5 Things To Watch Next Week+ChartBook

Treasury Yields in Focus Following Break-Out

US Two-Year treasury Yield, 4-Hour Chart Analysis

The most important trend last week in financial markets, besides the spike in Chinese stocks, was arguably the rally in US Treasury yields. As the global risk rally continued, thanks to the trade-related optimism and in the face of the conflict between India and Pakistan, and the global economic deterioration eased somewhat, safe haven flows reversed.

That led to a sell-off in US Treasuries (rising yields) and gold, the two main safe haven assets of the late-2018 period. We could get another push higher in yields next week, especially if the US-Chinese negotiations get even closer to ending, and the odds of a no-deal Brexit would further decline.

From a technical perspective, yields broke out of long-standing trading ranges, with the 20year pushing above the 2.55% level. A quick move above 2.6% would confirm the break-out, but given the mature risk rally and the broader downtrends, a failed move is also in the cards. In any case, yields are likely in for a volatile period, and huge moves are possible until the end of the week, with the US Employment report being scheduled for Friday.

A Quiet ECB Meeting amid Risk Rally?

DAX 30 Index CFD, 4-Hour Chart Analysis

This week, we saw something that was very rare in the past year, namely the relative strength of European stocks compared to their peers on Wall Street. The Brexit-related optimism and the rally in China, which was triggered by extension of the trade deadline all helped European equities, which managed to push over a rather strong technical resistance zone.

Besides the Brexit-optimism and the rally in China, the slightly better-than-expected European economic numbers fueled the rally, but the expectations regarding next week’s ECB meeting hasn’t changed. The European trends still look rather ugly from a global perspective, and last week’s slight uptick was likely far from enough to change the cautious outlook of the Central Bank and Mario Draghi.

In light of the recent global dovish shift, we wouldn’t be surprised if the ECB delivered another dovish surprise, with as especially in light of the German economic weakness, the bank would likely not mind a bit weaker Euro to boost the export-powerhouse.

US Stocks Facing Stiff Resistance Levels

Dow 30 Futures, 4-Hour Chart Analysis

The relative strength of the European indices could be explained with something else as well, as the major US benchmarks ran into stiff technical resistance. The 2800 level in the S&P 500 and the 26,000-26,150 zone in the Dow have stopped the recovery attempts several times during the late-year plunge, and after the strong post-Christmas rally, we are now back near the same levels.

We still think that US stocks will be headed lower in the coming months, despite the looming trade deal and the dovish shift by the central banks but short-term technicals continue to lean bullish. While the key benchmarks broke their steeply rising trendlines, the low-volatility consolidation still makes another push higher likely. That said, we could already see a failed break-out pattern next week, with a possible sell-the-news event (in connection to a US-Chinese trade deal) being a perfect trigger for that formation.

All Eyes on Wages on Jobs Friday

EUR/USD, 4-Hour Chart Analysis

The US labor market continues to show signs of robust expansion, with even the more forward-looking indicators, such as the weekly new jobless claims numbers being close to their best readings in this cycle. While the labor market is usually lagging the cycle, often peaking just before a recession, the recent data doesn’t show signs of deterioration, and that’s among the reasons of the current rally in Treasury yields.

Barring a huge negative surprise in non-farm payrolls, hourly wages will likely have the biggest impact this time around, as inflation continues to be close to the Fed’s target and a higher than expected reading could send yields much higher. The NFP number is expected to come in well below last month’s 300,004, while the unemployment rate is forecast to be unchanged at 4%.

The EUR/USD pair, which has been supported by the global risk rally and the optimism regarding the delay of the Brexit decline in recent weeks, avoided a move below the key 1.12 level several times in the past few months. That said, the recent push higher in US yields capped the Euro’s gains, and with the bearish long-term trend in mind, inflation fears might provide the trigger for a breakdown, so the forex market could also be in for a very active Friday.

Aussie and Loonie in Focus with Rare Decisions on Tap

Besides the US Employment Report, the US economic calendar will be low on key releases next week, even with the few delayed releases that will come out this week due to the government shutdown. That said, the ISM Non-Farm Manufacturing Index on Tuesday, the ADP Employment Report on Wednesday and Building Permits on Friday will also be closely watched.

The Australian Dollar will likely be in focus in the first half of the week with Building Approvals coming out on Monday, just before the RBA’s rate decision and statement. The Australian GDP will be also out on Wednesday, when the Canadian Trade Balance and the BOC’s rate decision could cause wild swings in the Canadian Dollar as well.

The Australian data dump will continue with Retail Sales on Thursday, ahead of the ECB’s meeting, while on Friday, the Canadian Employment Report and the Chinese Trade Balance will be accompanying the US labor market indicators.

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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.