Sliding bond yields, growth concerns and more opinion polls showing the 'leave' camp solidifying their lead in the polls ahead of next week's Brexit vote, saw both European and US markets fall sharply at the end of last week, and these concerns look set to translate into a weaker open this week.
The initial opinion poll in question at the end of last week gave the UK leave campaign a 55-45 lead, its biggest lead of the whole campaign, causing the pound to drop sharply and in turn exacerbating the broader market sell-off into the US close.
It would appear that the continued hyperbole of both campaigns, along with the daily dose of claims of financial apocalypse appear to be getting tuned out as voters tire of the slow drip of absurd claims by various politicians from both sides, of the debate. This hasn’t stopped the hyperbole, with the latest intervention from the Prime Minister David Cameron, on UK pensions, being described as “vote to leave and the puppy gets its” type of tactics.
This shift in sentiment away from the complacency just over two weeks ago when it was widely expected that the “remain” camp would probably carry the day, has spooked already anxious markets, already concerned about further slowdowns in global economic growth particularly in light of recent weak economic data out the US, China and Japan.
Earlier this morning we got the latest industrial production and retail sales data from China for May which showed that industrial production came in at 6%,unchanged from the previous month, while retail sales rose 10%, slightly below expectations, as the slowdown seen in the April numbers showed no signs whatsoever of picking up.
When all of these factors are looked at in conjunction with ECB President Mario Draghi’s speech last week where he gave the impression that he was becoming increasingly frustrated and concerned that the ECB is being pushed to the extremes of its mandate. As it is this is something the ECB is already coming under fire for, and as such raises the concern that he could struggle to get agreement to implement further policy measures in the absence of a willingness on the part of politicians to do their part in implementing structural reforms.
Sentiment is likely to remain similarly fragile this week as investors focus on a host of central bank rate meetings, from the US Federal Reserve, the Bank of Japan and the Bank of England, all of whom are expected to remain on hold.
This is also expected to be followed up by another intervention in the “Brexit” debate by the IMF later this week when they are likely to back-up their warnings of last month with the publication of their annual report on the UK economy.
EUR/USD – we saw a sharp key day reversal last week, after failing at the 1.1400 area which looks set to prompt a potential move back towards the 200 day MA at 1.1090, and trend line support from the December lows.
GBP/USD – last week’s failure at the 1.4660 area has seen the pound move back below the May lows at 1.4330, and below trend line support at 1.4300 from the lows this year. Having broken lower we could well see further losses towards the April lows at 1.4010.
EUR/GBP – the 0.7930 level and 200 week MA continues to keep a lid on the euro for the time being. While below here the downside bias remains towards 0.7760. A fall back below 0.7720 retargets the 0.7640 area.
USD/JPY – the failure to push below key support at the 106.30 area has prompted a rebound but we really need to push back through the 108.50 area to stabilise, otherwise it remains looks vulnerable to a retest of the 105.50 lows.
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