So far it’s been a week to forget as we start the New Year, and the old saying of so goes January, so goes the year is already being let out for air as investors speculate on what to expect for stock markets through the rest of 2016.
As things stand three days in and the DAX has lost over 5%, while the FTSE100 is down 3% while the S&P500 touched its lowest levels in nearly 3 months as a heady multitude of concerns about tension between Saudi Arabia and Iran, a North Korean bomb test, and China’s economy kept investors on the back foot, while oil prices continued their recent freefall, with Brent crude hitting its lowest levels since 2004.
Last night’s FOMC minutes also painted a picture of a number on the rate setting committee less than confident about the wisdom of raising rates last month, with a number of participants suggesting that it was a “close call” to hike the rate band.
The committee’s outlook on inflation continued to lean to the optimistic side with nearly all participants reasonably confident that inflation would move back to 2% over the medium term. The FOMC are presumably working on the assumption that if you say it often enough eventually it will come true, but the market has been waiting for several years now.
In fact Fed vice chair Stanley Fischer’s comments reaffirmed that belief, as well as the intent that the median expectations of 4 rate rises this year, was in the ballpark of probability.
Yesterday’s US ADP December payrolls data certainly blew expectations out of the ballpark, coming in at 257k, well above expectations, raising expectations of a big payrolls number tomorrow in the process, but judging by yesterday’s minutes there does appear a number of Fed policymakers who are likely to remain concerned about the weak inflation outlook and where the bar to further action could well be a lot higher than it was last month.
Over arcing all of this has been concerns about China and the rapid depreciation of the Yuan which has now declined over 5% since the beginning of November trading at 6.70 to the US dollar, and down from 6.57 at the end of last year alone. With yet another sharp depreciation overnight, as well as further stock market weakness in Asia this morning, deflation and growth fears look unlikely to abate in the short term, which means volatility surrounding China looks increasingly like it could well be an ongoing theme as we head into 2016.
The rapid decline seen in the last week or so has raised concerns about the fragility of the Chinese economy and while we may see a rebound in the short term, it would appear that we could well see further losses in the weeks and months ahead towards the 7.00 level, as Chinese authorities look to make their currency more competitive, which in turn could prompt similar devaluations across the region.
As far as the economy in Europe is concerned yesterday’s services data painted a fairly positive picture, apart from France where economic activity slipped into contraction in December, largely as a result of the residual effects of the horrific events in Paris in November.
On the unemployment front recent data has shown a slow decline in unemployment rates and the expectation is that this could be maintained today with the latest EU unemployment and Italian unemployment numbers for November. These are expected to remain steady at 10.7% and 11.5% respectively.
EU retail sales data for November might well disappoint though given the events of the 13th November in Paris and their after effects.
EURUSD – while below the 1.0800 level the downward pressure towards 1.0600 remains where we have trend line support from the all-time lows posted in October 2000 at 0.8220. A break below 1.0600 could see a return to 1.0465 and last year’s low. Rebounds should find resistance at 1.0820 and 1.0950.
GBPUSD – continued sterling weakness looks set to see a retest of the lows last year at 1.4565, with the 2010 lows at 1.4230 also a potential target. We need to see a rebound back through the 1.4820 area to stabilise.
EURGBP – continues to find resistance at the 0.7410 area with a break back below the 0.7280 area targeting a return to the 200 day MA at 0.7210.
USDJPY – the move below the 120.00 area targets a potential return to levels last seen in October last year at 118.10, with the potential for a move towards 116.00. A move back above the 120.30 area is needed to stabilise and argue for a return towards 122.20.
CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.