Despite a decent rebound on Friday, helped by a rebound in US treasury prices which finished the week higher, US markets still posted their worst weekly performance since the wild swings that were such a common occurrence in the first quarter of this year.
The bulk of last week’s stock market losses came over a 24-hour period on Wednesday and Thursday of last week, with a range of factors being cited as to why investors suddenly experienced a collective loss of nerve, and decided to cash out en masse.
One of the main characteristics of US markets has been their resilience over the last nine years, and despite the occasional flurry of volatility the trend has stayed remarkably steady, despite some steady undercurrents of uncertainties. The worry is that this mindset might be shifting at a time when economic growth is slowing and the US central bank appears set in its determination to push on with further rate rises.
While markets in the US have by and large stayed resilient the same can’t be said for markets elsewhere with European markets in particular looking vulnerable, having been in a slow decline since the middle of the summer, while markets in Asia this morning have also remained under pressure, as we begin a new week.
Having seen some big losses on Thursday in Europe we started with a strong and positive open on Friday, however the failure to hold onto any of these gains should be a concern to all of those who feel that we could be near a short term base, as we start a new week.
Whether its rising trade tensions, as the US reorientates its trade policy towards China and the EU, a slowing global economy, a US central bank that is tightening monetary policy fairly steadily, and inviting criticism from President Trump, or an uncertain political outlook in Europe, as populist politicians push back on EU interference in domestic fiscal policy, last week’s stock market rout saw the German DAX hit its lowest levels since December 2016, while the FTSEMib in Italy fell to its lowest levels in two years.
The turnaround in the Italian market has been all the more notable given that at one point this year it was the best performing European stock market, up by 12% in May, before slipping back to now be down 12% year to date and down over 20% from its May peaks, as investors worry that the Italian government remains on a collision course to defy the European Commission, and press ahead with its own budget plans.
The FTSE100 also fell back sharply closing below 7,000 for the first time since March, as a stronger pound acted as a bit of a drag.
With the start of US earnings season on Friday it remains to be seen whether we’ve seen the bottom in the short term, with some fairly decent numbers from JP Morgan, Citigroup and Wells Fargo, with most of the focus likely to be on company’s forward projections for profit and revenue guidance.
Rising optimism that some form of Brexit deal might well be concluded in the next few days had helped push the pound to its highest level against the euro since June last week, and these gains are likely to face significant tests in the coming days, given the lack of progress over the weekend, which saw Brexit secretary Dominic Raab fly into and out of Brussels empty-handed on Sunday.
It would appear that for all of last week’s optimism that we might see a framework of a deal in the coming days, the problems appear to be much closer to home, in the form of selling any sort of compromise on future customs and the Irish border domestically.
The prospect that the DUP would pick holes in any deal along with a number of hard-line Brexiteers in the Conservative party, has seen talks stall once again over the toxic subject of the Irish border, ahead of this week’s European Council meeting. The sticking point appears to revolve around the length of any back-stop period, with a number opposed to any form of open-ended backstop commitment.
With no further talks scheduled the prospect of a no deal outcome has once again increased, and this has seen the pound slide back in Asia overnight.
All of the while the UK economy has continued to hold up well with a plethora of economic data from wages inflation, unemployment and retail sales, all set to be released later this week.
EURUSD – found support at the 1.1460 area last week and has edged back towards the 1.1590 area and 50-day MA, before slipping back from the 1.1620 area. A sustained move through the 1.1600 area retargets the 1.1720 level. The 1.1500 area is likely to act as support for pullbacks.
GBPUSD – failed at the 1.3260 level last week with a key day reversal, but remains in the uptrend from the August lows at 1.2660. The weakness in Asia could see the slip back towards the 1.2980 area and the 50-day MA.
EURGBP – rebounded from 0.8725 last week and 3-month lows, with a bullish reversal. Could well extend towards the 200-day MA at 0.8840, and even 0.8870 but remains in a downtrend from August peaks. Support remains at 0.8720 and below that at 0.8640.
USDJPY – a sharp reversal last week from the 114.60 level suggests the prospect of further losses towards 111.20, and even the 200-day MA at 110.35. The 114.60/70 level remains a key resistance level and obstacle to further upside.