European Open: USD drifts higher ahead of US CPI, DAX implied volatility spikes

Asian Indices:

• Australia's ASX 200 index fell by -110.2 points (-1.55%) and currently trades at 6,998.60
• Japan's Nikkei 225 index has fallen by -563.69 points (-2.03%) and currently trades at 27,269.37
• Hong Kong's Hang Seng index has fallen by -360.31 points (-1.83%) and currently trades at 19,335.66
• China's A50 Index has fallen by -92.04 points (-0.7%) and currently trades at 12,987.87

UK and Europe:

• UK's FTSE 100 futures are currently up 8 points (0.11%), the cash market is currently estimated to open at 7,556.63
• Euro STOXX 50 futures are currently up 14 points (0.34%), the cash market is currently estimated to open at 4,110.54
• Germany's DAX futures are currently up 48 points (0.32%), the cash market is currently estimated to open at 15,007.47

US Futures:

• DJI futures are currently up 141 points (0.44%)
• S&P 500 futures are currently up 20.5 points (0.53%)
• Nasdaq 100 futures are currently up 61.5 points (0.52%)

• Asian indices continued to fall as contagion fears stemming from SVB’s collapse weighed on sentiment
• Japan’s share markets led the declines as they tracked JGB yields sharply lower (the 10-year JGB which the BOJ keep ranging between +/- 0.5% is now just 0.21%)
• European indices were the harder hit yesterday with the FTSE and DAX falling -2.6% and 3% respectively
• The MOVE index (a measure of US interest rate volatility) rose to a 13-year high as bond prices plummeted and investors rush to support bond prices
• Yet Wall Street remained supported despite up to 5x Fed cuts beginning to get priced in for this year, suggesting that investors are in no rush to pick up any ‘value’ around these lows
• It’s debatable as to how much of an impact Swiss PPI will now have on expectations for a 50bp SNB hike, given how fast yields are plunging as traders price in rate cuts
• Spanish inflation data is released at 08:00, and worth remembering that CPI reports for Spain, Germany and France all beat expectations previously and fuelled bets of a higher ECB terminal rate
• The US 2-year yield rose 21bp overnight dragging the US dollar higher with it, ahead of today’s highly anticipated US inflation report
• Perhaps these are the early signs that the moves of the past three days are exhausted, which leaves the potential for some mean reversion to finally kick in

Traders have been obsessed with US inflation data throughout the entire tightening cycle, and its relevance shows no sign of abating given the U-turn seen across bond markets as they price in cuts and a lower terminal rate.

It is debatable as to whether the Fed should be forced to hold interest rates based on the fallout of Silicon Valley and Signature Banks if they are indeed isolated cases. But they may feel the need to bow to public pressure an maintain price stability by holding rates – for the month of March at least - until the dust settles and confidence in the US banking system is fully restored.

However, a hot inflation print today would certainly complicate things for the Fed in light of recent events. And it’s not entirely impossible a hotter than expected inflation report may come, given that the rate of disinflation is slowing. But we shouldn’t lose sight of the fact that inflation ‘remains too high’ and that more hikes could arrive (once SVB dust settles), given just how hawkish Powell’s testimony to congress was last week. But I think most would agree that if we’re to see headline CPI drop to the upper 5’s, it could cement the case for a Pause in March and weigh further on the US dollar.

Dax 40 dashboard and daily chart:

Yesterday’s bearish engulfing candle was its worst session since December and most volatile day since November. Support was eventually found at the January 19^th low, yet the small lower wick in the daily chart shows that bears firmly won the day. Overnight implied volatility is its highest level since November and suggests a move in either direction today of around 175 points.

However (and perhaps famous last words) but DAX futures are ~0.3% higher, so perhaps the worst of the volatility is behind us. Regardless, this is a traders market and not an investors one, which requires being nimble, trading around key levels with smaller position sizes until we get a batter idea of what today holds.

Economic events up next (Times in GMT)

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge