Markets End The Week On The Back Foot As Reflation Trade Struggles

News and Events:

Risk rally on hold ahead of the weekend

After rallying strongly during the first couple of weeks of February, the US dollar suffered a substantial sell-off as investors ended the week on the back foot. The reflation trade that has been fuelled by Donald Trump’s announcement regarding a “phenomenal” tax plan is now running out of steam as investors lose faith amid a serious lack of details. Indeed, President Trump has been back-pedaling on many of his campaign promises and/or early announcements as president. There are therefore growing concerns among investors that he will significantly under-deliver.

After losing 1% against the single currency, the greenback stabilised above 1.06 ahead of the weekend. The dollar index rose 0.20% as the GBP and the EUR slid 0.24% and 0.27% respectively. Only the Japanese yen was able to hold ground – rising 0.28% – as investors seek safe haven assets. Gold was also gaining ground, climbing 0.15% to 1,240.

On the equity side, shares across the globe fell sharply on Friday. The Nikkei slid 0.58%, while the broader Topix Index was down 0.42%. In Europe, the Euro Stoxx 600 was down 0.40%. US futures were also blinking red on the screen. Treasury yields are moving south as investors rushed into bonds. There is little hope for this dynamic to reverse during the day as the economic calendar is really light and no press conference is expected on either the political or monetary policy fronts.

Strong US data supports stock rally

The Philly Fed manufacturing index failed to significantly correct as many analysts predicted after a strong November. Instead, it rose to a new post financial crisis high. The business confidence index surged to 43.3 against an expected 18. The employment portion of the index was softer than one would have expected give the topline read, especially regional manufacturing labor. However, the overall tone of the labor market was solid. Today’s report reinforces our view of a modest improvement in the health of the US economy. We retain our expectations of two 25bp hikes beginning in June but cannot rule out a proactive hike in March (Fed Fund market pricing in 30% probability). The strong growth expectation also supports higher US equity prices despite tailing P/E above historical average. Lower interest rates and global volatility combined with stronger EPS estimates and fundamental data suggest new highers are justified. However, the rally will need Trump to provide promised tax reform in order to trade higher. And on this fact we are concerned. As expressed yesterday we have yet to view Trump as a successful statesman rather than just a bully, indicating that all policy will be challenged (even policy with bi partisan support). Our expectations for a sustained USD rally remain weak and we see USD buying as an opportunity to reload USD shorts (especially in select EM currencies).

Today’s Key Issues (time in GMT):

• Feb 10 Money Supply Narrow Def, last 8.67t RUB / 08:00
• Jan CPI MoM, exp -0,70%, last 0,50% SEK / 08:30
• Jan CPI YoY, exp 1,50%, last 1,70% SEK / 08:30
• Jan CPI CPIF MoM, exp -0,70%, last 0,50% SEK / 08:30
• Jan CPI CPIF YoY, exp 1,70%, last 1,90% SEK / 08:30
• Jan CPI Level, exp 317,54, last 319,68 SEK / 08:30
• Dec ECB Current Account SA, last 36.1b, rev 36.4b EUR / 09:00
• Dec Current Account NSA, last 40.5b, rev 40.8b EUR / 09:00
• Dec Current Account Balance, last 4640m EUR / 09:06
• Jan Retail Sales Ex Auto Fuel MoM, exp 0,70%, last -2,00%, rev -2,20% GBP / 09:30
• Jan Retail Sales Ex Auto Fuel YoY, exp 3,90%, last 4,90%, rev 4,70% GBP / 09:30
• Jan Retail Sales Inc Auto Fuel MoM, exp 1,00%, last -1,90%, rev -2,10% GBP / 09:30
• Jan Retail Sales Inc Auto Fuel YoY, exp 3,40%, last 4,30%, rev 4,10% GBP / 09:30
• Feb IGP-M Inflation 2nd Preview, exp 0,13%, last 0,76% BRL / 10:00
• Jan Current Account Balance, exp -$5350m, last -$5881m BRL / 12:30
• Jan Foreign Direct Investment, exp $9500m, last $15409m BRL / 12:30
• Dec Int’l Securities Transactions, last 7.24b CAD / 13:30
• Jan Leading Index, exp 0,50%, last 0,50% USD / 15:00
• Jan PPI MoM, exp 0,80%, last 0,60% RUB / 23:00
• Jan PPI YoY, exp 9,10%, last 7,40%, rev 7,40% RUB / 23:00
• Jan Tax Collections, exp 136850m, last 127607m BRL / 23:00
• SURVEY: Private Capital Expenditure 2017-18 A$84.8b AUD / 23:00

The Risk Today:

EUR/USD’s buying pressures since the pair failed to hold below former hourly support given at 1.0581 (16/01/2016 low). Hourly resistance is given at 1.0679 (16/02/2017 high). Expected to see further strengthening. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD is still trading below strong resistance given at 1.2771 (05/10/2016 high). The technical structure suggests that the pair should bounce lower towards support given at 1.2254 (19/01/2016 low). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY’s demand is fading after its increase from support given at 111.36 (28/11/2016 low). Bearish pressures arise around hourly resistance given at 115.62 (19/01/2016 high). The technical structure suggests further weakness. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF’s short-term bullish momentum is pausing after the breakout of the downtrend channel. Key resistance is given at a distance at 1.0344 (15/12/2016 high). Nonetheless, we believe that the pair is likely to strengthen again above parity. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.