It looks set to be another disappointing week for global equity markets as the tensions that were prevalent at the start of the week have showed no signs of abating.
On the trade front there have been new developments, and they haven’t been positive with the rhetoric being ramped up as the US opens up a new front with China, while easing off on its disputes with the EU after a temporary exemption was granted on the steel and aluminium tariffs which were due to start today.
The announcement of a range of trade tariffs of up to 25%, as well as investment curbs to the tune of $60bn, as well as taking China to the World Trade Organisation (WTO) on a number of other issues, with more details to come in the next 15 days, hit stock markets hard with US markets closing sharply lower last night.
These measures have raised concerns about a counter response with some Chinese officials arguing that the US administration need to set out what it is they want with respect to concessions or discussions to deal with some of the problems.
The US Treasury has also been tasked to organise a plan to impose new restrictions on Chinese investment within the next 60 days.
The FTSE100 has been hit particularly hard falling below the 7,000 level as well as below its 2017 lows, to levels last seen in December 2016.
Industrials and basic resource stocks have borne the brunt of the declines, though unlike the FTSE100, the key European benchmarks are still above their February lows. Nonetheless a combination of concerns about rising trade tensions, as well as some weaker than expected economic data from France and Germany has helped feed into the weakness seen over the past few weeks.
Tech stocks have also come under pressure as a result of Facebook’s recent woes, with a statement by CEO Mark Zuckerberg failing to stem the weakness, with attention switching to the possible sanctions the company might face in terms of fines and litigation, as well as the potential longer term effect an EU sales levy might have on the tech sector’s bottom line.
Investors should be rightly fearful of this given that the tech sector has driven most of the gains in US markets over the past 18 months. A meltdown in this sector has the potential to get very messy indeed, with related ripple out effects.
This weeks Fed decision, to raise rates and tweak its guidance appears to have cut the rug out further from under the US dollar as policymakers adopted a safety first approach to future rate rise expectations, leaving them unchanged for this year. This appears to have caught markets off balance sending bond yields sharply lower and the US 10/2’s spread back towards its previous lows, though some of these declines could also be attributed to concerns about tariffs.
The flattening of the yield curve appears to suggest that investors are sceptical about the ability of central bankers to deliver on their guidance.
The Bank of England left rates unchanged as expected yesterday, however in a surprise twist two policymakers, Michael Saunders and Ian McCafferty, urged a hike in rates by 25 basis points to 0.75%.
This appears to be an attempt by the Monetary Policy Committee to reinforce the message that the central bank is serious about a possible move at the May meeting, and it certainly appears to have done the trick, however it still remains to be seen given some of the softness being seen in recent economic data both here and in Europe, whether the bank will be able to deliver on its guidance.
We also have the small matter of an IPO today with Dropbox set to issue 36m shares at the US market open today. Earlier this week the company raised its target range to $18-$20 a share valuing the business at $7.6bn, a brave decision given this week’s tech rout, and the inherent competition it is likely to face with respect to its business model.
EURUSD – moved back to just shy of 1.2400 yesterday before slipping back sharply. We still have support at the 1.2250 level but the rallies are getting shallower. We need a concerted break above 1.2350 to target the 1.2420 level. A push below 1.2250 retargets the 1.2160 area.
GBPUSD – pushed up to 1.4220 yesterday just shy of trend line resistance from the 2014 highs. A move through here retargets the 1.4350 highs. As long as this level holds we could drift back down to the 1.3980 area. A move below 1.3970 runs the risk of a return to the lows last week.
EURGBP – fell to an 8 month low at 0.8667 yesterday before rebounding. As such we still seem range bound with the potential for a short squeeze to 0.8820. We need to see a move back through 0.8820 to retarget the recent peaks above 0.8920.
USDJPY – still finding some support around the 105.20 area, but needs to push beyond 107.20 to suggest the base is in and retarget a move back to 108.30. A move below 105.00 has the potential to target 103.00.
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