Equity and Crypto Pain Persists

Tuesday February 6: five things the markets are talking about

The global equity rout extended overnight as Asian and European markets followed Wall Street and tumbled, sending equity indexes toward the biggest three-day slide in nearly three-years.

Volatility in stocks has pushed a number of investors to unwind equity bets and head to the ‘mighty’ dollar and the Japanese yen, another haven.

The dollar has also been benefiting from last Friday’s robust U.S employment data. However, despite the greenbacks recent gains, the prospect of faster-than-expected monetary policy tightening abroad has left the buck atop of its lowest level outright in more than three-years.

Note: Yesterday, the VIX saw its biggest daily climb ever, both in percentage and absolute terms.

1. Stocks markets tumble again

Yesterday, U.S. stocks plunged the most in more than six years and volatility roared back into the market as the S&P 500 sank -4.1%.

In Japan, stocks suffered their biggest point drop in 18-months overnight on fears about rising U.S bond yields and a potential pick-up in inflation. The Nikkei share average ended down -4.73%, while the broader Topix fell -4.4%.

Down-under, Australia’s S&P/ASX 200 traded at levels last seen in October as it slide -3%, while S. Korea’s Kospi was the outperformer in dropping just -1.8%.

In Hong Kong, stocks joined the market rout intensified. The benchmark Hang Seng Index plummeted -5.1%, its biggest daily percentage drop since August 2015, while the China Enterprises index HSCE fell -5.9%.

Note: Hong Kong is particularly exposed to U.S rate moves because the HKD is pegged to the U.S dollar.

In China, Shanghai stocks post their worst day in two-years. The Shanghai Composite Index slumped -3.4%, its biggest single-day drop since February 2016, while the blue-chip CSI300 index ended down -2.9%.

In Europe, regional equities move well off its opening levels, but remain in negative territory as U.S futures stage a sharp turn around. Earnings continue to dominate corporate news.

U.S stocks are set to open in the black (+0.6%).

Indices: Stoxx600 -1.9% at 374.8, FTSE -2.0% at 7191, DAX -2.2% at 12409, CAC-40 -1.9% at 5192, IBEX-35 -1.9% at 9884, FTSE MIB -1.5% at 22494, SMI -1.9% at 8927, S&P 500 Futures +0.6%

2. Oil prices ease, gold higher

Oil prices have fallen for a third consecutive session overnight, although the crude price remains in positive territory so far this year.

Oil is caught up in the markets general risk-off move and not helped by the strength of the U.S dollar in the past two trading sessions.

Brent crude futures are down -35c at +$67.27 a barrel, but still up +1% so far in 2018. U.S West Texas Intermediate (WTI) crude futures have eased by -25c to +$63.90.

Note: Since the S&P 500 hit a record high on Jan. 26, the index has lost -8%. Oil, in contrast, has lost -4.5%, while cryptocurrency bitcoin (BTC) has lost -50% of its value.

Adding to the pressure on oil, which hit its highest price in nearly three-years in January, has been evidence of rising U.S crude production, which could threaten OPES’s efforts to support prices.

Data from the U.S government last week showed that output climbed above +10m bpd in November for the first time in nearly fifty-years, as shale drillers expanded operations.

Gold prices have rallied overnight as the global equity rout encouraged investors to seek shelter in safe havens, although expectations of more U.S rate hikes this year will weigh on the market. Spot gold is up +0.3% to +$1,342.95 per ounce, following yesterday’s +0.5% gain.

3. Reserve Bank of Australia (RBA) on hold

The RBA overnight chose to stay out of the global shift among central banks toward higher interest rates, amid deep fears that domestic household debt burden would not stand up well to the pain of rising mortgage costs.

The RBA left its cash rate unchanged at a record low +1.5%, signalling no desire to follow the likes of the Fed, the BoE and the ECB in removing the policy accommodation.

Governor Philip Lowe said he remains hopeful that growth and inflation will trend higher this year, but stressed the big uncertainty is the outlook for consumers.

Elsewhere, investors have been dumping government debt, but for different reasons. In the U.S, investors see more inflation coming; while in the eurozone, they see stronger economic growth.

The yield on U.S 10-year Treasuries has increased +6 bps to +2.76%. In Germany, the 10-year Bund yield decreased -3 bps to +0.71%, while in the U.K, the 10-year Gilt yield has declined -3 bps to +1.53%, and the biggest drop in almost five weeks.

4. Dollar finds little traction

The USD remains on soft footing, unable to gather any safe-haven demand despite the pickup in global volatility.

