European markets got routed yesterday with some suggestion that markets might be nervous of what might come from tomorrow’s Fed meeting, however this week’s meeting is likely to be the least of the markets concerns of events in Eastern Europe take a turn for the worst.
Up until Friday markets in Europe had largely shrugged off the underperformance that had characterised US markets so far this year, with concerns over weak company guidance and the Federal Reserve’s likely rate rise path for this year, only part of the wider story.
Yesterday’s declines in European markets had more to do with events on the Ukraine, Russia border than with any other factors that have dominated sentiment over the past two weeks.
It appears that the penny has finally dropped with financial markets that events in eastern Europe have the potential to get even worse, after NATO announced it is putting additional ships and aircraft on standby for mobilisation, and that the US is considering sending troops to shore up its Baltic defences, in response to requests from the likes of Estonia for a greater US presence to deter a potential Russian escalation.
Not only did we see the FTSE100 post its biggest one day fall since 26th November, but the index also fell as low as 7,284, a three-day peak to trough move of 335 points in three days. The DAX also fell back sharply, losing over 4% at one point, before closing back above the 15 000 level.
US markets continued the negative theme after Europe had closed, with the S&P500 and Nasdaq 100 both hitting 7-month lows, before finishing a whiplash-inducing day to finish higher on the day.
It’s hard to know, having been down by 5% at one point yesterday, what caused the sudden turnaround in the Nasdaq 100, or the rest of US markets for that matter, but even with yesterday’s late recovery, both the S&P500 and Nasdaq 100 are still down over 5% from last week’s highs, which suggests we may have seen some a bit of bargain hunting, when both markets hit their 10% correction threshold.
As a result of yesterday’s startling rebound in the US, markets here in Europe look set to open higher this morning, despite a negative Asia session, with the volatility set to continue, with the only US economic numbers of consequence being US consumer confidence for January as the latest two-day Federal Reserve rate meeting gets under way.
Having seen US services PMI for January slip back to a six-month low yesterday, we could see a pullback in consumer confidence for January, to 111.9, after an unexpected rebound in December to 115.80.
In the UK the latest public sector borrowing numbers for December are expected to see a modest decline to £16.1bn from £16.6bn in November, although with all the additional Covid related costs these numbers are becoming much more difficult to predict. These sums are going to be particularly uncomfortable for the UK treasury with RPI at 30-year highs above 7%, and which will add billions to the government’s debt servicing costs over the next few years.
EUR/USD – rebounded from the trend line support from the recent lows yesterday, now at 1.1290. We need to see a sustained move through the 1.1380 level to open up a move back towards 1.1500. A move below 1.1280 reopens the November lows at 1.1195.
GBP/USD – yesterday saw the pound continue its move lower, taking out the 1.3480 level and with support now at 1.3420. A move below 1.3420 and the 50-day MA argues for a move down towards 1.3380. We need to see a move back above the 1.3670 area to retest the 200-day MA and 1.3750 area.
EUR/GBP – got the move towards 0.8420 yesterday, although we have since slipped back. We now need to hold above the 0.8380 level to keep the current momentum higher intact. Above 0.8430 argues for a move towards 0.8470.
USD/JPY – managed to hold above the 113.40 area for now. A break below 113.40 argues for a move towards the 112.80 area. We need to move back above 115.30 to retarget the recent highs above 116.00.