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Sliding yields act as anchors on risk

Yesterday’s gains for European stocks always had the feel of a rally bereft of conviction, given that bond markets were still finding decent support, with yields still looking on the soft side, and precious metals continuing to push towards multi year highs.

This lack of conviction eventually took its toll on early gains for US markets which subsequently rolled over into the close finishing the day lower after Monday’s modest gains.

As such today’s European session is likely to see a lower open with financials in particular likely to underperform, given the slide in yields overnight.

Quite simply last Friday’s events appear to have done significant damage to investor appetite towards risk, and as such the bar to a turnaround is likely to be on the high side. It’s not difficult to understand investor reticence in this regard, with the frequent twitter interventions by President Trump going a long way to undermine confidence in the reliability of the US position on trade, with Friday’s events likely to have been a tipping point for some.

Ordering US companies to find new markets outside China is not the sort of language you would expect to hear uttered by the President of the world’s biggest economy, and a democracy to boot.

It would appear that this is also a key factor for Chinese officials, and against this backdrop it is becoming increasingly difficult to see the way forward on any form of trade deal before next year’s US Presidential elections, which wouldn’t involve some form of climbdown from either side.

This is also being reflected in the performance of the Chinese yuan which continues to drift lower, having broken the 7.00 level earlier this month, and looks set for a move towards 7.20, and on towards 7.30 in the coming weeks. On a technical level it appears that a dam has been broken and with gold prices also breaking higher, and the US yield curve inverting even further, with the US 30-year yield breaking below 2%, the bond market appears to be flashing a variety of amber warning lights about the US as well as the global economy.

While some of this move lower in US bond yields can be partly put down to the fact that they still return a positive rate of return, unlike most of Europe’s bond market, it doesn’t explain why investors prefer to invest in bonds as opposed to stocks which now offer better returns.

The pound has continued to edge higher, hitting its highest level this month against the US dollar and euro as traders suddenly realise that in spite of recent gains against the single currency, that the euro may not be such an attractive bet after all, given the prospect that interest rates might move even deeper into negative territory.   

EURUSD – continues to look soft, in spite of Monday’s failed attempt to move above the 1.1170 area. As such we could well slip back to retest the lows at 1.1020, and on towards the 1.0800 area. Key resistance sits at the 50-day MA at 1.1200 as well as the 1.1250 area.

GBPUSD – while the pound is able to hold above the 1.2200 area the risk remains for a move through the 1.2300 area towards the 1.2400 level. Major support remains down the recent two-year lows at 1.2015, and this remains a key level along with major support sitting at the 1.1980 area.

EURGBP – now below the 50-day MA but we need to push below the 0.9000 area to open up a move towards the 0.8920 area. The weekly reversal from a couple of weeks ago appears to be playing out nicely. To keep the prospect of further losses on the table we need to hold below the 0.9180 area.

USDJPY – having hit its lowest levels since November 2016 earlier this week at 104.45, the US dollar needs to recover back above the 107.00 area to stabilise, with a break above the 107.20 level arguing for a move back to the 108.20 area. A move below 104.30 opens up the prospect of further losses towards 101.20.


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