Shares in Europe are looking to erase all of yesterday’s losses on the open of trading today to catch up with strong gains made in the US and Asia following a fresh round of stimulus from the People’s Bank of China and indications the Fed’s statement may keep its dovish tone.
After the close of the European session yesterday, US markets turned on their head when the dollar fell and stocks rallied after the People’s Bank of China announced it is infusing the top five Chinese banks with an additional 500 USD/CNY in liquidity.
Financial markets in Asia had been tumbling over a spate of poor economic data pointing to acceleration in China’s downturn so authorities stepped in to provide liquidity to its banks. It’s basically money-printing along the lines of QE which the Chinese banks can use to make loans or purchase financial assets and boost confidence in the economy.
The Wall St Journal reporter Jon Hilsenrath said in a webcast that he believed the central bank wouldn't alter its “considerable period time” language in its policy statement on Wednesday afternoon. He is known for his close ties and insider knowledge of the Fed. A potential change in forward guidance was a reason for dollar strength going into the meeting; no change in policy language could trigger further selling in USD after the Fed meeting concludes.
Weakness in China’s economy and fears over a more imminent Fed rate hike were two main drivers for weakness in stocks and strength in the US dollar, when both were addressed the Dow Jones Industrial Average moved to a new intraday high.
Market reaction to today’s Bank of England minutes, unemployment rate and wage data could be similar to yesterday’s reaction to inflation data; essentially short-lived. The British pound sold off into yesterday’s CPI news and a little after but subsequently retraced the entire move with traders exiting the market ahead of the Scottish referendum.
Given the difficulties likely to be faced by companies in the wake of a separate Scotland, it’s understandable that the business community has been the most outspoken. What perhaps is less understandable is given the closeness of the polls how UK stocks have not reacted more negatively to the possibility of a break-up of the UK.
Investors seem to be thinking Scotland will vote “No” to independence so better not to jump the gun and act early, rather just be reactive in case of a ‘Yes’; this could add to volatility in case of shock result.
Consensus is still for a ‘No’ vote but investors are unwilling to add to existing positions unnerved by the prospect of a potential 97% turnout including 16 and 17yr olds many of whom are unlikely to have responded to polls before and whose voting habits could tend towards the more emotional than practical
The latest surveys from pollsters ICM, Opinium and Survation demonstrated the ‘No’ camp ahead in the fight for Scottish independence with 52% wanting to remain part of the UK.
EURUSD – The euro went precisely nowhere yesterday forming a doji around 1.2940. The currency has pushed back into oversold territory on the RSI. An increase in volatility could push prices beyond 1.30 today but gains may not last without any definitive bottoming pattern.
GBPUSD – The pound fell in early trading yesterday but pulled back to opening levels after bouncing around 1.6160, the high from last Tuesday. 1.60 remains the big psychological level which coincides with the 61.8% retracement of the rally since July 2013 and a move below there could spell a new era of weakness for sterling.
EURGBP – The euro sterling cross has been trading back and forth between 0.7890 and 0.8035 and is sitting in the middle of the range.
USDJPY – Dollar yen has dropped down to 107, 106.50 could be next support from Tuesday’s high then 105.45, the multi-year high formed in January could act as support on any larger pullbacks.
Equity market calls
FTSE 100 is expected to open 12 points higher at 6,804
DAX is expected to open 38 points higher at 9,670
CAC 40 is expected to open 20 points higher at 4,429
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