US sell-off set to prompt a lower European open
After the S&P500 posted its biggest one day fall since last October last year the question being asked is whether the scales are starting to fall away from investor’s eyes as to whether President Trump will be able to deliver anything close to what has been priced into markets since his election last November.
Even the mistiest eyed optimist appears to be coming to the realisation that even on health care where there is some form of consensus, that reforms are likely to take a lot longer than realised and as such any other programs like tax and banking reform and infrastructure spending are likely to get pushed further out into the future.
Last night’s sharp selloff in US markets looks set to bleed through into today’s European session with a lower open expected across the board, as yesterday’s “risk-off” sentiment gains further momentum. Increased tension on the Korean peninsula isn’t exactly helping either after a reported failed missile launch from North Korea.
The decline in yields in the aftermath of last week’s so called dovish Fed rate rise, accelerated further, pulling banking stocks down with them, as the prospect of a flatter yield curve, and delays to banking reform prompted widespread profit taking.
The US dollar index also slid sharply, as the slide in yields reduced the greenbacks attraction, while further weakness in oil prices contributed to weakness in the oil and gas sector.
US crude prices hit their lowest levels since November despite a weaker US dollar shrugging off speculation that OPEC would extend its production cap beyond June. It would appear that the realisation that any further cuts could cede market share to US shale producers is weakening the resolve of some OPEC members as well as non-OPEC members like Russia, who would be unlikely to support any extension, given that the current policy has done nothing to erode the current overhang in overall inventories.
The pound had a decent day yesterday shrugging off the dip seen in the wake of the confirmation of the Article 50 trigger date. A big jump in UK headline and core CPI in February to 2.3% and 2% respectively reinforced last week’s dissent by Bank of England MPC member Kristin Forbes to call for a reversal of last August’s rate cut and an increase in rates back to 0.5%.
The rise in CPI was driven by fuel and food prices and while fuel prices tend to be more elastic in terms of movements up and down, food prices tend to be less so, which means that the pinch in consumers’ pockets is likely to be more sticky.
More broadly the UK economy continues to hold up well with UK manufacturers feeling the most positive about the sector in two decades, according to the CBI’s industrial trends survey for March, which showed that export order books were at their best levels in three years, though there was concern about rising price pressures, as a result of the weaker pound.
This optimism is quite contrary to the current pessimism surrounding sterling which shows record short positioning, ahead of next week’s Article 50 trigger date. Such positioning suggests a rather crowded trade, and the potential for a brutal unwind to the upside in the event the pound continues to defy gravity.
EURUSD – still finding resistance in and around the 1.0830/40 area, the 200 day MA is now coming into view at 1.0945 on a break of 1.0850. Pullbacks need to hold above 1.0680 for a test of the 200 day MA to pan out.
GBPUSD – despite the negativity the pound feels like it could break higher. A break through the 1.2500 could well retest the February highs above 1.2700. Support comes in at the 1.2380 area.
EURGBP – the recent retest of the 0.8800 level has prompted a pullback which could extend down to the 0.8580 area, while below trend line resistance at the 0.8720/30 area.
USDJPY – heading back towards the 111.50 area which remains a key support area. A move below 111.50 targets a potential move towards 110.20. Rebounds need to stay below 113.20 for this to unfold.
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