For most of yesterday it looked as if European markets would finish the day higher, unfortunately US markets had other ideas, opening lower and reversing all of the gains of the previous session.
This weakness dragged European stocks to their third successive daily decline, although the FTSE100 managed to eke out a paltry gain, helped by outperformance in the basic resource and energy sector.
Yesterday’s market weakness was led by the Nasdaq 100, which slid to its lowest levels in over a month. The inability to hold onto the attempted rally is not only worrying but also speaks to a general lack of confidence more broadly about the economic outlook, as well as the ability of central banks to engineer a “soft landing” as they look to tackle inflation.
With US markets finishing the day sharply lower, wiping out all of their Monday gains, we also saw the Nasdaq 100 post its biggest one day fall since February 3rd, while the Russell 2000 posted its lowest daily close since December 2020.
The general risk off tone we saw yesterday also manifested itself into another day of falling yields in a move that suggests that investors are now starting to begin a process of de-risking away from equities, while the US dollar index appears to be closing in on its highest level in 3 years.
While equity markets fell sharply oil prices were slightly more resilient, however that was more down reports that Russia had cut off gas flows to Poland after the Polish government refused to pay in roubles, and which sent energy prices spiking higher.
This escalation on the part of Russia, along with reports that Moscow might be behind a number of incidents in Moldova, with a view to mobilising its troops there hasn’t helped, while comments by Russian foreign minister Sergey Lavrov about the risk of nuclear war only served to unsettle markets even more.
Lavrov’s remarks appear to be the latest attempt by the Kremlin to try and keep the US and NATO off balance in a war that hasn’t gone Russia’s way and is unlikely to yield them the results they had hoped for.
Any hope of a respite from the selloff yesterday with the release of last night’s numbers from Microsoft and Alphabet appeared to be dashed after investors reacted badly to Alphabet’s numbers, although post release after hours sentiment can be flaky at best.
Microsoft on the other hand saw its Q3 numbers come in better than expected. Revenues came in at $49.36bn, slightly higher than expected, as did profits at $2.22c a share. Personal computing saw revenues of $14.52bn, helped by decent sales of Windows 11 and Xbox, while its intelligent cloud business, which includes Azure generated $19.05bn in revenue.
Alphabet saw Q1 total revenues come in at $68.01bn, while operating margins came in at 30%. Q1 profits came in slightly shy at $24.62c a share, while the company announced it was buying back an additional $70bn in shares.
On the face of it these numbers look pretty good, however it appears that investors have taken exception to the company missing on services revenues, coming in at $61.47bn, below expectations of $62.58bn. This was primarily via lower-than-expected ad revenue from YouTube which saw revenues of $6.9bn, below expectations of $7.4bn.
As a result of yesterday’s weak US finish, markets here in Europe look set to open lower this morning against a backdrop of escalating geopolitical risk, and declining confidence in the economic outlook.
EUR/USD – found support at the 1.0630 level, with a break targeting the 2017 lows at 1.0340. The 1.0750 area now becomes resistance along with the 1.0820 area.
GBP/USD – looks set for a test of the 1.2490 area the 61.8% retracement of the move from the 2020 lows at 1.1410, to the peaks last year at 1.4240. We now have resistance at the 1.2820/30 area.
EUR/GBP – has continued to edge higher pushing up against the 200-day MA, and 0.8470/80 area. Support comes in at the 0.8380 area. It appears we are in a range between 0.8500 and 0.8200.
USD/JPY – failure to move beyond the 129.00 area has seen some profit taking as we look to drift back down to the 125.80 area, on a break below the 127.40 level. The main support lies all the way back down near the 124.70/80 area.