EUR/USD (€1.2400) continues to maintain within its recent consolidated range, €1.2350-1.25, supported by the market sentiment that the eurozone is expanding robustly with stronger growth rates than previously anticipated.

GBP/USD (£1.3935) remains on the defense, as U.K ministers seem to have a difference of opinion on the Brexit strategy.

USD/JPY ‘s strong correlation with U.S interest yields seems to have broken down as the pair tested ¥109 in the session overnight despite the BoJ’s rhetoric that it would continue advocating an easy monetary policy.

Bitcoin (BTC) briefly traded below $6,000 overnight as weakness in digital tokens continued, with Ripple, Ether and Litecoin also tumbling at least -11%.

Note: The BIS said that central banks must be prepared to intervene to stem risks from digital currencies, as Bitcoin has become a “combination of a bubble, a Ponzi scheme and an environmental disaster.”

5. German factory orders surge

Data this morning showed that German factory orders surged in December.

Orders, adjusted for seasonal swings and inflation, increased +3.8% after dropping a revised -0.1% in November. Demand was up +7.2% from the previous year.

The Bundesbank says the German economy will maintain its momentum. After growing +2.2% last year, GDP is forecast to increase +2.5% in 2018.

Note: Strong domestic spending and prosperous global trade is supporting Germany’s economy. This has helped the country’s largest union win a +4.3% pay increase over 27-months.

Forex heatmap

Equities Slump Deepens; Dollar Steady

Monday February 5: Five things the markets are talking about

Global stocks have extended their biggest decline in two-years overnight while the ‘big’ dollar steadies outright against G10 currency pairs. Sovereign treasury yields continue to creep higher, while crude oil prices again come under pressure as U.S explorers raised the number of rigs drilling for crude to the most since August.

This week is again dominated by monetary policy decision with four central banks meetings in the coming sessions – today, the Reserve Bank of Australia (RBA), Wednesday, the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of India (RBI) and its ‘super’ Thursday for the Bank of England (BoE) as it also publishes its quarterly inflation report.

Other data releases will focus on December industrial production (IP) and January composite PMI’s. China will release January data for its merchandise trade balance and its consumer and producer price indexes. North of the U.S border, Canada will close out the week reporting its January labor force survey. It’s December international trade balance is reported on Tuesday.

1. Stocks see red

In Japan, the Nikkei share average fell sharply on overnight as fear that U.S inflation may be finally gathering pace pound global equities. The Nikkei tumbled -2.5%, its biggest one-day drop since Nov 9, 2016, when President Trump won the U.S election. The broader Topix slumped -2.2%.

Down-under, Aussie shares fell overnight, dragged down by financial and materials. The S&P/ASX 200 index slid -1.6% ahead of Wednesday’s Reserve Bank of Australia (RBA) rate decision.

In Hong Kong, stocks ended lower on overnight, but recouped much of their earlier losses sparked by Friday’s slide on Wall Street. The Hang Seng index slumped -1.09%, while the Hang Seng China Enterprises index fell -0.43%.

In China, stocks bucked the region’s tumble as the Shanghai Composite index ended the session up +0.73%, while the blue-chip CSI300 Index also reversed its earlier losses, closing up +0.1%.

In Europe, regional indices are trading lower across the board, but off the session lows as markets have faded a large part of the earlier move lower, on the back of a slight pullback in Euro Bond yields as well as a bounce in U.S futures.

U.S stocks are expected to open little changed.

Indices: Stoxx600 -1.0% at 384.1, FTSE -1.0% at 7366, DAX -0.5% at 12715, CAC-40 -0.9% at 5317 , IBEX-35 -0.6% at 10145, FTSE MIB -0.7% at 23048 , SMI -1.0% at 9132, S&P 500 Futures flat

2. Oil trades atop one-month lows, gold prices higher

Oil prices are under pressure for a second consecutive session overnight, as rising U.S output and a weaker physical market added to the pressure from a widespread decline across equities and commodities.

Brent crude futures are down -36c at +$68.22 a barrel, while U.S West Texas Intermediate (WTI) crude has fallen -13c to +$65.32.

Oil is caught up in the markets general risk-off move, not helped the strength of the U.S dollar in the past two trading sessions.

Adding to the pressure on oil, which hit its highest price in nearly three-years in January, has been evidence of rising U.S crude production, which could threaten OPES’s efforts to support prices.

Data from the U.S government last week showed that output climbed above +10m bpd in November for the first time in nearly fifty-years, as shale drillers expanded operations.

