After the sharp declines seen in Europe on Friday, anyone hoping for one of those late US rallies after Europe had closed, that has been so common in recent years, would have been sorely disappointed as US markets kept on falling posting their worst daily falls since 2011, as a trifecta of concerns about weak US earnings, Chinese growth, and financial market instability
in countries like Argentina, Ukraine and Turkey rippled out into other emerging markets.
This, in turn saw the Argentine Peso, Indian rupee, Turkish lira, Russian Rouble and South African rand all post sharp falls as investors returned to more traditional havens like gold, the Japanese yen and the US dollar.
With the US Federal Reserve looking increasingly likely it could announce a further $10bn tapering of its asset purchase program this week,
it seems quite likely that today’s European market open could well be a pretty volatile affair, with a sharply lower open expected after Friday’s sharp falls in US markets, and this morning’s falls in Asia.
The extent of Friday’s stock market falls would also seem to suggest that there could be further declines in the coming days and weeks
, which would be somewhat ironic given that we are now seeing some significant improvements in a lot of the economic data not only coming out of the US, and the UK but also, Europe as well.
The fact is that in the last twelve months, we haven’t really seen a decent correction in US markets, or European ones for that matter
and with some doubts about valuations any nervousness on the part on investors is likely to see further volatile trading.
The irony is that the improving economic data is bringing forward future expectations of slightly higher interest rates, not only in the US, but the UK
as well and it seems quite likely that if the Fed does decide to taper another $10bn of asset purchases then the flow of funds coming out of emerging markets could well turn into a torrent, and the outgoing tide could well reveal some rather unpleasant truths, and significant side effects.
This week in particular is likely to reinforce that growing economic optimism starting today with the latest German IFO survey for January
expected to show further improvement, coming in at 110.2, up from 109.5 in December.
We are also set to get the first glimpse of the latest Q4 GDP numbers for the UK economy
tomorrow, which will show that the UK was the fastest growing economy in Western Europe last year. The expectation is for quarterly growth of 0.7% to 0.8%, which should equate to 2.8% annualised.
Later in the week we then get the first glimpse of Q4 GDP estimates for the US economy
, which are also expected to show growth of 3.2%, down from 4.1% in Q3.
– a positive week for the euro last week but again the upside continues to be capped above the 1.3700 level, despite a spill over to 1 3730 on Friday
Long term trend line resistance remains at 1.3865 from the all-time highs at 1.6040 and ultimately this remains the key obstacle to a move through 1.4000.
Support now looks pretty solid around the 1.3500 area and only a move below negates a potential retest of the highs.
– having made a two and half year high on Friday at 1.6665 the pound suffered a sharp reversal in the process posting a key day reversal which could negate the possibility of any move towards the 2011 highs at 1.6745. The subsequent pullback has found support at 1.6480, but a break could well trigger a move towards 1.6300.
Only a break below 1.6250 signals a top is in and the potential for a move lower towards 1.6000.
– as suggested on Friday the bullish engulfing day last week has given us a rebound and puts us on course for a move towards 0.8330 and trend line resistance from last August highs at 0.8400.
The major support remains at the 0.8160/70 level which is the 61.8% retracement of the entire up move from 0.7755 to the 2013 highs at 0.8815, and a new one year low.
– Friday’s decline saw the US dollar fall back towards 102.00 before rebounding. This level is 38.2% retracement of the up move from 96.55 to the peaks at 105.50. Today’s break below 102.00 has the potential to open up 101, the 50% level. While above 102.00 we could see pullbacks towards 102.80 and 103.80.
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