Having seen such a decent month in January, it has taken six trading days for the gains in US markets this year to disappear, with the S&P500 closing over 4% lower and its worst one day decline since 2011.
These declines have been a long time coming and in a sense have already started to become self-accelerating. At the end of last year margin debt levels on US stocks were at record highs, helping fuel the rise we’ve seen in the last few months. The sell-off in the last few days is likely to reverse this trend, and potentially accelerate it further, particularly if investors start to unwind it over concerns that we could fall further, which seems likely if events in Asia this morning are any guide.
The weakness has continued in Asia with the Nikkei 225 bearing the brunt with its worst fall since 1990, and is set to spill over once again today into European trading with another sharply lower open for European stocks, as nervous investors continue to bail out.
It may seem counterintuitive but further improvement in yesterday’s US economic data only served to amplify concerns amongst investors that an improving economy will hasten the pace of further interest rate rises in the coming months, from the US Federal Reserve.
There is a caveat in that if we get any more days like the last couple of days that calculus might well change if central bankers fear that a too aggressive tightening policy might cause more problems than it would solve.
It’s certainly been an interesting introduction for new Fed chief Jerome Powell, as he starts his tenure in the US central bank hot seat.
With yesterday’s sharp declines in US equities, bond markets which had been selling off over concerns about higher rates rallied strongly sending the US 10 year yield sharply lower, as investors shovelled money into government bonds as a haven from this week’s rout.
The US dollar has continued to find its feet rising to its highest level in a week against a basket of currencies, though how long that will last could well depend on whether we get another government shutdown at the end of this week, with the latest deadline due to expire this Thursday.
The pound had a pretty awful day yesterday, sliding back across the board after the latest services PMI data for January showed that economic activity slowed down more than expected from the December numbers, thus reducing the prospect that the Bank of England would deliver a particularly hawkish outlook when it meets later this week to update its economic outlook and inflation forecasts.
EURUSD – appears range bound with the prospect that we could head back 1.2320 in the short term, having failed to move back towards the 1.2500 area, which capped last week.
GBPUSD – the pound continues to come under pressure breaking below 1.4080 and 1.3970 yesterday, with the break of the latter targeting a move towards 1.3850. Resistance now comes in at 1.4080 and behind that at 1.4250.
EURGBP – looks to be heading back to the 0.8910 area where we have trend line resistance from the October peaks at 0.9050. We now have support back at the 0.8810 area.
USDJPY – last week’s failure above the 110.20 area turned out to be a false break, and the subsequent failure to hold 109.70 has seen us slip back again and raises the prospect of a move back to the 107.20 area.
FTSE100 is expected to open 275 points lower at 7,060
DAX is expected to open 682 points lower at 12,005
CAC40 is expected to open 260 points lower at 5,025
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