Ahead of the U.S open, gold prices have inched higher as declining equities lend support to the yellow metal even though robust U.S. jobs data potentially increased the chances of more interest rate hikes this year. Spot gold is up +0.1% at +$1,334.23 per ounce, after declining -1.2% on Friday in its biggest one-day fall since early December.

3. Sovereign yields continue to back up

Investors on both sides of the Atlantic are dumping government debt, but for different reasons. In the U.S, investors see more inflation coming; while in the eurozone, they see stronger economic growth.

On Friday, the 10-year Treasury yield closed at +2.852%, the highest yield in two-years, compared with +2.410% at the start of the year. German 10-year sovereign Bunds have edged up to +0.701% from 0.430% over the same period.

Note: Inflation-linked Treasuries’ (TIP’s) show that almost two-thirds of the U.S bond selloff that started at the beginning of December is explained by inflation expectations.

Elsewhere, the RBA looks set to continue lagging the trend toward higher interest rates globally. It’s first policy meeting this year on Tuesday will likely see the RBA’s official cash rate steady at +1.5%, with interest in whether its guidance will be more upbeat reflecting a stronger job market.

Aussie policy makers continue to face the problem of weak wages growth, soft inflation reads and an elevated AUD (A$0.7934). Forecasts for the first interest rate hike have been pushed back lately.

4. Dollar under constant pressure

The U.S. dollar remains relatively contained after rebounding at the end of last week, when a strong non-farm payroll (NFP) suggested the currency’s weakness might have gone too far, too fast.

The EUR/USD (€1.2426) has managed to eek out a small gain overnight as optimism continued to flow about a grand coalition in Germany – political parties have said to seek a grand coalition by tomorrow (Feb 6th).

GBP/USD (£1.4102) is little changed despite the Jan. U.K PMI Services reading missed expectations (see below).

USD/JPY ‘s strong correlation with U.S interest yields seems to have broken down as the pair tested ¥109.80 in the session overnight despite the BoJ’s rhetoric that it would continue advocating an easy monetary policy.

Bitcoin (BTC) is down -6.7% at $7,637.

5. U.K services expansion slides to 16-month low, Europe expands

In the U.K, services PMI fell to 53, from 54.2 in December, below the expected consensus for an increase to 54.5. This morning’s data is now following weaker-than-expected manufacturing and construction PMI data last week.

Note: This January slowdown pushes the all-sector PMI into ‘dovish’ territory as far as the Bank of England (BoE) monetary policy is concerned. The BoE announces its latest interest rate decision and inflation report on Thursday.

Elsewhere, the composite PMI for the eurozone in January was revised up to 58.8 from 58.6, hitting its highest level in a dozen years and further proof that the eurozone economy started this year on a very strong footing.

At a national level, Italy stood out, recording its highest reading in a dozen years, as businesses hired at the fastest pace in 17-years.

Note: The ECB will be encouraged to expect acceleration in wages growth that would help it meet its inflation target in the coming years.

Forex heatmap

What to look for in U.S payrolls (NFP)

Friday February 2: Five things the markets are talking about

The U.S labor department is expected to report that 2018 has kicked off with a pickup in hiring.

Market consensus is looking for non-farm payrolls (NFP) to rise by +180k last month, while the unemployment rate continued to hover atop of +4.1% – its lowest level in 18-years.

What to look for in today’s payrolls report:

More hiring

The pace of job creation has been slowing as the U.S economy encroaches on full employment. Employers added an average of +171k jobs a month in 2017. After a slightly softer December (+148k), the market expects todays jobs report to rebound to around its recent trend.

Steady unemployment

The U.S unemployment rate is expected to remain atop of +4.1% last month. Fed officials continue to monitor domestic wage and price pressures, and a falling unemployment rate supports their expectation that tighter labor market will eventually boost inflation.

Note: Fed policy makers’ median projection in December saw the jobless rate dipping to +3.9% by late 2018.

Wage Growth

The biggest surprise in 2017 was that U.S wage gains actually softened after two consecutive years of gains. Average hourly earnings for private-sector workers were up +2.5% in December y/y, but down from +2.9% annual growth at the end of 2016. Minimum-wage increases in many states should help boost earnings for January.

Housekeeping matters

As is typical for the January jobs report, today’s release will include a number of routine changes from the Labor Department. New population controls mean the household-survey figures for the number of employed and unemployed will not be directly comparable between December and January.

The payrolls data will include an annual benchmark revision – roughly +4% of payroll employment will be “reclassified” by industry due to the adoption of updated classifications.

