Daily Market Outlook, January 22, 2024

Munnelly’s Market Minute…“Hang Seng Sinks To GFC Levels”

Asian stocks were mixed as Chinese stocks weakened, despite last week's record levels on Wall Street. Nikkei 225 rallied and broke above 36.5K handle ahead of tomorrow's BoJ announcement. Hang Seng and Shanghai Comp underperformed due to notable weakness in tech and property, with the Hang Seng Mainland Properties Index hitting a record low and trading back to levels not seen since 2009. Sentiment remained pressured in the mainland amid ongoing economic concerns, and the benchmark LPRs were kept unchanged, as expected. The BoJ is expected to maintain its current monetary policy THIS week, but investors are watching for any indications from Governor Ueda regarding the negative effects of negative rates, as this could signal a future change in policy. Additionally, Tokyo's CPI is likely to have decreased in January, which could further undermine the BoJ's confidence in achieving its 2% inflation target.

In the UK, despite the unexpected increase in December CPI, it still fell 0.6 percentage points below the Bank of England's forecast in the November MPR. With pay growth continuing to slow down, this should be sufficient for all MPC members to contemplate maintaining current interest rates at the February meeting. The upcoming PMI, CBI, and consumer confidence surveys next week will offer the last update on the economy before the February meeting.

The January ECB meeting on Thursday is not expected to bring any policy adjustments or announcements, but rather focus on reflecting on the upcoming year. ECB watchers are looking for the first rate cut to be moved from December to September, but there is high uncertainty, which means that no cuts this year is also a possibility. The Governing Council may discuss the first outcomes of the operational framework review, to be published later in the spring. This week, there will be a release of January business surveys. The PMIs, which are still at low levels, are expected to gradually recover, while the Ifo and INSEE are anticipated to weaken slightly.

Stateside, the upcoming 31 January FOMC meeting is the next major event for financial markets. Before that, this week's 4Q GDP and PCE inflation measures are important to consider. GDP is expected to be more resilient than previously thought after the surge in 3Q, with an estimated 1.9% growth rate, in line with potential growth. Core inflation is slowing down, but confidence in reaching and maintaining 2% is not high enough to warrant near-term rate cuts.

Overnight Newswire Updates of Note

Ron DeSantis Drops Out Of 2024 Presidential Race, Endorses Donald Trump
Tim Scott Endorses Donald Trump In Blow To Nikki Haley
China Leaves Lending Benchmark LPRs Unchanged As Expected
Japan’s Baseline Forecasts Show Government Missing Budget Goal
Japan Premier Slips In Polls After Disbanding Tarnished Faction
Fed's Daly: Policy In A 'Good Place,' Risks 'Balanced'
EU Tackles New $20 Bln Plan To Boost Ukraine Military Aid
All Parts Of UK Hit By Economic Stagnation Since 2010, Says Think-Tank
Netanyahu Rejects Conditions For Hostage Release, After Hamas Report
Libya Restarts Production, Exports From Biggest Oil Field
TSMC To Launch Chipmaking Plant In Japan, But US Plant To Face Delays
ADM Places CFO On Leave, Cuts Earnings Forecast Amid Probe
ExxonMobil Sues To Block Shareholder Climate Petition

(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 (535M), 1.0850 (578M), 1.0900 (252M), 1.0935 (274M)
1.0975 (300M), 1.1000 (840M)
USD/CHF: 0.8530 (350M), 0.8660-70 (435M)
GBP/USD: 1.2650 (440M). EUR/GBP: 0.8600-15 (300M)
AUD/USD: 0.6535 (800M), 0.6575-80 (1BLN), 0.6600-05 (819M)
USD/CAD: 1.3450-60 (521M)
USD/JPY: 147.45-50 (628M), 148.00-10 (1.3BLN), 148.50 (873M), 149.50 (687M)
FX option implied volatility is declining due to lower levels drawing demand for protection against increased risk of realized FX volatility from interest rate divergence and a potential Trump election win. Buyers are seeking FX volatility protection after the March 30 U.S. Federal Reserve policy announcement, with options expiring after the November 5 U.S. election also seeing increased demand. Lower implied volatility means cheaper options, reflecting the lack of conviction within recent FX ranges. There is a growing risk of a USD/JPY setback, leading to a preference for owning downside strikes. Dealers also highlight the pending U.S./Japan rate divergence as a potential volatility risk.