It’s probably fair to say markets are in a spot of bother right now. This has been seen overnight again with another tumble in Japanese shares further into bear market territory.
The immediate theme for stock markets has been distress in the financial sector and a sharp decline in bank stocks. But there is a much more disconcerting wider theme of lost faith in central banks that threatens a more protracted period risk aversion.
Having seen some reprieve for one day, banks closed back at lows for the week on Thursday. Across asset classes, risk aversion has seen havens like of gold, the Japanese yen and government bonds all heavily in demand. Gold surged over $50 to the highest in a year while the US 10yr treasury yield sank below 1.6% to its lowest since 2012.
European markets look set to open higher open on Friday, perhaps helped by some confidence being shown in the banking sector by JP Morgan chief executive Jamie Dimon buying $26m worth of his own bank’s shares. Markets could bet another boost if Deutsche Bank confirms plans to buy its own debt.
If there is some relief, it may not last long. On Monday next week, Chinese markets will have some catching up to do when returning from Lunar New Year celebrations, while US markets are closed for Presidents Day.
The stock market decline has been magnified by new lows in the price of oil which saw shares of oil majors sink, with BP touching a new 5 ½ year low. Venezuela lobbying for a meeting between Russia, Saudi Arabia and other OPEC producing counties appears to be falling on deaf ears leaving oil markets in decline despite a surprise draw in US weekly inventories.
In the two days of Fed Chair Janet Yellen’s testimony, dollar weakness has been concentrated in the yen and currencies with negative rates while commodity currencies have been battered with the price of oil.
Capital flight back into Europe has helped the euro maintain its breakout towards the top of its 1.05 - 1.15 trading range despite weak industrial production data. German GDP is expected to expand 0.3% q/q in a preliminary reading reported on Friday while CPI is expected to decline -0.8% m/m mostly due to the renewed slide in oil prices.
The major data point of the day will be US retail sales for January. Expectations are for no change over the month after a -0.1% decline in December.
The weakness of the US consumer for most of 2015, especially given the wealth-effect of lower oil prices is something that needs to improve for the economy to turnaround. Unfortunately, even though jobless claims fell to the lowest in seven weeks on Thursday, as Ms Yellen alluded to in her testimony to congress, job growth has been concentrated in lower wage sectors, which means less discretionary spending in what is a consumption-based economy.
At the heart of the issue is that markets are not confident that US and global economic growth will be enough to compensate for the withdrawal of monetary stimulus.
EURUSD – The euro has continued its strong uptrend after breaking its triangle consolidation on the daily charts. 1.1460, the peaks from May 15 and September 18 2015 could be resistance while 1.12 is immediate support.
GBPUSD – The pound is consolidating between 1.44 and 1.46 with long wicks either side showing consolidation. The rebound from long term support at 1.42 suggests the bias is for a topside breakout to re-test 1.47 then 1.49.
EURGBP – The euro has struck a one-year high versus the pound at 0.79, last seen in December 2014. The break back through long-term support turned resistance at 0.7750 is significant and suggests an eventual move to 0.8070, the June 2010 low.
USDJPY – The yen surged 200 pips on Thursday, making the total drop for USD/JPY 1000 pips in nine days. The break of 116 in combination with the prior break and successful re-test of the broken rising long term trendline indicates a long-term downtrend has begun. Projecting the height of the consolidation from 116 to 126 indicates an eventual move towards 106.
Equity market calls
FTSE100: to open 43 points higher at 5,579
DAX: to open 116 points higher at 8,868
CAC40: to open 48 points higher at 3,944
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