5 Things To Watch Next Week + Chartbook

What On Earth is Happening With the US Yield Curve?

US 10-Year Treasury Yield, 4-Hour Chart Analysis

In the past few months, the US bond market experienced outsized moves amid the uncertainty regarding the Fed’s rate hikes. As the European Central Bank, the Bank of England, and the Bank of Japan are still holding their benchmark rates near zero, the US Treasury market and the US yield curve continues to be at the center of attention.

Analysts are trying to get their heads around the recent plunge in US rates, as even Fed Chair Jerome Powell admitted that markets are now pricing in a sharp slowdown even in the US, with a full blown curve inversion getting closer. Friday’s much-awaited dovish shift in Mr. Powell’s rhetoric sparked another mammoth short squeeze in stocks, while yields actually rose after the key speech.

The Fed Chari hinted on the possibility to change the schedule of its quantitative tightening, and that gave back hope to bull that the Central Bank will, or at least try to prop up markets down the road. While the bond market already “priced out” all rate hikes for 2019, it will be very interesting to see the trend next week following the speech, with the broader trend in yields being decisively negative.

US Stocks Looking for Stability After Roller-Coaster Ride

Dow 30 Futures, 4-Hour Chart Analysis

The first trading week of the year was crazy on Wall Street, with historic short-squeezes, sudden crashes, and wild intraday trends being the norm. Bulls are hoping to see some stability on the heels of the dovish shift by the Fed, but form a technical perspective, what we are looking at is a textbook bear market rally.

Despite the 5% rallies in the largest stock benchmarks, the majority of stocks still haven’t even confirmed a short-term trend change. We don’t view the Fed’s shift as a game-changer here, and we clearly expect the bearish trend to continue, but after the hyper-bearish December, a stronger feel-good rally could be ahead, especially should Trump provide a trade-surprise next week.

Trade Talks Set to Kick Off Between the US and China

Shanghai Composite Index CFD, 4-Hour Chart Analysis

The 6th round of the trade talks between the two superpowers is scheduled to start on Monday, and investors across the globe are hoping for a quick agreement, which would remove one of the main perceived risk factors from the equation. While we firmly believe that the Chinese issues are more structural, should the negotiations progress quickly, risk assets will likely enjoy a stronger counter-trend rally in the bearish long-term environment.

Since the start of Donald Trump’s Trade war, a deal with China currently looks the most likely right now. The President has been actively commenting the correction in the stock market in the last couple of months, putting the blame mostly on Jerome Powell, but recently, he admitted the role of the trade tariffs, and that could hint on a much more constructive approach from the US side.

With the Chinese economy sending constant warnings and with the local stock markets being crippled by deep negative trends, the Chinese side’s incentives are also clear, but it’s hard to tell what the country’s strategy will be. We expect quick compromises in most of the key issues, but on the long run, enforcing such an agreement will be very challenging, and we wouldn’t see and agreement as a durable bullish catalyst.

Yen in Focus in Forex Markets

USD/JPY, 4-Hour Chart Analysis

Although the Yen’s flash-smash, which was a flash-crash in some of the key risk-on currencies, was at least in part, caused by the low holiday liquidity, it still indicates widespread fragility in the markets. The USD/JPY pair is one of the most liquid markets in the forex segment, and the fact that an Apple-warning caused such carnage in it means that the quiet bull market years are likely behind us for good.

While the Yen retraced a large chunk of its gains following the liquidation event, given the broader uptrend in the safe-haven currency, we might be seeing more fireworks next week. Since the Dollar has been stagnating in recent months, and the Greenback is still not showing renewed bullish momentum, the USD/JPY pair could soon revisit the crash-lows in “normal” market conditions too.

Day-traders will likely enjoy volatile conditions with strong moves in both direction in the Yen, but from a broader perspective, traders should keep their bullish bias towards currency.

Fed Meeting Minutes and CPI Highlight the Week

The week will be relatively low on key economic releases and although, the ISM non-manufacturing PMI on Monday and the US CPI report on Friday will have the potential to move financial markets. With all indicators seemingly confirming the global slowdown, especially a strong PMI and/or CPI reading could result in turmoil in bond, currencies, and stocks alike.

Central banks will likely be dominating the news flow again, with Wednesday’s Fed meeting minutes, Bank of Canada meeting on the same day, and Jerome Powell’s speech on Thursday all closely watched by forex traders. Trading activity might pick up even more in the Great British Pound in the second half of the week, since the speech by BOE Governor Carney and the monthly GDP and manufacturing production readings will all influence the currency.

ChartBook

Major Stock Indices

S&P 500 Futures, 4-Hour Chart Analysis

Nasdaq 100 Futures, 4-Hour Chart Analysis

VIX (US Volatility Index), 4-Hour Chart Analysis

DAX 30 Index CFD, 4-Hour Chart Analysis

FTSE 100 Index CFD, 4-Hour Chart Analysis

EuroStoxx50 Index CFD, 4-Hour Chart Analysis

Nikkei 225 Futures, 4-Hour Chart Analysis

EEM (Emerging Markets ETF), 4-Hour Chart Analysis

Forex

EUR/USD, 4-Hour Chart Analysis

GBP/USD, 4-Hour Chart Analysis

EUR/GBP, 4-Hour Chart Analysis

AUD/USD, 4-Hour Chart Analysis

Commodities

WTI Crude Oil, 4-Hour Chart Analysis

Gold Futures, 4-Hour Chart Analysis

Copper Futures, 4-Hour Chart Analysis

Featured image from Shutterstock

Author:
Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.