1. Stocks see red as yields back up

In Japan, the Nikkei share average fell overnight on weakness in most sectors, with banking stocks down on worries that JGB bond yields would be kept low after the BoJ conducted a special bond purchase operation to curb rising yields. The Nikkei dropped -0.9% while the broader Topix shred -0.3%.

Down-under, Australia’s S&P/ASX 200 Index rose +0.5%, supported by higher commodity prices. In S. Korea, the Kospi index declined -1.7%.

In Hong Kong, the Hang Seng Index ended Friday marginally down, but posted its biggest weekly loss in two-months, pressured by rising sovereign bond yields. At the close, the Hang Seng index was down -0.12%, while the Hang Seng China Enterprises index rose +0.78%. For the week, the Hang Seng lost -1.7%.

In China, stocks reversed earlier losses and ended higher on Friday, supported by gains in resources firms. Nevertheless, regional indexes still posted hefty weekly drops, led by the Shanghai benchmark index, which posted its worst week in 14-months. At the close, the Shanghai Composite index was up +0.5%, while the blue-chip CSI300 index was up +0.6%.

In Europe, regional indices continue to trade lower with the German DAX registering another -1% decline as rising sovereign rates and mixed earnings continue to weigh on equity markets.

U.S stocks are set to open in the “red” (-0.7%).

Indices: Stoxx600 -0.9% at 389.8, FTSE -0.3% at 7466, DAX -1.4% at 12822, CAC-40 -1.2% at 5390, IBEX-35 -1.3% at 10264, FTSE MIB -1.1% at 23279, SMI -0.7% at 9229, S&P 500 Futures -0.7%

2. Oil prices extend gains on compliance with output cuts, gold lower

Crude oil prices are rallying for a third consecutive session after a survey showed strong compliance with output cuts by OPEC and others including Russia. It’s currently offsetting market concerns about surging U.S production.

Brent futures are up +24c, or +0.3% at +$69.89 a barrel, while U.S West Texas Intermediate (WTI) crude is up +33c or +0.5% at +$66.13 a barrel.

A Reuters survey this week showed that production by OPEC rose in January from an eight-month low as higher output from Nigeria and Saudi Arabia offset a further decline in Venezuela and strong compliance with a supply reduction pact.

Stateside, an EIA report Wednesday disclosed that U.S crude output surpassed +10m bpd in November for the first time in nearly half a century.

Gold has edged lower ahead of the U.S open, under pressure from a stronger USD outright. Investors will take their cues fro today’s NFP report. Spot gold is down -0.3% at +$1,345.22 an ounce.

3. Global bond yields break higher

Overnight, the Bank of Japan (BoJ) again conducted a fixed-rate JGB purchase operation (the fourth time performed). Japanese officials offered to buy unlimited amount of 10-year JGB’s at +0.11% in an attempt to control their yield curve. The BoJ said its action to cap rises in bond yields was consistent with the central bank’s current easy monetary policy.

The market is also taking a look at bund yields – higher yields stateside seem justified, given expectations of further rate increases by the Fed, but rising yields in German Bunds seem to be ‘out of sync’ with ECB policy. The ECB is set to remain a “net” buyer of bonds until at least September 2018 and isn’t expected to raise policy rates until 2019.

The yield on U.S 10-years has gained less than +1 bps to +2.79%, the highest in almost four-years. In Germany, the 10-year Bund yield has climbed +2 bps to +0.74 percent, the highest in more than two-years, while in the U.K, the 10-year Gilt yield increased +5% bps to +1.531%, its highest yield in 21-months. In Japan, the 10-year yield has declined -1 bps to +0.086%, the largest drop in 11-weeks.

4. Dollar comes up for air

With higher sovereign bond yields supporting a number of higher currency values, both the ECB and BoJ are beginning to show increasing uneasiness around the recent appreciation of their respective currencies (€1.25 and ¥109.87). The somewhat ‘outlier’ to higher domestic yield has been the USD – it cannot seem to rely on rate and yield differential for solid support.

EUR/USD continued to probe the psychological €1.25 level area on removal of stimulus expectations, but the ‘single’ unit seems unable to sustain any momentum through this key resistance point. ECB officials have upped its rhetoric on volatility concerns. EUR bulls continue to look at pullbacks to add to current ‘long’ positions.

The BoJ’s commitment of keeping its 10-year yield fixed despite rising upward pressure on global yields might allow 10-year yield differentials to move against the JPY. For now, JPY is confined to its ¥107-112 range.

