Weekly market overview December 31 - January 4.

2019 started with a wild week in the financial markets worldwide. Traders’ emotional overreaction on first macroeconomic reports and geopolitical headlines this year showed how vulnerable equities, commodities and currencies markets are nowadays. Many analysts wonder if such triple-digits roller-coasters in stock indices and 100-pips sudden tails in currency pairs would become a norm in 2019. Several key financial instruments have already shown initial technical signs of the recent trends reversals. US stock indices seemed to find a bottom, at least a local one, however, the volatility index, measuring investors’ uncertainty, is still at high levels. OPEC countries, as well as one of the largest oil producers in the world - Saudi Arabia - announced a sharp cut in output and supply, which caused a strong demand for WTI Crude and Brent oil. Both types of the black gold charted one of the strongest weekly performances in six months. Precious metals tested high levels, never seen since Spring 2018, lifted by strong demand for Bonds and Treasuries across the board. Two fascinating stories - 400-pips plunge of UDS/JPY on Thursday and solid recovery of commodity currencies on Friday - deserve a separate description. Anyway, the only thing to be confident in is that it’s only a beginning of an extremely interesting and historically meaningful year.

Miracles started with an unexpected gap of the most heavy-volume traded currency pair in the foreign exchange market. EUR/USD has been slowly climbing towards 1.15500 technical resistance level on weak demand for the greenback across the board, ending the tough year 2018 slightly below it. However, the pair gapped more than 100 pips once the calendar switched in New York trading session opening. Several negative macroeconomic reports triggered further selling pressure on the single European currency. German Services and Manufacturing Purchase Managers Indices declined in December, underlying the depth of a possible slowdown in the Eurozone. European Markit Composite Index and Services PMI were also negative, adding fuel to the fire. One of the main Draghi’s justifications to keep ECB ultra-soft monetary policy - inflation - showed another month of stagnation with the Consumer and Producer Price Indexes in red in December. All of that, together with safe-haven flows in the world’s reserve currency, pushed EUR/USD as low as 1.13000 this past week. The recent sideways range remains in play with possibly more time to go before Euro would be able to break through 1.15500 psychological mark in a sustainable manner.

Most of the downward pressure on dollar index has been noticed on Friday as US economy reported Non-Farm Payrolls in December and US Federal Reserve Chairman Jerome Powell hosted press conference on monetary policy perspective. DXY fell sharply despite lots of positive surprises in the unemployment report. First, the US economy added 312K jobs in December, which is the highest number since February. Moreover, average hourly earnings jumped 3.2% indicating a potential spike in consumer spending, and thus inflation. November’s disappointing number of 155K jobs was revised up to 177K, which also added optimism for equities investors. Despite some negative change in the general unemployment rate (3.9% vs 3.7% previously), most of the data was in favour for more interest rates hikes by the Federal Reserve this year, and DXY was gaining strength initially. However, Powell changed everything with his dovish speech. Fed Chair expressed several concerns including Chinese slowdown and stock indices plunge. He showed a readiness to make a pause in the gradual rate hikes, passing from heavy pressure from political side and the private sector. Nevertheless, Powell is not intended to resign even if US President would have asked him to do that.

 Jerome Powell
Source:Wall Street Journal

It was surprising to see how fast investors’ sentiment changed in two days. The thing is that Thursday was brutal for equities as China reported a stronger-than-expected slowdown in the economic growth. Apple shares fell more than 9% on bombshell cut of the sales volume. Major stock indices were plunging more than 2% on average with Dow Jones Industrial Average falling more than 400 points on Thursday. The lack of any progress in US-China trade negotiations was also a negative factor for stock indices. However, the robust NFP data and dovish Powell changed everything completely on Friday. US equities rallied with DJIA gaining more than 800 pips in one single day!

Japanese yen was among the biggest gainers versus the greenback this past week. Several news agencies reported a sudden plunge of USD/JPY for more than 400 pips in one hour (!) right after New York stock exchange closed the trading session. Analysts called that plunge as computer-driven with the trading software struggling to find normal bid-prices. However, we would assume a different nature of that event. The trick happened during early Asian trading session with most of the Japanese traders on holiday. North American traders also closed their terminals at that time. Offshore hedge fund pirates were hunting for stop-losses with an extremely large trading volume to push the market lower. They succeeded with USD/JPY falling more than 3% in a blink of an eye. Of course, human traders have got involved in the process once they saw what’s happening. But pirates already took profits by that time, reversing for long positions and counting for normal recovery of the rates and quotes. AUD/JPY and GBP/JPY cross rates were hit the hardest with an incredible plunge of 500-600 pips and a half-way recovery in the next 24-hours. A similar story happened with GBP/USD in October 2016 when traders could not believe their eyes in the middle of quiet hours between North American and Japanese trading sessions. Pirates always hunt in thin trading conditions, so traders should never forget about the danger to leave opened positions overnight. One of the most strange things was the lack of any reaction from Bank of Japan officials, and we wonder if they knew about that drop to happen, if not involved in the process…

One more top story of the first trading week in 2019 was Canadian dollar’s sudden reversal. The fundamental analysis was telling about a huge divergence between US and Canadian unemployment reports. Canada showed rather a slow pace of job creation in December, missing the market expectations, in contrast to the US data. However, that did not stop USD/CAD bears from further selling pressure and here is why. The first positive impact has been seen from the crude oil side. Major world’s oil producers agreed to have a massive output cut in order to stabilize the supply part for the equation which has been pressuring the price of black gold recently. Oil speculators had an immediate reaction, massively eliminating short positions for WTI Crude and Brent. Some of the most aggressive traders even reversed, going long. WTI Crude price managed to bounce 7.1% from the market bottom, closing the trading week around $48.20 per barrel, having tested $49 on Friday. That factor could not be ignored by the Loonie traders and USD/CAD fell sharply from multi-month high levels, breaking through 1.34 support. An outstanding bearish performance of almost 2% Southwards has indicated a potential top of the market at 1.3662, posted in the last trading week of 2018. That price action becomes even more significant in the light of upcoming meeting of the Bank of Canada this week, and we might see a further decline of the greenback versus the Loonie if the BoC statement was more hawkish than the recent rhetoric.

See also: