Global Equity Markets Mixed Overnight

STOCK INDEX FUTURES

Global equity markets overnight were mixed with Asian stocks lower, European stocks mostly higher and US stocks starting out under pressure. With a major bank CEO yesterday urging the US Federal Reserve Chairman to “raise rates” in this week’s meeting, the pendulum of low rates for extended period-of-time appears to be shifting direction and that could cause profit-taking selling in equities. It should be noted that Lipper data pegged US equity inflows at $248 billion so far this year which follows two years of outflows and therefore a shift in sentiment in equities could present outsized corrective action. However, as in treasuries, equities have displayed significant bullish resiliency and a lack of attractive alternative investments leaves the bull camp with ultimate control.

S&P 500: Not surprisingly, the S&P has started to falter in anticipation of tomorrow’s US Federal Reserve outcome. It should be noted that the December index contract is amid a “roll” to March and that brings with it increased volume and volatility. However, we do not detect anxiety toward the Federal reserve outcome, and it appears that anxiety from the UK Prime Minister’s infection warnings has moderated. Nonetheless, we see further erosive action with near term targeting seen down at 4650 and then again down at 4577 into tomorrow’s Fed announcement. We also expect to see knee-jerk reaction selling following today’s US PPI report.

CURRENCY FUTURES

DOLLAR: On one hand, the dollar has forged a series of higher highs and higher lows on the charts, but on the other hand the index has been unable to move up and away from the 96.00 level. However, potential hawkish dialogue from the Federal Reserve tomorrow should be a big assist to the bull camp especially if this morning’s US PPI matches or exceeds expectations of a gain of +0.5%. Countervailing the idea of rising US interest rates is evidence that the Bank of Japan has provided temporary support for its economy and there is the ongoing fear of the omicron variant. We see solid “buying support at 95.95.

EURO: While the March euro has built a shelf of support above 1.1286, the bigger downtrend pattern from the May high remains in place. There is also a lingering sense that the euro zone will see the worst of the omicron infection flare and Europe is not producing ultra-hot inflation readings like the US (yet). Furthermore, overnight overall Euro zone industrial production for October was disappointing and the bull case in the dollar is more dominating than bullish arguments in the euro.

YEN: Apparently, the Bank of Japan saw the need to provide fresh support for the Japanese economy despite better-than-expected Japanese industrial production and capacity utilization readings for October. As in the euro the long-term downtrend in the Yen remains in place despite the currency’s capacity to consolidate around mostly above the 88.00 level.

SWISS: The upward thrust in the Swiss franc overnight suggest that the Swiss is in a different mode than other nondollar currencies. However, to shift a long-term downtrend to the upside might require a move above the 200-day moving average at 1.0960 and or a move above a 9-month-old downtrend channel resistance line at 1.0977. The downtrend channel resistance line falls to 1.09700 on Friday.

CANADIAN DOLLAR: With the Bank of Canada indicating they will take sagging jobs conditions into consideration in deciding how to react to the threat of inflation. Therefore, it is clear the Bank of Canada remains “dovish” with its policies. In other words, Canada is poised to see low rates remain in place for longer. Therefore, we see the March Canadian retesting the December low at 77.81 and possibly falling to the August low down at 77.32 tomorrow afternoon.

INTEREST RATES

Ordinarily, seeing treasury bond prices sitting three points above the December lows and eight points above the October lows into what is expected to be a hot US PPI report would offer a significant short selling opportunity. However, US CPI did not undermine treasuries or for that matter equities which in of itself is astounding from a classic fundamental analysis perspective. Certainly, the US Federal Reserve has promised from the beginning of the pandemic that they would “keep rates down for an extended period of time” and they have made good on their promises. Therefore, it is not surprising to learn that US bond funds saw record inflows so far this year with a total inflow of $612 billion in the first 11 months of 2021 which in turn blows by the previous record annual inflow of $486 billion in 2019. On the other hand, the time of holding down rates has likely come to an end with tomorrow’s Fed statement.