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A soft ISM Manufacturing PMI for January out of the US was enough of a catalyst to send shockwaves through equity markets yesterday, leaving market participants more dazed than Payton Manning and the Broncos after being annihilated by the Seahawks on Sunday.   While the market had long been overdue for a meaningful corrective phase, today’s price action confirms that we have negated the uptrend in place since the fall of last year, and that we are entering a correction period.

Although the concerns in emerging markets and the spillover effects in the developed world are what have sparked this massive sell-off in equities, a significant correction is healthy for the market, and we are likely to see equities trade in a sideways fashion at best in the near-term, as markets struggle with assessing value in a world with reduced monetary stimulus and capital flight concerns in emerging economies.   When the dust settled after investors bowled through the emergency exits, the S&P was off by 2.2% (a 40pt drop), cash VIX smashed higher by over 3 vols to trade up to 21.4%, while the yield on the 10 year US treasury dropped south of 2.59%.   The Loonie was well insulated from the global sell-off in anything high-yield, as the poor USD economic was taken by markets as a negative towards the big dollar; however, as the pattern has been lately, the Loonie rally was sold with conviction, as corporates were waiting on the sidelines to gobble up USD at cheaper prices.

The overnight session saw Japanese equities taking their cues from trading in New York, with the Nikkei cratering by over 3% at the open before some of the bleeding was stemmed by both Prime Minister Abe and Bank of Japan Governor Kuroda getting on the tape to try and calm markets by outlining their easing program has had the intended impact and that an appropriate exit policy will be decided on when needed.   The yen managed to weaken on the jawboning from policymakers, with USDJPY managing to keep its head above the 101 handle, however the Nikkei wasn’t as fortunate, with the index dropping over 4% as the Asian session finished up.

Elsewhere in Asia, the Reserve Bank of Australia sent the csoaring by keeping its overnight interest rates on hold at 2.5% and dropping the easing bias from its rate statement.   Noting that inflation was coming in slightly warmer than expected and the fact that the fall in the exchange rate would assist in achieving balanced growth, the RBA dictated the most likely course of action would be a period of stable interest rates, putting an end to the easing cycle for now.   The Antipodean currency rocketed higher on the release, shooting well over a full-big figure into the high-0.88s, and dragging the rest of the commodity-bloc currencies with it.   We would caution that although the RBA has telegraphed an end to the cutting of interest rates, the central bank still would like to see a lower AUDUSD, with official guidance suggesting a target in the 0.80-0.85 range.   As such, we feel that any such rallies like today’s will be a good opportunity for corporates that are long AUD to offload some exposure, as it is likely policymakers will try to talk down the Aussie further in the hopes the depreciation will act as a form of stimulus in itself.

Turning our attention to Europe, equities continue to trade lethargic midway through the session, although the magnitude of losses has abated somewhat from yesterday.   The FTSE is struggling to make any meaningful headway on the back of a stronger than expected UK Construction PMI, while the Pound has gained back its overnight losses and managed to halt its recent slide against the USD.   Activity in the construction sector for January increased to its highest level since August of 2007, coming in at 64.6 vs. the median analyst estimate of 61.5.   Cable has managed to prop itself up above the 1.63 handle heading into the North American cross, with price action today being key from a technical perspective for the pair.   Yesterday’s fall through the 50-day moving average and trend-line support is worrisome in regards to technical positioning, with the 100-day moving average at 1.6250 acting as good support overnight and the next key level to watch if GBPUSD takes another leg lower.   The 1.6400 mark will act as the line in the sand to some extent for GBPUSD, with continued price action south of this level strengthening the case for a further wash-out in GBP longs.  

Heading into the North American open, market participants are cautiously raising their heads out of the sand, with S&P futures up by a modest amount in the wake of yesterday’s sell-off.   As there is a shortage of tier-one economic data to be released today (only US factory orders at  10:00am EST) expect equities to trade warily as investors re-assess the economic landscape after yesterday’s sell-off, looking ahead to tomorrow’s ADP jobs number as the next economic data point to drive market sentiment.   The Loonie is managing to put in some strong gains ahead of the opening bell in North America, being dragged along by improved sentiment in the Antipodean region after the RBA left rates on hold.   USDCAD is currently pivoting in the high-1.10s, but a further consolidation to the 1.10 handle does seem like a potential given momentum indicators and some of the faster money positions looking for more attractive levels to get long USD.    

With little in the way of North American data for the remainder of the session,tomorrow  we will get the first look at the employment situation for the US in January.   The ADP number is expected to show an increase of 180k new jobs during the month of January, but after the drastic decoupling in correlation to the BLS Non-Farm Payroll last month, the market is likely to be skeptical of tomorrow’s release.   Just to quickly re-hash, last month’s ADP showed the economy created 238k private jobs during the month of December, yet the BLS only registered an increase of 87k (and after taking the government into consideration this netted out to 74k Non-Farm payrolls), a stark difference in the two numbers which have shown a fairly tight correlation in recent months.   Despite the challenges participants may have drawing meaningful foresight from tomorrow’s numbers before  Friday, a good ADP number will no doubt help swing momentum to the bull side, where a softer than expected print will most likely provide the bears with more fodder to pressure equities lower.

Further reading:

USD/JPY: Trading the ISM Non-Manufacturing PMI

EUR/USD Feb. 4 – Little Movement Ahead of Services PMIs