Last night on the globex open, the S&P futures traded at 1899.50 and briefly traded above 1900 before falling back and trading sideways during the Asian session then lower down to 1886 during the mid-European session.. At today’s regular trading hours open, the S&P opened at 1893.75 and continued the recent trend of selling on the open as the large caps made a mid morning low of 1881.75 before drifting higher into the noon day before stalling out at the 1895 area and flunking into the close to 1868.00 on a $410 MOC sell imbalance.
Heading into tomorrow, the economic calendar is featured with the first day of the two-day meeting of the Federal Reserve governors. At this point in time, there doesn’t seem to be a single analyst who anticipates a January rate increase; however, of interest in this meeting will be how the Fed is determining risk events over the last few weeks, and the forward projection going into spring. The equity markets will attempt to quote “turn-around Tuesday” as the equity index is closed near the lows of day on Monday after tanking in the closing hour. From a historical standpoint, the final week of January is moderately strong, including in years in which the indexes are performing weaker. Furthermore, Credit Suisse (VX:CSGN) projected $11 billion of inflows into the equity markets in what amounts to an end-of-month rebalance. Going forward, the S&P futures will need to maintain Thursday’s low of in the 1835-40 price range in order to propel higher; but at this point, 1900, there appears to be firm resistance, having been a market ceiling both on Friday’s trade and Monday’s trade.
Heard across the newswires today was relatively little, but did feature the European Central Bank President Mario Draghi’s comments at noon Central Time, which failed to move the euro currency; however, shortly after his comments began, the S&P made its regular session high, and then sold off 20+ handles.
Bank of America:
The waiting is the hardest part
After the Fed hiked rates in December, markets and analysts widely expected no further action at the January FOMC meeting. However, with sharp risk-off moves in global markets since the start of the year, sentiment has turned to looking for a more dovish Fed. Specifically, some market participants anticipate the Fed will signal far fewer rate hikes this year than the four implied by the December dot plot. We think that is unlikely, despite the market now barely pricing one rate hike for all of 2016 (Chart of the day). The Fed can afford to remain patient this week and watch to see how the macroeconomic data and markets evolve heading into the March meeting. The Fed may sound somewhat more cautious in the January statement, but will not give updated guidance on the pace of hikes, in our view.
After a number of central banks gave dovish messages in recent weeks, including Draghi suggesting additional ECB easing could come in March and Kuroda stating the BoJ will do whatever it takes to get inflation back to target, attention has shifted to the Fed. We have been struck by the number of clients—particularly those focused on equities or oil—asking what the Fed might do at this meeting to lend additional support to their markets. EM investors have also grown anxious about the pace of Fed tightening. A Fed that is seen as insufficiently dovish could disappoint risk markets and spill over into fixed income assets through sentiment and safe haven flows.
With no press conference or updated forecasts (no new dots) in January, markets may need to wait for subsequent speeches, particularly Chair Yellen’s Semi-annual Monetary Policy (Humphrey-Hawkins) testimony on 10-11 February, to get a better sense the Fed’s current views on the likely pace of hiking and risks.
FX: A data dependent Fed could provide modest USD support.
Despite the significant re-pricing of Fed expectations—with another full hike not priced until December 2016—the trade-weighted USD is 1.5% higher since before the December FOMC meeting. Indeed, 2y rate differentials have moved against the dollar over that time (Chart 1). The divergence suggests in the near-term Fed hikes and the policy divergence theme are unlikely to be significant FX market drivers with China and the commodity price decline more important for market direction. One only need look at the response to the blockbuster December non-farm payrolls report. The upside surprise was the strongest since 2012 yet USD/JPY finished the day lower, suggesting the market would continue to question to Fed’s ability to hike the four times the dots imply.
Importantly, the dollar’s correlation with risk sentiment is changing. The dollar’s 12- month rolling correlation has fallen significantly since end-2014, suggesting it could be regaining some of its defensive qualities as China comes into greater focus, particularly if global growth falters. Together with uncertainty about the timing of the next Fed hike and additional ECB stimulus, the near-term outlook for the USD is less clear, though we still like trading USD against higher beta currencies like AUD, NZD, and CAD if risk is under pressure.
Given how much the market has repriced the Fed path, a steadfast, data dependent tone in the FOMC statement could provide some support for the dollar. With only 6bp priced for the March meeting, any implication that meeting remains “live” could see expectations moving in a USD-positive direction. But, until we see a firmer trajectory of US data (outside of the labor market) and/or stabilization in China and global risk appetite, we believe the market will continue to question the pace of Fed hikes, meaning significant USD upside is limited in the near term.
Goldman Sachs:
-Conversations with investors reveal nervousness about recession risk as well as concerns about company revenues and earnings growth.
–Recession remains far from our baseline view…
…but reverberations from lower oil prices and the China slowdown might weigh more heavily on multinational revenue growth than spillovers to macroeconomic growth would suggest.
-Imports (from the world) by China and oil exporters offer incremental explanatory power for S&P 500 revenue growth after controlling for US economic activity.
-This simple regression suggests that the recent declines in imports by China and oil exporters likely reduced S&P 500 (nonfinancial) nominal revenue growth by several percentage points.
-Perhaps surprisingly, the reduction of imports by oil exporters weighs heavier than that of China.
JP Morgan:
The QE force awakens; pan it – Outlook: After the worst-ever start-of-year performance for risky markets and the best-ever for the dollar, calm has returned. Expectations of more ECB/BoJ QE are the drivers, as they were last October. But as the QE force awakens, we are unlikely to change forecasts or make more than modest changes to the trade recommendations. The reason is that successive rounds of ECB/BoJ QE exhibit diminishing returns, due to some combination of valuations, positioning or offsetting global factors (weak EM growth, commodity oversupply, dovish Fed). This week’s Outlook refreshes previous JPM research on QE’s fading influence, with allusions to Star Wars pre-reboot. – Macro Trade Recommendations: Retain a core defensive stance but trim exposure as equity markets stabilise. Take tactical profits on short USD/JPY, but keep strategic JPY exposure by adding a calendar spread one-touch in NZD/JPY. Stay long EUR/AUD in cash but monetise the high in the EUR/AUD slew by selling a 2-mo 1.59 call. Stay short GBP vs EUR and SEK, but take profits on 1Y cable risk-reversal and reinvest into 6-mo 1.40-1.33 put spread. Re-sell a maturing EUR/SEK put (9.15 strike) whilst holding a core cash short. Stay short EUR vs CHF and CZK and long USD vs SGD.