The seven-week rally in European stocks came to a shuddering halt yesterday, as doubts about 'the recovery trade', along with profit-taking, led to the biggest one day fall in two months.
Airlines, financials, energy and retail stocks boere the brunt, as the FTSE 100 fell back below the 7,000 level, giving up all of its gains of the last five days. US markets also fell back, sliding back for the second day in succession, with Nasdaq and the Russell 2000 leading the fallers.
Rising coronavirus cases in India and Japan, along with new restrictions on overseas travel, appears to have prompted a repricing of the recovery trade, in what has been a broad-based sell off. There isn’t a universal consensus as to the reasons for the recent sell-off, however we were overdue some sort of correction given recent gains, and profit-taking is probably as good a reason as any, with a whole host of company earnings due to drop in the next two weeks. On the other hand there is also a nagging doubt that the economic recovery that is currently being priced, looks set to encounter a few potholes, and it's this that appears to have exacerbated some of the rush to cash out on some risk positions.
Airlines in particular have been affected, and those with international travel exposure have been hit the hardest, as it becomes apparent that while domestic travel might see some form of recovery, long-haul travel is likely to take a lot longer to return to normal. Markets in Asia have seen similar weakness this morning, with the Nikkei falling especially sharply, following on from yesterday’s slide in Europe and the US, with markets in Europe expected to open mixed. With the collapse of the European Super League, Juventus shares could well tumble further, as all English clubs involved pulled out.
One of the key concerns that has been worrying investors this year has been the potential for a sharp rise in inflationary pressures, not only in the US, but here in the UK as well, which has served to push bond yields sharply higher in the past few months. While yields have softened in recent weeks, these concerns about rising prices haven’t gone away, with rises in factory gate prices showing some evidence of upward pressure. For now, there doesn’t appear to be too many signs of a build-up in higher prices in terms of the UK inflation basket, however as those of us who have to fill up our cars have noticed, pump prices are quite a bit higher now, than they were at the end of last year. This may well manifest itself in today’s annualised March numbers, given the sharp falls in prices we saw as the UK went into lockdown a year ago.
As we head towards the summer the headline CPI numbers could start to get more interesting, particularly since PPI data has been trending higher in recent months, and could be worth watching as a leading indicator as to what might be coming in the next two to three months. Expectations are for UK inflation to edge up to 0.8% from 0.4%, with core prices set to edge higher to 1.1% after unexpectedly dropping to 0.9% last month.
The Bank of Canada meets later today, with little expectation of any change in policy after two months of decent payrolls growth.
EUR/USD – drifted back from 1.2080 but upside remains intact while above the 1.1980 area. Bias remains for a move towards 1.2150, however a move below 1.1980 opens up the 1.1930 area.
GBP/USD – the failure above 1.4000 has seen the pound slip back, with support down at the 1.3860 area. As long as we hold above this area, we can see the potential for further upside towards the highs this year at 1.4200.
EUR/GBP – failure to move above the 0.8730 area last week has seen the euro slide back, however while above support at 0.8580, there is a risk of a move back towards 0.8680. Bias remains for a move towards the 0.8530 area, while below the recent peaks.
USD/JPY – just about holding above the 50-day MA with further support at the trendline from the January lows currently at 107.70. We look set for a test of this key area with resistance currently back at the 108.70 level.