Reddit ‘War on Wall Street’ adds uncertainty to a week of competing data

Risk sentiment is currently stuck between the push and pull of vaccines and variants of the virus. These two stories are likely to keep the market choppy but we still lean towards risk off as restrictions tighten and the data starts to turn lower as we have seen from the China PMI’s.

We start the week and the month with a lot of competing data sets plus we will see more big company US earnings announced. 

The US PCE Core Deflator YoY was stronger than expected at 1.5% vs 1.3% expected which helped move US yields higher due to inflation expectations.  China PMI’s were weaker over the weekend. Manufacturing PMI 51.3 vs 51.6 exp and Non-Manufacturing 52.4 vs 55.0 exp. There is also expected to be a lot less activity over Chinese New Year than usual as travelling is limited.

Silver surged this morning on the open as we look to see the continuation of the Reddit ‘War against Wall Street’, which has led to an extreme increase in demand for the physical metal over the weekend and large retail demand in futures to start the week.  

J&J vaccine shows 66% efficacy. The low efficacy initially led to some disappointment on Friday, but sentiment soon rallied back as the likes of Fauci pointed out that it still has 85% efficacy against severe cases and will prove another valuable tool in the fight against the pandemic, especially since it only requires a single dose and is easy to store and transport.

Republican Senators have proposed a smaller $500-$600bn stimulus package to the Biden administration, as they look at the Trump type of figure. 

FX remains choppy. The largest position remains short dollars, but recent moves appear to be exacerbated by position cutting after a rough month for hedge funds and the higher US yields may inflict more pain.

USDJPY also inflicting pain to a heavy short position and not trading with risk sentiment at all. All moves in FX are currently USD led so all views should be expressed as such.

Month end JPY selling could have played some part. The break and close above 104.32 top of ichimoku cloud was important and expect the move higher to continue as that is the pain side, even if hard to agree with the move fundamentally JPY is no longer trading like a haven.

RBA tomorrow, no change expected. They could mention extending their asset purchase program past the April deadline, but most expect that to come at a later meeting. Australia Retail Sales on Friday.

USDCAD higher still makes sense as Republicans push back against US stimulus, Oil to be weighed on by reduced travel, higher US yields and because the market is still short USDCAD. Expecting us to push up to 1.3000 over the coming weeks. 1.2738 low on Friday after the better Canada GDP data and J&J vaccine headline is support.

This view extends to AUDUSD and all growth currencies against USD. AUDUSD traded up to 0.7704 on Friday which will have squeezed out most short-term risk off shorts. This now opens up the downside as risk off moves continue and Perth goes into lockdown. Iron Ore and USDCNH will be important for direction.

Our overview and outlook of the key trading pairs and indices is as follows:

EUR/USD

The euro remains stuck in a range between 1.2050 and 1.2185 despite the ECB downplayed rate cuts odds. However, according to Credit Agricole CIB Research, the USD tends to do well on average in February, therefore seasonality also favours a pullback in EUR/USD. Having said that, if the overall market recovers today, then we could see the single currency higher today, retesting the 1.2185 resistance.

GBP/USD

The cable is trading back above 1.37 amid upbeat market mood after some positive updates regarding the US fiscal stimulus. Additionally, UK’s 600,000 vaccinations a day boosted the risk sentiment, which could support higher prices for the Sterling. Bulls need to break above 1.3745 to open doors for a possible 1.38 retest.

USD/JPY

USD/JPY is trading above the 1-year downtrend as soaring US bond yields boosted the USD and faded the safe-haven demand on the JPY. Today, a solid rebound in the US equities and bond yields could push the pair higher to retest the 105 level, as long as price holds above the recent 104.60 support.

FTSE100

After falling below our 6350-support level last Friday, London’s FTSE100 has surged over 100 points higher this morning at 6450 tracking gains in Asian equity markets, as investors look ahead to a busy week of company earnings. China’s Caixin PMI decreased to 51.5 in January from 53.0 in December but remained above the neutral mark of 50 reflecting continued growth. Investor sentiment this morning is also boosted by progress on vaccines. EU Chief Ursula von der Leyen said Sunday that AstraZeneca is increasing its coronavirus vaccine deliveries to the EU by 30%. The economic events calendar has manufacturing PMI readings from the UK at 0930 GMT.

DOWJONES

Wall Street ended sharply lower on Friday, with the Dow Jones Industrial Average down 2.0% dropping 100 points below our 30000-support target now turned resistance amid concerns about whether President Joe Biden's proposed $1.9 trillion stimulus package can get passed, along with uncertainty over the coronavirus vaccine rollout. But the Dow reversed course this morning on the futures market tracking gains in Asian equity markets. Technically speaking, the RSI moved back higher from oversold territory as the index is now hovering around the 20-period MA. Looking ahead, we suspect the Dow will rise higher today on bargain hunting, but the 30235 key important resistance level will be tough to break as we approach the 200-period moving average.

DAX30

The Dax30 hit both our long/short resistance/support targets to settle 1.60% in the red, weighed down by a slower than expected vaccine rollout to the 27-nation bloc as European Commissioner continues to pressure pharmaceuticals, with Chancellor Merkel scheduled to have a crisis talk today. AstraZeneca announced that it will deliver an additional 9M doses to the EU in the first quarter, bringing the total to 40M in Q1, however still half of what was earlier expected. Asia/Pacific markets printing in the green after the PBOC injected funds in the market, have outweighed weaker than expected German Retail sales data, with 13600 as the next resistance target.

GOLD

Gold was not immune to Friday’s frenzy trading, hitting our long resistance targets only to erase gains after confirming the 1870 resistance target, which coincided with the 200 period SMA on the 4H chart. A gap up in today’s open, which has not been fully closed, indicates strong demand on the safe haven supported by slow vaccine rollouts and concerns over the UK variant Covid becoming the dominant strain in the US.

USOIL

Slowing factory activity in Asia with China reporting weaker than expected Caixin Manufacturing PMI in early trade today had WTI Crude hit a low of $51.60 at the open, before retracing higher as we trade between $52/$52.60 support resistance levels. Tighter supply is keeping Crude supported after news that OPEC and allies estimated that they have implemented 99% of their agreed curbs in January. $52.60 remains key resistance level to breach for further upside, with downside looking more favourable with $52 as closest support target.