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There were a number of interesting themes on Friday which have widely been discussed on the desk today, but probably the main points were the failed break above the year high on EUR/USD, the move above 3% in the US ten-year treasury and subsequent five-year high in USD/JPY. Continued selling in USD/TRY (Turkish lira) has also been in focus, especially for those who like a bit more volatility.
No real upside in EUR/USD despite hawkish comments from Mario Draghi
EUR/USD hasn’t really caught a bid today and is unchanged on the day, despite comments from Mario Draghi on Saturday in Der Spiegel magazine that he has no urgent need to cut rates and sees no deflationary signs. Certainly these comments support the views of the ever hawkish Oliver Weidmann on Friday, although with EUR/USD at 1.38 I get the sense that the market has priced out further policy moves off the table anytime soon. The pair rallied to a high of 1.3770 today despite the ECB Presidents comments and looks delicately poised, with trends support and resistance in either direction.
The DAX is the index of choice from the global trading community, although our client base is predominantly short (75% of clients hold short positions) and looking for a move lower into the early stages of 2014. That said, the index is on fire and the bulls will want to see 9600 break for a longer-term move to 10,000. The index does look a little overcooked, but is not at extremes just yet; however pullbacks should be limited to the November highs of 9424. It is worth highlighting that for Australian investors, had you bought into this index this year (helped naturally by the strong moves higher in EUR/AUD) you’d have made over 50% - that is provided of course that you held on for the whole twelve months.
In Asia, China has seen more reserved price action today after taking the spotlight last week and traders will keep one eye on the repo markets this week, while another on the PMI data released on New Year’s Day. Japan has pushed modestly higher, while USD/JPY continues to gravitate to resistance at 105.50 (the 61.8% retracement of the 2007 to 2011 sell-off). USD/JPY from a fundamental perspective is now at a key juncture and it’s hard to see what will push it markedly higher from here. Inflation is growing much quicker than most had anticipated, and there are signs that corporate Japan is starting to play ball and raise wages, but it’s worth remembering that the faster inflation increases, the greater the wage increases need to be. It’s also worth pointing out that consensus target for USD/JPY in Q2 is 105.00, so the higher the pair goes, the further it separates from valuation and given the comments from Chinese officials today, will also increase the prospects that the Chinese start limiting the amount of deflation Japan can export.
The Nikkei rounding off an astonishing year
The Nikkei still looks to round off what has been an astonishing year, with the index having its best year since 1972. In 1972 the index rallied some 92%, so it’s hard to think Japan will ever see that sort of performance again. I do feel that for those looking for volatility, the Nikkei will remain a major focus for traders in 2014; especially as we go into April and the hike in consumption tax and the different fiscal and monetary offsets to be undertaken from the BoJ and Abe government.
The ASX 200 has put on 0.5%, with breadth looking good, with 68% of stocks up on the day. The market has been happy to bid up REITS, material and healthcare names, but the big story has been in price action in Forge Group (FGE). In one day this mining services company saw its price swing 80% (A$1.09 to A$1.96) on what was fairly limited news. It certainly seems that traders initially saw today’s news flow as highly positive and then changed its mind somewhat. Still for those who were long from last week a 46% gain on the day will impress.
European markets look set to pullback modestly on open, with some traders pointing to the fact we could be seeing Monte Paschi nationalised. This issue doesn’t seem to be hurting the EUR at all, with this being seen as more a psychological issue, in so much that it highlights the frailties that still exist in the Eurozone. Traders will also be keen to keep an eye on the US, with pending homes sales on the docket.
All eyes on the raft of Fed speakers
It will be interesting to hear from the raft of Fed speakers this week, with seven speakers due this week, including Bill Dudley and Ben Bernanke. The Fed fund future (December 2015) is now pricing in 75 basis points of tightening from the Fed, which is exactly the same as the levels of hikes the consensus of the Fed detailed in its recent meeting. This is the first time in a while the markets is positioned exactly the same as the Fed forecasts, thus everything now is data dependant and for the USD to really strengthen (especially against the EUR and GBP) we will need a continued improvement that causes the market to question the credibility of the Feds current guidance on the funds rate.