Over the last few years investors have consistently felt confident enough to buy the dip when it comes to stock market sell-offs. For some reason in the last few weeks this confidence appears to have been somewhat lacking, and when you look around it’s not hard to understand why, the surprise is why it has taken so long, given that a year ago multiple missile tests from North Korea, and concerns about Chinese growth were more or less being dismissed with a shrug.
I guess what the events of the last few weeks have proved is that markets tend to move on momentum and confidence, and sometimes it doesn’t have to be one big catalyst that changes that sentiment but an accumulation of much smaller factors, that slowly chip away at that underlying resilience.
In the last two months we appear to be seeing this edifice starting to crumble, and while European markets appear to have been the canary in the coal mine in terms of starting their moves lower in the middle of the summer, US markets now appear to also be starting to show signs of crumbling, with the Dow and S&P500 now in negative territory for the year.
The record highs for the FTSE100 and the DAX that we saw in May now seem a distant memory and with the US FAANG (Facebook, Apple, Amazon, Netflix and Google) rally now also in bear market territory, the big question now is how much further can we fall, or are we near a short term base?
A deteriorating global economic outlook, downgrades to company forward earnings, a 25% fall in crude oil prices in the last six weeks, against a global geopolitical backdrop with multiple flash points from trade, Brexit and Italian politics, combined with central banks that continue to drain the punchbowl, and perhaps it’s not surprising that investors are paring back on risk.
The big question now is whether we are likely to see further weakness in equity markets, or whether we could see a rebound. From a technical standpoint the omens don’t look good with recent attempts at rebounds failing miserably and any likely catalysts for a decent rebound hard to find.
If Brussels decides to launches its excessive deficit procedure against Italy today, thus upping the ante against the Italian government for its so-called budget transgressions, then we could see Italy’s banks come under further pressure. The crisis in Italy has already undermined Greece’s weak banks to the extent that they are likely to need bailing out again.
On the data front today we’re not likely to see anything particularly market moving with the latest UK public sector borrowing numbers for October, as well as US durable goods orders and weekly crude oil inventories.
Of the three, the latest US inventory data could well precipitate further weakness in the oil price, offset somewhat against a fear that OPEC might well be tempted to cut production more aggressively when it meets early next month. Expectations are for a 2.5m build after last week’s blow out 10.3m number, so we might see the potential for a modest rebound.
In the UK Theresa May is expected to travel to Brussels to meet with Jean Claude Juncker in an attempt to flesh out the 7-page political declaration on the future EU-UK relationship, as well as trying to create a calmer political climate that will get the withdrawal agreement over the finishing line. This appears to be taking place against a backdrop of unhelpful interventions from Spain, France and other European countries who would like the deal tweaked more to their benefit, while a spate of unhelpful diplomatic interventions aren’t helping either, with the Spanish foreign minister suggesting that the UK might be more susceptible to breaking up than Spain.
EURUSD – the failure to move up towards the 1.1500 area saw the euro slip back yesterday and could well argue for a retest of the 1.1280 level in the short term, with the potential to revisit the lows earlier this month.
GBPUSD – continues to consolidate between key support near the August lows at 1.2650. While above here the recent range is likely to remain intact. Below 1.2600 could well open up a move towards the 1.2000 level and 2017 lows. We need a move back above 1.2920 to stabilise and prompt a retest of last week’s peaks at 1.3075.
EURGBP – continues to struggle just below the 0.8940 area which remains a key resistance. As such we could slip back towards the 0.8820 area in the short term. Above the 0.8940 area argues for a move towards the August highs at 0.9100. Still in the broad range, with support also at 0.8740.
USDJPY – last week’s failure to retest the October peaks at 114.60 appears to have set up a bearish weekly reversal which could well precipitate further losses towards 111.80. While below 113.70 the bias remains for a push back to the October lows.
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