Daily Market Outlook, January 29, 2024

Munnelly’s Market Minute…“China Winds Up Evergrande, Middle East Tensions Rise”

Over the weekend, news emerged that China's securities regulator would halt the lending of certain stocks for short selling starting today. Initially, this led to a rise in equities across China and Asia. However, optimism quickly faded, and stocks eased back, with Chinese markets mostly in the red with worries about the real estate industry front and center, as China's decision to wind up Evergrande has raised the prospect of contagion risk. Concurrently, US and European stock futures edged lower amid rising tensions in the Middle East.

Speculation surrounding the near-term trajectory of interest rates remains the primary driver of financial market movements. This week, the probability of interest rate cuts in early 2024 has been particularly volatile, initially falling but then rising again. European Central Bank President Lagarde emphasized in last Thursday’s update that decisions on interest rates were data-dependent and that the Board had not yet discussed cuts. However, markets interpreted her lack of strong pushback against suggestions of rate cuts starting in April as a signal. Consequently, expectations of a first reduction in April have risen to almost 90%. Lagarde highlighted wage trends as a key signal for when the ECB might be prepared to act, making them closely watched over the next few months.

In the upcoming week, the US Federal Reserve and Bank of England will deliver their first policy updates of the year. While no rate changes are expected, the focus will be on any signals regarding future intentions. The US economic activity remains robust, despite decreasing inflation measures, indicating a less urgent need for rate cuts. The Bank of England has been more cautious than its counterparts in signaling a turnaround in interest rate policy and is likely to reiterate its previous message. Although it may lower rates later in the year, the Monetary Policy Committee is likely to consider it too early to signal such an intention.

Ahead of these key events, today's docket lacks significant data releases. The US will see the Dallas Fed manufacturing survey for January, while Japan will release its December labor market report. Comments from ECB policymaker Guindos will also draw interest. Overnight, the British Retail Consortium (BRC) will release its January shop price index update. Following the December uptick in UK CPI, markets will closely monitor this report for confirmation of domestic disinflationary trends.

Overnight Newswire Updates of Note

China Evergrande Receives Winding-Up Order From Hong Kong Court
China Tightens Securities Lending Rule To Support Stock Market
Biden Vows To Retaliate After Strike Against American Forces In Jordan
US To Reportedly Announce Billions Of Dollars In Subsidies For Advanced Chips
Hints Of Early ECB Rate Cut Highlight Divisions In Council
ECB’s Knot Says Wage Data Needed Before Rate Move Possible
ECB’s Villeroy Says ECB Could Cut Rates At Any Time This Year
Kemi Badenoch Tells Tory Plotters To Back Rishi Sunak
Oil Jumps After Separate Attacks Escalate Middle East Tensions
China To Merge Three Major Asset Managers Into China Investment Corp
First Boeing 737 Max Jet Delivered To China Since 2019 Lands
ADM Postpones Some Exec Bonuses Amid Accounting Probe

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0800 (631M), 1.0815-25 (617M), 1.0840-50 (851M)
1.0890-1.0900 (1.3BLN), 1.0910-10 (1BLN)
USD/CHF: 0.8750 (1.4BLN). EUR/CHF: 0.9285 (425M), 0.9450 (200M)
GBP/USD: 1.2600-15 (716M), 1.2665-70 (505M), 1.2700 (672M)
AUD/USD: 0.6570 (260M), 0.6585 (373M), 0.6630-40 (564M)
USD/JPY: 146.75 (420M), 148.50 (450M)
There are significantly fewer long positions in the EUR/USD market, but it remains the largest foreign exchange bet. Traders have reduced an $8 billion bet on the euro rising out of a total $20.5 billion wager to just $12 billion. Despite the reduction, it is still double the size of any other individual foreign exchange bet. The quieter foreign exchange markets may lead to further reduction in long positions. With fewer long positions, there is less resistance to the underlying upward trend. It is possible that the rise of EUR/USD may continue before the US begins its easing cycle in May.