WHAT HAPPENED YESTERDAY
As of Fri 14 Feb, Singapore Time zone UTC+8
FX MOVES
U.S. Dollar Index, +0.05%, 99.10
USDJPY, -0.28%, $109.78
EURUSD, -0.29%, $1.0841
GBPUSD, +0.65%, $1.3046
USDCAD, +0.10%, $1.3263
AUDUSD, -0.27%, $0.6719
NZDUSD, -0.37%, $0.6441
MARKET MOVES
S&P500, -0.16%, 3,373.94
Dow Jones, -0.43%, 29,423.31
Nasdaq, -0.14%, 9,711.97
Nikkei Futures, -0.95%, 23,643.0
SUMMARY:
China reported a big jump in Coronavirus cases, the news was particularly disappointing because reports over the past few days had indicated that the rate of new cases was slowing down. The surge was due to a new diagnostic procedure, but White House officials reportedly remained skeptical of China’s information, thinking Beijing is still underreporting cases.
Risk currencies moved lower on the report, with Aussie and Kiwi weakening due to their close trading ties with China. The commodity currencies (AUD, NZD, CAD) will continue to be driven by the virus situation as any impact on global supply chains and trade will impact them the most. EUR continues to dribble lower as the break below 33-month low attracted more speculative sellers. GBP had a brief spate of volatility, jumping more than half a percent with the surprise announcement that the UK Chancellor, Savid Javid, will be replaced by Rishi Sunak. Sunak is seen as someone who will be more supportive of PM Johnson’s pro-business policies.
The stock market slipped from record highs on Thursday following a spike in reported coronavirus cases in China, but it did close well off session lows. The S&P 500 lost 0.16% (down as much as -0.94%), the Dow Jones Industrial Average lost 0.4%, and the Nasdaq Composite lost 0.1%.
U.S. Treasuries finished mixed and little changed. The 2-yr yield increased one basis point to 1.45%, while the 10-yr yield declined one basis point to 1.62%. The U.S. Dollar Index increased 0.05% to 99.10. WTI crude rose 0.5%, or $0.23, to $51.40/bbl.
In other news, the Federal Reserve Bank of New York will reduce the size of its overnight and term repurchase operations, according to Bloomberg. A judge reportedly placed a temporary block on Microsoft’s Pentagon cloud contract award following a lawsuit from Amazon.
US CONSUMER INFLATION
U.S. underlying consumer prices picked up in January, while the number of Americans filing claims for unemployment benefits rose slightly last week, suggesting the economy was stable enough for the Federal Reserve to keep interest rates on hold this year.
Consumer Price Index (CPI) increased just 0.1% m/m in January (consensus +0.2%) while core CPI, which excludes food and energy, increased 0.2%, as expected. The monthly increases left total CPI up 2.5% yr/yr, versus 2.3% in December. That is the largest yr/yr increase since October 2018. Core CPI was up 2.3% yr/yr for the fourth straight month.
The key takeaway from this report is that it won’t spark any undue inflation/rate-hike concerns in the market given the stability of core CPI and the Fed’s seeming willingness to let inflation run a little hot to prevent inflation expectations from slipping too much.
IMPACT: Inflation prints coming largely within expectations will do little to aid a Dollar bid as the backdrop rhetoric from the Fed is that they are willing to allow inflation to run a little hot. By that measure, the impact of mildly rising inflation on the Dollar will not be received with much fanfare.
FED TO WITHDRAW LIQUIDITY FROM REPO MARKET
The Federal Reserve is accelerating the pace of its withdrawal from short-term funding markets, even as investors’ demand for the central bank’s cash remains elevated. The new plan reduces the maximum amount the Fed will lend overnight each day from $120bn to $100bn — a change that will kick in on Friday. Moreover, the Fed will limit the amount it will lend in the form of two-week loans to $25bn as of Tuesday, from its current $30bn offering, and pare that amount even further in early March. At that point, the Fed will lend a maximum of $20bn on a two-week basis.
Analysts were primed for the shift, thanks to numerous reminders from chairman Jay Powell and other Fed officials in recent weeks that the central bank seeks to gradually transition away from active interventions in the repo market. The reductions were somewhat sharper than some had expected, however.
IMPACT: This is a key announcement and development to watch, as this is akin to the Fed gradually pulling the rug from under the markets. The melt-up in the market was largely due to the Fed’s response to the REPO crisis via a massive expansion of its balance sheet within a short period of time. With no signs of foreign buyers stepping back into the treasury market to buy up US Treasuries and finance US deficits, the withdrawal from the Fed may be followed by a sell-off in risk-assets.
LATEST VIRUS UPDATE: CHINA REPORTS BIG RISE IN CORONAVIRUS DEATHS
The big jump in China’s reported cases reflects a decision by authorities there to reclassify a backlog of suspected cases by using patients’ chest images, and is not necessarily the “tip of an iceberg” of a wider epidemic, a top World Health Organization official said on Thursday. Mike Ryan, head of WHO’s health emergencies program, said that more than 14,000 new cases reported in Hubei province overnight came after a change to include results from quicker computerized tomography (CT) scans that reveal lung infections, rather than relying just on laboratory tests to confirm cases.
IMPACT: The impact of the virus is still largely benign within the western hemisphere. Any significant revision in its impact and infected cases outside of China may cause a repricing of risk assets.
DAY AHEAD
U.S. January retail sales figures will be announced later on today, these prints are seen as a reliable barometer of consumer spending. Retail sales are forecast to have increased by 0.3% month-on-month in January – the same pace as in the prior month. A miss in numbers will pose a downside risk for the Dollar given the recent strong gains as it would raise concerns about the health of the US consumer amid a weak global economic environment.
SENTIMENT
OVERALL SENTIMENT: Risk sentiment seems weaker than yesterday and we may see some reduction of risk positions ahead of the weekend. Volatility, especially in the currency markets, remains low for now but the dribble lower in EUR is attracting more sellers. Rallies in EUR/USD will likely be met by more selling if this continues.
i.e. CCY, Ticker (Short-Term: 1-3 MONTHS, Medium-Term: 3-6 MONTHS, Long-Term: 6-12 MONTHS)
FX
US DOLLAR, USD (-ve, Neutral, +ve)
JAPANESE YEN, JPY (+ve, +ve, neutral)
EURO, EUR (-ve, -ve, Neutral)
STERLING, GBP (Neutral, Neutral, Neutral)
CANADIAN DOLLAR, CAD (-ve, -ve, Neutral)
AUSTRALIAN DOLLAR, AUD (-ve, Neutral, Neutral)
NEW ZEALAND DOLLAR, NZD (-ve, Neutral, Neutral)
SWISS FRANC, CHF (+ve, +ve, neutral)
MARKETS
S&P 500, SPX (+ve, +ve, +ve)
NIKKEI 225, JP225 (Neutral, -ve, -ve)
SHANGHAI COMPOSITE, SSEC (-ve, -ve, Neutral)
TRADING TIP
The good old days are over…
This is a frequent lament of traders whenever they go through a period when markets are not going their way. There is only one constant in the markets, and that is that the market conditions will change. The ever-changing conditions are why there are opportunities for us to get into profitable trades.
Though volatility in the currency markets is now very low by historical standards (the break of EUR/USD below the 33-month low this week is one of the lowest momentum breaks I can remember!), this does not mean this will always be the case.
Even in low volatility environments, there will still be opportunities for trades with good risk vs reward characteristics to be put on. Don’t lose heart! If making money was easy, then everyone would be rich!
Are the good old days over? Far from it, the best days are yet to come. The first step to making it so is for you to believe it!
