A bout of risk aversion took hold in markets last week with US and European equities closing lower whilst havens like the yen, gold and bunds gained ground.

Uncertainty is evident again with a lower open expected for European equities on Monday after the World Bank released its latest Asia-Pacific forecasts and data showed Chinese inflation held steady. The IMF will be releasing its latest world economic outlook on Thursday.

Nerves ahead of the beginning quarterly earnings season saw stocks in the US have the worst weekly finish in the nine weeks since bottoming in February. The traditional kick-off begins today with Alcoa releasing Q1 results.

Reduced forecasts for the speed of US rate hikes and fears over losses on energy sector loans meant the financial sector was the biggest drag on the S&P 500 last week. The trading and investment banking business at heavyweights JP Morgan, Bank of America, Wells Fargo and Citigroup is expected to have the worst quarter since 2009 in revenue terms. Fixed income trading has been a drag for years but if the US government intervention on Pfizer-Allergan and Halliburton-Baker Hughes deals is a sign of things to come, then the outlook for M&A banking doesn’t look too favourable either.

It was not just the US where banking looked weak last week as volatility increased again in Europe, especially with Italian banks which have some of the most bad-debt laden balance sheets. The ECB’s apparent willingness to go further down the rabbit hole of negative interest rates is a source of uncertainty surrounding European bank’s ability to turn a profit.

Given the possibility of further cuts to the ECB’s deposit and perhaps headline rates as well as the recently expanded QE to €80bn / month, the demand for German bunds is understandable. After three weeks of oscillating around 10,000, the German DAX rolled over last week. If the weakness in German equities continues, there is a good chance of a negative yield on the 10yr bund to match those in Japan and Switzerland. 

The speed of the ascent in the Japanese yen will put markets on high alert for intervention from the Bank of Japan this week. Markets are calling the bluff of the Bank of Japan. The yen closed higher on Friday in a direct challenge to Japanese officials who had earlier in the day verbally intervened. With USD/JPY at 108, relatively strong by recent historical standards, the Bank of Japan faces a strong risk of failure by jumping the gun. Unless there is a sudden drop below 105 in the early part of the week, the BOJ will likely hold back on directly selling yen in the market.

The inflation data from China was a mixed bag today and has not dented sentiment on the Shanghai Composite which traded higher after the results. CPI rose 2.3% y/y, unchanged from last month but less than the 2.4% expected while PPI fell -4.3%, less than -4 9% last month and the -4.6% expected. Moderate inflation gives the PBOC more scope for further rate cuts. Worries over China’s economy have been sidelined thanks to the stabilisation of the yuan and reduced capital outflows. Trade balance data reported on Tuesday followed by GDP, industrial production and retail sales on Friday morning have the potential to reignite economic worries.

EURUSD – The euro flat-lined last week after finding resistance at 1.1460, which matches previous peaks from May 2015 and September 2015. For the time being the pair remains within its long-term trading range of 1.05-1.15.

GBPUSD – The pound fell to one-month lows last week. The price remained above the low of Wednesday’s hammer-like daily reversal for the last two days of the week. Bias remains with long-term downtrend but another short-squeeze is possible while near 1.40.

EURGBP – At current levels the euro-sterling pair faces resistance from the 0.81 handle, trendline resistance, a long-term pivot near 0.8065 and the 61.8% Fibonacci retracement of the decline since August 2013.

USDJPY – Friday saw dollar-yen rebound above 1.09 but then gave up all the gains to close just above 1.08. The short-term downtrend is due a correction after falling for 8 of the last 9 days, however the next major support lays around 1.053.


Equity market calls

FTSE100: to open 14 points lower at 6,190

DAX: to open 28 points lower at 9 594

CAC40: to open 17 points lower at 4,286


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