GBP (£1.4216) is trading softer ahead of the U.S open after a weaker U.K Construction PMI print (see below) and housing activity contracting for the first time in 17-months.

Last December, bitcoin appeared to be marching toward $20,000/coin after climbing as high as $19,511 on Dec. 18. Since then, the cryptocurrency (BTC) has plummeted -56%, leaving it just above $8,000.

5. UK Construction PMI falters

Data this morning showed that U.K activity in the construction sector eased to a four-month low at the start of this year.

Markit’s U.K’s purchasing managers’ index for the construction industry fell to 50.2 in January, down from 52.2 a month earlier – the figure was just above the 50.0 no-change mark, suggesting only a fractional rate of growth.

Digging deeper, concerns about the U.K.’s economic outlook has weighed on new orders, with residential building activity contracting. Cost pressures remain intense, fuelled by shortages of input materials and high costs for imported products.

Forex heatmap

USD Struggles Ahead of Jobs Report

USD Struggles Ahead of Jobs Report

US expected to add 184,000 jobs in January

The US dollar fell against a basket of currencies on Thursday. The greenback has failed to gain traction in 2018 and is awaiting the first US jobs report of the year looking for a shot in the arm. The U.S. non farm payrolls (NFP) will be published on Friday, February 2 at 8:30 am EST. Economists are expecting the US to add 184,000 positions and keep the unemployment rate at 4.1 percent. Last month’s report came in lower than expected but the saving grace for the USD was that hourly wages grew 0.3 percent as expected. There are similar gains forecasted for January wages with a special emphasis on inflationary data as the Fed ponders what to do with stagnant wages despite a strong job component.

  • European manufacturing gathered steam in January
  • Unemployment claims fell last week in evidence of strong US labour market
  • Higher growth expectations outside of US putting pressure on dollar

Dollar Lower Despite Support from Central Bank



The EUR/USD gained 0.82 percent on Thursday. The single currency is trading at 1.2515 a day after the U.S. Federal Reserve kept rates unchanged and ahead of the release of the January’s U.S. non farm payrolls (NFP) report. Strong manufacturing data out of Europe continued to make the case for accelerated growth. The European Central Bank (ECB) did not make any changes to its QE program or interest rate in January, but with higher growth and inflation expectations are rising that its bond buying program could end this year with a possible rate hike.

US economic growth continues to soldier on, with the U.S. Federal Reserve forecasted to lift interest rates 3 to 4 times in 2018. Strong fundamentals and a supportive central bank should have the USD higher versus the euro, but political uncertainty going into the midterms has impaired the dollar. Employment has been the pillar of the economic recovery, but at near full employment there is little that even a monster jobs report can do to boost the dollar. The ADP private payrolls report released on Wednesday saw 234,000 jobs added in January, and while there is no perfect correlation between the ADP and the NFP, after the disappointing jobs report in December an improvement is anticipated which could help the USD finish the week higher versus other currencies.

The USD has fallen 3.25 despite so far this year and comments from the Fed that inflation is expected to rise helped only a little. The FedWatch tool by the CME is showing a 83.1 percent probability of a rate hike in March after the release of the FOMC January statement. Growth and interest rate rises have all been priced in, but for some investors the threat of higher political uncertainty during the midterms is a cause for concern.

Next week will offer the USD less opportunities to shine as the main indicator release will be the non manufacturing PMI related by the ISM. Services have slowed down since reaching a reading of 60.1 in October with the forecast for the January figures to be around 55.9.



US bond prices have fallen as a result of higher growth and inflation expectations this year and yields are higher seeking to attract investors that have been tempted by fixed income alternatives overseas.

The USD has been on the back foot against major currencies for most of 2018. The rally that followed the victory of Donald Trump in the November 2016 elections was driven by tax reform and infrastructure promises. The 12 month period before the promise and the reality proved to be too much for a market that was expecting a quicker turn around and the greenback depreciated in 2017. This year follows a similar trend with the euro hitting three year highs and even the pound recovering to pre-Brexit levels thanks to a softer dollar.

Market events to watch this week:

Friday, February 2
4:30am GBP Construction PMI


*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Dollar Support Lukewarm despite Fed’s ‘Hawkish-hold’

Thursday February 1: Five things the markets are talking about

Global equities have kicked off the new month mostly in the ‘black’ as capital market participants have decided that the outlook for growth and corporate earnings remains strong enough to suppress concerns about the back up in sovereign yields.

U.S Treasuries have resumed their slide, while the ‘mighty’ U.S dollar trades steady against G10 currency pairs.

