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European equity markets rebounded strongly yesterday after President Trump pulled back from threats to curtail investment in US markets from companies that have at least 25% Chinese ownership. Instead the President said that he would defer all decisions to the newly strengthened Committee on Foreign Investment in the US to deal with concerns about overseas investment into US companies that might be deemed commercially sensitive.

This is likely to be mere semantics and is likely to still mean the US administration can block bids they don’t like, they’ll just be able to do it in a more judicious way.

This softening of position appears to be victory for the more moderate approach advocated by Treasury Secretary Steve Mnuchin in comments made earlier this week, and a setback for Peter Navarro, the President’s trade advisor. Despite this small victory for moderation it remains only one step in what has been a pretty incoherent message from US officials this week, and there are sure to be further bumps in the road, as we head towards next week’s deadline on the start of Chinese tariffs.

A big draw in US oil inventories also helped see European stock markets finish the day strongly higher, and while US markets briefly followed them higher, the gains soon disappeared in the US afternoon session as stocks in the tech and financial sector rolled over pulling US markets into a negative finish.

Banks have been struggling for several days now, falling steadily for the best part of three weeks on concerns that a flattening yield curve will make it much harder to generate long term profits. Even as the US Federal Reserve outlines its plans to push up rates further this year as well as gradually trimming down its balance sheet banks have been coming under pressure as short and long-term interest rates converge to the narrowest they’ve been since August 2007.

The fall in tech stocks is not as surprising given their rich valuations, and they have been overdue a pullback, however the inability of US markets to rebound despite this apparent softening in position by the US administration does raise some questions as to whether we might be set for a little bit more weakness as we head towards the end of the quarter.

Last night’s selloff in the US is also likely to translate into a weaker start for European markets this morning, ahead of some preliminary CPI numbers for June from Germany, Spain and Italy, which are all expected to come above 2%. The ECB will also be publishing its latest economic bulletin, as it assesses the health of the EU economy.

We’ll also be getting the final reading of US Q1 GDP which is expected to be confirmed at 2.2%.

The pound could get a respite today after several days of coming under pressure, as a result of some dovish comments from incoming Bank of England policymaker Jonathan Haskel, earlier this week. He suggested that the amount of slack in the labour market may be being underestimated, which in turn may call into question the prospect of a rate rise this year. Later this afternoon Bank of England chief economist Andrew Haldane, will have the opportunity to put in the counter argument when he speaks in London.

At last week’s Bank of England policy meeting Mr Haldane surprisingly joined the hawks camp in arguing that interest rates needed to go up due to concerns over decreasing spare capacity in the UK labour market, the completely opposite view to the one espoused earlier this week, by his soon to be colleague Mr Haskel. Investors will be hoping that Mr Haldane sheds some light on the main reasons to his sudden conversion from dove to hawk, and thus help to put a floor under the pound which has slipped over 9% since its 1.4350 peaks in April.

EURUSD – the move back below the 1.1600 area opens up a retest of the May lows at 1.1510/20. A break below 1.1500 has the potential to open up a move towards the 1.1360 level. A move back above 1.1630 stabilises.

GBPUSD – testing trend line support from the 2017 lows which comes in at the 1.3100/10 level. A break below 1.3100 opens up a potential move towards 1.2980, while a move back above 1.3220 argues for a move back to the 1.3320 area.

EURGBP – still capped with resistance near the 200-day MA at the 0.8820/30 area with the recent lows at 0.8700 the next key support. A move through here opens up the 0.8640 area.

USDJPY – moved back above the 110.00 area yesterday which brings the recent highs at 111.00 back into focus. Support now comes in at the 109.70 and 109.20 area.

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