European markets had a poor day yesterday, all of them down over 2%, with the notable exception of the FTSE 100 which was helped in no small part by its hefty energy component, and a sinking pound, which helped to keep it above the 7,000 level.
Once again it is fears about surging energy prices, supply chain disruptions, and concerns about more persistent inflation that is sparking a move out of the more highly valued areas of the stock market, as the volatility that we saw last week, continues into this week as bulls and bears indulge in a game of pass the parcel. The pound is also suffering as a consequence of concern over an economic slowdown.
We do have some UK lending data later this morning and this should give us an idea as to whether UK consumers are starting to rein back on spending against a backdrop of rising prices, with the latest mortgage approvals and consumer credit data for August.
There could also be an element of month and quarter end flows helping to drive some of this volatility, however it is clear from recent messaging from central bankers, that concern is rising about a much more persistent inflation narrative, which in turn could mean that a US rate rise could well be a lot closer than had been originally priced, as recently as a couple of meetings ago.
Having been told for months that inflation is transitory, and that rates would stay low until 2024, it is becoming increasingly apparent that recent events are sowing concern amongst policymakers, that a rate rise could well be on the cards by the end of next year, two years earlier than had originally been priced in March.
We are already seeing declining consumer confidence because of these headwinds, as US consumer confidence for September hit a six-month low, and yesterday’s comments from Fed chair Jay Powell would suggest that it would need a very high bar for the Fed not to start tapering by the end of this year, though he was keen to stress that this shouldn’t be interpreted as a timetable towards a rate hike.
The market however appears to have other ideas, with the spread between US 2-year and 5-year yields back at levels last seen in early April, at 72bps, up from 60bps a week ago.
The rise in energy prices that we saw yesterday was one factor behind yesterday’s moves, however while the US dollar hit its highest level since November last year, there was little in the way of follow through, despite record highs for European natural gas, and Brent crude prices which traded close to three-year highs, before closing lower on the day, in a late afternoon reversal, after a surprise build in API inventories. This build has also seen oil prices continue their decline in early trade this morning
US markets also fell back yesterday, with steep losses across the board, with the highly valued tech sector bearing the brunt, although the Russell 2000 wasn’t too far behind. While the Nasdaq 100 hit its lowest levels in over a month, both the S&P 500 and Dow are still above last week's lows.
Despite yesterday’s losses, markets in Europe look set to open slightly higher, with attention once again likely to be on various central bank speakers, as we get set to hear from the holy trinity of Christine Lagarde of the ECB, Andrew Bailey of the Bank of England and Fed chair Jay Powell at the ECB forum on central banking at 4.45pm (UK time).
EUR/USD – looks set for a retest of the 1.1650 area, with a break targeting a move back towards the 1.1610 area. A move below 1.1600 opens the 1.1450 area. We need to see a move through 1.1760 to open a return to the 1.1840 area.
GBP/USD – fell below the 1.3600 area, undermining the bullish scenario and raising the prospect of a move towards 1.3400, and even the 1.3230 area. We do have support at 1.3500, but need to see a move back above 1.3620 to stabilise and open a return to 1.3750.
EUR/GBP – found support at the 0.8530 and surged beyond the highs last week at 0.8610 area, before running out of steam at the 0.8640 area. We need to see a move beyond 0.8670, to target 0 8720. Support sits down near the 0.8600 area, and below that at 0.8530.
USD/JPY – moved back to the 111.65 area, with the highs this year at 112.25 the next target. Support now comes in at the 110.80 area, as well as back at the 110.20 area.