Investors have had plenty of time to absorb the various headwinds that have come their way over the course of the last few years, and on each occasion any dips in equity markets have tended to get bought into.
Whether it be concerns about political instability in Europe, quantitative tightening, a slowdown in China, the UK Brexit vote, Donald Trump becoming US President, and North Korea firing off missiles over Japan, markets have proved to be fairly resilient.
In recent weeks this resilience has started to be tested in ways that are slowly becoming apparent in other asset classes, with flows into safe havens showing signs of gathering pace.
The rise in gold prices to record highs against a host of different currencies, with the exception of the US dollar, as well as the sharp collapse in bond yields is raising concerns that stock markets may well be about to take a sharp trip back to the lows last seen at the end of last year.
On their own, concerns about US, China trade, slowing growth, and the risk of recession in Europe’s biggest economy, Brexit, the possibility of Italian elections, unrest in Hong Kong, as well as a crisis in Argentina, and tensions in the Arabian Gulf might be containable. Taken together in the round as a cocktail of risks against a backdrop of central banks almost out of ammunition and you have a recipe for a lot of nervous investors.
US yields in particular took a sharp dive yesterday, over concerns that the US economy might be heading into recession over the course of the next 12 months, after President Trump said he wasn’t in any hurry to make a deal with China, calling into question the timeline of the next discussions, which are due to take place in September.
With tensions in Hong Kong rising there is a growing concern that if events get out of control, China could well feel forced to intervene, with all the inevitable outcry such an action would cause, along with additional consequences for the global economy.
As a consequence, US markets also fell back sharply and while these losses aren’t expected to be reflected in a weaker open in Europe this morning, Asia markets have taken tumble overnight.
Last week the UK economy contracted by 0.2% in GDP, the first quarterly contraction since 2012, and eating into the expansion that we saw in Q1 of 0.5%. Some of this weakness shouldn’t have been too much of a surprise given the front loading we saw due to the timing of the Brexit deadline at the end of March. As a result of this front loading of business from April into March, the April GDP numbers subsequently saw a monthly contraction of 0.5%, as businesses allowed inventory to run off.
Today we’ll get to see how the jobs market is holding up as well as get an insight into the pressure on wages which has continued to push up to multi year highs in recent months. The resilience of the labour market has been quite startling given all the reports we’ve seen in the media over the last 12-18 months of widespread job losses across a range of sectors, the unemployment rate has remained anchored near its lowest levels since the 1970’s at 3.8%.
In the aftermath of the Brexit extension in March the UK economy has slowed down markedly, but thus far this doesn’t appear to be being reflected in terms of the pace of wage increases. These have continued to pick up despite a weak economic backdrop. In May, wages excluding bonuses rose by 3.6%, an eleven-year high, and have been rising steadily for the last two years, and this looks set be extended into June, with a rise to 3.8% expected.
EURUSD – the rebound from the 1.1020 area appears to be struggling near the 50-day MA and the 1.1250 area. We need to overcome the 1.1280 level to retarget the June peaks.
GBPUSD – another two-year low at 1.2015 yesterday has seen a minor rebound, with the major support sitting at the 1.1980 area. As such it feels a little bit vulnerable to a short squeeze. Needs to move back above the 1.2260 area to prompt further gains back to 1.2380.
EURGBP – made a new multi-year high of 0.9325 yesterday before slipping back to the 0.9245 level. The next resistance is at the all-time peaks at 0.9805 which was saw in the wake of the financial crisis in December 2008.
USDJPY – the flash crash lows this year at 104.70 are the next key support level after the move below the 106.00 level last week. We need to see a recovery back above the 106.20 to stabilise and argue for a move back to the 107.80 area.