Bears in Control Until Fed Statement

STOCK INDEX FUTURES

Global equity markets overnight were mixed without respect to geographic pattern with many markets unwilling to forge large moves ahead of the FOMC statement later today. Fresh overnight negatives for equities were seen from fresh US/Chinese trade tensions as the US added several Chinese companies to the blacklist for US exports to Chinese biotech, tech, and chipmakers overnight. Earnings announcements will include Lennar after the Wall Street close.

S&P 500: The S&P is holding up better overnight than other segments of the market and that is not surprising considering the negative impact on the tech sector from US/Chinese tensions. Perhaps the S&P is supported because of positive Covid treatment developments yesterday. However, investors hate uncertainty, and this afternoon will bring significant uncertainty. Fortunately for the bull camp, the S&P respected and rejected 4600 yesterday but volatility should remain high because of the Federal Reserve meeting. Volatility should also remain high because of the roll from December to March contracts (witching). Uptrend channel support in the March S&P is seen (from the October and December lows) at 4528.60, with that uptrend channel support line increasing to 4539.35 on Friday.

Other US Indexes: Like the S&P, the Dow futures have skirted the negative impact of US/Chinese battling over critical tech sector companies. Critical support is seen at yesterday’s low of 35,333 but the risk to fresh longs is very substantial. As indicated in other coverage this morning, NASDAQ tech related shares are under pressure as the US and China exchange fresh restrictions on tech sector and national security related companies. In fact, Uber appears to be giving up on business in China as it looks to liquidate Didi. Near term and unreliable support is seen at 15,734 in the March NASDAQ futures contract.

CURRENCY FUTURES

DOLLAR: While the dollar index has not forged a higher high for the move early today it sits just under the December highs and seemingly poised to return to the November high up at 96.84. In fact, we are

surprised that the dollar index has not made fresh contract highs already as US inflation should solidify and expand a significant US interest rate differential edge. The bear camp in the dollar is left to “hope” that currencies have “over factored” the impact of a doubling of the previously announced tapering pace. It should be noted that the dollar will be presented with another inflationary set of data from import and export prices this morning. Uptrend channel/buying support is seen at 96.15 with initial resistance seen at 96.68.

EURO: The euro is benefiting from a wave of hot price index readings overnight with many countries matching historically hot US readings from yesterday and last week. However, the path of least resistance in the euro is down and a quick slide down to 1.1250 is likely. Remain bearish toward the euro if it avoids a close above 3-month-old downtrend channel resistance line at 1.1340.

YEN: With a downside breakout in the Japanese Yen overnight the downtrend is confirmed, and supportive fundamental economic data is fully discounted. In fact, Japanese Tertiary industry index readings for October jumped by triple the amount seen in the prior month and completely countered expectations for a decline in that reading. Initial and unreliable support is seen at 87.85 with the Yen capable of large losses ahead.

SWISS: While the Swiss at times over the past two weeks has shown bullish resiliency and non-dollar leadership yesterday’s upside breakout and definitive reversal down action projects the Swiss down to at least 1.0812 in today’s action.

POUND: Surprisingly the Pound is avoiding the pressure of dollar strength this week and that is likely the result of its oversold technical standing. It is also possible that the Pound has overcompensated for the UK reversion to activity restrictions and has underestimated the status of the UK economy. In fact, overnight the UK posted a clean sweep of hotter than expected November inflation readings at all levels of its economy.

CANADIAN DOLLAR: The Canadian is selling off first and asking questions later with the currency seemingly on a fast-track to retest the August low down at 77.32. Part of the selling interest in the Canadian stems from the struggling Canadian economy, recent declines in energy prices and the expectation of soft Canadian consumer price index readings ahead. 

INTEREST RATES

Treasury prices remain near 6-day highs and nearly 8 points above the October lows despite the hottest string of US consumer and producer prices in decades and by some measures the hottest readings ever. Even widespread expectations that the Fed will “double” its tapering of asset purchases today has had little negative influence on treasury prices. In other words, bullish resiliency continues to dominate bond and note markets, but it would be very surprising for the markets not to show some negative knee-jerk reaction to today’s events. However, US retail sales early in the session are likely to be heavily discounted because of the uncertainty from the afternoon FOMC meeting news. It should be noted that the US daily infection rate on Monday jumped significantly (December 13th was 201,786) and that clearly depicts a “fresh wave” of rising omicron infections. In the end, the bull camp is banking on an “as expected” Fed result with some bulls expecting the Fed to attempt to keep inflation expectations anchored by suggestions inflation will ultimately be proven to be transitory once supply chains are repaired.

The North American session will start out with a weekly private survey of mortgage applications followed by November Canadian housing starts which are forecast to have a modest downtick from their October reading. The November Canadian CPI is expected to hold steady with the previous 4.7% year-over-year rate. November US retail sales are forecast to have a moderate downtick from October’s 1.7% reading. The New York Fed’s December Empire State manufacturing survey is expected to have a moderate downtick from November’s 30.9 reading. November readings for the export price index and import price index are both forecast to have modest upticks from their previous readings. October Canadian manufacturing sales are expected to have a sizable uptick from September’s -3.0% reading. October business inventories are forecast to have a minimal uptick from September’s 0.7% reading. The December NAHB housing market index is expected to have a minimal uptick from November’s 83 reading. The highlight for global markets will come during afternoon US trading hours with the results of the latest FOMC meeting. While no change in benchmark US rates is forecast, there is growing anticipation that the FOMC will announce an increase in their pace of tapering QE measures. The market will also scrutinize post-meeting comments from Fed Chair Powell and will also note any changes to the Fed’s economic projections (known as the “dot plot”). The October Treasury International Capital (TIC) will be released later in the afternoon and will be scrutinized for net changes in Chinese and Japanese Treasury holdings. Earnings announcements will include Lennar after the Wall Street close.