Yesterday, as expected, the Fed held the overnight interest rate target range steady between +1.25 – 1.50% in a unanimous vote (9-0). In their accompanying statement, policy makers noted that the U.S labor market had continued to strengthen and they dropped the language on expecting inflation to remain below +2% in near-term. In fact, the statement made few changes from December and affirmed a solid outlook for U.S. growth. It offered little sign that officials’ thinking about the economy has changed materially.

Note: Next up is tomorrow’s U.S non-farm payroll report (NFP), where U.S employers are supposed to have added more jobs in January than a month earlier (+180k vs. +148k).

1. Stocks get the green light

In Japan, the Nikkei share average rallied overnight, rebounding from a six-day losing streak and pushed most sectors into positive territory, as a weaker yen and upbeat corporate earnings drove the benchmark index higher. The Nikkei rose +1.7%, while the broader Topix jumped +1.8%.

Down-under, Australian shares rose overnight, supported by strong gains in mining stocks and financials. The S&P/ASX 200 index climbed +0.9%. In S. Korea, the Kospi index dropped -0.05%.

In Hong Kong, shares weaken as energy and finance stocks fall. At close of trade, the Hang Seng index was down -0.75%, while the Hang Seng China Enterprises index fell -0.94%.

In China, equities were also under pressure, as investors dumped firms, which are expected to report weaker 2017 earnings, and took profits ahead of the upcoming long Lunar New Year holidays. At the close, the Shanghai Composite index was down -0.99% losing ground for the fourth consecutive session. The blue-chip CSI300 index was down -0.71%.

Note: Data overnight showed that growth in China’s manufacturing sector remained solid last month, beating market expectations, as new business led factories to raise output at the start of 2018.

In Europe, regional indices trade higher across the board and in tandem with U.S futures, as corporate earnings support the move higher.

U.S stocks are set to open in the ‘black’ (+0.2%).

Indices: Stoxx600 +0.4% at 397.1, FTSE +0.1% at 7540, DAX +0.4% at 13237, CAC-40 +0.5% at 5507, IBEX-35 +0.5% at 10507, FTSE MIB +0.9% at 23717, SMI +0.4% at 9376, S&P 500 Futures +0.2%

2. Oil rises as OPEC compliance trump’s U.S output, gold lower

Oil is better bid after a survey showed OPEC’s commitment to its supply cuts remains in place, even as U.S production topped +10m bpd for the first time in 48-years.

Brent crude futures are up +49c at +$69.38 a barrel, while WTI crude for March delivery rose +45c to +$65.18 a barrel.

Note: Brent crude rallied +3.3% in January – it was the strongest start to a New Year for five-years.

The week’s EIA report showed the biggest increase in crude oil stocks in 11-months, a rise of +6.8m barrels.

For crude bears, they now have to gage how much U.S production will increase as prices rise.

Ahead of the U.S open, gold prices are under pressure after the Fed left interest rates unchanged, but hinted at hikes later this year. The market would also prefer to take his cues from tomorrow’s U.S payrolls report. Spot gold is down -0.4% at +$1,339.71 per ounce. Yesterday, it touched +$1,332.30 an ounce, its lowest print since Jan. 23.

3. Sovereign yields continue to back up

Yesterday’s FOMC meeting was the last attended by Chair Janet Yellen before she turns over the reins to her successor, Fed Governor Jerome Powell.

Governor Powell will begin his term as chairman on Saturday, and is scheduled to be sworn-in as chairman of the Fed board of governors on Monday.

With the Fed’s three hike ‘dot-plot,’ the odds for a rate increase at the March 20-21 meeting remains at around +78%.

However, yesterday’s FOMC statement hinted that officials might favour more than three-rate increases this year because it offered slightly more conviction that inflation would move higher in 2018.

The yield on U.S 10-year Treasuries has backed up +3 bps to +2.73%, the highest in almost four-years. In Germany, the 10-year Bund yield has climbed +2 bps to +0.72%, the highest in more than two-years, while the U.K’s 10-year Gilt yield has advanced to +1.525%, its highest yield in 21-months.

4. Dollar support remains lukewarm

The USD has ebbed and flowed in the overnight session on market belief that yesterday’s Fed ‘hawkish hold’ has very much been priced-in.

EUR/USD (€1.2433) is back above the psychological €1.24 handle as Euro manufacturing PMI’s this morning support the region’s recovery story.

Note: Beats: France, Swiss, Norway, Czech; misses: Germany, U.K, Spain, Sweden, Poland and in-line: Euro-Zone and Russia.

