Daily Market Outlook: Thursday, January 4

By Patrick Munnelly of Tickmill

Thursday, January 4, 2024 5:32 AM EST

Asian markets experienced widespread declines as the cautious approach persisted from Wall Street, even in the absence of a specific trigger. The Nikkei 225 resumed trading after a prolonged break and recovered some of the losses seen in the region yesterday, with the decline being somewhat limited due to the recent weakening of the JPY. The Hang Seng and Shanghai Comp both experienced declines, but the Hang Seng's losses were less severe due to gains in oil majors. On the other hand, the Shanghai Comp did not benefit from the positive Chinese Caixin Services PMI data, which indicated that both domestic and foreign demand are still insufficient.

Today's attention is on the final releases of December services PMI reports, which are anticipated to confirm stronger growth compared to the manufacturing sector. In the UK, the flash estimate for the services PMI reached a 6-month high of 52.7, surpassing the manufacturing output index of 45.5. This has raised hopes that the UK economy may avoid a technical recession.

However, in the Eurozone, services activity, particularly in France, was weak, with a flash estimate of 44.3, and the overall Eurozone measure was below par at 48.1, down from 48.7 in November.

In the UK, focus will also be on the Bank of England's latest money and credit data for November. Of particular interest are the mortgage approval figures for house purchases, with a consensus forecast expecting a slight increase to 48.8k from 47.4k in October, although still below the pre-pandemic average of 60k+. Additionally, the release of the BoE's Decision Maker Panel (DMP) survey of businesses will provide insights into economic trends, including prices and wages.

The European focus extends to national December Consumer Price Index (CPI) inflation reports. France's figures showed an increase in EU-harmonised inflation to 4.1% from 3.9% in November. Germany is expected to release regional CPIs, with the national EU-harmonised measure projected to show a temporary surge to 3.9% from 2.3%, mainly due to energy price base effects. The Eurozone CPI flash estimate, due tomorrow, is expected to reflect base effects, with policymakers likely drawing comfort from a forecasted fall in core inflation, excluding volatile energy and food components.

Stateside, upcoming releases include the final estimate of the US services PMI, expected to be confirmed at 51.3, and the latest weekly initial jobless claims data, expected to remain low. The ADP employment report is also due ahead of tomorrow's eagerly awaited official labour market report.

Overnight Newswire Updates of Note

Fed Minutes Suggest Hikes Are Over, But Offer No Timetable On Cuts
Markets See Fed’s Exit From Quantitative Tightening Nearing
Morgan Stanley Say Not To Count On A March Rate Cut
China Services Sector Expands In December, Private Survey Shows
China Finance Chief Says Fiscal Spending To Rise This Year
Fitch Downgrades Four Chinese National AMCS By One Notch
Earthquake Raises Hurdle For BoJ To End Negative Interest Rates
Oil Rises For Second Day On Libyan Outages, Middle East Attacks
OPEC’s Crude Oil Output Steady Before Start Of New Production Cuts
Asia Stocks Slide After Fed Minutes, Led By China After Fed Mins
CVS To Replace AbbVie’s Blockbuster Humira With Cheaper Rivals
US, Allies Warn Houthis Of ‘Consequences’ As Crisis Intensifies

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0820-30 (1.5BLN), 1.0860-65 (800M), 1.0885 (318M)
1.0950-55 (514M), 1.0990-1.1000 (860M)
GBP/USD: 1.2510-15 (517M), 1.2600 (301M), 1.2700 (250M), 1.2720-25 (225M)
EUR/GBP: 0.8520 (350M), 0.8625 (319M)
AUD/USD: 0.6650-60 (880M), 0.6750-55 (1.9BLN). AUD/NZD: 1.0900 (715M)
NZD/USD: 0.6190 (280M), 0.6200-10 (460M), 0.6285 (340M)
USD/CAD: 1.3300 (245M), 1.3360-65 (740M), 1.3395 (1BLN)
USD/JPY: 143.25 (871M), 143.80-85 (1.3BLN), 144.00 (1.2BLN)
EUR/USD options are active ahead of Friday's U.S. NFP data. The overnight option expiry is now set for 10 am New York/15:00 GMT on Friday, which includes the NFP release. Overnight implied volatility has increased by 3.0 to reach 13.0. The premium break-even has risen from 45 to 60 USD pips in either direction. This highlights the event risk premium, indicating that the market expects an increase in related volatility. The 1-week and 1-month implied volatility has risen from 5.0 and 5.9 before Christmas to 8.5 and 7.3 respectively. The setback in EUR/USD spot price has driven demand for options, leading to increased implied volatility.