Equities rebounded strongly yesterday, but with the crisis in Ukraine intensifying, we believe that this is just an adjustment bounce, which was also helped by Fed Chair Powell’s remarks. Testifying before the House Financial Services Committee, he said that he will probably support at quarter-point rate increase at the upcoming gathering. We also had a BoC decision yesterday, with officials hiking by 25bps as expected, and sounding optimistic that more liftoffs may be in the works.
Fed Chair Powell Inclines Towards a 25bps Hike this Month
The US dollar pulled back against all but two of the other major currencies on Wednesday and during the Asian session Thursday. It gained only against JPY and CHF, while it underperformed the most versus GBP, CAD and AUD.
The weakening of the US dollar and the other safe-havens yen and franc suggests that investors’ risk appetite may have improved somewhat. Indeed, turning our gaze to the equity world, we see that major EU and US indices were a sea of green, with the positive mode rolling into the Asian session today.
With the war in Ukraine raging, we believe that this is just an adjustment bounce, which was also helped by Fed Chair Powell’s remarks before the House Financial Services Committee of the US Congress, and not the beginning of a positive reversal. As long as the Russia-Ukraine crisis continues, we will maintain the view that another round of selling could be possible at any time.
Now, as for Powell’s testimony, the Fed Chief said that he and his colleagues will move forward with their plans to raise interest rates this month, but he added that he is “inclined to propose and support a 25bps rate hike.” This may have come as a disappointment to some market participants expecting a double hike, although the probability of such an action has declined notably recently, due to the ongoing tensions in eastern Europe. However, he also noted that he is ready to use larger or more frequent rate hikes if inflation does not slow, which keeps the door open to a steeper rate path than the market currently anticipates.
With oil prices keep surging yesterday, we don’t see this as a distant scenario. If the spike in energy and other commodity prices translates into further acceleration to the already high inflation, officials may need to indeed proceed with faster hikes. This is inline with our view, that when the geopolitical tensions ease, an aggressive tightening mood by the Fed may keep a lid on any relief bounce in equities. Faster rate hikes mean higher borrowing costs for companies sooner, as well as lower present values, which could slowly start weighing on equities again.
Euro Stoxx 50 – Technical Outlook
The Euro Stoxx 50 cash index traded higher yesterday, after it hit support at 3707 on Tuesday. However, the recovery was limited, and the index stayed well below both the prior upside support line taken from the low of May 13th and the downside one drawn from the high of January 5th. In our view, this keeps the near-term outlook negative.
Even if the recovery continues for a while more, we would expect the bears to take charge again from near the 3880 zone, or below the downside line drawn from the high of January 5th, and perhaps aim for another test at 3707. This will confirm a forthcoming lower low on the daily chart, and may see scope for declines towards the low of February 26th, at 3620. If that barrier is not able to halt the slide, the we could see larger extensions, perhaps towards the low of January 29th, at 3460.
On the upside, we would like to see a strong recovery back above 4180, before we start examining whether the outlook has turned back positive. This will signal the index’s return back above both the aforementioned diagonal lines and may see scope for advances towards the 4240 or 4303 zones, marked by the highs of February 10th and January 20th, respectively. If market participants are not willing to stop there, then we may experience extensions towards the peaks of January 5th and November 18th, at 4395 and 4415.
BoC Hikes Rates as Expected, Sounds Optimistic for More
Yesterday, we also had a BoC decision, with the Bank hiking rates by 25bps, to 0.50%, as was widely anticipated. In the statement accompanying the decision, officials said that Russia’s invasion to Ukraine “is a major new source of uncertainty,” adding that rising commodity prices would fuel further inflation, but new supply disruptions could weigh on global growth.
That said, officials also said that the rebound from the Omicron variant was “well in train,” and that growth for the first quarter of 2022 now looks more solid than previously projected. This may have encouraged market participants to add to their bets with regards to future rate hikes by this Bank. The Loonie was the second winner in line among the majors yesterday, perhaps due to that, but also due to the surging oil prices. The same catalysts are likely to keep it supported in the foreseeable future as well.
EUR/CAD – Technical Outlook
EUR/CAD tumbled yesterday, falling below 1.4165, which is the lower end of the sideways range the pair had been trading within since October 4th. The slide also took the rate below the 1.4055 barrier, which is marked by the low of April 13th, 2017, and now we are getting closer to the 1.3960 zone, marked by the inside swing high of February 16th, 2017. All this paints a very negative picture in our view.
The bears may decide to take a break after testing the 1.3960 zone, thereby allowing a rebound. However, as long as the rebound stays limited below the lower end of the aforementioned range, at 1.4165, we will see decent chances for another round of selling, and another test near the 1.3960 zone. If the bears manage to overcome that hurdle this time around, we would expect extensions towards the low of February 15th, at 1.3780.
On the upside, we would like to see a strong break above 1.4635, the upper end of the sideways range, before we assume that the bulls have gained full control. This would confirm a forthcoming higher high on the daily chart, and may initially pave the way towards the 1.4840 zone, marked by the peak of September 28th. Another break, above 1.4840, could carry larger bullish implications, perhaps setting the stage for advances towards the 1.5100 territory, which acted as a ceiling between July 19th and September 20th.
As for Today’s Events
We get the final Markit services and composite PMIs from the Eurozone, the UK, and the US, which are, once again, expected to confirm their preliminary estimates. Investors may pay more attention to the US’s ISM non-manufacturing index for February, which is expected to have ticked up to 61.0 from 59.9. We also have Fed Chair Powell’s testimony before the Senate Banking Committee.
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