Futures Slide, Global Rally Fizzles; Oil Set For Longest Rally On Record

Top European News

  • Crispin Odey Says Believes Brexit Will Not Happen: Reuters
  • Euro Bond Supply Avalanche Meets Wall of Cash From Fund Managers

In FX, the dollar session was choppy but ultimately on the backfoot after losing the 95.500 level in early Asia-Pac trade as the Fed signalled a more patient approach ahead of the US CPI release later today. Both Fed Chair Powell and Vice Chair Clarida noted the Central Bank has the ability to be patient and flexible on rates given the State-side inflation data. As such the DXY fell to an overnight session low of 95.322 (vs. high of 95.508) and currently hovers around the middle of the range with US CPI in sight. Lloyds notes that the sharp decline in energy will likely weight on the headline CPI as they forecast a fall to 1.9% from 2.2%, though they expect the core figure to remain steady at 2.2%.

  • AUD,NZD, CNY, CAD – The marked outperformers and major beneficiaries as the USD/CNY is poised for its best week since 2005 with aid from the dovish Fed and a sub-6.80 PBoC fix. AUD/USD currently resides north of 0.7200 (vs. low of 0.7183) and reached levels last seen mid-December as optimistic Australian retail sales also underpinned the Aussie currency. Meanwhile, the Kiwi stands at the G10 leader as tailwind from its antipodean counterpart boosted the NZD/USD above its 50 and 200 DMA at 0.6786 and 0.6799 respectively to test 0.6840 to the upside, with the DMAs also set to form a golden cross. Finally, the Loonie is on the front foot as it reaps its reward from the declining greenback and the rising oil price with USD/CAD now below 1.3200 (vs. high of 1.3245) ahead of its 100 DMA at 1.3169.

In commodities, Brent (+0.6%) and WTI (+0.8%) prices are in the green benefiting from the positive sentiment seen across US and Asian sessions after dovish comments from multiple Fed speakers. Russian oil output for January 1st-10th has dropped to 11.38mln BPD from 11.45mln BPD in December; additionally, Russian Energy Minister Novak is reportedly planning to attend the upcoming January 22nd-25th Davos summit. Gold (+0.5%) prices are just shy of USD 1295.2/oz, the sessions high, following dovish comments from the Fed applying downward pressure to the dollar. Copper prices are similarly higher on the positive market sentiment, in particular that Chinese Vice Premier He is to visit the US later on in the month. Elsewhere, India’s steel ministry is refusing to back down on tougher import rules on steel, pressuring automakers into using local steel instead.

US Event Calendar

  • 8:30am: US CPI MoM, est. -0.1%, prior 0.0%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.2%
  • US CPI YoY, est. 1.9%, prior 2.2%; CPI Ex Food and Energy YoY, est. 2.2%, prior 2.2%
  • 8:30am: Real Avg Weekly Earnings YoY, est. 1.2%, prior 0.54%;
  • 2pm: Treasury monthly budget statement postponed by govt shutdown

DB's Jim Reid concludes the overnight wrap

Fortune continues to favor the brave in markets at the moment following another broadly positive last 24 hours for risk assets. It may have been a less convincing session on Wall Street last night compared to recent days with the S&P 500 for example passing between gains and losses no less than 19 times, however, a +0.45% closing move for the index does now mean it’s finished higher in 6 out of the 7 sessions in 2019 so far and each of the last 5. That’s the best streak since September and if it rises again today, it will achieve in the second week of the year a feat that only occurred twice in all of 2018. The index is now up +10.44% over the last 11 sessions, the best such stretch since October 2011.

There’s little doubt that sentiment over this period has been largely driven by communications from the Fed, and it’s no surprise that attention focused yesterday on Chair Powell’s public remarks. However, as we enter the 12th month of his Chairmanship, he seems to have improved at the art of Fedspeak, using many words but not saying anything substantively new. Markets were broadly unchanged during and immediately after his speech, and the S&P 500 rallied through the afternoon to ultimately close higher.

In terms of substance, Powell reiterated that the economy is “doing quite nicely” though he is attentive to “the financial markets expressing a view about the concern about downside risks associated with global growth and with trade.” To balance the divergent signals between strong data and tepid markets, Powell said he plans to “be patient and flexible and wait and see what does evolve.” So that’s consistent with our economists’ base expectations for two more rate hikes this year. Powell also repeated his guidance on the balance sheet runoff and the uncertainty over its terminal size, and he mentioned China as a key uncertainty to the global growth outlook.

After markets closed, Vice Chair Clarida presented a similar message. He referenced tighter financial conditions and global growth as key "crosswinds" affecting the US economy, and argued that "if these crosswinds are sustained, appropriate forward-looking monetary policy should respond." He said the Fed would change its balance sheet policy if necessary, though any policy shifts would have to be consistent with their mandate. So, another Fed official seemingly in support of a pause in the rate hike cycle.

Back to markets where the DOW and NASDAQ also gained +0.51% and +0.42%, respectively yesterday. The VIX also ended at 19.50 which was down about half a point while 2y and 10y rates +2.3bps and +3.2bps respectively, meaning the curve was about 1bp higher at +16.5bps. The USD strengthened +0.32% while WTI oil closed up +0.44% to take its remarkable run of daily gains to 9 and the longest since January 2010. The price is up +17.89% during this current run which is the most over 9 sessions since March 2016.

Early on in the day there was some damage done by the US retail sector with Macy’s grabbing much of headlines with shares plummeting -17.69% for its worst-ever loss, after cutting its annual earnings forecast. Kohl’s also dropped -4.81% after reporting disappointing holiday period sales while Barnes & Noble dropped -15.76% in the wake of also downgrading earnings guidance. Target’s (-2.85%) holiday sales actually appeared more in-line with estimates however the company failed to escape the wider sector carnage. It was a similar story for retail CDS with spreads +36bps wider for Macy’s, +16bps wider for Kohl’s and +12bps for Nordstrom. The broader CDX IG index did, however, finish 2bps tighter while US HY cash spreads also tightened 2bps for its fifth consecutive rally, over which it has narrowed a remarkable -87bps.

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