus vaccinations, the Brexit trade accord, the passage of the US spending bill, and a Biden Presidency, are a cocktail of developments that could keep the broader market sentiment supported in the foreseeable future. With that in mind, we would treat the latest setback in equities, or any short-term extensions of it, as a corrective move before the next leg north. Among currency pairs, the ones we expect to perform better are those consisting of a risk-linked currency and a safe haven, the likes of AUD/USD, AUD/JPY, NZD/USD, and NZD/JPY.

Now, passing the ball to the energy world, oil prices slid yesterday as OPEC and major non-OPEC producers — known as the OPEC+ group — failed to reach consensus with regards to changes in February’s oil output. Saudi Arabia opposed any increase in production, mainly due to new lockdowns imposed around the world, while Russia called for pumping more due to recovering demand. Talks are set to continue today with the outcome having the potential to affect notably the black liquid. A deal to increase production would mean higher supply, and it will thereby be negative for oil prices. Now in case they agree to maintain the existing cuts, we may experience a relief bounce. Overall though, we expect oil prices to move in tandem with the overall market sentiment. Given that we expect risk appetite to continue improving in the first months of 2021, we expect oil prices to trend higher as well.

S&P 500 — Technical Outlook

The S&P 500 cash index traded somewhat higher during the early trading yesterday, hitting a fresh record high of 3780.60. That said, it tumbled thereafter, falling below the support (now turned into resistance) territory of 3725. Overall, the index continues to trade within the upside channel that’s been containing the price action since November 9th, and thus, we would consider the broader near-term outlook to be cautiously positive.

We would treat yesterday’s fall as a corrective move, and we would expect the bulls to jump back into the action soon. A potential rebound may allow another test near the record peak of 3780.60, or even higher, near the crossroads of the 3800 zone and the upper bound of the pre-mentioned channel. A clear break above that crossroads could paint an even brighter picture, perhaps paving the way towards the 3900 territory.

In order to abandon the bullish case and start examining whether the bears have gained control in the short run, we would like to see a clear dip below the 3660 level, marked by yesterday’s low, and below the lower end of the upside channel. This will confirm a forthcoming lower low on the 4-hour chart and may initially see scope for declines towards the low of December 21st, at 3605. Another break, below 3605, may extend the fall towards the 3545 zone, which provided strong support on November 19th and 20th. Slightly lower lies the 3510 hurdle, which is marked by the low of November 10th.

AUD/JPY — Technical Outlook

AUD/JPY traded lower yesterday, but hit support at 78.88 and today, during the Asian session, it rebounded somewhat. The pair continues to print higher highs and higher lows above the upside support line drawn from the low of November 4th, and thus, we would still see a positive near-term outlook.

A clear break above 79.80, and even better, above the psychological zone of 80.00, would confirm a forthcoming higher high on both the 4-hour and daily charts and may encourage the bulls to climb towards the 80.70 zone, which is defined as a resistance by the high of April 17th, 2019. If that barrier is not able to halt the advance, its break may lead the pair towards the 81.50 area, marked by the high of December 17th, 2018.

On the downside, we would like to see a clear dip below 78.45 before we start discussing a bearish reversal. The rate would already be below the aforementioned upside line and the bears may initially push the action towards the 77.85 level or the 77.50 barrier, marked by the lows of December 22nd and 21st respectively. If none of those barrier holds, the next stop may be the 76.87 area, marked by the low of December 7th.

As for the Rest of Today’s Events

Apart from the runoff election in the US state of Georgia, we also have some data releases on today’s agenda. During the European morning, we get Switzerland’s CPI for December, which is expected to have stayed unchanged at -0.7% yoy. With consumer prices deep in deflationary territory, the SNB is likely to maintain the view that the Swiss franc remains highly valued, while remaining willing to intervene more strongly in the FX market. Germany’s retail sales for November, and the nation’s unemployment rate for December are also coming out. Retail sales are expected to have declined 2.0% mom after rising 2.6% in October, while the unemployment rate is forecast to have held steady at 6.1%. Later in the day, from the US, we get the ISM manufacturing PMI for December, which is expected to have declined to 56.5 from 57.5. The API (American Petroleum Institute) report on crude oil inventories for last week is also coming out, but as it is always the case, no forecast is available.

Tonight, during the Asian session Wednesday, we get China’s Caixin services PMI for December, for which no forecast is available.

As for the speakers, we have two on the schedule. Those are New York Fed President John Williams and Chicago Fed President Charles Evans.


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