After two weeks of weakness created by the Russia-Ukraine conflict risky assets are trending lower and gold higher. German DAX sold off today as the German manufacturing PMI disappointed and it was reported that Russian leaders had already given an order to attack. Satellite images show how Russian troops are spreading out along the border. At the same time though, there are some slight hopes of a political solution. This leaves traders with a conclusion that the only reliable guide (once again) is how price reacts to the news and whether key support and resistance levels are violated or honoured. This is why in this report we again focus on the news flow and price action and give you the key levels to trade against. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
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BTCUSD traded down to 38000 after we said on Friday that bitcoin is bearish. This weakness was in line with our bearish medium-term view (see here) that “it’s likely that Bitcoin stays medium-term bearish below last week’s high. A rally above 46000 looks unlikely”. We said earlier that Russia invades Ukraine further the price of gold is likely to stay bid and could attract allocations from Bitcoin. This is what has been happening lately. The reports of war in Ukraine have told about shelling in the regions supported by Russia. This has helped the price of gold to rally and has intensified selling pressure in bitcoin and other cryptocurrencies.
At least one misinformed commentator in the FX industry has erroneously called bitcoin a defensive asset. This rather amusing idea was shown to be nonsensical by the world’s biggest voting machine, the market itself. Funds have flowed out of bitcoin and into gold, which obviously is the most famous and truly defensive asset.
Furthermore, while cryptocurrencies are recognised as an asset class many would argue that a crypto coin is not an asset. There’s no cash flow and the moment there’s no electricity, there’s no trading in or with bitcoins either. Crypto coins are called virtual for a reason. Bitcoin is a luxury item that can be maintained only as long as there are enough energy sources available for non-essential uses or general public acceptance to do so.
When this changes we are left with real tangible assets such as real estate and precious metals. The fact that bitcoin’s energy consumption is equivalent to the annual energy consumption of Sweden (a country of 10 million people) makes, barring some extraordinary new energy sources coming widely available, the wider acceptance of bitcoin highly unlikely. Gold, however, is likely to maintain its status as the ultimate safe-haven asset for centuries to come. At the end of the day, gold has been valued for thousands of years. Through wars and rebellions, famines and seasons of plenty, it’s gold that has been the asset to either fall on when everything else fails or when to show off one’s wealth.
Technically bitcoin is in a downtrend and trading right below 39450 resistance at the time of writing this. After trading lower for two weeks some of the speculative air is taken out of this market and shorts are more vulnerable to good news from the Russia-Ukraine conflict. This morning it was reported that Russian leaders have already given an order to attack and satellite images showed how Russian troops are spreading out along the border. At the same time though, there are some slight hopes of a political solution to the situation. This leaves bitcoin traders with the conclusion that risks are still considerable to those holding large positions and that the only real guide is the price action itself. If we see the price still selling off from resistance levels making new lows the only conclusion is that the majority of bitcoin market operators are bearish. Then our job is to keep on selling failed rallies. Below 38K, look for a move to 36270. Alternatively, a higher low above 38000 and/or a decisive and sustained rally above the 39450 resistance level could move the market to the 43400 – 44400 range.
DAX is selling off after German Manufacturing PMI disappointed and came in at 58.5 (59.6 expected) and after it was reported that there are no concrete plans for Putin to meet Biden. We said on Friday that if the crisis in Ukraine continues to produce negative newsflow it’s quite likely that DAX trades lower. DAX is clearly one of the stock indices likely to suffer from sanctions against Russia in the event of Russia invading Ukraine further. This is why rallies in the index keep on failing. Traders should look to take advance of the added volatility at key price levels. The idea is to trade against (either targeting reversals or break-out trades) these key price levels if we see confirmation for these trade ideas in price action. Looking at the weekly chart, there’s been no sustained rally in six weeks now. If the war news stays negative the index might break the 14830 support level and head down south. In this scenario, it’s impossible to estimate how deep or long the following bear market could be. Alternatively, Russia will call the troops home and we get a strong relief rally in German stocks. DAX has created yet another lower high which together with negative news flow from Ukraine could lead to index testing the Feb. 14th low (14840). The other key price levels for DAX are 14905, 15234 and 15353.
Gold rallied higher beyond 1877.09 resistance last week after some reports of artillery shelling around the Donetsk airport in the Russian operated separatist area. The concern shared by the west is that separatists could use a fabricated conflict to justify the Russian invasion of Ukraine. These fears have kept the price of gold bid. Gold is still in an uptrend and trading above 1886.54 support. If the level hold’s the next key resistance level is at 1916.55 which is about 1.14% from the current level. The proximity of this key resistance has slowed the market down a bit but with the Ukraine situation being so alarming it’s likely that the market will stay strong. The central banks aren’t likely to act with the planned tightening if a major war breaks out in Europe. This would attract investors to bond markets which in turn would suppress yields and support gold. If however, there is good news the price of gold could break the nearest support and test the 1879.35 level (channel low) and possibly penetrate it. In such a case, the 38.2% Fib retracement at 1855.31 could come into play.
Macro Drivers for the USD As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The Federal Reserve||Fed could be hiking rates significantly this year and even raise the rates by 50 basis points per FOMC meeting (instead of the normal 0.25%). The Fed believes that rates could rise significantly before hurting employment.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US Congress has passed a $1.2 trillion infrastructure spending plan.|
|Yields||In Q3 and Q4 2021, the benchmark 10-year US Treasury yield ranged between 1.1720% and 1.6830%. The hottest inflation readings since 1982 have pushed the 10 yr. yield higher as bonds have been selling off.|
|Employment||The January non-farm payrolls increased by 467K while the analysts had expected only 110K new jobs. Average hourly earnings were confirmed at a much better level than predicted (0.7%, 0.5% expected).|
|Inflation||The annual headline inflation reading for January came in at 7.5% (7% prior). This was the highest CPI print in 40 years. The core CPI (all items less food and energy) was confirmed at 6.0% (5.5% previous).|
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The Next Main Risk Events
- EUR – German ifo Business Climate
- USD – Flash Manufacturing PMI
- USD – Flash Services PMI
- USD – CB Consumer Confidence
- AUD – Wage Price Index
- NZD – Official Cash Rate
- NZD – RBNZ Monetary Policy Statement
- GBP – Monetary Policy Report Hearings
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- German Manufacturing PMI 58.5 (59.6 expected)
- French Flash Services PMI 57.9 (54.0 expected)
- UK Retail Sales m/m 1.9% (1.1% expected)
- US Philly Fed Manufacturing Index 16.0 (19.9 expected)
- UK CPI 5.5%, (5.4% expected)
- Canada CPI 0.9% (0.6% expected)
- US Retail Sales 3.8% (2.1% expected)
- US Industrial Production m/m 1.4% (0.4% expected)
- Only 10K Russian troops withdrawn from the Ukraine border
- ZEW Economic Sentiment (48.6, 54.4 expected)
- German ZEW Economic Sentiment (54.3, 55.1 expected)
- US PPI (1.0%, 0.5% expected)
- Empire State Manufacturing Index (3.1, 11.9 expected)
- No indication yet that Putin has decided to invade Ukraine further
- UK Prelim GDP q/q (1.0%, 1.1% expected)
Chief Market Analyst
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