Espresso Morning Call: Risk appetite sours, USD rebounding

What we are looking for

• USD starting to rebound decisively: With higher yields in recent sessions, there is a USD rebound forming on major forex.
• Indices are being dragged lower: Indices have held up well, but are being dragged back slightly this morning. US futures are moderately lower, weighing on European indices in early moves. 
• Commodities are being dragged back too: The stronger USD and soured risk appetite are weighing on commodities. 
• Data traders: A quiet day for data traders with no major economic announcements due. 

Overview

There has been a subtle shift in sentiment in recent days. Consolidation on the recent risk rally has turned into a near-term reversal. This is coming as US Treasury yields have picked up and the USD has started to recover. It is a relatively quiet week on the economic calendar, with the US Thanksgiving holiday playing into this. However, we will be watching the Fed speakers, who broadly continue to be hawkish on the continued fight against high inflation.

The USD rebound is developing on Monday morning, and this is weighing on not only commodities but also equity markets (which had previously been holding up relatively well). Rising cases of COVID in Beijing are adding to a souring of risk appetite.

It is almost entirely bare on the economic calendar today, with no major economic announcements due.

Today’s news

Market sentiment has soured: A USD rebound, falling commodities and indices.

Treasury yields are relatively steady: Yields have been rebounding in recent days, but are holding ground this morning.

China’s interest rates held steady: The People’s Bank of China has kept its interest rates on hold with the 1 Year Loan Prime Rate at 3.65% and the 5 Year Loan Prime Rate at 4.30%. This was as expected. 

China COVID cases rising again: Cases are rising in Beijing and this has weighed slightly on sentiment in the Asian session. 

FOMC’s Bostic standing firm on terminal rate: Bostic (non-voting in 2022, centrist) believes he would opt for 50bps in December, but that another 75 to 100 basis points are necessary to tackle inflation. This is broadly in line with market pricing. 

Cryptocurrencies fall sharply: Sharp falls on crypto over the weekend and into Monday morning leave Bitcoin almost -4% on Friday’s close at $16000. Ethereum is -7% at $1120. 

Economic Data:

• There is no major economic data due today

Major markets outlook

Broad outlook: A risk negative bias to today’s moves. 

Forex: USD is in recovery mode, outperforming major forex, with only CHF and to a slightly lesser extent CAD holding up relatively well.

• EUR/USD has decisively pulled back from the resistance around 1.035/1.0370 with two negative closes. Furthermore, the market has pulled decisively lower this morning, under initial support at 1.0270. This now brings a pullback towards the key breakout support band 1.0100/1.0200 as the next big test. Reaction around here will be crucial for the medium-term outlook. The initial resistance is 1.0305/1.0395.
• GBP/USD has been consolidating recently, but the early decline today leaves a pullback towards the 1.1500/1.1645 support area as a growing potential. Reaction around there would then be crucial. Resistance is mounting between 1.1950/1.2030.
• AUD/USD has been easing back over the past few sessions, leaving a series of lower daily highs. Breaking decisively back under 0.6670/0.6700 has opened for a pullback towards the key breakout support band 0.6520/0.6550. Reaction around here will be crucial in the coming days. With the RSI unwinding towards 50, for now, we still see weakness as a chance to buy.

Commodities: Precious metals are decisively pulling lower now. Oil is also looking decisively corrective.

• Gold posted a rebound high at $1786 and is now decisively unwinding the bull run. A move below initial support at $1753 will set up a decisive correction towards the $1730/$1735 old breakout support. As the RSI unwinds towards 50, the reaction to this support should be a key gauge for the medium-term outlook. Initial resistance is at $1767.
• Silver is retreating and a move below the old breakout resistance between $20.85/$21.23 brings a deeper correction into play. A close under $20.85 would open a move potentially back towards the support band around $20.00. The RSI momentum has been strong but is now unwinding decisively towards the 50 area. Initial resistance is strengthening around $21.25/$21.35 with $22.24 now key.
• Brent Crude oil has fallen sharply in recent sessions. The move under $93.00 implied a retreat towards $86.00. The support at $89.20 has also now been breached to open the target. Along with the RSI already leading the move lower but also with downside potential a full retreat towards the $83.50 September low cannot be ruled out. Resistance is $91.40/$93.00.

Indices: Wall Street continues to drift slightly lower. European markets have been holding up relatively well but are lower today.

• S&P 500 futures have left a rebound high at 4050 and continue to drift lower. The move is still holding on to the support band between 3883/3935 which was the previous breakout. For now, this still looks to be an unwind of more positive medium-term momentum and within a five-week uptrend. However, reaction to this breakout support band will be key. Initial resistance is at 3993.
• German DAX continues to perform very well, even on Friday coming close to an upside break of the recent consolidation. The move is just easing back slightly early today, but if the buyers continue to fight back then support will hold. This is despite the RSI still hovering above 70. The support around 14125 (last week’s low) remains key near term and is protecting an unwind potentially back towards the 13970 breakout. The recent resistance is at 14460 and is holding back a test of the June high of 14708.
• FTSE 100 has pulled back from a test of the 7442 to continue to trade within a tight near-term range between 7304/7442. Despite the early pullback today, recent positive closes and holding on to the support of a five-week uptrend retain a positive bias. A break above 7442 would open 7516 and possibly 7578.  A close below 7304 opens the next support at 7228/7250. 

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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