Most global equity indices continued drifting north yesterday and today in Asia, perhaps as investors become more and more optimistic over Q3 earnings. The fact that US long-dated yields also climbed higher suggests that market participants anticipate tighter monetary policy soon.
Still, the earnings may indicate that the economic outlook is not as bad as previously thought. Today, the highlight on the agenda may be Canada's CPIs, with accelerating inflation adding to the case for further tapering by the Bank of Canada (BoC) next week.
Earnings Continue to Support Sentiment, Canada CPIs in Limelight
The US dollar traded lower against most major currencies on Tuesday and during the Asian session Wednesday. It underperformed versus NZD, AUD, GBP, and slightly against CAD, while it eked out some gains against JPY and CHF. The greenback was found virtually unchanged against EUR.
The strengthening of the risk-linked Kiwi, Aussie, and recently the pound, combined with the weakening of the safe-haven yen and franc, suggests that financial markets continued trading in a risk-on manner yesterday and today in Asia.
Indeed, looking at the performance in the equity world, we see that major EU and US indices traded in the green, with the only exception being France's CAC 40, which closed virtually unchanged.
The positive appetite, although softer, rolled over into the Asian session today as well. Japan’s Nikkei 225 and Hong Kong’s Hang Seng were up, but China’s Shanghai Composite was virtually unchanged, and South Korea’s KOSPI slid.
With no clear fresh catalyst to drive the markets, we believe the risk-on activity may be due to investors' optimism about Q3 earnings.
Remember that last week, big US banks reported better-than-expected results, while yesterday, it was the turn of Johnson & Johnson (NYSE:JNJ) and Travelers (NYSE:TRV) to reveal upbeat numbers.
With the US long-dated bond yields also climbing higher, it seems that market participants continued to add to their risk exposure, despite still anticipating the Fed to tighten its monetary policy faster than earlier thought.
This may be due to rushing into taking advantage of ultra-low interest rates before they start rising, or it could be because the earnings results are revealing a more encouraging picture with regards to the global economic outlook than previously assumed.
With all that in mind, and with several major indices around the globe rallying after breaking key technical resistance zones last week, we believe that more positive results could encourage more buying.
At the same time, risk-linked currencies are likely to benefit, while the safe havens may stay on the back foot. However, as we noted yesterday, we are reluctant to call for a long-lasting recovery.
We prefer to take things step by step because the fundamental background that triggered the latest correction in equities has not changed much. Oil prices remain elevated, which could lead to higher inflation.
At the same time, China faces several problems, from default risks in the property sector to tight regulations for tech firms and fresh lockdown measures due to the spreading of the Delta variant.
Today, the main event on the schedule may be Canada's CPIs for September. The headline CPI rate could inch up to +4.3% YoY from +4.1%, while no forecast is available for the core rate.
Following the BoC's Business Outlook Survey that revealed business sentiment had hit a new record, higher inflation could encourage tapering by the BoC at next week's gathering.
This may prove supportive for the Canadian dollar, which has been performing very well recently, aided by the rally in oil prices. Let's not forget that Canada is the world's fifth-largest oil-producing nation, while it holds the fourth position in exports.
DAX – Technical Outlook
The German DAX traded slightly higher yesterday after it hit support at the last downside resistance line drawn from the high of Aug. 31. Then it continued in a consolidative manner, fractionally above the 15477 level.
In our view, as long as the index remains above that last downside resistance line, the outlook remains positive.
Thus, we would expect the bulls to retake charge at some point soon and push the action up to the 15630 barrier, which is near Monday's high, marked by the peak of Sept. 28.
If they are unwilling to stop there, then a break higher could allow advances towards the high of the day before, at 15720, or the peak of Sept. 17, at 15795.
We will abandon the bullish case if we see a drop back below 15295, marked by the inside swing high of Oct. 3. This move could push the index towards the inside swing high of Oct. 12. A break could see scope for extensions towards the same day's low, at around 15015.
USD/CAD – Technical Outlook
USD/CAD traded slightly higher on Tuesday after it hit support at 1.2310. The pair remains below the short-term downside resistance line taken from the high of Sept. 29 and above another line taken from the peak of Sept. 20. In our view, this paints a negative near-term picture.
We believe that the bears could jump back into the action soon and push the rate down for another test near 1.2310, where a break would confirm a forthcoming lower low and signal the continuation of the prevailing downtrend.
The next stop may be at 1.2250, marked by the low of June 23, the break of which could extend the fall towards 1.2175, marked by the inside swing high of June 10.
On the upside, a break above the psychological figure of 1.2500 could brighten the picture, as the rate would be above both the downside lines. The bulls may then climb to the 1.2560 level or the 1.2600 area, marked by the highs of Oct. 8 and 7, respectively.
If they don't stop there, we could see them aiming for the peak of the day before, at around 1.2650.
As for the Rest of Today's Events
During the early European morning, we got the UK CPIs for September. Both the headline and core rates slid slightly more than anticipated, but the pound barely reacted.
After all, both rates are still well above the Bank of England (BoE) objective of 2%, and thus, they are unlikely to alter the Bank's monetary policy plans. Still, British policymakers could push the hike button before year-end.
Eurozone's final CPIs for September are also due to be released, but as is always the case, they could confirm their preliminary estimates.
With regards to the energy market, we get the EIA report on crude oil inventories for last week, and the forecast points to a slowdown to 1.857mn barrels from 6.088mn the week before.
However, bearing in mind that the API reported a 3.294mn barrels inventory build yesterday, we consider the risks surrounding the EIA forecast as tilted to the upside.
As for the speakers, we will hear from Chicago Fed President Charles Evans and Fed Board Governor Randal Quarles.