The single unit is also getting some passive support that eurozone inflation data may have bottomed.

GBP is higher by +0.5% at £1.4245, atop of its strongest level in 19-months, supported by the markets optimism on Brexit talks. Some fixed income dealers are bringing forward their forecast for the next Bank of England (BoE) rate hike to May. It’s conditional on a Brexit transitional agreement next month.

USD/JPY (¥109.73) trades at its overnight highs, underpinned by the Fed’s ‘hawkish-hold’ statement. The pair seems to be locked in a ¥107-110 range.

And following a horrid January for crypto currencies, Bitcoin (BTC) has again edged lower, trading below the psychological $10,000, down-6% at $9,605.

5. U.K manufacturing growth slows

Data this morning revealed an unexpected drop in January U.K manufacturing PMI to a seven-month low of 55.3, down from 56.2 in December and below the market consensus for 56.5.

Digging deeper, Markit (which compiles the survey) said that the reading remained “well above its long-run average of 51.7” and still showed a strengthening in new export order inflows.

Today’s report also revealed a sharp rise in inflationary pressures, with purchase prices rising at the fastest rate in 11-months.

Forex heatmap

Fed Could Signal Changes to Outlook

Wednesday January 31: Five things the markets are talking about

Month-end USD sales and event risk of today’s Fed’s interest rate decision (2 pm EDT) have seen a dramatic pick-up in realized volatility that’s given implied vols another boost this week.

Ahead of the U.S open, Euro stocks have stemmed the bleeding; Asian bourses were mixed, even as the EUR (€1.2454) and JPY (¥108.69) both climbed.

The U.S dollar has found little support from President Trumps first State of the Union address last night as his speech offered few clues on U.S policy.

At today’s FOMC meeting, officials are likely to keep interest rates steady, but they could provide clues on whether their 2018 outlook has changed amid a steadily expanding economy.

Up to now, many investors have doubted the Fed’s dot plot; initially for good reason as central-banker predictions on the pace of rate hikes were not as aggressive as Fed officials predicted. However, that was last years thinking.

In the past month, the market has gotten on board with the prospect that the Fed just might follow up last year’s three-rate hikes with three more in 2018.

Fed-fund futures now show a +36% probability that three +25 bps increases are to happen in 2018, versus +25% a month ago. Meanwhile, for just one hike it’s slumped to +10% from +23% and for two hikes dropped to +29% from +36%.

Conversely, bets have surged that three may be ‘too conservative’; the probability of four rate increases is at +19%, versus +8.7% a month ago.

1. Stocks rebound, on pace for monthly gains

Global stocks and bonds mostly rebounded overnight, keeping major indexes on track for solid monthly gains.

Ahead of the U.S open, investors have been analysing President Trump’s first State of the Union address, a slew of corporate earnings and Janet Yellen’s final meeting as leader of the Federal Reserve.

In Japan, the Nikkei fell for a sixth consecutive session overnight, with most sectors in negative territory. The Nikkei was down -0.8%. The index is still up +1.5% this year, it has fallen -4.5% from the 26-year peak hit a week ago. The broader Topix has declined -1.2%.

Down-under, Aussie shares shrugged off lower oil prices and rising bond yields to end the overnight session higher as real estate stocks strengthened. The S&P/ASX 200 index gained +0.3%. In S. Korea, the Kospi climbed +0.2%.

In Hong Kong, stocks reversed earlier losses to end higher overnight, posting its best month in nearly three-years, helped by gains for financial and services firms. At close of trade, the Hang Seng index was up +0.86%, while the Hang Seng China Enterprises index rose +1.29%.

In China, stocks ended the session mixed, with the blue-chip index recouping earlier losses to close higher, aided by a bounce in real estate and consumer firms. At the close, the Shanghai Composite index was down -0.19%, while the blue-chip CSI300 index was up +0.48%.

In Europe, regional indices are trading mostly higher, rebounding from yesterday’s steep declines on the back of upbeat earnings and a small retreat in bond yields.

U.S stocks are set to open in the ‘black’ (+0.3%).

Indices: Stoxx600 +0.1% at 396.6, FTSE +0.1% at 7592, DAX +0.3% at 13235, CAC-40 +0.2% at 5483 , IBEX-35 +0.2% at 10452, FTSE MIB flat at 23874 , SMI flat at 9433, S&P 500 Futures +0.3%

2. Oil drops for a third day, gold prices higher

Oil prices are under pressure for a third consecutive day, but remain on track for its biggest gain in January in five-years, and this in spite of data that shows that U.S stocks rose more than expected last week.

