 Good morning. Welcome to CMC Markets on Friday, the 7th of January 2022. Happy New Year to you all. And this quick look at the week ahead beginning the 10th of January 2022. And it's been a mixed start to the year for equity markets, particularly with respect to European markets and US markets. US markets have had a difficult first few days of 2022, as I speak, ahead of today's US payrolls report for December. European markets, on the other hand, appear to be doing quite a bit better. Obviously, that presupposes that today's US payrolls report doesn't throw up anything in the way of curveballs. But certainly, I think this week's market action has been upended to a certain extent by the release of this week's or last month's Fed minutes. Now, you may recall, last month, the Federal Reserve outlined an acceleration of its tapering program to $30 billion a month starting this month. It also adopted a slightly more hawkish outlook when it came to tackling the risks of rising inflation, bringing forward the prospect or expectation of three rate hikes in 2022 and three rate hikes in 2023. Now, this week's minutes sprung a little bit of a surprise because while none of the above or what I've just spoken about was a surprise, an animated discussion or a spirited discussion about reducing the size of the Fed's balance sheet did make it onto the agenda. Now, that's probably not going to be or shouldn't be too much of a surprise given that it does tend to go hand in hand with the prospect of rate rises. But to look at the market reaction, you would have thought that the Fed were looking to start reducing the size of their balance sheet as soon as the next meeting, which is essentially not the next meeting because the next meeting is the end of this month, but certainly at the next key meeting which is in March. Well, that simply isn't going to happen and it's not likely to happen given the fact the Fed is still adding to its balance sheet and will only finally stop adding to its balance sheet at the March meeting when the likelihood of a March rate rise has risen quite significantly over the past few days and we can see that borne out in the way that the U.S. 10-year yield has behaved over the course of the past few days. We've seen a big rise in 10-year yields from 151 at the end of last year to 172 today. So, so 20 basis points in the space of five days, which is not too shabby when you think about it. We've seen a significantly similar move in U.S. two-year yields as well. If we look at this chart here, we can see a similar, rather sharp move higher in two years. So, look at the 31st of December, 0.73, we're up to 0.87. So, again, it's a similar sort of story for the five-year. I won't show you that because it's basically just reinforcing a narrative that's pretty much baked in. But if we look at a slightly longer timeframe, we're still well below the levels that we were pre-pandemic. So, I think while there is a concern about rising inflationary pressure, there are, we are starting to see some early signs that maybe some of the bulk of that inflationary pressure is starting to subside. Now, certainly there are further upside risks. We can see that being played out currently in oil prices. And we can see that with respect to Brent Crude. But crucially, what we've seen here with Brent Crude is we're retesting the highs that we saw back in October and November. And certainly the line of least resistance is very much to the upside at the moment, particularly given what's going on in Kazakhstan, which produces 1.6 million barrels a day. There's no evidence so far that output there has been affected by the recent unrest, which suggests that markets are probably worried a little bit too much about supply disruption relative to obviously increased demand. And certainly COVID cases this first week of the year have been increasing. But more importantly, what we have seen is the hospitalization rates still remain very much towards the lower end of expectations. And while hospitalizations have been rising, an awful lot of those COVID cases have been as a consequence of other, there being people being in hospital with other conditions. So in other words, patients have been treated for something else, but have also tested positive for COVID as well. Obviously, staff absences are also playing into the strain on various health services around the globe because of self-isolation rules. Even if you're asymptomatic, don't have any symptoms and you test positive, you have to isolate, which to my mind seems completely bonkers when pretty much over 70 or 80% of people who are in hospital are vaccinated and double or even triple jab. As I am, I'm triple jabbed as well. So the likelihood of serious illness remains very, very low, particularly when it's Omicron where the symptoms are relative to Delta and Alpha fairly mild. Nonetheless, this is where we are. And what we've seen so far this week has been what I would call a very mixed start to trading on equity markets. This week, FTSE 100 has outperformed. We are now well above 7,400. We've been as high as 7,530. The bigger question for me is whether or not we can continue to move higher. And I suspect that we probably can. As long as we can hold above 7360, which is essentially this area of peaks through here, then for me, while we are seeing a little bit of short-term weakness, for me, the risk for the FTSE 100 still remains for further gains back towards the levels that we saw pre-pandemic. It's quite instructive, in my opinion. FTSE 100 is one of the few global indices that hasn't been able to retest or get anywhere near close to its record highs all the way back here in 2018 when it was trading as high as 7,903. Haven't been