From Friday and up until yesterday’s European session, market sentiment remained supported, perhaps due to hopes that negotiations between Russia and Ukraine could bear fruit. However, talks yesterday saw no progress, which was seen as a disappointment, despite another round of talks scheduled for today. The increasing covid cases in China may have added extra pressure to equities during the Asian session today.
Equities Slide Again on Geopolitics and Rising COVID Cases in China
The US dollar traded higher against the other major currencies on Friday, Monday, and during the Asian session Tuesday. It gained the most versus AUD, NZD, and JPY, in that order, while it eked out the least gains versus EUR and GBP.
The simultaneous weakening of the safe-haven yen and the commodity-linked Aussie and Kiwi, combined with the relative strength in the euro and the pound, suggests that sentiment surrounding the war in Ukraine has improved somewhat, and this is also supported by the fact that the European shares traded in the green yesterday.
That said, Wall Street saw its main indices trading unchanged or negative, with the deteriorating appetite rolling into and intensifying during the Asian session today.
In our view, investors may have turned willing to add to their risk exposures after Russian President Vladimir Putin signaled a positive shift in talks with Ukraine on Friday. Hopes over a diplomatic solution rolled over into this week as well, but no progress was announced in yesterday’s talks.
This may have been a reality check for market participants, who abandoned equities during the US session and continue to do so in Asia today. Another catalyst behind the slide in Asian markets may have been the increasing COVID-19 cases in China.
More talks between Russia and Ukraine are scheduled for today, but our view remains the same. With no concrete signs that common ground could be found soon, and with the war still raging, we would consider the risks as staying titled to the downside.
Having said all that, though, besides geopolitics, monetary policy is likely to return to the front page of investors’ agendas this week as well. Tomorrow, we have an FOMC gathering, while on Thursday, it will be the turn of the BoE. Both Banks are widely anticipated to lift their benchmark rates by 25 bps, and thus, if this is the case, attention will quickly fall on hints and signals on their plans.
Market participants expect both Banks to proceed with another five-quarter-point increase by the end of the year. Therefore, clues pointing to anything less could prove negative for the respective currencies, the US dollar and the British pound. We would like to see the wording matching the market's current pricing for decent decision-related spikes north.
EURO STOXX 50 – Technical Outlook
The Euro Stoxx 50 cash index opened with a positive gap yesterday and managed to stay slightly above the 3707 barrier, marked by the low of Mar. 1. However, overall, the price structure remains of lower highs and lower lows below the downside resistance line drawn from the peak of Jan. 5, and thus, we still consider the near-term outlook to be negative.
Even if we see some more recovery, we expect the bears to retake charge, perhaps from near the 3880 zone, marked by the inside swing low of Feb. 22. This could result in another slide and a test near the 3707 barrier, below which we have the 3620 zone, which could also get tested. If the bears are not willing to stop there, then a break lower could carry larger extensions, towards the low of Mar. 7, near the 3400 territory, the break of which could pave the way towards the 3310 hurdle, defined by the inside swing high of Oct. 12.
To abandon the bearish case and start examining whether the bulls are in full control, we would like to see a decisive break above 4180, marked by the high of Feb. 16. This could initially aim for the peak of Feb. 2, at 4260, where another break could carry extensions towards the 4395 or 4415 levels, marked by the highs of Jan. 5 and Nov. 18, respectively.
If participants manage to overcome those zones, they will enter territories last seen in 2007, with the next potential resistance areas perhaps being at around 4500 and 4600.
USD/JPY – Technical Outlook
USD/JPY has been in a rally mode since Mar. 4, as marked by a steep upside support line drawn from the low of that day. Yesterday, the pair hit a high of 118.30, and today, it stayed hovering around that zone. Overall, the technical picture is positive, and thus, we will continue aiming higher.
Even if we see a setback due to a perhaps overstretched rally, we see decent chances for the bulls to jump back into the action from near 117.35, Friday’s high, or from near the aforementioned upside line. This may result in another test at around 118.30, the break of which could encourage traders to push towards the psychological round figure of 120.00. The last time we saw the price testing at that level was back in January 2016.
We will start examining the bearish case only if we see a clear drop back below the 114.40 zone. This could confirm the break below another upside line, flatter than the one we mentioned, drawn from the low of Dec. 3.
Such a move could encourage the bears to dive towards the 113.60 zone, which provided support between Jan. 14 and 24, the break of which could open the path towards the low of Dec. 17, at 113.15. If that barrier cannot withstand the fall either, then we are likely to experience extensions towards the 112.55 zone, which acted as strong support between Nov. 30 and Dec. 3.
Elsewhere
During the Asian session, we already got the minute from the latest RBA meeting, but the information we got was more or less the same as what we learned from the meeting. Specifically, the war in Ukraine is a major new source of uncertainty, and the board will not increase rates until actual inflation is sustainably within the 2-3% target range.
Early in Europe, we already got the UK employment report for January, with most numbers exceeding their forecasts. However, the pound did not react, perhaps as GBP traders keep their gaze locked on Thursday’s BoE decision.
From Germany, we have the ZEW survey for March, with both the current conditions and expectations indices forecast to have declined notably. However, with the war in Ukraine and its consequences to the European economy, that will not surprise.
In any case, we still see the path of least resistance for the euro to the downside. Eurozone’s industrial production is also due to be released, and it is forecast to have slowed to +0.2% mom in January, after expanding 1.2% in December.