Only last week European stocks hit a four month low before embarking on a three day rebound this week.
This rally came unstuck yesterday as the downtrend from the June peaks resumed and with US markets also declining sharply we can expect to see markets in Europe open lower this morning, with investors also absorbing the effects from yesterday’s terror attacks in Barcelona, which has seen money move towards safe haven assets like gold and the Swiss franc overnight.
The fall in US markets was most notable given how resilient they have been to the political intrigue taking place in the US over the last few weeks, with the Dow posting its largest one day fall in three months while the S&P500 dropped to its lowest levels in over a month.
For several months US markets have managed to give President Trump the benefit of the doubt with respect to the implementation of some form of fiscal or tax reform, particularly since he appeared to have the support of the business community, and for the most part, many in the Republican Party.
This confidence appears to be slowly melting away given recent events that have taken place in the aftermath of Charlottesville, as US politics descends into parody.
The mass resignations from the President’s business advisory councils followed by their dissolution, and the subsequent heavy criticism from fellow Republicans appears to show a US President more isolated than at any time in his short Presidency, giving the impression of US politics that appears to represent events that on a normal day could be said to have come from the Daily Mash, as opposed to the Economist.
With support peeling away from all sides’ investors appear to be coming to the conclusion that the US President is likely to find it even more difficult to achieve anything close to what was expected than was the case at the beginning of this year. This of course then begs the question as to whether he’ll be able to achieve anything at all, at a time when the political cost of continuing to support him rises with each passing day and each tweet storm.
On the currency the US dollar had one of those days when it couldn’t make up its mind one way or the other, while the euro slipped back after it was reported in the latest ECB accounts that some on the European Central Bank governing council were concerned that the euro could overshoot to the upside, given that on a trade weighted basis we’ve seen a rise of over 8% in 4 months.
The speed of this rise may well account for the reticence of ECB President Draghi to comment on the prospects and timing of a tapering program, next week at Jackson Hole.
Central banks generally don’t tend to fixate too much on currency moves of 5% to 10% if they happen over a two to three year period, but when they happen in a short time frame the calculus tends to change given that a rapid move could introduce a sharp deflationary or inflationary impact, while on a corporate level big companies aren’t likely to have hedges in place to deal with those sorts of short term moves.
The pound has found little solace in a week of largely positive data, retail sales for July rose 0.3%, slightly more than expected, however this was offset by a downward revision to the June numbers. Nevertheless the employment situation continues to remain positive, while the wages to prices gap has closed in the right direction, even if it still remains negative.
EURUSD – briefly dipped below the 1.1680 area before rebounding the risk remains for a move to the 1.1620 area, while below the 1.1800 area. We still remain on course for a move towards the 1.2000 area, as long as the 1.1620 level holds in the short term.
GBPUSD – the pound continues to remain above the 100 day MA and the July lows at 1.2810, and while it does the uptrend remains intact. A move back above 1.2930 is needed to stabilise and retarget the 1.3040 area. Below 1.2810 targets the 200 day MA at 1.2600.
EURGBP – continues to edge higher as it looks to head towards the November 2016 peaks at 0.9300. Support remains down near the 0.9040 area and below that at the 0 8980 area.
USDJPY – the failure to move above the 111.30 area keeps the focus on the downside and a move towards the 108.70 area.
