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Opening Bell: USD, VIX Futures, Treasuries Steady Despite Shutdown

Published 01/22/2018, 06:15 AM
Updated 09/02/2020, 02:05 AM

Key Events

All four major US indices—the S&P 500, NASDAQ Composite, Russell 2000 and Dow Jones Industrial Average—closed higher on Friday, and each, except for the Dow, posted records. This, while shrugging off the risk of a government shutdown which occurred at midnight Friday, after markets had closed. We covered the shutdown in greater detail in yesterday's Week Ahead post.

Stoxx 600 Daily

Global Financial Affairs

This morning, Asian stocks were mixed; the Stoxx Europe 600 opened lower. Bulls attempted to carry prices higher, only to be pushed back down by bears. Should the session close with the same price behavior it would form a shooting star, signalling that investors seem to be split between those who rely on global economic growth and don’t care about the shutdown and investors who await a bipartisan resolution, to avoid being caught in a correction. The momentum, however, is on the side of the bulls, after an upside breakout of a bullish pennant on Friday.

VIX Futures Daily

As mentioned earlier, the government is now in shutdown mode. It's now the third day and counting.

While S&P 500 VIX Futures opened 1.16 percent higher at 12.07, they've fallen 0.86 percent to 12.03, as of 02:34 EDT. This indicates trader anxiety, though the decline clearly points to a sense of calm descending. The benchmark has been falling since August 31, 2015. It is now sitting against the resistance of the downtrend line. An upside breakout may suggest a reversal, from bullish to bearish sentiment.

UST 10-Y Weekly

The yield on the US 10-year Treasury initially dropped 0.55 percent—the potential result of a combination of funds rotating out of equities and into bonds and of a reduced expectation of higher rates due to the shutdown’s possible economic damage—but has been pared back to 0.25 percent and is now fluctuating.

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DXY Daily

Ironically, against this backdrop, the dollar eked out a small advance, bouncing from an earlier decline, mirroring the cooling nerves S&P 500 VIX Futures were also projecting. Technically, the greenback is trading within a rising flag pattern, in which demand is presumably provided by profit taking by sellers following the 2.45 percent plunge for the global reserve currency in the 4 trading days between January 10 and 15, and by dip-buyers—wherein a downside breakout would signal a resumption of the trend prior to this interruption.

EURUSD Daily

The USD’s strength even withstood bullish news from its biggest currency trading partner the euro. The common currency scaled back an early advance after German Chancellor Angela Merkel made a breakthrough toward forming a ruling coalition, when the country’s center-left Social Democrat party (SPD) agreed to begin formal negotiations.

While escaping “political disaster,” according to the New York Times, Thomas Kielinger, a prominent Die Welt journalist argues the instability thus far and if Germany won’t return to Europe’s center stage soon, enables French President Emmanuel Macron to lead the EU while Germany’s economy will be “at a standstill.” Technically, the euro—in a mirror image of the dollar’s bearish flag—appears to be on the verge of completing a pennant, upon an upside breakout, which is bullish within an uptrend.

While the shutdown may cause a temporary market correction, in our opinion it will have no lasting impact on broader stock rallies. The last shutdown occurred in 2013, and it only provided a buying-dip for further rallies.

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USDCNY Monthly

FX traders continue to monitor China’s appetite for the strength of its currency as the yuan trades at the symbolically key level of 6.4 per dollar. Technically, the USDCNY pair has been trending down since January of last year. However, it has reached the uptrend line since January 2014.

Up Ahead

  • Barring any last minute drama in Washington, President Donald Trump will join world leaders and senior executives in Davos, Switzerland, for the annual World Economic Forum.
  • Central Banks: Bank of Japan monetary policy decision and briefing on Tuesday; European Central Bank rate decision on Thursday
  • U.K. Prime Minister Theresa May’s Brexit bill is set to be taken up in the House of Lords.

Earnings

  • Halliburton (NYSE:HAL) is scheduled to report earnings today before the market opens: EPS forecast is $0.46 versus $0.04 YoY
  • Netflix (NASDAQ:NFLX) is scheduled to report earnings after market close: EPS forecast is $0.41 versus $0.15 YoY

Market Moves

Stocks

Currencies

  • The euro climbed 0.2 percent to $1.2241.
  • The Dollar Index fell 0.12 percent
  • The British pound increased 0.3 percent to $1.3899, the strongest in 19 months.

Bonds

  • The yield on 10-year Treasuries decreased one basis point to 2.65 percent, the biggest dip in more than a week.
  • Germany’s 10-year yield advanced less than one basis point to 0.57 percent.
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Commodities

  • Brent crude advanced 0.4 percent to $68.88 a barrel, the biggest gain in a week.
  • West Texas Intermediate crude increased 0.4 percent to $63.63 a barrel, the largest climb in more than a week.
  • Gold fell less than 0.05 percent to $1,331.72 an ounce.

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