Daily Market Outlook, February 6, 2024

Munnelly’s Market Minute…“China Sovereign Fund Stepping In, Leads Asian Markets Higher”

Asian stocks showed a mixed performance, as Chinese market stabilization efforts countered early challenges from Wall Street, where yields reached year-to-date highs following strong ISM Services data and recent hawkish Fed comments. The Reserve Bank of Australia(RBA), kept rates unchanged as expected and reiterated its hawkish stance. The Nikkei 225 was subdued by disappointing household spending and soft wage data, but the downside was cushioned by a series of earnings releases. The Bank of Japan (BoJ) is planning a policy shift by April, with a focus on wage outlook. It is preparing to end negative interest rate policy (NIRP) and make changes to other policy framework areas, but is expected to proceed cautiously with further actions. This information comes from sources cited by Reuters. The Hang Seng and Shanghai Comp outperformed, with sentiment boosted by China's recent market stabilization efforts, including reports that China's sovereign fund will further increase ETF holdings, and the CSRC encouraging listed firms to buy back more shares to inject more capital into the A-share market.

Looking ahead, today's UK PMI construction report for January will provide a timely update on a sector highly sensitive to interest rates, which has been under pressure recently. While the December reading showed the headline index remaining below the 50 expansion/construction level for the fourth consecutive month, it reached its highest point since August, hinting at a potential slowdown in the rate of output decline in the sector.Housing remained the weakest part of the UK construction sector in December, according to the survey. However, both commercial activity and civil engineering also experienced output declines for the fourth consecutive month, indicating widespread weakness. The consensus forecast suggests another, albeit smaller, fall in activity in January.

The European Central Bank's (ECB) survey of consumers’ inflation expectations will offer insight into the speed at which price pressures are easing. November's reading saw 1-year inflation expectations drop to their lowest level since early 2022, while the more stable 3-year measure fell to 2.2%, just above the ECB’s 2.0% inflation target. Market views on the timing of ECB interest rate cuts have been volatile, but a further decline in consumers’ expectations today may increase hopes of a spring move by the Eurozone’s central bank.

Several US Federal Reserve policymakers are scheduled to speak, and their comments will be closely monitored for any new clues on the timing of interest rate cuts. Today's speakers represent a range of views, with Cleveland Fed President Mester and Minneapolis Fed President Kashkari being among the more hawkish policymakers, while Boston Fed President Collins has taken a more centrist stance. Additionally, the US will be selling USD 54 billion of 3-year notes on the supply front.

Overnight Newswire Updates of Note

RBA Keeps Rate At 12-Year High, Signals Higher Bar For Rate Hikes
China Sovereign Fund Vows To Buy More ETFs, Fuelling Stock Rally
Xi Set To Discuss China Stock Market With Financial Regulators
BoE Official Sees Interest Rate Cuts Ahead As ‘Reward’ For Lower Inflation
Fed’s Bostic Says Fed’s Goal For Unemployment Has Fallen
Fed Says Banks Tightened Credit Standards In Fourth Quarter
Biden Threatens Veto Of US House's Standalone Israel Aid Bill
UBS To Restart Buybacks This Year As It Integrates Credit Suisse
NXP Semiconductors Gains Amid Strong Q4, In-Line Guidance
RTX Receives Subpoenas From SEC Over Engine Issue
Bank Of America Reaffirms Apple's Buy Rating Over Vision Pro
Novartis To Buy MorphoSys For EUR2.7 Bln To Gain Cancer Drugs
Toyota Raises Profit Outlook Amid Strong Sales

(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 (EU2.46b), 1.1000 (EU1.12b), 1.1020 (EU1.1b)
USD/JPY: 147.20 ($877m), 148.75 ($709.9m), 149.10 ($657.9m)
USD/CNY: 7.2225 ($1.57b), 7.0900 ($700m), 7.1500 ($566.1m)
AUD/USD: 0.6610 (AUD1.36b), 0.6580 (AUD1.33b), 0.6590 (AUD964.6m)
USD/CAD: 1.3380 ($395m), 1.3150 ($300m)
NZD/USD: 0.6005 (NZD703m), 0.6130 (NZD320.4m)
GBP/USD: 1.2300 (GBP795.5m), 1.1854 (GBP570m)
USD/MXN: 17.12 ($300m)
The FX options market was surprised by Friday's strong NFP beat, resulting in limited sales of shorter-dated implied volatility. Implied volatility is only slightly higher on Monday, indicating that the current extension of USD gains is expected to be slow and limited for now. EUR/USD 1-month implied volatility fell on Friday but regained some ground on Monday, while GBP/USD also recovered slightly. There is talk of big exotic related structures at 1.2500 which could increase demand for volatility and downside protection if that level is threatened.