Risk-off as geopolitical concerns rise ahead of today’s ECB meeting

Headlines

* USD gains as risk sentiment sours on Google, Treasury yields rise

* S&P 500 lowest since June, Nasdaq has worst day since February

* Bank of Canada holds rates at 5%, keeps threat of more hikes

* Meta sees continued rebound in advertising, reports largest sales in years

FX: USD continued to rebound though the soft risk sentiment didn’t push the DXY above mid-October highs.  GDP gets released today. The market mood seems fairly fluid with whippy trading in play. The DXY closed near its highs for the day amid heightened geopolitical tension and an awful US Treasury 5-year auction.

EUR ended the day in the red. The German IFO survey saw the first advances since April, albeit from low levels. That helped the euro before the day turned more mixed late on. Markets await today’s ECB meeting after weak PMI data and the soft Bank Lending Survey reaffirmed the expected pause by policymakers.

GBP dipped initially to a low of 1.2114 before finding buyers. But similar to the euro, selling late in the session saw cable close on its lows. The soft tone of yesterday’s PMI and jobs data is weighing on broader GBP sentiment. There is little on the UK calendar until next Thursday’s BoE meeting. Last week’s low sits at 1.2089.

USD/JPY resisted the USD advance and the bid in 10-year Treasury yields for most of the day. But the major ultimately closed above 150 at 150.19. That is at least a 12-month high, around the time the pair spiked to 151.94 last October.  It beats the recent high is at 150.16 while the 21-day SMA is 149.32.

AUD underperformed after initially popping higher to the 50-day SMA at 0.6397. Higher than expected Q3 CPI (5.4% y/y vs 5.3% expected) saw analyst expectations of a November rate hike increase. There are now around 13bps priced in against half that before the data.  CAD was also soft after the Bank of Canada left rates unchanged. It forecasted weak growth though left the door open to more rate hikes. USD/CAD made fresh cycle highs at 1.3810. The March year-to-date top is 1.3862.

Stocks: US equities were lower across the board in a grim day for risk assets. The benchmark S&P 500 lost 1.43% to settle at 4186. That was its fifth daily drop in six. The benchmark index closed below the widely watched zone of support around 4200. The tech-heavy Nasdaq finished 2.47% lower at 14,381. That was its lowest close since June and the biggest single-session percentage decline since February. The Dow outperformed but settled down 0.32% at 33,036. Alphabet shares plunged 9.6% after the tech titan reported disappointing cloud services revenue, reviving fears of an economic slowdown. Meta released its results after the closing bell. The parent of Facebook and Instagram posted stronger-than-expected earnings while Facebook users grew year on year. The stock rose over 3% in extended trading.

Asian futures are mixed. APAC stocks also traded mixed on Wednesday following the lead from Wall Street and heavyweights Microsoft and Alphabet. The better-than-expected Aussie CPI saw hawkish revisions to analyst RBA calls and real estate losses. Both the Hang Seng and Shanghai Comp surged at the open after President Xi’s visit to the PBoC and “focus on the economy”.

Gold price action was choppy with a high at $1987 seeing sellers step in. But the precious metal eventually closed higher consolidating recent gains. Last week’s high at $1997 while this week’s low is $1953.

Day Ahead – ECB Meeting, US GDP

Recent eurozone data has helped the doves on the ECB’s Governing Council. Another on-hold decision is expected, with inflation cooling further and those PMIs especially, sliding further into the contractionary territory and setting off recession warning signals. But higher oil prices and continued labour market strength do keep upside risks to inflation alive. How much will be President Lagarde’s job at her press conference? The rate tightening cycle is impacting the economy so how long will rates have to “remain restrictive”?

Q3 US GDP is forecast to come in around 4%. The consumer remains remarkably resilient while residential investment and government spending should help activity. We’ve had consistent positive upside surprises to data recently. This has underpinned support for the USD so that appears to be the direction of travel.  

Chart of the Day – EUR/USD’s false break

Monday’s price action got many in the market hoping for a longed-for pullback on the dollar ascent and a decisive push higher out of the long-term bear channel. But eurozone PMI data, which contrasted strongly with still solid US data, wholeheartedly dented the upside break. Prices very briefly advanced above the 50-day SMA at 10672 and the major Fib level at 1.0611. But sellers stepped in reversing all of Monday’s gains. A support zone sits below at 1.0525/35. Resistance is just above 1.06 and then 1.0694. 

(Sources: vantagemarkets.com)