anywhere close to that. There are many reasons for that. Obviously, the weakness in the banking sector, weakness in travel and leisure, and weakness in oil and gas. Those are very key significant sectors in the FTSE 100. And as such, it helps explain why this particular index has underperformed. Certainly in the context of where we are at the moment, FTSE 100 certainly has scope to go an awful lot higher. While we hit my end of year target 7400, I'm certainly not complacent about the fact that we could go higher. I would expect us to do so. Looking at the German DAX, we've run into a little bit of resistance up around 16300, which coincides with the previous peaks all the way through here. We've come off in the last three days, but nonetheless, we are still up on the week for the DAX. You can see Monday's performance here, Monday, Tuesday, Wednesday, Thursday, and obviously today, Friday. Now, that obviously could change, but there is obviously significant resistance on the German DAX at 16300. So that is a bit of a worry, the fact that we weren't able to take that particular level out. So I'll be paying particular attention to that with the fact that the slow stochastic is also rolling over. That does raise the potential that we could slip back towards the 15600 level in the short to medium term. So the DAX does look a little bit toppy. We similar sort of story with respect to the NASDAQ. We retested the highs. We're now looking to retest this key area of support around 15500. That remains a key risk for the NASDAQ 100. But then even below that, we've got this trend line from the lows back in March 2021, which could also act as a fairly decent area of support as well. And then below that, we've got the 50 day moving average. So there are decent areas of support coming in on the NASDAQ 100. Looking at the S&P 500, it's a similar sort of story right on the 50 day moving average. You can draw in a trend line from the October 2020 lows here. And that's a nice little trend line there. And you've also got this area of support through 4500. So while we're seeing a little bit of weakness in US equity markets, it's not really any dissimilar to the pockets of weakness that we've seen over the course of the past few months, where we see impulsive thrusts lower, only to then rebound of key support levels. So while you can certainly make a case for a little bit of profit taking in US equity markets, especially, we still need to break the key technical levels to suggest that is likely to play out. And that's something that we really do need to pay attention to as we look ahead towards next week's key indicators. And in the context of that, and the discussion around higher rates and the likelihood of the Fed reducing the size of its balance sheet, sometime in Q3 or Q4 of this year, certainly no sooner it'll be unlikely to be sooner than that. And I think that's something the market needs to get its head brown. Also, the fact that if there's any evidence that inflation is starting to show signs of topping out or softening, that could also temper rate hike expectations going forward. And that I think is why this coming week's US CPI numbers for December could be very important, because we saw in the prices paid data from the ISM surveys that it was a bit of a mixed bag manufacturing. ISM prices paid saw a big drop in December. Those services remained fairly resilient, but it didn't go surging significantly towards the upside. So with a March rate hike, very much a live discussion. You know, the St. Louis Fed President James Bullard hinted at that earlier this week. This week's December CPI is likely to be a key signpost in the wider discussion as central banks wrestle with the dilemma of rising price pressures and an economic slowdown caused by tighter restrictions and declines in consumer confidence. Now, in November, US CPI, as a reminder, hit a 39 year higher, 6.8%. Just think about that for a moment. 6.8%. Earlier this week, German CPI hit 5.3%, which was the highest level since 1992. Yeah, so we're talking really elevated levels of inflation. And let's not forget the interest rates in Germany in 1992 were 8.5%. They're minus 0.5% now. So there's a huge difference there as well. So the big question, I think, as we look towards these November numbers, I'm sorry, December numbers for US CPI, is whether or not we're going to see a move through 7%. And that is certainly the forecast given the direction of travel that we've been seeing in PPI numbers. The PPI numbers have been very much leading indicators for CPI, pretty much across the board, whether it be China CPI, German CPI, UK CPI, or US CPI. So if you look at PPI over the same period, that's been trading up near 7.78%. So it wouldn't surprise me to see US CPI coming at 7.1% for December. And that's certainly what the forecasts are. Excluding food and energy is expected to go through 5% to come in at 5.4%. So that's certainly a question in terms of, is higher inflation already priced into bond markets? And if so, how much is priced in? And what effect will that have on the US dollar? What is the dollar index? We've been seeing higher and higher levels of CPI. And yet over the course of the last few weeks, the dollar's gone nowhere. And the reason for that is because we've also been seeing higher and higher levels of CPI pretty much everywhere else. So it's really a question now, who do you think is going to blink first? And everyone is pretty much priced in the fact that the Federal Reserve is likely to blink next. The Bank of England blinked first in December when it raised rates to 0.25% came under some criticism for doing that. But to my mind, it was already priced in. So there was no downside for them