European equities traded mixed yesterday, but Wall Street and Asian ones finished their sessions in the red, as higher energy prices heightened concerns over accelerating inflation, which could lead to faster tightening by major central banks. The fact that Evergrande missed another payment to offshore bondholders may have also weighed on the broader appetite.
Heightened Inflation Fears Trigger Another Round of Risk Aversion
The US dollar traded mixed against the other major currencies on Monday and during the Asian session Tuesday. It gained versus JPY, GBP, EUR, and CAD in that order, while it lost some ground against AUD, NZD, and CHF.
The weakening of the yen and the strengthening of the risk-linked Aussie and Kiwi suggest that markets may have traded in a risk-on manner yesterday and today in Asia. However, the slight strength of the Swiss Franc and the weakening of the Loonie and the pound point otherwise. Thus, with the performance in the FX world painting a blurry picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, EU indices traded mixed, with FTSE 100 and CAC 40 recording gains, but FTSE MIB and IBEX 35 sliding. Euro Stoxx 50 and DAX finished virtually unchanged. Market sentiment softened during the US session, with all three of Wall Street’s main indices ending their session in the red, and deteriorated even more in Asia today.
With no new major events to drive the markets, we believe that the further reduction of investors’ risk exposure is the result of the cocktail of developments we had last week. Yes, on Wednesday, Russia indicated that energy supply to Europe is likely to increase, but yesterday, oil prices kept drifting north, with WTI conquering highs last seen back in 2014. Therefore, with only talks and no concrete action yet, we believe that market participants could stay concerned over high energy prices translating into further acceleration in inflation, and thereby faster tightening by major central banks. What’s more, China’s Evergrande missed a third deadline yesterday to pay interest to offshore bond holders, adding to fears over a potential default, which could leave its mark to the nation’s financial system, and perhaps have a spillover effect to the rest of the world. As for the US funding saga, Senate lawmakers agreed to raise the nation’s debt-ceiling until December, but that doesn’t mean that the probability of a potential government shutdown then is zero. A fresh standoff between Democrats and Republicans suggesting a shutdown in a couple of months, could weigh further on investors’ morale. Therefore, we see the path of least resistance for equities to be to the downside for now. At the same time, we expect the US dollar to stay in uptrend mode.
Now, looking at the economic calendar, during the early European session today, we got the UK employment report for August. The unemployment rate ticked down to 4.5% from 4.6% as was expected, but the net change in employment revealed less jobs than the forecast suggested. In any case, they still were more than in July. As for wages, they slowed more or less in line with expectations. Although a decent report, the pound barely reacted at the time of the release. As we noted yesterday, with the latest supply chain problems in the UK, we saw it unlikely for data concerning the period of August to be able to drive the pound, even if this means greater likelihood for earlier rate hikes by the BoE. After all, over the weekend, BoE policymaker Michael Saunders told households to get ready for “significantly earlier” interest rate rises as inflation pressure mounts, and yet, the pound was the second loser in line yesterday among the major currencies, confirming our view that it remains more linked to developments surrounding the broader market sentiment.
DJIA – Technical Outlook
The Dow Jones Industrial Average cash index traded sharply lower yesterday, after it hit resistance slightly below the 34985 barrier. Overall, the index remains below the downside resistance line taken from the high of September 3rd, but also above the upside support one drawn from the low of October 1st. Therefore, although we see the downside scenario as more likely than the upside one in equities, we prefer to stand pat for now with regards to this index.
In order to get confident on more declines, we would like to see a clear dip below the 34260 barrier. This could signal the break below the upside line drawn from the low of October 1st, and may initially target the 33845 zone, which provided strong support between October 4th and 6th. If the bears are not willing to stop there, then a break lower may pave the way towards the low of October 1st, at 33525.
On the upside, we would like to see a clear recovery above 34985 before we start considering the bullish case again. This could confirm the break above the downside line taken from the high of September 3rd and could initially challenge the peak of September 10th at 35110. If the bulls do not stop there, we could see advances towards the 35280 zone, which provided strong support between August 31st and September 5th, the break of which could aim for the 35520 area, which acted as a ceiling between August 25th and September 6th.
GBP/CAD – Technical Outlook
GBP/CAD traded in a consolidative manner yesterday, staying between the key zone of 1.7055 and the support of 1.6950. On Friday, the pair fell below the 1.7055 hurdle, thereby confirming a lower low, which combined with the fact that it remains below the downside resistance line taken from the high of September 20th, paints a negative near-term outlook.
A move below 1.6950 will confirm another lower low and may see scope for declines towards the 1.6870 area, defined as a support by the low of May 6th. If that zone is not able to stop the slide either, then its break could carry larger bearish implications, perhaps extending the fall towards the low of December 11th, 2020, at 1.6770.
We will abandon the bearish case and start examining a bullish reversal, only if we see a break above the 1.7170 obstacle, which stopped the bulls from climbing higher between September 30th and October 6th. The rate will already be well above the aforementioned downside line, and we could see advances towards the 11.7245 level, marked by the inside swing low of September 27th, where another break may set the stage for extensions towards the peak of that day at 1.7368.
As for the Rest of Today’s Events
A few hours after the UK employment data, we have the German ZEW survey for October, with both the current conditions and economic sentiment indices expected to have declined slightly, to 29.5 and 24.0 from 31.9 and 26.5. Later, in the US, JOLTs job openings for August are coming out and the forecast points to a small decline.
We also have five speakers and those are: ECB Chief Economist Philip Lane, ECB Supervisory Board Chair Andrea Enria, ECB Executive Board member Frank Elderson, Fed Vice Chair Richard Clarida, and Atlanta Fed President Raphael Bostic.
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