Overnight Headlines

*US futures lower after Apple and Amazon earnings disappointment

*USD wallows near one-month low, strong euro and stock rally weigh

*Oil set for first weekly drop since August as supply concerns ease

*Bad bets trigger tumult in short-term bond markets

US equities set new record highs with broad based gains. Small caps made a strong comeback with the Russell 2000 +2.2%. But Apple and Amazon both posted disappointing results after the close. The stocks are down 3.5% and 4% after hours. Asian indices are lower even though Evergrande made another payment and avoided default for a second time. US and European futures are slipping, especially the Nasdaq which is down close to 1%.

USD subsided after struggling to get above 94 on the DXY. Support at 93.50 didn’t hold with losses mainly against the euro after the ECB meeting. The 50-day SMA is initial support at 93.34. EUR popped up to 1.1692 yesterday but is back trading around resistance/support at 1.1665. EUR/GBP moved higher but hit resistance at 0.8472. USD/CHF touched levels last seen in late August, having broken down through the 200-day SMA at 0.9148. AUD is also coming up against its 200-day SMA at 0.7556.

Market Thoughts – Central Bank credibility

Those of us who have followed central bank meetings and policymakers over the year understand the pressures and nuances of their positions. Literally billions of dollars and euros and pounds are hanging on their every word and phrase. But sometimes the market does not believe the Governor or President and “front runs” what consensus believes will happen at a future date. Currently, central banks keep ignoring persistent inflationary pressures, but markets don’t. Of course, who is right or wrong is all part of the trading game.

Despite President Lagarde’s very dovish signals yesterday, EUR/USD followed the rates market higher. For sure, the ECB has finally shifted official inflation communication towards a more balanced assessment. However, the market is now pricing in a 10bp rate hike in September next year, way ahead of most analysts.

The RBA is also being challenged after the bank declined to defend its yield cap. Rates markets now have a cumulative 100bps of hikes for next year. All eyes will be on the hawkish shift by the RBA next week. This is especially due to the fact that we only get Q3 wage inflation data after the meeting.

Chart of the Day – EUR/JPY poised to go higher

We get eurozone inflation shortly which will probably make another dent in the ECB’s temporary narrative. The headline figure is set to accelerate to 3.7% y/y. Core should stabilise at 1.9%. Yesterday’s strong readings in Germany and Spain point to upside risks. The region’s latest GDP data may positively surprise today as well, given the strong French beat earlier this morning.

EUR/JPY made new cycle highs at 133.48 before pulling back last week. This has eased overbought conditions after a sharp rally from the lows in late September below 128. Prices have consolidated above 132 over the last few sessions. A golden cross is taking place which is ordinarily a bullish sign.  We should now push above 133 towards the June highs above 134.