Having got off to a good start this week, equity markets managed to give back a good proportion of those gains yesterday as further sharp declines in energy prices undermined the initial positive sentiment that came out from events over the weekend in France.

These falls were followed in Asia overnight though Chinese markets proved to be a bright spot after MSCI approved the entry of A-Shares into the MSCI emerging markets index meaning that investment funds that track the index would be obliged to buy these stocks. While this is a big step for Chinese equities it also means that Chinese regulators will need to be more circumspect when it comes to intervening in their local markets, so as not to deter inward investment into these markets. 

Back in Europe even a weaker pound couldn’t prevent the FTSE100 from giving up all its Monday gains as sharp declines in copper as well as further weakness in oil prices to nine month lows prompted a wide scale sell-off on both sides of the Atlantic.

This was despite new record highs for not only the German DAX but also the Dow and S&P500, and it was oil prices slipping back to their lowest levels in nine months that appears to be unnerving investors.

In the last month oil prices have slid 15% from their May peaks and now sit below the levels they were prior to last Novembers OPEC output freeze, while natural gas is also down over 10% over the same period. If OPEC members were hoping that the recent agreement to freeze or cap output into March next year would help stabilise prices they couldn’t have been more wrong.

Now the risk is we could see further declines, particularly if shale producers continue to add rigs, and demand continues to slow in Asia, and there are no further supply disruptions. The key support levels sit down at the November lows at $43 on Brent and $42 on US WTI, which if they give way $40 could come into view very quickly indeed and drag equity markets down with them, especially if today’s weekly inventory data disappoints.

What these declines mean for inflationary pressure is not good news for the US Federal Reserve, for whom some US policymakers appear to be turning a tin ear to what is going on in the bond market.

It is this flattening out of the yield curve that appears to be signalling that the FOMC is underestimating the prospect that inflation could well be much weaker than they think it is in their inflation expectations, and as such suggest that we may not see any further rate rises this year, despite what US policymakers would like us to think.

The pound had a disappointing day yesterday after Bank of England governor Mark Carney threw a bucket of cold water over last weeks unexpected split on the monetary policy committee (MPC) about the decision to keep rates on hold.

While inflationary pressures appear to be slowing outside the UK, it is quite clear that the Bank of England governor appears unwilling or unable to acknowledge the concerns of the more hawkish members of the MPC in thinking that the recent weakness in sterling has exacerbated the effect of inflation here in the UK and could well continue to do so. His solution to that it appears is to help undermine the pound further, which is likely to make matters worse on the prices side of the equation.

It would appear that with rates already at record lows economic groupthink is once again taking over at the Bank of England as gilt markets start to price the possibility that rates might go even lower.

This morning’s public sector borrowing figures for are expected to show that in May the government borrowed £7.2bn, down from £9.6bn in April.

We also have the small matter of the Queens speech where the new Conservative minority government will attempt to get its new legislative program through the House of Commons, with or without the help of the DUP. it is unlikely that the DUP would vote against it and raise the prospect of another election and a possible Corbyn government, but nonetheless it is likely to be a tense process, and something that could be a speed bump for the pound if the bill fails to get the required votes to pass.

EURUSD – if support near 1.1100 gives way we have the potential to open up a move lower towards the 1.0900 area, with the 1.1020 area the first port of call. This would signal a double top reversal with resistance back up towards the 1.1300 area. While above 1.1100 the range trading scenario remains intact.

GBPUSD – the pound slid back yesterday towards the 100 day MA at 1.2630 and could well overshoot towards the 1.2560 area and 200 day MA. A slide back through here could well open up the 1.2380 area again. We need to get back above the 1.2740 area to stabilise.

EURGBP – the euro rallied back through the 0.8800 level yesterday, remaining on course for the 0.8920 area. The first resistance sits up at the highs this month at 0.8866, while any pullbacks are likely to find support around the support at the 0.8720 level which remains a key area.

USDJPY – finding resistance at 111.80, where the daily Kumo cloud sits. A break through here opens up the potential for further gains towards the 112.40 area, and 113.00. We need to hold above the 200 day MA at 110.60 for this move to unfold, or risk a return to the 109.40 area.

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