to doing it. And that's why the Pounders probably performed slightly better this week than perhaps it would have done if the Bank of England hadn't hiked. And now the possibility is the Bank of England could go again at its decision in February or they could well wait until March. But at the end of the day, bottom line is it's quite likely that the markets are pricing in a rate hike for the Fed this year, more than one. Rate hike from the Bank of England, potentially more than one. European Central Bank rate hikes, yep, do me a favor, probably not going to happen. Certainly I think the ECB is likely to look at asset purchases before it looks at potentially raising rates. I think there's very little likelihood of the ECB pulling rates above zero in the near to medium term. We've also got US retail sales coming out next week on the 14th of January. And despite the levels of inflation, US retail sales have been fairly resilient. And the expectation perhaps is that it is likely to continue. We saw a gain of 0.3% in November compared to an October gain of 1.8%. I would suggest that December is probably likely to be fairly weak given the fact that there was widespread restrictions starting to kick in throughout December as rising COVID infections prompted a number of US states to impose restrictions on movement. So we could see a disappointing month for US retail sales as US consumers stay at home and avoid crowded spaces. So they're able to see the families over the Christmas and New Year period. You're probably going to see a similar trend play out in the UK retail sales numbers in the following week. So what is essentially all of this mean for currencies going forward? Well, in terms of Eurodollar, it's really hard to get enthusiastic about Eurodollar, I've got to say. But having said that, we do appear to be finding a little bit of a short-term base in and around 112. But we've also got decent resistance at 113.85%. So at the moment, it's a bit of a range trade. It is finding support at very gradualistic higher levels. But for me, the buyer still remains very much to the downside. But I think it really depends on where we go and how we react around this area here, 113.85%. If we get a move through 113.85%, we could see a squeeze back to this blue downtrend line here. It's a similar sort of line on the dollar index pointing towards the upside on this chart here. You can draw it through there. Dollar index is essentially a proxy for Eurodollar. It does appear to be starting to show signs of a little bit of a rollover. It really depends on whether or not it can get back above 97 or break below 112 on Eurodollar as to where we go to next. But certainly, I think there is scope for a little bit more dollar strength. But I think an awful lot of that will depend on the data going forward. So Eurodollar is a bit of a Zedsville at the moment. But overall, there does appear to be some early signs that perhaps we could be due a little bit of a short squeeze. Having said that, looking at cable, we're still within this downward channel that we've been in pretty much since June last year. Very much a year of two halves for cable over 2021. Strong first half, weak second half. Now, we've had a good start to the year so far. Hit a high of 136. To really, I think, get a focus on a higher pound, we need to take out this trend line from the peaks back in June. If we're unable to do that, then the likelihood is we're going to drift back down towards 134. Why 134? Because it coincides with these two loads through here and through here. So if I draw a line through that, that can give me a sort of bit of a benchmark as to where we can drift back to. So that's around about 134, 134.20. We break back below that, then obviously the biggest support is around about 131.70. But we've certainly seen a much more firmer pound in the opening hours of 2022 than has been the case over the course of the past few weeks. And it is welcome. The bigger question or not is whether we can sustain it. One of the reasons the pound has been so strong is because we've broken to the downside in Euro sterling. We've finally broken that 84.50 level. It's been a very messy downside move. But ultimately, I would expect that to continue, but not before potentially a little bit of a short squeeze higher. But what's significant is we've finally been able to get back below these November lows down here around about 83.80 and traded as low as 83.30 here. Now the big question is, can we make further losses down towards these lows back in February 2020? You would have to think so as long as the Bank of England is able to deliver on any further rate rises. And I think that's the big question at the moment. Will the UK data hold up enough to justify a semi normalization of monetary policy for the Bank of England? If they're able to do that, then we could will see further gains for the pound against the Euro. We do have UK data out next week. We've got the monthly GDP numbers for November, as well as as well as other data. But that's the main data that I'll be keeping an eye out for. And that's expected to come in with a rise of 0.4% after October disappointed with a 0.1% expansion. But all of that is by the by December is likely to be disappointing because of the plan B restrictions that were implemented by the government just prior to the Christmas period. The only plus point to that was that they actually didn't impose a lockdown. So quickly have a look at the Aussie dollar as a quick side show here. We've seen a bit of a big decline in the Aussie dollar here. That could well weaken further on the back of dollar strength. But overall, we could see a little bit of dollar strength in the short to medium term. But