Brent is down -49c at +$68.43 a barrel, after touching a two-week intraday low earlier overnight. U.S West Texas Intermediate (WTI) futures are down -39c at +$64.11.

Yesterday, U.S crude fell -1.6% to close at +$64.50 a barrel, far outpacing a -0.6% drop in the price of Brent.

Note: Prices of WTI and Brent are still on track for a fifth month of gains and Brent is set for its largest percentage increase in the month of January since 2013, with a rise of +2.7%.

Providing price pressures are U.S producers increasing their rig count – energy companies added 12 oil rigs last week, the biggest weekly increase in 11 months.

A report from the API Tuesday shows that U.S crude stocks rose by +3.2m barrels last week. Expect dealers to take their cue from today’s U.S DoE report (10:30 am EDT) – the report is expected to show an increase in inventories for the first time in 11-weeks.

Ahead of the U.S open, gold prices have rebounded a tad as the U.S dollar resumes its downtrend. Spot gold is up +0.4% to +$1,342.80 per ounce.

Note: Many believe that gold bullion remains vulnerable to weakness ahead of the Lunar New Year. On Tuesday, the ‘yellow’ metal touched its lowest since Jan. 23 at +$1,334.10 an ounce.

4. Sovereign yields remain elevated

U.S government bonds continue to gyrate near this weeks low prices prints, pushing sovereign yields stateside a tad higher towards their four-year high yield print.

U.S yields, in particular, have hit fresh four-year high yields this month as investors have bet on a pickup in growth and inflation following the passage of the U.S corporate tax cuts.

The great debate – the rise in U.S sovereign yields has certainly raised a number of concerns about the durability of the stock rally, while others have said that U.S corporate earnings growth looks solid enough to support further stock gains.

The Fed is expected to send an upbeat message in its statement later today as market based inflation expectations and the growth outlook have improved since the last meeting. The Fed’s ‘dot plot’ forecasts three rate increases for 2018.

The odd’s for a Fed hike in March – the first meeting this year that has a press conference and fresh projections outlook, is around +70%.

The yield on U.S 10-year Treasuries fell -2 bps to +2.70%. In Germany, the 10-year Bund yield has declined -1 bps to +0.67%, the first retreat in a week, while in the U.K, the 10-year Gilt yield declined -1 bps to +1.46% and the biggest fall in a fortnight.

Note: In Japan, the Bank of Japan (BoJ) increased its purchases in 3-5 year JGB’s by +¥30B to +¥33B – the first increase in six-months.

4. Dollar on the defense

The once ‘mighty’ USD remains on the back foot outright vs. G10 currency pairs and is poised to close out its worst monthly performance in 24-months.

The EUR/USD is slowly edging back towards the psychological €1.25 handle as dealers discount some disappointing Euro inflation data (see below), while believing (pricing-in) that the ECB would tighten policy aggressively down the road. The techies see €1.25 as key resistance in the short-term.

The GBP (£1.4138) trades atop of its overnight lows, mostly weighed down by report the E.U Commission officials had rejected the City of London’s proposal to strike a post-Brexit free trade deal on financial services.

USD/JPY (¥108.82) remains little changed ahead of the U.S open.

Elsewhere, South Africa’s rand (ZAR $11.8285) has gained +1% – its strongest rate outright in almost three-years.

5. Eurozone inflation continues to lag, despite robust economic growth

Despite some stellar job numbers and stronger domestic growth in Europe, data this morning once again highlights a missing ingredient in the eurozone’s expansion – an acceleration in the rate at which consumer prices are rising.

The E.U said prices were +1.3% higher in January than a year earlier, the lowest rate of annual inflation since July 2017 and well short of the ECB’s target, which is just below +2%.

Some of that decline had been expected by the ECB, since energy prices jumped at the turn into 2017, and those sharp rises have not been repeated this year.

Note: But not all of the weakness in inflation is down to energy prices. According to Eurostat, services prices rose at an annual rate of +1.2%, unchanged for four straight months. Overall, the core rate of inflation edged up to +1.0% from +0.9%.

The ECB continues to expect that inflation will eventually rise, driven in large part by a rise in wages as unemployment falls and as skilled workers become scarce.

Other data this morning showed that eurozone employment continues to run strong. In Germany, Europe’s powerhouse, January unemployment rate has hit fresh its post-unification low of +5.4%, while the eurozone matches its December 2008 lows of +8.7%.

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