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Europe set to open slightly higher, as S&P 500 slips below 4,000

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Having come off five successive weekly declines for markets in Europe, yesterday’s sell-off doesn’t bode well for the prospect of a pause in the recent weakness, as we saw both the DAX and FTSE 100 fall sharply below their April lows.

While investors have spent most of the last few months fretting about events in Europe and the war between Ukraine and Russia, there had been the hope that the Chinese economy might be able to pick up the slack, as far as global growth is concerned. Yesterday the penny finally dropped that this was unlikely to happen, after another poor set of China trade numbers affirmed the idea that no matter how poor the economic data, Chinese authorities don’t appear to be in any mood to change tack when it comes to their current zero-covid policy, as authorities in Beijing and Shanghai tightened covid restrictions further over the weekend.

US markets also fell like a stone for the third day in succession, with the Nasdaq 100 and S&P 500 falling through key support levels, with the S&P 500 falling and closing below the 4,000 level for the first time since April last year. So far year-to-date the Nasdaq 100 is down over 25%, while the S&P 500 and the DAX are both down over 15%, with the risk that we could well see further losses in the coming weeks.

For a good part of this year the rise in US bond yields has helped put downward pressure on stock markets over concerns that higher rates would tighten financial conditions, as well as putting upward pressure on real yields. Yesterday we saw both yields and stocks fall heavily in unison in a move that could be being driven by a fear that the global economy is heading for a sharp slowdown, stagflation or even recession. The price action yesterday shows that markets are becoming more concerned about one or all of these scenarios, than they are about rate rises, on the basis that any coming rate hikes could well soon be reversed by rate cuts.

The reaction of the oil price was telling, in that yesterday Brent prices reversed all last week’s gains in a single day, finishing the day down by over 6.5%. This was about the only good news yesterday and has continued this morning with further weakness, as consensus over an EU ban on Russian oil fractures, and concerns over future Chinese demand rises.

This theory of plateauing inflation could well be put to the test further when we get the release of China and US CPI, both of which are due tomorrow, and which some are suggesting could start to show the beginnings of a peak.

The US dollar continued to gain ground yesterday, making a new 20-year high in the process, although in classical haven fashion it was outperformed by the Japanese yen, although gold got clobbered, falling back towards its lowest levels in two months.

Having seen markets on both sides of the pond post three days of fairly sizeable declines, markets in Europe look set for a pause this morning, with the hope we might start get so some modest buying interest.  

EUR/USD – the support at 1.0470 appears to be holding for now. A move below argues for a move towards the 2017 lows at 1.0340. To stabilise we need to get back above the 1.0650 level to signal a move back towards 1.0820.   

GBP/USD – made a marginal new low at 1.2261 and has recovered a little. The outlook looks grim with a break below 1.2250 opening up the 1.2000 area. We need to see a recovery back above 1.2470 to open up the 1.2600 area.

EUR/GBP – still holding below the 0.8600 area and December highs for now, with a break targeting the 0.8660 area. Support lies back at the 0.8470/80 area.

USD/JPY – made a marginal new 20 year high at 131.35, before slipping back. Still remains on track for a move towards 135.00. Need to see a break of 131.50 for this to unfold. Support now back at the lows last week at 128.60.


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