as highlighted by Euro dollar, it does appear to be showing signs of waning a little bit as most of the tightening appears to be already starting to be priced in. And that's no better evident than in what the US bond yields have been doing. On the earnings front, we've got some key numbers from the likes of Tesco's Sainsbury's Marks and Spencer's Christmas trading announcements. If we look at Tesco's, for example, they've been very much the outlier when it comes to outperformance over the course of the past 12 months. It's recent Cantor numbers, Cantor World Panel trading numbers, showed that of the big four supermarkets, they did the best with Christmas sales or Q4 sales that fell 0.9% compared to 2020 levels. Now that may seem a little bit disappointing, but you've got to remember that in 2020, most of the country was locked down and an awful lot of people stayed at home. And that meant that they ordered a lot more food in than would have been the case, given the fact that this year, people were allowed to travel around. So we're able to visit friends and family. So numbers should be fairly good. We could see a profit upgrade going forward. Certainly, I think when you compare it to, say, for example, Sainsbury's, Tesco's is very much outperformed, whereas Sainsbury's is underperformed, which I find bizarre because when you actually look at Sainsbury's numbers, they're actually not that bad. There was the bid speculation that we saw in August, which subsequently amounted to nothing. But certainly there is talk that Sainsbury could be susceptible to a bid, perhaps because of its valuations. Morrison's has obviously been pulled off the stock market, as has been bought out. That really only leaves Tesco, Sainsbury's, and to a lesser extent, Mark's and Spencer's, which is moving into the food space with its tie-up with Ocado, which are basically the only players in the UK food sector. When you look at the Mark's and Spencer's, that's done and continues to do very, very well. It's been one of the big winners over the course of the past 12 months. Mark's and Spencer's upgraded their four-year profit-for-tax outlook to be in the region of 500 million at its last trading update. The company has also signed deals with White Stuff, Fatface, to basically sell their products on its website. There's a special section on the M&S website called Brands. Click on that and you can order third-party brands from the M&S website. Obviously that's helped add to the numbers for M&S's general merchandise sales. That's certainly a significant contributor to the outperformance that we've seen in M&S. We've also got ASOS. That's due out as well. Online retailers have had a nightmare last year. ASOS has had a nightmare this year, all on the basis of higher supply chain costs, higher staff costs, higher product costs, eating in to their margins. That'll be interesting to see how that pans out. Finally, we've got the start of US earnings season. We've got JP Morgan and Citigroup Q4 earnings. We look at how banks have performed over the course of the past few days. They've done very, very well. Obviously, they will do well on the basis of higher yields. If UK banks are going to do well, so are US banks. Certainly, they've traded sideways for the past three months or so. In fact, pretty much since this time early last year, Q2 last year, March, April, US banks have pretty much traded sideways despite the fact that they've been releasing reserves from loan loss reserves to boost their profits. They haven't actually been able to make new record highs, which is interesting. The JP Morgan numbers this year have been impressive. Q3 numbers saw revenues beat expectations at $30.44 billion, $30 billion and a quarter revenues. Profits the beat was large. Again, loan loss provision releases. Most areas of the business, fixed income was the underperformer. The bigger question is, will that continue to be the underperformer? Are these windfalls now firmly in the rear view mirror? Are future returns likely to be much harder won? That is the big question when it comes to US bank earnings. It's a similar story to Citigroup. We look at Citigroup's numbers and you compare them or share price and you compare it to JP Morgan. They have underperformed quite significantly relative to JP Morgan. The same factors that have seen JP Morgan's shares trade sideways have seen Citigroup's numbers trade lower. Equity is in trading done very well. Release of loan loss reserves has been a familiar theme over the course of the past 12 months for US banks as it has been for UK banks. Again, fixed income. That's been a serial underperformer. What's business lending been like? What's consumer lending been like? All of these have been key factors when it comes to the economic recovery. What will this week's or this coming week's Q4 numbers tell us not only about the US banking sector but overall about the health of the US consumer? I know I've gone on a bit today simply on the basis of the fact that it's the first one of this year and there's quite a lot to get through. Hopefully that will have given you something to get your teeth into as we look forward to a 2022 that's likely to be very challenging shall we say in terms of direction when it comes to how markets are likely to perform. More importantly, when it comes to whether or not we've seen a short-term top in US equity markets and whether or not we're going to see new record highs for say for example the DAX or whether we're going to see the FTSE 100 break above 7,500 and head towards those pre-pandemic peaks of 7,800. So that's it for me for this week. Once again, thank you very much for listening. This is Michael Houston talking to you from CMC Markets.